GLWA, Board of Directors Workshop Meeting - from recording

6:11PM Sep 15, 2023

Speakers:

Keywords:

year

forecast

cost

projects

increase

budget

charges

cip

point

pay

prices

inflation

put

sewer

capital

contracts

bid

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today

contractors

The board of directors on September 13, Wednesday, here at Plymouth United Church of Christ. On Warren Avenue on call please.

Chairperson Hendricks President Vice Chairperson Baker, Secretary Nellore. President, Director Brown here, Director Quadra LLC, directors and

members, you've had an opportunity to review the agenda. Pretty short and concise and general questions. I'll entertain a motion to approve the agenda as we

move through will have the agenda for today's meeting.

Second, will be supported. All in favor? Aye. Motion passes. Next item is Approval of the minutes of the August 23. Board of Directors meeting.

RG AFRICOM

support loop is supported no questions on the minutes of the meeting? If not, all in favor, indicate by the side by that motion is passed. Next item on the agenda is public comment. Three minutes per speaker, Mr. Wilson.

Thank you, Mr. Chairman, this the opportunity for members of the public to address the Great Lakes Water Authority, if you're in the room, you can come to the podium. And if you participate by zoom, you can either raise your hand on the application or to participate in by zoom by telephone, telephone. So this time if there's anyone that wants to come forward, and we are not seeing any hands raised, Mr. Chairman sucks call for public and

we will put other jobs either in the room or

still no hands up. So a third and final call again,

the Reverend Robert the crowd, and then in rural Virginia. See none Erina will close that portion of the agenda. That was the Wilson next item on the agenda is communication. Do we have any correspondence there are none according to the agenda. The old business there is none. And that takes us to new business. And the reason that we're here today is the presentation budget and charges briefing September 2023. The speaker picks

Good afternoon. And thank you for your very much for having a meeting today. It's the time of the year where we're working on budgets. And there's several key matters there. We really want to advise you love and consult be able to consult with you on as we move into our FY 2025 fiscal year plan. Do you want to just before we start getting my appreciation to the teacher for public affairs day, Debbie, Keith Curtis, Brent and Jason. It's a heavy lift for our team to set things up with this alternate location. And we always appreciate your support and doing this in addition to your extra time with us today. So our presentation day is in two parts. You guys remember last November, we presented a report to you on the economic outlook Task Force. When we saw tremendous changes in the economy that was impacting our costs on a very rapid basis, we assembled a team of national experts in economics construction sector supply chain, and formed the economic outlook Task Force. They presented the first report to us last November. And since that they prevent presented quarterly updates to the audit committee. One of the desired outcomes of that initial report was a forecast planning scenarios. So different assumptions might have different levels of index. So we kind of had a pessimistic, optimistic and somewhere in between forecast scenario in terms of percentages over the next five to five years to help us better understand what we need to potentially be prepared for, for both operating and capital costs. So in your packet today, the first thing that we're going to turn to is the economic outlook Task Force updates. And the public sector consultants has a team that we've worked with on a regular basis. Make Curry who is the lead unfortunately he is had to choose between us or celebrating his wedding anniversary today and if he chose appropriately, but working very closely with him and really pulling the report together. For us with the details for review with Nick is Ben Moulton. For technology reasons today. Ben is not able to join us via zoom but he is actually on my phone and he is going to walk First, through this presentation and that way, then we will when you're ready to admit right now we have on that ship, you can see us on Zoom. We have your cover page shown, and the public affairs team is going to advance the slides. So just say next, when you're ready to go to the next page.

Sounds great. Can you hear me? Okay?

Yes, we can.

Excellent. Well, thank you for the introduction. And again, apologies, I'm not there with you in person, I'm happy to be on stage at the moment. But as he mentioned, I'm on benfold On a second supplemental partner consultants worry, 90 days public policy research and consulting firm that provides a wide range of services, including this type of work, to nonprofits, public sector, agencies, associations and all kinds of other groups. So it's a real pleasure to be with you all this afternoon, even though it's not in person. So you know, I think we go to the to the next slide here, and I'll jump right into the presentation. Excellent, I can see we're on the next slide. So, so perfect, thank you. So I'm going to just start with this overall executive summary slide. As Nicky mentioned, we've been providing quarterly updates, but I want to provide an overall look, as we get into some of the more specific details are later in the presentation. So I want to start with just a conversation here about inflation. So as anybody that's paying attention, or just looking at their pocketbook, over the last couple years, inflation has been a major issue and created a lot of challenges are individuals and families but also businesses organizations trying to, to plan for their future spending. So as we are seeing in the data, including some just released this morning, if I hadn't has been much more stable in 2023, than it wasn't 2022 accent, as, as many of you may know, inflation was hovering around 80% or lower for a long period of time, leading up into the the pandemic where we saw major spikes in 2021 and 2020. Cooling a little bit into 2022 was relatively high. So you know, last year, we were sitting at about 7% inflation year over year. So end of the year 2022 into end of year 523. We're hovering right around 7%. And right now, the kind of year over a year, look, from the from the analysis disrupt this worry is a recovery right around 4%. Since the beginning of this year, up until now, so anyone who has been watching Market stuff this morning knows that inflation report was released in the year over year from August 23. Back to August is reaching 22 Is that 3.7%. So that climbed a bit from 3.2%, between July of 22. And July, July, between July 22 And July 20 to 23, excuse me. And so that's good news in an aggregate sense that we're down from 7% down into the numbers that start with a three or four. But as any, you know, analysts would probably tell you right now, okay, from 7% to three and a half to 4% is likely going to be a lot easier than getting some three and a half to 4% down to the 2% Federal Reserve target, it's widely, likely going to take quite a bit of action and to continue moving in the right direction there. That declined up from 7%, down to closer to 4% has been primarily driven by reductions and reversals and trends related in food prices, oil prices, and then the kind of exhale a lot of supply bottlenecks that were associated with a lot of pandemic game. So a lot of those things that have been helpful in getting us from seven down to four. But the analysis today is showing that you know, a creep back up in energy prices is resulting in, you know, that kind of stalling of that decline as we hover right around that three or 4% number in that coin down to that 2% number. So I know that story will have percentages and things around and unfortunately, that's going to continue here on the next bullet. So our inflation forecasts at work as Nicky mentioned, that we've been working on over the last, you know, really almost two years and so we continue to update our forecasts with data as it becomes available and mind those protections are on a regular basis. So you June 2023, was the data we had, we were projecting a 12 month, end of year 2023 inflation rate at about 4.2%. Based on the data that we have, that's been updated since June, our forecast is showing a number of about 3.6%. So that would be, you know, end of year 2023, compared to end of year 2020, to around 3.8%. With that updated data, a couple of notes to also include some kind of national international perspective, as many of you heard about and write about. And there were several concerning bank failures earlier in this year, that created some uncertainty in markets and the broader economy. Those issues, among others, have created some risk for recession. Although you know, the economy remains relatively strong unemployment is, is low. And speaking of low employment, so it's starting low unemployment combined with inflation, is continuing to put pressure on a lot of industries, including construction. As we all know, you know, whenever there is a potential downturn in the economy, or as we've seen with inflation, construction was one of the first industries that's hit really hard to start to pull back spending, there starts to be concern about supply side issues, material costs, labor costs. And so we're seeing that in Southeast Michigan across the state across the country, really speaking of that, construction is, you know, we're hearing in Southeast Michigan and a remain high, and it's likely that those costs will continue to remain high. You know, the research literature on this suggests that these prices, these prices are often quick to rise as contractors try to account for rising costs on their end. And so they're quickly trying to adjust and, and make sure the bid that they're putting in now, that is for money they will receive later will actually give them enough money to complete the project pay their workers buy the materials they need. So that's why those those pay prices just start to climb really quickly as inflation grows, unfortunately, they're often slower to come down, lower unemployment, higher wages, rates, or workers in the broader economy, but in terms of the prices that are going to create some challenges, those labor costs been elevated. And the results in those days stay here and do a little bit longer to come down, even as prices start to come down. So as my last bullet on this slide, is that, and I'm gonna go into some material costs in the next couple of slides. So I'm gonna go ahead and advance to the next one here. Okay, so we're looking at three charts here, you know, in ever increasing, please smaller kind of time horizon. So as you'll see, on the far left of the screen here, this is a 20 year, look at a basket of construction materials. So, you know, collection of different materials that are, you know, required to do a lot of construction projects. And we're looking at an index that tries to measure the change in the prices that producers of these materials are paying consumers on the back end, people who are buying these materials, do stuff with them. So I just want to know, quickly, the far right table there are, it's fine, right? There is from a Y axis, the vertical axis there are much more zoomed in. So the numbers are declining, you know, numbers of

