Fwd: Operating Costs and Capital Reserve Questions

[Alfred Roy]

FORWARDING THIS TO THIS FORUM

Al

Sent via Galaxy S20

---------- Forwarded message ---------
From: Alfred Roy <alin...@gmail.com>
Date: Wed, May 14, 2025, 11:36 AM
Subject: Operating Costs and Capital Reserve Questions
To: <mjmerr...@gmail.com>
Cc: Jay Moynihan <jay.mo...@oldlymeshores.org>, Bob Palazzo <bobpa...@architecturalbuildingservices.com>, <chris....@oldlymeshores.org>, <dennis....@oldlymeshores.org>, <jack.r...@oldlymeshores.org>, PAUL YELLEN <pye...@snet.net>

Marty,

Questions regarding operating costs and capital reserve.

Internal

1. What is the basis for the $30k annual operating costs?
   
2. What is the rationale for the annual Capital Costs & Reserve of $50k/year ($1M over 20 years)?

Shared Infrastructure

1. What is included in the OLS Portion - 21.1% cost of $140k/year?
2. What is the basis for $150k/year for Capital Costs and Reserve?  ($3M over 20 years)
1. Are MBA, OCB, and TOL also accumulating $3M for this over 20 years?  A total of $12M?
2. Is this estimate based on industry best practices?

"Reply to All" should result in your response being posted in the BOND2025 Forum.

Thank you,

Al

Operating Costs
				Stormwater
		Shared	Internal	& Roads	Total
Annual Estimated Operating Costs		150,000	30,000
Fees to East Lyme & New London ($400 per EDU) (909 EDU's)		363,600	-	-
Capital Costs & Reserve		150,000	50,000	10,000
		663,600	80,000	10,000
OLS Portion - 21.1%		140,020
20 years of costs		2,800,392	1,600,000	200,000	4,600,392
Per OLS EDU		14,510	8,290	1,036	23,836
Per OLS EDU per year		725	415	52	1,192

[Jay Moynihan]

Just to note we have not discussed specific

 percentages or objectives to the matter of reserves at

Thanks 

Sent from my iPhone

On May 15, 2025, at 11:25 PM, Martin Merritt <mjmerr...@gmail.com> wrote:

Al,

In answering your questions about Operating Costs and Capital Reserves, I would suggest that our estimates of the annual operating costs is most likely reasonable based on 1 and 3 below.

However, for the Capital Costs:

• #2 below on our internal system -  would suggest that at a minimum we should have $2 million of reserves.  We are estimating $1 million.  So one might suggest that our annual reserve of $50,000 per year, should actually be $100,000 per year.  However, since we will be earning interest on these reserves, then perhaps our estimate of $50,000 per year is reasonable.
• #4 below on the shared system -  would suggest that we reserve $600,000 to $800,000 each year and we are only suggesting a reserve of $150,000 per year.  So even though we would be earning interest on these reserves, we may not need to provide for the full $600k per year, but perhaps the estimate should actually be $300k per year.  Something to think about.

Please see further information below.

If you have thoughts on why our estimates should be adjusted, I would be happy to understand your thoughts, reasoning, and your estimate of what those reserves should be.  

Again, I believe we have been more thoughtful and detail oriented than any other WPCA board to date.  Instead of just estimating operating costs at a simplified $500 per year, without doing any background research or analysis, we have provided a detail schedule of our estimates, which we have also considered based on industry information.

Thanks

Marty

1.  Internal System Annual operating Costs.  - I believe our estimate is reasonable

 Total Estimated Annual OPEX

$17,000 – $41,000 per year
 Typical average: ~$25,000–$30,000/year

This range assumes:

• No lift stations (gravity only)

• Moderate cleaning/inspection schedule

• No major rehab within the first 20 years

Local government or small utility operations

2.  Capital Cost Reserves for Internal - Our estimate is probably on the low side

 1. Rule of Thumb Method

Industry best practices recommend setting aside 1.5% to 2.5% of the asset value annually for long-term capital renewal of sewer systems.

For a $10 million system:

• Low estimate: $10M × 1.5% × 20 years = $3 million

• High estimate: $10M × 2.5% × 20 years = $5 million

 Recommended reserve over 20 years: $3–5 million

3.  Annual Operating Costs of the Shared System - Our estimates appear to be reasonable

4. Capital Cost Reserves for Shared - Our estimates do not appear to be high enough

• 

--
You received this message because you are subscribed to the Google Groups "2025 Bond Resolution" group.
To unsubscribe from this group and stop receiving emails from it, send an email to bond2025.g+...@oldlymeshores.org.
To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/d760a032-bd34-497f-93cc-a109aa103200n%40oldlymeshores.org.