five 5.8 medicines there as you go up the scale, whereas in the left two graphs, we're looking at much larger increases, so just want to make sure people pay attention to that. And that's clear. So as you can see, over the 20 year trend, we have a massive spike in 2021 2020, and 2021, meaning into, you know, all the way into 2023 that as we zoom in a bit closer, we look at the five year horizon, guys have seen these, these, again, these prices really spike during 2020 2021 and into 2022. And that we're seeing over 2023 is, you know, a little bit more stability, you know, like he may have plateaued, but little ups and downs. And that's what you can see on the graph over on the far away. As you can see, you know, there's been a drop dropped, you know, since July, we're going to return to the starting point 43 of the start of 2023 brought a new kind of rise back and then things are starting to kind of go back down again. So just important to remember that even when you know the chart on the far right, or even the one in the middle starts to dip down. We are still way above the trend over the previous 20 years. So even if the you know, cost you're paying and hopefully today is a little cheaper than it was, you know, a month ago, we're still even that price is still way above where we would have expected it to be in, you know, July of 2019, that trend was relatively stable. And also there's a huge spike. So just an important from within playing, and they really challenging phrases are really quick to rise, even when they come down, you're still way above where you where you were before. So let's jump to the next slide. So in addition to looking at, you know, a basket, comedy, a collection of materials is also important to look at individual materials that are really important to GL WA, and its contractors. So as you can see, between July 2017, July to 20, you know, relatively stable prices, and also a lot of these really important commodities. And again, looking at the prices, producers are paying, until again, no surprise here, major major jump in 2020 and 2021, particular iron, steel and chlorine, really important materials for both capital and operating projects that need to wait 22 weeks, around the beginning of the year for middle of the year, prices start to come down for these materials. And again, when adjusted, even where those prices have come down, you know, we're looking at 40, down around 12% Over the last year, it's still way higher than it was, you know, in 2018, and higher than you would have expected it to be if you were just looking at 10 years of trend data. So that's the story on iron and steel pipes and tubes as well as chlorine. And then if you look at those next four, you know aggregates and then electrical equipment, things like that. Those are, you know, maybe a little bit more slower increase, but those increases have continued. And they really add to you know, maybe they slowed, you see a little plateaus in there. But they still up year over year, whereas some of these other materials were down year over year. So here's an important thing to keep in mind, as we're thinking about, you know, the last slide that shows a lot of these things together, and then kind of breaking it apart and looking at some of the more individual components. So perfect. Now let's talk about another key component of any project. You know, we all know material prices are really important, but so sore wages and, and this is a look at full compensation across all private industries in Detroit, the Midwest and the United States for America. So again, important thing to look at on the vertical axis, these are the these are the rates of either increase or decrease in these in these cases increase in total compensation, we're talking wages, salary, benefits, retirement, all those things kind of put into one, as you can see, you know, over the last five years for the first three years, relatively stable with with these costs kind of going up about two to 3% per per year, kind of looking back, and then all of a sudden 2021, these increases start to increase pretty dramatically. In fact, by the time we get to the end of the year, last year, we've nearly doubled the rate at which these wages are increasing. So now that wages and compensation have doubled, the rate at which they are increasing doubles. And so you know, those, those rates at which wages have been increasing, has started to decline or still above the kind of trend, you know, in the first half of this chart. So just an important thing to keep in mind, if we were to see, you know, the actual wage decline in here, you know, you'd have to look at the bottom of this graph, which is at 0%. So that's just an important thing to keep in mind here. And not much difference between what's going on in Detroit and in West overall, I would say is is pretty close, by the time we hit June of this year, is released on a quarterly basis. So let's jump to my last slide here. And now I'll pause for questions, we can turn to any of the other slides that I've covered so far. So as I mentioned, 2020 1920 20, even if we read that further, looking at inflation rates at 2%, or lower. And so all of a sudden, when we hit 2021, those rates jump, you know, we're at 4.7% of 2021, depending on the measure you're using are somewhere between six and a half and 7% and seven and a half percent at the end of 2022. And that's where we have survey projections. And so as a convention, we're looking at an optimistic case in the green. So lots of different factors can be included in that as to why inflation might reduce faster than we expect. We're looking at a pessimistic case and the red were racing Are these inflation rates elevated longer. And then the base case, what we're kind of the general consensus, this is where we're this is where we're expecting things to fall in our 2022 projections, we fell just within this kind of blue bar. And we're hoping that'll be the same in 2023. From an analytical perspective, that obviously won't, for the economy, say that inflation goes more into that into that create more there. So as you'll see, as I mentioned earlier, in the presentation, we're projecting around 3.6, by the end of the year, for year over year, inflation rate, and then we're seeing a continued decline into 2024. And the years, as you'll see, on this blue bar, though, we're not projecting at this point, you know, again, when you're in the tents and percentages here, you know, it's important to keep in mind that that kind of went blue around the blue bar, that kind of shows some, some range there that we're talking about races still could be above the 2% Fat target in the in the out years. That said, we are, you know, we're optimistic scenario, see inflation rates declining in just below the target into 2024, and remain where they were around 2019. And for, as a super optimistic case, you know, if you're, if you're reading a lot about this issue, you often find that folks are, again, very concerned is going to be difficult to get all the way back down and below 2% Over the next five years. So I'm gonna stop there. Happy to answer any questions, and we can flip back to the slides that are related to those questions.

And before that, if I could just point out a few things. So team, if you could go back to slide four, please. Thank you. So So one of the things that you're gonna hear us talking about, or we talked about last year, when we first did this report and talked about our outlook is when the Regional Authority was formed, those conversations we're putting out in 2014 15. Now effective January was 2016. And we did a feasibility forecast at that time, plant Moran provided that report to both the DWSD GL wa boards, a feasibility for regional authority and the reasonableness of the 4% promise that I'm going to be presenting more than 4%. And so when you look at the slides, we can see the era in which that decision was made, things were probably, you know, that was our reality. And it had been that way for quite a while. And, you know, if you haven't gotten past 2007 aims, the latter half as we approached, that, you know, 2010, and then we're going to love 1213, this level of stability wasn't a reality. The issue is we're in a different reality today. That's played out over the past couple of years. So just in terms of in terms of context of where we're at, with our feasibility forecast, versus Why are we so different? Why are we feeling this pressure, that line chart tells that on if you wouldn't mind backing up one more slide. By cow, the chief operating officer for wastewater operations to be around did a really nice job for us as the executive leadership team to help understand the dynamics of our CIP. And he took a particular project, and through each tip, as it was planned earlier, is now moving more towards phases of vetting design, Next Level Design execution, how each tip, the project's cost increases. And, again, if it was a more stable arrow, like we had in 1314 15, we wouldn't be having that conversation, which is why we're kind of looking at all of our existing scenarios through new lenses. And what this really points out is, I would not want to be a construction contractor estimator in this environment. Because, you know, in my prior public accounting life, over half my client base was construction contractors, and the estimators were really the ones who made the money for the business because either they, you know, set the bid prices at a good price or not so good. And it would have been very hard for anybody to unforeseen the impacts of the economy. So while we see bids coming in, we're also recognizing the stress that the construction sector has been under and continues to see and the strategies that we talked about when we presented the economic outlook task force report last year, in terms of looking at packaging our projects differently, perhaps buying supplies differently supply chain getting some materials is a big issue. So Um, you know, all of these things play into, you know, some pretty serious issues that we're faced with today. Again, we're always, you know, manage them and work through these. But if they are significant, and if it's not the tides of change are incredibly. So with that, those are my comments. That was Ben's report. Any questions for Ben? Questions?

All right. Well, Ben, thank you very much. We're gonna begin today, I'm gonna log off the call, and I will talk to you

later. Sounds great. Thank you all so much.

All right. So with that, we'll move to the next presentation document in your binder.

And that is a briefing on budget and charges. And the first slide just kind of gives an overall overview of the timing. You know, this is a large organization $100 million, plus annual budgets, rolling 1.5 billion or more. Yep, capital improvement plan. And all the contracts that come before you that you're working there multiple large dollar contracts. So so how do we build in agility, nimbleness and resiliency, for an organization that is this large, and it comes down to scenario planning, and understanding what our challenges are so that we can work through them. So that's why we're having this meeting with you. Today, I've worked with directors meeting to receive the economic outlook Task Force updates, as well as a briefing on budget and charges. We annually have what we call our charges, rollout meetings, charges, rollout number one is October 19. And then is where the phone capital improvement plan document version one is presented. The timing of this meeting really works out today. Because yesterday we have a capital uplift our board Capital Planning Committee, and at that meeting, the Capital Planning Board members received a briefing on where we're at in terms of aligning the CIP with the 10 year forecast that we've been working through. In November, we the four units of service that really units services to how we divide up the budget pie. So CIP is an input into the budget units of service to L series of technical analysis, presented that meeting. Internally, we tried to put, we try to put pencils down November 30, to compile proposed budgets and charges documents to present to the audit committee in December. And that's really the first time the board sees the CEOs proposal as it relates to the budgets that we have compiled and prepared, as well as what all of this is looking at in terms of charges to member partners. Going on to the next slide. Then January, very a big month for us. Charges roll out number three is when we meet with our member partner communities and present the proposed charges walk through those talks about the proposed budget and how that ties to charges. Then we have a series of one on one meetings with their member partners, where they can meet with members of our team to walk through their charges, worksheets individually understand how the budget works, how their charges work. And then we regroup for one final meeting charged to a lot number four in January, where we report out on our one on one meetings, the types of questions folks have if there's anything that we think needs to be tweaked based on that feedback, and further review of the budget. And January, would you present the budget to the board as well, that prepares us to move forward to a board meeting in February, where we conduct the public hearing and potential adoption of the budget with an effective date of July first or July the fiscal year. Next. So today I want to talk to you about some strategic matters in terms of the budget, again, unprecedented budget constraints. Because many of our contracts are three and five year contracts. We have contracts that were entered into pre COVID where we were able to control those costs. So sometimes wrestlers are delayed pop up, of course because we have prices locked in and Now we're going back to the markets. And instances we can we do have the conversations with vendors about holding their prices and at times are brought to you, I think some extensions related to that. So we have one more year, the 4% promise fy 2025. That means our budget increases no more than 4%. how that relates to remember partner charges overall, is typically you can expect that our budget increases 4%. And if we have some offsets, like investment earnings, then it will be some amount less than 4%, which is generally been our history. So the long term course, and we're gonna provide analysis today to explain how we get to making the statement is to really correct over delivery, the 4% promise. And a lot of it is the focus on the cat, the needs of the cat, the capital needs of the system, the level of deferred maintenance, and we're also doing all the right things by the various studies that have Needs Assessment condition assessments. But what happens when you do determine something needs to be addressed, it's not always an option to not address it in our world. With that, we still see that we can largely not a huge variation, but what we presented to you last November, but largely, we still think we can return to our long term plan objectives by year 10 of this forecast, because our numbers are too big. The commitment to the 10 year forecast is something that is applauded by rating agencies, analysts and others. And because we're so big, every decision you make is not a one year decision, other than maybe setting charges, all the contracts, budget documents, bond issuances are all long term decisions. And then just be mindful, we have to not just look inward, but look outward, what round us impacts us the economy, the cost of maintaining replacing infrastructure, our financial as well as operational resiliency. And frankly, the increased competition for low cost SRF loans. The intended use plan was just issued by the State of Michigan for water this week, wastewater sewer a few weeks ago, and those documents are subject to public hearing. But it basically Telegraph's who's gonna get the low cost SRF loans, our state is taking on lead service line replacement, that's a high priority for public health and safety impacts a lot of disadvantaged communities. So those score high points on awarding projects. So well, GL WA has in the past enjoyed State Revolving Fund dollars, there is increased competition that is facing us. In terms of charges, Bart's gonna our foster is here with us today, our charges kind of stole from the foster group is also going to talk about, we'd have just really one or two slides, unique things upcoming for this year's charges. So going on to the next slide, in terms of the near term issues to address, talked about the 4% promise, I'm gonna give you some examples so that you can see what we're facing in terms of our operations and maintenance budgets, our capital spend rate assumption. So in our earlier years, it was a new organization. And I think this might have been discussed at yesterday's Capital Planning Committee, that there was just understanding, we didn't have people, we didn't have project managers here to run projects. And so the CIP spend in our early years was as low as 34%. Now we're doing what we're supposed to be doing, which is delivering capital to maintain the system appropriately. And that means our capital spending when I saw in those early years, when it was 34% 46%, I needed a way to translate from what we are getting instinct on from a financial perspective on what we thought the organization was able going to be able to deliver for all of these dynamics, compared to a financial plan. Because if we bonded and built a financial plan, based on 100% delivery in those days, we would overborrowed, we would have spent a lot of money on interest expense that we needed to. So we needed a way and then you know, frankly, as a general rule, GL WA is excelling as peers. It's not uncommon to see most utilities delivering at about 80% of their capital plan, because there's a lot of project interdependencies timing issues, other things that occur. So, you know, so we kind of thought normal state would be 75 to 80%. So we've gone from low delivery to now on pace delivery. Particularly as we're moving into construction phases, those are hard dollars. It's not like engineering where it's lower softer dollars, it's hard dollars and net spend occurs quickly. And you know, once you have a project going, you don't stop it.

So last year, I talked about entering an era about tightening, we're now in an extended area era of belt tightening, we still have hanging out the Highland Park issue, we're in mediation, I'm always hopeful that we will be reaching a conclusion with that soon. And then like I said, we'll talk about some dynamics related to sewer shares. So on the next slide, just talking about our long term forecast and how it plays out, so managing our cash is very important. So the cash flow time the cash flow to our investment returns to issuing debt. So So you've inherited one of the largest, highly most highly leveraged utilities in the country in terms of outstanding debt. So our mission has been to bring down our debts, almost 50% of the budget on a daily basis goes to debt service. So how do we bring that down? So we had a strategy during 2016 1718 19, where we had budget savings into 2020, where we built up our reserves, and then we entered the era where return on investments was 1%, because the economy was much different than it is today. And so that's when we spent down those capital funds. And we really had like a holiday for two years. Other than state low cost State Revolving Fund loans, we finally had a holiday for about two years, and issuing debt. So when I look at, you know, where we started to where we're at, in terms of our debt service, we haven't decreased our outstanding debt, but we haven't increased it. We've done a lot of capital improvements in the meantime. And that's through managing this pay as you go as part of a balanced strategy. With utilizing debt. We are now down to what I would say our minimum previously established 90 million as a minimum in our improvement and extension funds. Given the cost escalation $90 million doesn't bind today, what a box five years ago, we set that targets. So we're revisiting some metrics to reevaluate what our minimum should be. So going on to the next page, we also want to highlight I mentioned increased competition for SRF projects. And we've been, again in the past really enjoyed generally getting the projects awarded that we applied for. But that's not the case now. So this year, there's seven projects on this list, we apply for $481 million with the projects, the draft IUP. That's the intended use plan that the state recently issued. Looks like they pending any changes are looking at award amounts of 252 million with grants and principal forgiveness of $20 million. So in order to 11. But the point is we applied for almost $500 million, and got about 250. So about 30% of what we applied for. So the other the other thing I wanted to point out on this slide, let's see. So you'll see projects. So you'll see some yellow highlights. So the other thing we talked about about cost escalation and Estimating costs, is you'll see, for example, Project 212008, the WR water resource recovery facility, aeration improvements wanted to that project at the time, we did all the applications and public hearing work for the SRF it was at 90 million. This project came in at 196 million. We got bids in April. And I would leave it to Naveen to give the detailed explanation. And so of course, when you saw bids come in, it's like, oh, well, those must be inflated, surely. And the need and our procurement team have had many, many meetings with a contractor. And I think for me a lesson in this is what because of the HR infrastructure, when they're doing a project there might be other elements of the project. In this instance, it includes the foundation, so new equipment, but I'm doing the chain citizen explanation so to be feel free to kick me out of the way please. It is the contract doesn't want to be do you really want to put all this new equipment on this old Foundation. And you saw in the public sector consultants report the cost of cement increases. So there's things like that when we're replacing our assets or old assets. Sometimes you don't know until you get into these things. And we have our engineers eyes, but then we bring in contractors eyes, they also look at things differently because they, you know, they're doing the construction work. And so and so this is thrown, then this is why we're meeting with you so early, frankly, is because how do we bring this project to you with this $906 million Delta, without talking about where we're at with the long term forecast. So we received Pitts in April, the contract has been working with us, it's holding their prices, but they're anxious to get a go, no go. And so again, that's, you know, part of the driver of us chatting today. The free consultation, again, when we applied without the project will be valued at 6.8 million. The revised estimate this month is at 125 million. And pump station number two, bar rack replacements and grip collection system improvements. The SRF application was for 98 million, which, you know, is a document that's really less than a year old. And now we're looking at 110 million. So again, these are real live examples to back up, you know, what we're talking about and, and the challenges that we need to work through the Veep any cleanup,

just want to make one note on these estimates as well. And I thought the forecasts really spoke to it. What we notice in these cost estimates, because of our projects, they're not one year turnaround projects, and not two year turnaround projects, they're seven years five to seven years. And what tends to happen is the contract that will do escalation, and they sometimes apply it to the middle of that year, because they can't procure everything the first day, right? So they're buying copper later in the project lifecycle, they're buying steel later in the project's lifecycle. So they're also escalating based on these factors. And this is very conservative numbers, we're seeing ranges between five to 6% that they're applying to their cost estimate, just to be able to escalate a seven year project lifecycle. So so a lot of these numbers, our estimators are doing it. But we're missing the mark. And we're seeing the areas where these cost increases are experienced, mostly equipment, electrical equipment being a big one. Concrete is another one. So those are the factors that play a major role in these estimates that we're seeing deltas between what was the engineers estimate, versus what the contractors estimates? Thank you, Mr.

Chair. These low bid contracts,

these are low bid contracts. So somebody

told me, let me paint the contract. They wanted to contract based on COVID.

Then constructor are low bid contracts. That is correct.

And then are you concerned that you have other contractors that didn't win the bid? And now you're willing to increase the cost to a price that may be higher than some of the other contracts?

Can you say that one more time and I want to make one clarification on a little bit?

I would concern that DWSD that if we increase the price, a little bit contract that there's some liability with the contractors that did not win?

That is correct. So these are just for clarification, the numbers that are shown that we went to SRF. For those are opinion, probable construction costs. So those are their engineers estimates. That's what we have as a tool before we go out to advertise as the number that is what we assume is going to be the cost of construction. What you see in the highlights. The top one is a bid that's received. And that's a design builder. So it's not 100% of COVID. That one is a qualified Bates bitter, but the other two, those are just updated opinion, probable cause so from the time the construction package was built, right, it's there's a time that it takes for us to go out on the street. We had our engineers go back and give us a new opinion of probable cause. So when you see in the highlighted for food and bar racking grid, those are still estimates. We still haven't received heartbeat numbers, but you're absolutely right after we receive heartbeat numbers. We're not adjusting our number then at that point is the fact that's what the cost to build it. It's and and unfortunately, the first one that we have received so far is everything that's going on To end it has doubled in costs.