[Dede DeRosa]

On the matter of reserves, I would be interested to know who was consulted to determine an appropriate amount or even if there is a need for it. There should be plenty of history from POW, East Lyme, F&O, etc.  I would think our reserves should be consistent with our partners in this project. We are only a 200 household drop off a much larger system - what exactly are we anticipating we need to reserve for?

Sent from my iPhone

On May 16, 2025, at 12:20 AM, Jay Moynihan <jay.mo...@oldlymeshores.org> wrote:

Just to note we have not discussed specific

To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/EE0F4959-A211-4AC2-BE1B-C62F50440E2C%40oldlymeshores.org.

[Alfred Roy]

Marty,

Thank you. I can review later today.

Al

Sent via Galaxy S20

On Thu, May 15, 2025, 11:33 PM Martin Merritt <mjmerr...@gmail.com> wrote:

I have tried to post this in the forum 3 times, and for some reason a few of the portions of the e-mail will not re-post on the forum.

If you have others you would like to share this with, please do.

Marty

On Thu, May 15, 2025 at 11:17 PM Martin Merritt <mjmerr...@gmail.com> wrote:

Al,

In answering your questions about Operating Costs and Capital Reserves, I would suggest that our estimates of the annual operating costs is most likely reasonable based on 1 and 3 below.

However, for the Capital Costs:

• #2 below on our internal system -  would suggest that at a minimum we should have $2 million of reserves.  We are estimating $1 million.  So one might suggest that our annual reserve of $50,000 per year, should actually be $100,000 per year.  However, since we will be earning interest on these reserves, then perhaps our estimate of $50,000 per year is reasonable.
• #4 below on the shared system -  would suggest that we reserve $600,000 to $800,000 each year and we are only suggesting a reserve of $150,000 per year.  So even though we would be earning interest on these reserves, we may not need to provide for the full $600k per year, but perhaps the estimate should actually be $300k per year.  Something to think about.

Please see further information below.

If you have thoughts on why our estimates should be adjusted, I would be happy to understand your thoughts, reasoning, and your estimate of what those reserves should be.  

Again, I believe we have been more thoughtful and detail oriented than any other WPCA board to date.  Instead of just estimating operating costs at a simplified $500 per year, without doing any background research or analysis, we have provided a detail schedule of our estimates, which we have also considered based on industry information.

Thanks

Marty

1.  Internal System Annual operating Costs.  - I believe our estimate is reasonable

✅ Total Estimated Annual OPEX

$17,000 – $41,000 per year
➡️ Typical average: ~$25,000–$30,000/year

This range assumes:

• No lift stations (gravity only)

• Moderate cleaning/inspection schedule

• No major rehab within the first 20 years

Local government or small utility operations

2.  Capital Cost Reserves for Internal - Our estimate is probably on the low side

✅ 1. Rule of Thumb Method

Industry best practices recommend setting aside 1.5% to 2.5% of the asset value annually for long-term capital renewal of sewer systems.

For a $10 million system:

• Low estimate: $10M × 1.5% × 20 years = $3 million

• High estimate: $10M × 2.5% × 20 years = $5 million

➡️ Recommended reserve over 20 years: $3–5 million

[Martin Merritt]

Dede,

Thanks for your note.  We did review financial statements of other WPCA's, noting that it is normal and recurring that each WPCA set up reserves for capital improvements.  

I think we can all agree, that it would be prudent and proper to set up some level of reserves.  Eventually things will break and they will need replacing.  Especially on the Shared Project with the bioxide station and the pump station.  Per industry standards, pump stations and bioxide stations have a life of between 20 - 40 years.   The pump station and bioxide station were bid at a cost of $4.1 million and $9.8 million.  If we have to replace these in 20 to 40 years, then I would argue the prudent thing to do is to begin setting up capital reserves today.  The combined cost of $13.9 million divided by 40 years would suggest an annual reserve of $347k per year.  However, the replacement most likely wouldn't be for the entire cost to build, so reserving at the $347k might not be required.  However, one also has to consider that the cost to replace items 20 or 40 years down the road will be much higher.  But we will also be able to earn interest on our reserves, so perhaps they will offset. 

In our analysis, we have provided for a smaller amount of reserves of only $150k per year on the shared structure.  Perhaps the argument should be, are we reserving too little, as opposed to too much?

Again, I'm sure we would be happy to look at all research that anyone would like to present, suggesting that the reserves should be different than our estimates.