If you're an engineer estimators have an idea of what the profit margin is, on the contrary, to some

extent they do they make their estimates of what those margins are. But I don't think they are anything outside of what they used to be right. This is what we're hearing, it said the margins are the same. The amounts change, because the dollar amounts change, but nothing.

I mean, but maybe the contractor has to take a haircut on the profit margin, until we get costs back in mind and be not interested. That's something that we negotiated, that we, other than coming in asking for more money. Let's do this both parties take a haircut.

Yeah. And I think, yeah, and, and so I, so when we're in a situation like this, we bring in other resources that we have, we have a key comm that we're under contract with, as well as PMA. And we both have contracts with them, to help us work through value and engineering and other design, and then bringing in their independent evaluation of costs. So this is something where we're fortunate that we have a suite of other professional resources databases that we bring to the process. I'm not sure if there's other things that you do as you're ready to this process before we would even think about bringing it to the board.

Absolutely, absolutely. So I think those are phases, right? Those are phases of negotiation. So as Nikki indicates, so the first thing I've done for the ratio of one and two is I send that back to the engineering estimating team. And this is this is one of the largest firms in the country. And they're doing estimates, and it's a very detailed estimate that they provided us that was so different than what they provided. There. I'm asking them, and we are putting the pressure on to what is why do we have this variance? What is causing this variance? And unfortunately, it's so unstable, that that is a very common conversation that you you have with the estimator that says, Well, this is what we assumed this is significantly changed over a six month period, over a year period, there has been such such fluctuation. Then, after we figure out the scope, after we figure out the validity to the dollars of that assets, then we get to the soft costs, which are you know, what is the overhead and profit? And is there room to really negotiate some of those unfortunately, as you know, the some of the low bid numbers, we really can't negotiate too many of those items, because of the way that the bidding process is. But it is something that we work with the Engage appropriate firms to be able to assess this to make sure that you're getting the most fair and equitable cost, what projects

do you want to address, why design build and whether it makes sense for public projects like this to be able to control costs?

Absolutely. So I think for this specific project, so we delivery methods, right are very applicable to the demand on the project. In this specific case, there was a lot of there was a lot of unknowns with respect to what's inside the tank, and how we could deliver it. When you drop a tank, it's a major operational change. And you could run into costs associated with dropping a tank, inspecting the tank, designing something coming back after two years of design and finding that the condition change, and therefore the cost is now an increase. So we in this application, it made a lot of sense for us to do design build, because they're dropping the tank that contractor sees the condition, they quickly can turn around and design and they can start putting shovels in the ground a lot sooner before additional deterioration happens that could become a liability to us. So we look at every project and the delivery method and delivery method is really partnered with the type of project that is, as you all know that we have talked about the the underground project and how that was appropriate for us to do a CMR at risk construction manager at risk. That one has a deal of different delivery methods and design bill, but it was appropriate because it's so much underground like

Alright, moving on. Next we are going to slide going to slide nine. So in terms of counting the overall budget things we have discretion over how much you spend on capital, how much we build the firm to have an exception fund, how much we spend on operations and maintenance and what our revenue is from charges. Again, almost half our budget is debt service. That's something we don't have discretion on. We have a lease payment. That's a fixed amount, Legacy pension. They is predetermined amount in water residents residential Assistance Program. So those, those, those are some of the we are the levers that we can hit, and the ones that we are simply off limits. So with this went on to the next page. And at this point, so I'm gonna ask our foster to join us, you know, Bart as our charges, consultant. And you know, there's only a handful of those of us in the room, we were in the room when the 4% promise in the forecast was created, along with leadership, financial leadership with the three counties, the city of Detroit, and Barton I as the resources, call it. And, and so we want to talk about the 4% promise, where that stands. And then Bart also serves as our feasibility consultant when we issue bonds. So when we put together an official statement, which is a legal bond offering document, we're pledging on revenues. And so what bondholders are buyers of those bonds want to know is, if I buy these bonds, is there going to be sufficient revenues to run the system, as well as to pay my debt service. And so that's the other capacity that he performs for us. And that's why I've asked him to speak today, as it relates to our performance and where we're going from here as we prepare for the future.

You want to pick up here? Yep. Thank you, it's good to see all that. That's live. I want to we're gonna get to data forecasts later on in the presentation. And we're coming at it from from birth, frankly, from GW expert, and reminding all the stakeholders exactly what the thinking was, that led into the financial deal that became God. That 4% Promise is what was subjected to the review by plant Moran at the time, and the lease feasibility forecasts published in May of 2015. And the stakeholders wanted to know, hey, can this new regional entity of Ford and $50 million annual lease payment and maintain a promise to not increase its rates its budget by more than 4%, every year for the next nine years. And there we go, the forecasts show not only can do it, it can do it improved, operating statistics, operating metrics. There's a chart that later on, but the feasibility business case forecast performing the authority was to get to this debt service coverage ratio with a system of 1.7 by your five, so they have 1617 1819 20, by your five, let's get to 1.7. That's the, from my perspective, that's the most important metric on the fiscal health of the utility systems. So that we look at a lot of other things. But that's one thing that we're focusing on in terms of objectives. Let's go ahead into the next slide, please. The the notion that was put into that feasibility forecast was the assumption that the 4% would be embraced every year. And actually, the GAO who has struggled to get it down to the 4%. So that's what's represented by that black line, if they've been the 4%, full 4% budget increase every year, from 2017, which is the first real fiscal year for the authority through 2024, which is what we're in now. That would have increased the budget cumulatively by just under 37%. Decisions were made every year on individual budget increases, and you can see what has actually occurred is that the water park is at 16%. And the sewer Park is at 4%. So the takeaway from this slide is had the full 4% been fully implemented every year, then the charges today to the water number of partners would be 21% Higher, and those the serial number partners would be 24%. Higher. Setting the table with this and then we'll come back to it when you get the forecast later on the next slide. Next slide, please. And that last slide was really geared on the budget. As Nikki mentioned earlier, the budget change and the charges change are not always gonna be the same. There had been some years where we had a budget change of 2% but require a 3% charge increase because investment earnings were in a tailspin. So we had a negative variance on what we thought we could get from non charge sources. And therefore the charge increase had to be higher than the budget increase. The opposite happened last year, in 2024, we were able to achieve a two a 4% budget increase, but only had to increase charges by two and three quarters percent, because we're recognizing the availability of enhanced investment income. So we just wanted to summarize recent history of what the actual charge adjustments have been. In that a seven year average of roughly 2% of water. And less than than 1% of sewer bills, just want to set the table with that. And we'll return to a we get to the forecast.

So next, we're going to go through some details on operating expenses. And going on to Slide 13. So, so what we're comparing this chart or something in a different way than we normally show it. So going back to 2020. We're showing what our actual budget is. So as you know, during the year, we amend the budget. So as we see fluctuations, but you know, part of the question is, well, what did we what were our assumptions, what do we think the year was gonna look like when we started out. So this chart shows and the dark blue line is the actual approved budget, where we thought we started the year. So 2020 and 21, and not so bad, we'll end up spending in our operating expenses, a little bit less than we had started out, which is good, because any SS then goes into the permanent extension fund to help offset capital increases. fy 2022. Again, that that was largely level as we get into get into FY 2023. That was when we really began to see. And again, part of this, even though the pandemic was playing out before that, that's when those chemical contracts were coming up. And that's where we're really starting to see. So we started off the year at about 329 million, and then ended the year with nearly 361 million, so over $30 million in operating expenses increases, and I'll show you the details of the app, then moving into 2024. That's the fiscal year we're in. So by September 1, I already gave a list of the team a budget amendments that we're going to bring into the audit committee this month, for the first quarter, again, for chemical and utility costs increases, just doing a little bit of a deeper dive on the next slide, moving from all operating expenses to looking at Konami costs. So this is chemicals, utilities, and sludge disposal. So yesterday, I apologize, I wasn't able to sit through the entire capital planning committee meeting, I was in and out a little bit, for multiple reasons. But I heard director brown give a nice explanation of flocculation and how that works. And taking all these little particles and getting bigger particles as we process to get to our clean drinking water. But the the particles that have coagulated through basins, tunnels, and different processes, but both water and sewer system have sludge disposal, scooping out that's large and hauling it away. Very expensive. And really even pre COVID, we started to see some cost increases that have just continued to escalate. So you can see back in 2020, our initial budget was at 9.6 million and I landed at 7k. That's a nice small positive variance. But then as we moved into 2023, we're in the process of closing the books were 2023. It was $38 million of increase in one year. Not quite 50%. But pretty close. And as we're entering this first few months of this year, we're continuing to see costs increases. The next slide is focusing just on electricity costs. Again, every year even going back to 2020. We are seeing increases, again, going from 40 million in 2022. We're at looking at this year 48 million with the intel that we're getting. We do have a team, a cross functional team, engineering, Director of resiliency, Director, energy management, members of financial services who've really kind of created their own internal taskforce on your utility costs, and what we can do to address those and better understand the rate models where we might be The Challenger rather than the challenging for, as we look at the build up of these, and it really is not usage driven, it's its cost. Next page is natural gas costs. Natural gas costs are interesting because there are futures that you can get to offset that we are in communication with you somebody in the past. And, again, the market changed significantly. I think there's some strategies, we can work to mitigate this. But I don't want to make any promises at this point. But you can see an adult FY 2020, actuals 5.2 million, fy 2023 12 million, these are powered costs are not discretionary. They are what they are. Water cost. That is a little bit of a different scenario. In this is mostly water used in wastewater operations as part of the processing. In the earlier years 2020 2021, it was discovered that there were meters that weren't working. So DWSD was our provider at that point was under charging, we were underpaid. We worked our teams work together to fix the meters. And you'll see some ketchup billings in FY 2022. And then now a normalized state is we're entering 2023 as well as they, like all other providers have had some cost increases and did a cost of service study to better support the charges in that area. So again, another area of increase. And then moving on to chemical class. Again, I've mentioned chemicals a number of times, FY 2020, actual 14 point 2 million, as we're closing out, 2023 29 point 5 million. Yes, we've had some significant unusual weather events, but on the whole, it really is largely price driven, not usage driven. So um, so that's it on the expense side, let me go to the next slide. I we were, we had a great month of May 2023, the first half of June in terms of water sales, we ended up by 2023 with a small positive performance on water sales. But as we entered the first two months of this fiscal year, July and August, with cooler weather, and for us that has translated into a $4.4 million revenue shortfall for the water system. In July and August. We did have experienced a shortfall like this in the past couple of years ago. And it really took the entire fiscal year until we were able to recover. So kind of unique having our fiscal year end in the middle of what could be our peak season. And so that cut off between July and August. But this is something that will probably be reporting to you through our monthly KPIs for several months to come. And hoping that we just have some very pleasant weather and people do a lot of gardening next spring. So that is where we're at on water revenue. And again, that will be reflected in first quarter budget amendments. So the next one to turn to transit capital spending. Again, the Capital Planning Committee met yesterday, I borrowed the following two slides from that presentation. And we're going through what we call CIP alignment. So we have our 10 year forecast. And

that's an update of the previous year. Generally, the tweaks, by me timing to bond issues level of SRF, that might lower debt service. And because the CIP engineers like just to say, hey, what's our parameters for what, you know, what can we do? Because they there's a lot more than they can do that. What's a bit CIP document? And I wouldn't say we have a team that has a lot of projects that are not on the reading list, particularly as we're doing more condition assessment and identifying areas where we would prefer to be placing our attention with capital spending, and to the extent that we could get grants or other funding to support that, as well as resiliency initiatives. So what was presented yesterday is when when I when we give parameters to the CIP group, I look at it in terms of five year tranches. So I we don't get to micro of like it's been 192 this year and 193 next year. It's kind of like let's look at as a program of doing fine transit. Each and every two years. And to the extent that we can smooth it out, but don't artificially smooth things out, tell us, you know, within this period of spending for five years, and what's not on here is we actually do 10 years, and they do tenure planning as well. So, so we're bad in terms of what we call free alignments, or the financial plan. To give you a framework, the FY 2025 29 Five year CIP that's published, for the water system is 957. Point 6 million. The current planning scenario that we're working through as we go into next year, is increased to 1,000,058. pretty lean, considering the level of cost increases that we're seeing. And again, these are largely based on estimates one of the things that they do in the CIP document they would when they present it, that's of interest to me is, how many projects do we have in flights, where there's a construction contract, how many are in design, and how many are future yet to come? How many like universal rock funding, but this is a pretty lean increase that they're working with them. And that's part of our reason for initiating this conversation with you. Now, again, before we may bring more projects to the Board to approve, we're, we're not going to bring you something NASA approval next month, say, oh, gosh, now we need more money. We're telling you right now, what our financial situation is, before we bring things to you. Same story on the next page with the wastewater system. Again, this is a larger increase. I think we may have talked about it a little bit more yesterday. But again, I think as he's identifying things to the system, you just heard about the project with $100 million increase. This is based on what they can do. Now, when they develop this, they work very closely also with the CEO, so that no trade offs and decisions are understood by everybody. And what you're seeing here is the final scenario that we landed on that we think we could do if there are multiple other scenarios. And this plan where we're at, we thought struck the best balance, we could strike between doing what needs to be done with always still keeping an eye on affordability. So next step, or next slide, sorry. So again, steps we're taking to address cost increases. I mentioned the working group that we have the commodities. And I'm going to, we're also as we're moving into this, decoupling a little bit of the financial plan to have more of an aggregate amount, rather than tying dollar for dollar to the capital improvement plan, because the CIP is getting bigger and dynamic be because of these things, still in alignment. But and then the other thing is, I have under the own end leads. So in all of those instances where you saw increases in costs, we were able to offset that through increased investment earnings. So that really saved us investment earnings really saved us. But we only have to invest in earnings to the extent that we have funds available to invest, that sort of getting to, you know, understanding the cash flows of these projects is very important to us as well. So if we had five projects that $50 million, or five projects at $200 million, or one project of 196 million, that 190 6 million spent might occur faster, has different cash flow implications than if he's managing five projects, and the cash flows, paces spending impacts when we borrow so. So you can see there's a lot of intricacies as we work through this. And so now, so that's kind of things going on with your men budgets, and how that relates to the financial plan. And then, we now want to turn to talking about the 10 year financial planning is a roadmap. This is why we need to take your financial plan. This is why we really need to manage to a 10 year financial plan because none of these decisions again, you're making is for today, I often say and remember partner meetings, decisions made decades ago, impact us today, decisions we're making today are going to impact future generations. We issued 30 year bonds are the condition of our capital improvements. We have a team that's facing now deferred maintenance, as well as a number of reasons. Financial resources being among those, historically, always a challenge. So So, on the next page, just want to talk about briefly our water and sewer bond ratings. And again, this is important to us because bond ratings are a driver of what our cost of borrowing is. And we are very transparent with our rating agencies and bondholders, we meet with them regularly. And that's why we put out the extensive packets that we do and the audit committee monthly reports. And, you know, I'm just want to point out on the left side of this is the, the underlying debt is the DWSD. debt that was assumed by JL WA, you'll see on here the line drawn in July 2013, if you look to the left of that, that's where the predecessor DWSD was. We, when when there was a threat, even though we had sufficient resources, and excellent debt service coverage, but when there was a threat of impairment to the bonds during the city's bankruptcy, we had a significant we went into junk status class was about to happen. And you can drop very quickly. But it's always a very slow climb back up, the rating analysts will tell you that, they'll look at us and say you guys are doing all right things, keep showing us that you're doing that we'll keep thinking about that grade. But keep keep demonstrating performance. And and so I just want to put this out there to again, just remind us of where we're at. We, we were very optimistic, and we think that we can continue to improve. But, but we can't lose sight of that, because a dip down is now where we want to be able to work with our story. So so I'm going to ask again, to address the 10 year forecast, Bart, come up and walk us through that that begins on page 28.