We are happy to be "pushed" on our analysis.  This is the democratic process.  I believe we have worked hard to present the best financial analysis yet on this project.  I don't believe any of the current WPCA members could be labeled as "sewer experts".  If we want to hire someone to review all of our information, then please bring that up.  We have compared our figures with our specialist F&O's figures, utilized their information, and then we believe improved upon it.  We have even provided a comparison of our figures to F&O's figures.  We have also compared our figures with the States figures, and provided a reconciliation.  We think there is plenty of information there.  If you have thoughts on adjustments or additional information, and better yet, can assist in compiling any additional information, the WPCA would welcome this assistance and input.

Marty

[Alfred Roy]

[Jay Moynihan]

Hi. I have had the joyful experience of being 

responsible for a public utility and addressing 

matters such as assessing & developing 

reserves & rates. I may be able to be helpful as we 

consider these matters 

Sent from my iPhone

On May 16, 2025, at 10:06 AM, Martin Merritt <mjmerr...@gmail.com> wrote:

Dede,

[Bob Palazzo]

I believe that all of the past WPCA members can recall all of the issues East Lyme had over the years with the Bride Brook pump station , these facilities require maintenance and it is expensive to repair these  facilities.

So, I think it would be prudent to build reserves for the costs.

Likewise most associations and municipalities build reserves for paving $132.00 per year per EDU $11.00 per month over the course of the past 20 years would have covered our current road repaving costs, now we will be borrowing funds and paying interest on the paving as well as the drainage improvements. 

The reserves for the drainage over the past 20 years would have been approximately $650.00 per annum per EDU,  $54.25 per month to cover the current cost of the drainage improvements.

 OLS will now be paying for this in the rears and building reserves for future capital improvements and maintenance will be on top of those costs.

Pay now or pay later these expenses related to the sewer infrastructure will be incurred one way or another in the future.

If the sewers were a totally gravity system and not requiring backup generators and pump stations it would be a different story altogether.

Sent from my iPad

On May 16, 2025, at 10:22 AM, Jay Moynihan <jay.mo...@oldlymeshores.org> wrote:

Hi. I have had the joyful experience of being 

To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/A2B9F94C-587A-4F71-B26C-6550523541E4%40oldlymeshores.org.

[Alfred Roy]

Marty,

Thank you for your explanation. 

First. Jay has indicated an ability to begin engaging in the OpEx and Reserves discussion when time permits. His public utility experience will prove invaluable. 

Second. Ideally, I look forward to additional involvement and responses from other WPCA members using this forum.

Lastly. I completely reject the overall premise as relates to OpEx and Resrves for the Internal Infrastructure. This is a gravity system with no moving parts, machinery, monitoring, or controls. In consulting with DPW and Wastewater managers in Farmington, Avon, and Canton, I learned that the gravity systems are virtually maintenance free. Aside from pump stations and treatment facilities, the street system does not require routine inspection or maintenance. On rare occasion, they may perform tests to identify potential I&I violations. As a practical matter, the internal system, by design, is very simplistic rugged, and not prone to failure. As such, accumulating a capital reserve is an unnecessary financial burden. In the off-chance of a dig-in, the offending party would be liable.

For the shared infrastructure, I strongly advise pursuit of a coordinated effort with CSA members to devise an Operations, Inspection, Maintenance, and Repair program. I seriously doubt all four entities need to accumulate $3M or more in reserve over 20 years. The CSA hsd planned to engage industry experts to devise an adequate joint reserve strategy

Jay will likely have insights on all of this once the full board gets engaged.

Thid current detailed discussion set the stage as a basis for future exploration and decisions. 

At present however, the focus must be on the instant matter at hand. Articulate rationale in support for the obligations set forth in the Bond Resolution. 

Sent via Galaxy S20

On Thu, May 15, 2025, 11:18 PM Martin Merritt <mjmerr...@gmail.com> wrote:

Al,

In answering your questions about Operating Costs and Capital Reserves, I would suggest that our estimates of the annual operating costs is most likely reasonable based on 1 and 3 below.

However, for the Capital Costs:

• #2 below on our internal system -  would suggest that at a minimum we should have $2 million of reserves.  We are estimating $1 million.  So one might suggest that our annual reserve of $50,000 per year, should actually be $100,000 per year.  However, since we will be earning interest on these reserves, then perhaps our estimate of $50,000 per year is reasonable.
• #4 below on the shared system -  would suggest that we reserve $600,000 to $800,000 each year and we are only suggesting a reserve of $150,000 per year.  So even though we would be earning interest on these reserves, we may not need to provide for the full $600k per year, but perhaps the estimate should actually be $300k per year.  Something to think about.

Please see further information below.

If you have thoughts on why our estimates should be adjusted, I would be happy to understand your thoughts, reasoning, and your estimate of what those reserves should be.  