Take a pause and start talking about debt service coverage. I know that most people understand what we're talking about. But it's always good idea to remind folks, so if, if I take in $100 a year, and it cost me $50, just to run my operations, I have $50 left over the terminal art is net revenue to do whatever I want to win. First thing I got to do is pay the people who I owe money to pay the people that I'm indebted to. So with that $50 If I've got mortgage payments, auto payments, credit card payments, what have you $25, that stuff comes first out of my pocket before I can do anything with discretion with it. That's the simple example. My debt service coverage ratio is the 50 bucks, I got left after I pay my monthly bills divided by the $25 that I owe the people that sent me money. That's the simplest form of debt service coverage is much more complex, or a billion dollar a year operation. But it is the metric that we choose to look at first to try to target sustainability from financial perspective. So what we have in front of you here that we're going to be talking about are really three different scenarios. We introduce this lease feasibility forecast that was conducted in May of 2015. That really set the business plan for the foundation of the authority. We have going down on the slide, the February 2023 forecast, which was about a 30 page document that that I prepare and submit in support of the budget charges. It was included in the budget and charged disclosure or approval of the charges and budget in February 2023. In that little less than a year ago, we had a similar meeting where we talked about desired objectives on debt service coverage, it had fallen below where the forecast wanted us to be. And our desired objective was to get back up to 1.5 by 2028, which was the fifth year of last year's tenure program, and up to 1.8 by 2020 2032. Three, which was the 10th year of last year's tenure program. That was the objective. The update we're going to talk about right now it's the same objective. We have not changed the objective. We tried to come up with a financial plan that gets us there. Went back up to the top. We introduced this earlier, the five year forecast and the lease feasibility study assumed and I'll show you the numbers here in a minute. 1.72 could be achieved by 2020. On sewer it was up to 1.77. When we met with you last year, we said well, we really can't meet the objectives on water without getting really big numbers. But we're going to cue to the 4% promise for 2024 and 2025. And then we're going to forecast a 6% annual increase for the rest of the study period. That's where we were in February. On sewer we were going to huge the 4% for 2024 2025. And then for a short period, we had to bump it up to five. But by bumping it up to five the out years we could get to three all elaborating a different thing was certainly a nutshell summary of where we are today or where we were in the middle of August when my eliminatory update was posted is big. Because of some of these headwinds that Nikki's introduced. It takes larger forecasts and increases to make progress towards the objectives. Go ahead, go to the next slide, please. Before we get into the details on this, one thing I want to point out is Nikki asked about earlier, why more need for budget increases on water than sewer? Aren't these pressures on the operating side, pretty much equivalent to both systems. They're not precisely the equivalent, but they're fairly quick on the operating side. We looked at the water and sewer capital and numbers. On a couple slides ago, the annual water spend targeted is about $210 million. That's over half of the annual revenue in the water system. It's like 56% of the annual revenue our system. Annually, however you finance it, the current capital program is requiring more than half of what you're taking in revenue, that you can finance with the combination of debt and pay go funds and things like that. But that's a it's a fairly high metric. The comparable sewer metric is $180 million a year. But sewers got a lot more revenue. And like $480 million revenue a year. So it's only like 35% of the total revenue. So if somebody asks you, Hey, why are we forecasting, larger water increases in sewer, it's really, it's tied into the candidate inflationary impacts. But it's the relative magnitude of the capital program, as known today, as known today. So this is really busy, what I tried to do was boil down 34 pages of exhibits and narrative into a couple three slides. And if you'll indulge me, I'm going to walk you through some of the history of what I'm trying to present here. That green bar green line is the representation of the flight brand feasibility forecast from May of 2015. And they had five years in there you can see the debt service, this is water, the debt service coverage ratio growing from about 1.5, to that 1.7 To my interpretation of their of their work was the 4% was going to continue forever. And maybe there'll be additional growth in that metric. But for purposes of illustration, I've just kept it at that 1.72. What's actually happened between 2017 and 2022 is illustrated by that black dotted line. The intended growth index, service coverage has not been achieved. Number of different inputs, one of the promos, primary inputs is the 4% was not pursued. And you can see at the bottom of that chart, the actual amounts. The second the last row, the actual amounts that were that were achieved in the water system, were for 111111 is voter two. So that I'm sorry, the second last one for a negative reduction 1%, two and a half, six. So cumulatively instead of the 4%, the average annual that we achieved through 2024 was less than 2%. Less book, less revenue increase, less debt service coverage, those ratios declined to about 1.4, which is what we expect to report with us just finished here. When we met earlier this year and supported the 2024 budget, that's the forecast is represented by that gray dotted line. And you can see that we didn't get even with the 6%. The increase in the increase, run 4% to 6%. We didn't get where we wanted to be in 2028. But we got there and 2033. But nope, the blue line is where we are forecasting today. And because of the mostly because of the operating expense headwinds that thinking introduced, we're starting from a lower point, which is really why what we're suggesting forecast wise, is that the first part of this forecast period needs to go up from 6% to seven and a half percent for water. And then the back half can be at the 6%. That was documented back in February, which gets us to the target, quite frankly, it's it's to the target at the end of the 10 years.

The one through two in the left column. What is that? represent? Just one

with us the debt service coverage ratio, I'm sorry, yeah. Okay. It should be labeled as such. So the other thing I'll point out here is, you know, the fourth line from the bottom from the bottom, if the 4% promise was fully implemented, and you asked me today, what's been the average average annual budget increase? It's a pretty simple math, it's been 4%. What's actually happened on the next line there is, you know, there's it's compounding and you can't just take the average with the compound increase is that we've basically cut that in half in the history of GL wa today, and delivered on that. What does that mean, in terms of let's go ahead, go to the next slide. What does that mean in terms of revenue to the system and charges to the member partner. So that's what this is intended to show. So if you look at that blue line, that is what the annual revenue through the system would have been. And we just started with the baseline in 2017, and increased at 4%, through the end of the current 10 year forecast period, and just 2014 2034, excuse me. And now the dotted line is where we will be at the end of 2024. And the gap that the the the since inception, the decision to implement less than the 4% promise has resulted in significant savings to ultimate customers. The number three, how over $300 million has been charged has had been lower cumulatively since inception by $300 million, than they would have been had the full 4% been implemented. The right half of that chart is intended to show pay, even with bumping up to seven and a half percent for the next four years after the last year 4% promise and then moderating the 6%, those lines won't cross forecast wise until we get up towards the end. And the cumulative savings will have continued to grow. So the amounts that member partners have been charged relative to what the intention of the lease feasibility study was, will be lowered by the to the tune of one $40 million over this 17 year period. So just do that do that. Yeah, sorry. So it'll get easier to show when we get to sewer. But today, unless I have that mind, customers have been charged $309 million less than they would have had we just 4% 4% of 4% through FY 2020 through fy 2024. This forecast assumes that we're going to do 4% in 2025. It assumes that we're going to do seven and a half percent, or 26 789. And then it assumes we're going to be 6% for the rest of the 10 year period. So it's going to that assumption is going to get us to a point where we will actually have been higher than if we had just done 4% All the whole time. But the early part of that period, still has additional savings going on. So the savings to the customers that are paying it. If you asked me Foster, if we had done 4% 320 34 Or your crystal ball is perfect. And we're going to do what's in your forecast. What's the cumulative impact on charges to water member partners? It's $440 million lower than they then they could have expected and they just assume that the lease feasibility forecast was going to lock in 4% forever.

Okay, so the 309. So the four is not in addition to the three,

just Correct. Correct. Thank you. For my apologies, yes, I'm going to spend less time on the sewer. But the numbers are a bit more dramatic. So let's go to the next slide. Same forecast the debt service coverage there. And as I mentioned the lease feasibility forecast. Add it to 1.77. By the time we get to your 2020 the actual delivery mineral water the if the preliminary I'm sorry, the if it had been the actual annual average to date, number of water that was 1.9 is the 1.4 figure you see in third the last line there under 2024. So the coverage has been even lower on sewer. There are a lot of reasons for that. But the good news, I'm sure is that we're not starting off as fully as moderately starting off at a lower point than they were a year ago. So you'll see that the growth with five and a half percent for the first four years and then three and a half percent in the in the out years allows us to do Get to the insert. And if this forecast was crystal ball perfect, by the time we get to 2034, the average annual increase will be 3%. So what does that mean to sewer member partners and what they've been charged, just go ahead and go to the next slide. Today, that same $309 million savings on water has actually been $450 million on sewer. And even with this higher than 4% aren't going out, those winds are forecasted to cross. So

we're going to grow

the $450 trillion of proceeds savings up to $1.6 billion through the 16 year timeframe, or roughly $100 million a year. So that the elevator speech on the suicide would be, hey, if we get to 2024. All right, 2034. And this forecast is accurate. What does that mean to constituents in the region, on average, they paid $100 million less a year, but they would have had the full 4% and embrace the entire 30. That's that's the perspective I'm trying to grow on. And I'm trying to make an argument on supporting the forecast amount, I'm just trying to provide some perspective. There's one final slide on the forecast that simply takes the water and sewer pieces and put them together. And I found it comforting that it led to a nice round $2 billion number. So. So that's kind of the executive summary of the forecast dated August 21. We're in the process, we learned things this morning that they want to make modifications for. I don't know if you want to summarize that before we get into the charges, charges. And this will be sort of the final piece of putting all the budget together. Next slide, please. The final piece of putting the CIP the financing plan, the budget is the charges charges to member partners. This figure 20.5, which is what we're working on, marks a reset year for the sewer shares. So the last that people are paying today require committees are paying today, their share of the system based on analysis done in 2020, which one is in place for the 2022 shares, it's been locked in since this is a regularly scheduled reset, we will have at least three more years of flow contribution data to utilize. Maybe we'll work to the extent that it's available in time. And that will be plugged into the analysis to figure out Have there been material changes in the Partner A versus number of partners. We don't expect those to be material, we're using long term averages. So even if we have three years to what's already in there, we're using a 10 year average. So it's not going to be material, it will be different. Nobody's going to the thing, if we go for 4% increase, it will not be beautiful and 4% for every member, some will be higher, some will be low for the first time in three years. The other piece of that puzzle, by the way, is we had a look at the cost drivers. The utility costs get treated differently in the shares processed and the chemical costs than the capital costs. So that'll be in there as well. As we stand here today, I don't expect that on water. Water, we just reset with different charges. And there were material differences around the average where individual member parties. We don't anticipate that there is a methodology workgroup working right now for potential methodology changes. Frankly, we're in the middle of September, I can't fathom that any recommended methodology change is going to clear the hurdles in time for us to do anything for 2025. We may have some tweaks around the edges, but my assumption is that if it's 4% is going to be 4% for everybody. Now there are there are peak demand compliance issues with contracts, not just exceptions, but in general that's the message that we're dealing with today. And I expect that when we deliver whatever the proposed increase is, is going to be pretty uniform for all five

sorry, so. So we lay a lot on you today. And again, I so appreciate you coming here for the special meeting take for the special topic on Okay, and I know it's been a lengthy presentation. There's just a lot going on and and again on V is in sync with you, as we have discussions with you as we move forward with other initiatives. I'm not sure at this point. If we again, we're seeking just to receive and file this report. This is kind of teeing up the budget charges season, but it's also teed up discussions about other capital projects and programs we've been brought to you. So I'm not sure if you have any questions for BART or myself. I see Brian, with your microphone. Sorry. Hi, John.

That was a good presentation. You embarked in the team and put it together very, very detailed, my questions revolve around four to six promises, once it terminates, or is no longer the case? What could great players expect to happen? And you answer that, I think in the last couple of slides, so I didn't have a whole lot. But I'm sure my colleagues have questions that they want to ask. Who wants to go first?

So question for if it was a good presentation, I think it's helpful to highlight it. We haven't done the corporate sentence. That's positive, of course. Thank you for that, at this point. The customers won't question for bardez on long term financial plan, you base it on

hitting the metrics of the 2015

feasibility study. We haven't hit those metrics. And we haven't necessarily been impacted negatively on them. Why didn't you base that on the 2018? forecast? So I think.

Right. So I think I'll answer that, because from a management perspective, that was what was put out there as the will How do you feel a little bit measured against is this was the feasibility forecast. And and I think there was expectations that the buyer is writing to be higher than our direct service coverage would be higher, that we would achieve certain things. And, you know, when I look at this through a critical side is, you know, why aren't you there? And when we look to our peer utility, so generally, in the spring, we have PFM, our financial advisors do a benchmarking analysis of us compared to other peer utilities. And so there's a question and again, we don't want to let you down by having to slip in our ratings. We don't want to let our constituency down with a slipper on our ratings or an increase in costs. And so to us that there was a goalpost that was set to needs of expectations in that forecast. So it was feasibility, but it was also we interpreted as expectations on what performance would be, and the value that a regional authority would bring to the region to be able to control the cost of the service.

So that's really set in stone. But it was something that was out there eight years ago.

And it's benchmarking is like why would you KPIs it's a it's a measure.

Okay. Um, just a couple more comments or thoughts. I mean, it certainly speaks to the need for state and federal funding for capital. And I know, CEO and Bill are working on that. But that really does tell a story that with all the dollars that are out there, how little we've gotten directly in our dollars, and certainly with the new federal, bipartisan bipartisan infrastructure and those dollars we really get and make a plan and I think on the procurement, I assume you've looked at this as Are there any strategies we can use to help bidding for To reduce the uncertainty of visitors, you know, I'm price escalations are unknown, especially if it's five to seven years that we've been affected. And fellas, I'm sure you've looked at that. That's something I'd be interested in hearing those strategies that you already have implemented to help lessen that.

And so we are very fortunate and that, you know, I mean, when you see our reports, we have multiple bids for very large projects, I think in this academy in particular, so most of our beds are to in state contractors, in particularly with increased, so are contractors, just as we talked about the utility sector of trying to recruit employees, they're seeing the same retirements and staffing challenges. It used to be that we saw, I think, a little bit more activity from our state bidders. But now they're mobilization costs, because the cost of everything is increased, the mobilization to bring your crew into the state is higher, we're still enjoying seeing multiple vendors. But we do have focus groups with our vendors that we do chat with on a regular basis. We also do that via a con and PMA, for conversations with their colleagues, what are others seeing and doing myself talking with my other colleagues across the country of what are they doing? And you know, this, this is just not up to GL WA. You know, frankly, we're fortunate that we do get multiple bids, our peers don't always have that situation.

Other questions? Or comments? So

maybe it's a great presentation. I love the way the information dealt with options around cost pressures, increase, there will be constant. And we'll accept that as our new reality. Let us simply walk through managing it through increased revenues and cover increased costs, what are the options are there the dialogue around maintaining revenues and decreasing costs? bit more difficult, but you're tired through that one that probably didn't get the most airtime. But I think it's most commendable, where you maintain revenue, and your costs increase, which is assets, doing more or less the same. That is the cost savings are very difficult to capture. Numerically, they did walk through some of the numbers on that bridge, which is commendable. I'd like to briefly talk about the design build process, I've seen that applied in multiple industries multiple ways. To most runners to take RFQs, and the vetting process on robots. And also a cost plus scenario with some kinds of cost savings, cheering, pains and myths is it option that's available to us. So we use a cost plus bid materials, etc, can somewhere be standardized across the vendors. And there's slight fluctuation but but once you get those heavy costs down, you get into the variable ones like labor or localization, etc. So cost is a cost plus process neutralized just a bit. And I think it reduces some of the liability that I spoke about earlier for low cost bid process, which is a total dead and they were low cost good. And you can see the country now just but if it's a cost plus group and some flexibility in tucked in a little bit in terms of if that option is available for us.

I think particularly we've explored that because someone in our projects are over a period of time. And so things have increased so much over time. So I think that is a strategy that we've explored with some of our different projects. Because it certainly makes sense. I think we ran into some dynamics and challenges and trying to do that.

And I can speak a little bit more to that. So we suppose we have boundaries was was specific some of the projects but as of right, I will say that design build projects being funded by SRF are relatively new in UK right? It's I think it's going to five, six years where they actually start entertaining that type of funding structure. Most of the time. Traditionally, the water sector has been designed been built to total cost. Then we went into started dabbling into progressive design build, because of our projects complexities have not necessarily known exactly what we need to do. There's a lot of chemistry that goes into our products, understanding what the scope of the project needs. To be, we started kind of dabbling in the progressive design, though. Now we are in this design and build environment as well, where we are currently at this point doing more guaranteed match price on the design bill. So therefore, we're, we take our projects, typically to the 30% design phase. And then at that point, we're advertising and getting a guaranteed Max price for the project to be executed. To take into design build cost plus, we have started talking about it, we started doing it with the CM at risk, where we will be discussing potential contingency cost sharing. If the project gets done earlier how we would do that, and there are some just public sector challenges with with respect if you finish the job early, how to be divided costs, that wasn't actually materialized. So it is something that we have talked about, but not necessarily materialized, but it is something that we can look into to see, you know, my criteria is are typically isn't state funding eligible, right, because the state funding has become more and more stringent requirements. So you got to make sure that that is eligible, because I don't want to lose SRF funding opportunity because of that. And then the second one will be as a public sector.

One of the big bosses, looking at the cost plus concepts is it more often times solidifies your relationships with vendors and contractors. Because you're right, a lot of organizations don't get the responses, they don't have a lot of options to choose from. But if I have a relationship with an organization with some kind of consistency, and moving my equipment and our capital, depots, etc, I'll do more frequently. Because you'll help cover the costs are currently and I can still have my profit margins, return on assets fairly standardized. Not always, but it does lend itself to building long term relationships with lots variation,

which takes out some of the challenges so far, you know, competitive.

Oh, it's J,

two things. One, I really appreciate the extra time. And if I wind up, taking extra time to just have this to focus on. Second thing, and this is kind of following up on on Brian's comment, as we move forward with this, since it is sort of a goal or a target, I'd like us to think about, and particularly because you're going to be meeting with the rating agencies kind of give, you know, what you think they're thinking and what you think the requirements of hitting that target is I revised want to come ahead and hit them straight out and ask them that directly. But as you gain information about what it's going to do, I think seeing whether or not you know, we felt a little bit short, were able to provide some, you know, cheaper rates or something like that, I think that's always something that we should be striving to be physically.

Yeah. And we can provide a synopsis to where we're at with the existing rating agency reports that we have. And during the COVID era, typically, the rating agencies were pretty strong on the water wastewater utility sector, one did kind of be because of these issues, or across the board. You know, they did issue kind of an old one ranges, he had to issue a warning for the entire sector. You know, I think fortunately, we've gotten past that. So much of our credit story, when we meet with rating agencies is DWSD. Yes, performance, which as been very positive, even during the pandemic of the illness, we have the same challenges, you know, affordability, rising costs, and the collection issues and the strategies that they put in place with the lifeline plan and other things to mitigate that, you know, we often say there's a business case for affordability. And, you know, I think they've demonstrated that. So, you know, and again, I think the rating agencies do look forward to talking to GL WA, to hear how they're handling some of these things. You know, were talking about when we have a problem, we're not gonna drop it until we have it solved or, you know, managed in the best way that we think we can. So that we can put together a synopsis of what's particularly from pfms perspectives as they work with so many other utilities with our peers are doing and their rating agency reports versus ours. And really, I think, overall, the rain handless so they're trying to manage risk. And so they're looking for consistency and positive performance. Thank you.

Other questions in just a couple of minutes here, I almost hate to do it since I was doing. So Nikki, what was the dollar value of what we were paying to the pension system for the first 10 years? The second period of time that the 4% was locked in?

Yeah, so that was 45 million in total between DWSD and GL WA, for taggi costs and annual administrative expenses.

So yes, we do have to make a pension payment, but we don't have to make a 45

year collapse. So the latest actuarial is brought that down to where they're showing, based on the 2022 actuarial that we might have a surplus. So at that point, that would be the $4 million a year and administrative costs, we are going to be having a conversation with the pension system, because we've built up a prepaid to see we might still recognize that expense, but maybe get some cash flow relief on that. And that is the decreased patch and things are reflected in these forecasts.

I guess, you made you made a statement earlier to to enhance it to one of Brian's question that we don't want to disappoint our constituents, are you referring to the 120 communities that we believe? Or are you referring to the residents that pay the rates within the we

are in touch entire entire service area? And anybody else who relies

on which one? Are we talking about residents, so we don't, because they don't, they don't care about? They don't really care about the boundary. They care about how much we raise their rates, if that's what they really care about. And I haven't been able, I don't think, Brian, I don't think I've been able to go get the 4% since I've been here and no, I'm not going to get over 4% while I'm here. And I'm just I'm being honest, based on the level of disadvantaged communities with in Cleveland, on one hand, we say that we only were able to get $250 million out of 500 million that we apply for, but we got to 250, because we were able to convince the state that we have so many disadvantaged communities, a part of the application requires that we're addressing disadvantaged communities. And so when we're raising rates, we certainly have to take disadvantaged communities have what they can afford to pay into consideration. And our bond rating has steadily gone in the right direction may not have gone where we forecasted it as fast as we have, but it has, it has gone. So you know, I just want to make that point that there are other ways other than raising raise in order to get to where we want to go. We talked the other day about $50 million dollars that didn't get spent in bond proceeds for capital programs, people's rate payers pay for that $50 million. We can talk about how many employees that we budget that are actually on the payroll that rate payers pay it. And so I would like to hear some other methods of getting to where we need to be over the next few years without raising rates above four 4%. Because I will obviously I was there when we created the 4% promise. It was never a four it was never a capital and for me it was always going to be forever. It's the only Bitcoin he votes on his voice. So that one pass for him and said, Ryan, one passport as long as we have the level of poverty, because these are people that have to pay the increase these ways. So that's and I said this the other day, and I say it again and I sincerely mean that you have the 18th If I might have said it about another part of the believer, but when you talk about birth and you talk about the folks that are investing or buying download this PDF. And again your team, you can do it, I know who can do it. So I am not saying that I can't get the 4%. I'm saying I want to hear other options out of the template one that we forecasted from 10 years ago up, we're continuing to derive that, that.

Can I just say, you know, we don't take the 4% as a ceiling. And I think that's why you see in the sewer forecast in the later years, we returned to three and a half, we, you know, we take keeping the costs down as long as we can. And that's part of having a for a forecast discussion is to look at different scenarios, and understand the implications of those, you know, so what we've presented to you today is one scenario, there are other, there are other options. Again, we thought it best met the sweet spot of where we are today. You know, again, we get an influx of federal dollars, that would make a huge impact.

Other questions? Mr. Baker,

are we I get an update about a transaction, just timing, or we're going in October.

So once again, as we have told the board, talking about timing and specifics, on transactions, is is a risky topic. And it's something that that would not be prepared to go in a public meeting, we certainly do intend to give the Board updates as we evaluate whether that the possibility of such a transaction and the timing of such a transaction. So we thought that would be something that we would bring to you at your next board meeting, and probably form a closed session.

Thank you, John. Thank you, Mr. Chairman. I want to I'd like to focus on a couple of different things here. Mr. Brown brought up the fact that in many people's minds, both elected officials appointed officials, and the general public, that this 4% pledge, was like, chipped in stone, like one of the commandments. And so too. But on the other hand, you recognize we all recognize that inflation is real. And if we want to keep these facilities and the projects going forward, we keep coming closer and closer to the fact that 4% Really can't make it work. And I'm sympathetic to the public altar work, regardless of whether you're in Wayne County, Oakland, Flint, or Detroit, that there's people that can afford to cover your water and sewer bills. And there's other people that are just really up against the wall. And we need to kind of keep that keep that in mind. I particularly appreciate having this discussion today. It's going into a budget planning process. We're going into a situation where there's communities that are dealing with their own issues, we want to try to be as give them as much warning, I guess, as possible about what's happened to us what one of the things that I'm so from my perspective, pleased with how the member partners are brought into the various leaders, or there's been meetings with them free trade. This is no surprise. And we need to keep doing that. And and the comment that was made earlier by director brown about, you know, we have a bid from a contractor, and inflation is just shot right through the roof about it. Somewhere else who bid perhaps, would like another another opportunity? And this gets very tricky. This is where Randall and Bill come in. And in terms of looking at this from a legal perspective, we certainly don't want to step into something where we we make a mistake that costs us money, because we handle everything needs to be as you keep saying over and over as transparent as possible. But I share Mr. Brown's view about trying really hard not to push past 4% And then perhaps even If we need to get some kind of understanding of the public, that will be delayed two years, three years or so, until we can see inflation drop down, wages continue to stabilize, and perhaps go upward. And so that's been the 4%, would be to juggle with that, and perhaps get into a situation where it could be 4.5, or four or something along those lines, or graduated in such a way that it isn't a big leap. But again, I really appreciate that the district of Boston, and the gentleman that was on the call earlier, how that was all presented, certainly something sobering for me to think about, and talk to the people I need to discuss this with.

Keep that posted. Yeah, and, and the, and clearly, if we had not had this economic impact of the previous three years, when we began this conversation of exceeding 4%. And, in keep in mind, even when we talk about role plays, you might not be as high, it's already up here. It's just whether it goes up here more, or dips a little bit. But, you know, I think what we're experiencing is the cost resets, in the capital program. And, you know, so all of those are good, you know, and ideally, you know, I hit my local utility hat on, we also did five and 10 year forecast, and we had a smoothed annual consistent increase so that there wasn't increases and decreases from year to year. And, and having that predictability is important for people who are planning so that are, so I'm sensitive to my colleagues who are in the shoes that I was in previously, of trying to do multiple year budgets. And you know, and I think sometimes, too, when we talk about affordability, affordability is what we immediately think of, but it's also managing the system so that we don't have a situation where we do have a spike. And I think that's what we're working with internally is how can we smooth out the projects and the expenditures to try and meet that

graphs you provided with this top point is that going along, also, right takes off like that. It's like, wow. And that's what the leaders of all these communities need to see. And then help us to explain this to their constituents, or our constituents about, you know, he got quipment. And if we neglect it, we don't drink water side by side. And the whole issue about flooding. Which is, in everybody's mind, every time there's a weather forecast about two inches or three inches of rain. I'm sure people that have had floods are like romantic vertical deal with the basement floor. Also, this was really article.

So I'm not sure there's other questions. I know our CEO is poised to wrap us up today when we're ready.

30 seconds.

Mentioned the deferred maintenance is not a cost savings. And this is a this is a form of conversation should be added because these are tough decisions. Obviously, line by line up with the budget matters. That's a cost savings opportunity. But sometimes the strategies drive bad behaviors, not saying that it's in this room. But as Board of Trustees, we need to have these conversations to repair. It's 20 million today 50 million tomorrow night cost savings. And it is incumbent upon the team to push back in the snow, the downside of those conversations as we talked through the numbers, so thank you, for your transparency. And

so I appreciate that. I appreciate all the comments. I think these are tough conversations. We have to have them. I'm glad that we were able to bring them to this early in this this process. I think that was a very direct rather very, very poignant because that is where we are. Right? JL wa knew and understood that it was taking on a tremendous amount of deferred maintenance and capital and pushing that cap off. And we have been working very, very diligently every single year to do everything we can to keep the charges low. Right. We have a 4% Promise, we're holding the 4% promise you Put the big dollar differences that you see the assets still have those needs. And what you're seeing is us inching toward the end of the useful life of assets that have 60 7500 Very useful lives. And that are average assets. In the pipes, our pipes age 7500 years. Right there. So we are there. And if we do emergency repairs, number one, what happens is the service disruption disruption is not just inconvenient. It is life changing. Sometimes for people, we have water service disruptions. So and I don't, I don't sound this alarm. Very often, you don't hear me say this to this board very often. But I am telling you, we are at a point where we have to invest in these assets, we absolutely must. And so we've got to do whatever we got to do to be affordable. And we're committed to that. We are people serving people, we we are a bunch of public servants, you know, trying to do the right thing every single day. We have got to fix these assets, we have got to redo them. So it is absolutely a necessity. There isn't a lot of ones here, right. This is just what you need to do. And so I appreciate the comments. I think we heard some creative things today about what might we do differently, what what might we look at things differently to try to control costs. But the capital program needs to move forward. And it needs to move forward in a very robust manner. Because in the end, the failures cost more than the repairs. And then the residents are not just inconvenience that lives are disrupted. So that, again, appreciate the fact that we had the conversation so early. I thought it was also a very good presentation for Thank you very much for and, and directors. Thank you for your candor. We appreciate that. And that's the kind of input that we are looking for.

Thank you, so anyone else? Nick, you don't? Okay, well, then, moving on with the last couple of items on the agenda, which really isn't much caring because I like to eat? Yes.

And most of the receiving power we are

losing support it. All in favor. Aye. Aye. Aye. Motion passes. I guess I want to express our thanks to the Reverend Dr. Nicholas, there was a senior pastor and minister here at Plymouth United Church of Christ and his staff and all of the members of the church family for open up their doors and allowing us to be here to host this meeting. I think I've been advised that there may be additional or subsequent meetings, held that this venue and for that we say thank you in advance. Any other remarks? The board members, Mr. Wilson, you got on the maps. There are no other magazines. If not a limited chain, entertain a motion to adjourn to be full support. Round Miller. All in favor. Hi. Big two