Again, I believe we have been more thoughtful and detail oriented than any other WPCA board to date.  Instead of just estimating operating costs at a simplified $500 per year, without doing any background research or analysis, we have provided a detail schedule of our estimates, which we have also considered based on industry information.

Thanks

Marty

1.  Internal System Annual operating Costs.  - I believe our estimate is reasonable

✅ Total Estimated Annual OPEX

$17,000 – $41,000 per year
➡️ Typical average: ~$25,000–$30,000/year

This range assumes:

• No lift stations (gravity only)

• Moderate cleaning/inspection schedule

• No major rehab within the first 20 years

Local government or small utility operations

2.  Capital Cost Reserves for Internal - Our estimate is probably on the low side

✅ 1. Rule of Thumb Method

Industry best practices recommend setting aside 1.5% to 2.5% of the asset value annually for long-term capital renewal of sewer systems.

For a $10 million system:

• Low estimate: $10M × 1.5% × 20 years = $3 million

• High estimate: $10M × 2.5% × 20 years = $5 million

➡️ Recommended reserve over 20 years: $3–5 million

3.  Annual Operating Costs of the Shared System - Our estimates appear to be reasonable

4. Capital Cost Reserves for Shared - Our estimates do not appear to be high enough

• 

  
  

On Wed, May 14, 2025 at 11:37 AM Alfred Roy <alin...@gmail.com> wrote:

[Alfred Roy]

Bob,

Please see comments in CAPS. 

Al

I believe that all of the past WPCA members can recall all of the issues East Lyme had over the years with the Bride Brook pump station , these facilities require maintenance and it is expensive to repair these facilities.

AGREE

So, I think it would be prudent to build reserves for the costs.

SHARED SYSTEM ONLY (see my previous response to Marty)

Likewise most associations and municipalities build reserves for paving $132.00 per year per EDU $11.00 per month over the course of the past 20 years would have covered our current road repaving costs, now we will be borrowing funds and paying interest on the paving as well as the drainage improvements. 

GOOD INFO BUT NOT GERMAIN TO THE VOTE

The reserves for the drainage over the past 20 years would have been approximately $650.00 per annum per EDU, $54.25 per month to cover the current cost of the drainage improvements.

 NO RESERVES REQUIRED FOR THE INTERNAL SYSTEM

 OLS will now be paying for this in the rears and building reserves for future capital improvements and maintenance will be on top of those costs.

RESERVES, INSPECTION, AND MAINTENANCE OF THE SHARED ONLY

Pay now or pay later these expenses related to the sewer infrastructure will be incurred one way or another in the future.

NO EXTRANEOUS EXPENSES FOR THE INTERNAL

SHARED RESERVES, ETC FOR THE SHARED INFRASTRUCTURE 

If the sewers were a totally gravity system and not requiring backup generators and pump stations it would be a different story altogether.

OUR INTERNAL SYSTEM IS A TOTALLY GRAVITY SYSTEM, SO YES ONLY FOR THE SHARED

Sent via Galaxy S20

[Alfred Roy]

Forwarded to this forum

Sent via Galaxy S20

[Martin Merritt]

Al,

Thanks for your thoughts and your experience with these items.  It helps to have more heads with knowledge involved and review our estimates and assumptions.  As previously noted, I don't believe we have any "Sewer experts" on the WPCA (I am certainly not one).  We are volunteers trying our best.  So I appreciate your thoughts and concerns.

INTERNAL SYSTEM

After review of additional materials, and through these discussions, I don't disagree that perhaps our reserves for the internal sewer could be lower.  I wouldn't agree with a zero reserve though.  Perhaps it would be good to build up a reserve of $100,000 over 10 years, and then we could hold it there.  I don't think any of us can guarantee that we won't have ANY problems with:

• Root intrusion
• Settlement issues
• Blockages
• No joint failures
• No issues with manholes
• Construction defects

Although repairs are definitely less likely with gravity fed sewers, I don't think we should plan on the costs being zero.  (the cost estimates provided to the community provided for a $600,000 reserve over 20 years.  So perhaps we can shave off $500,000 from the estimated operation costs, or about $2,500 per homeowner, or about $125 per homeowner per year). 

Also, one thing we should discuss and consider reserving for is for future joint failures and the related excavation costs.  Although the PVC piping should be good for many years, the joints are normally the cause of major repairs down the line.  I don't know what the industry estimates for those are.  I read that they are 30-40 years (are we using mechanical fittings, rubber gaskets?).  Is this something that we should reserve for?  Over what time and how much?  Per Bob's e-mail, at some point we will have to pay for these costs.  We can reserve for them up front, or we can try and borrow money down the road.  However, borrowing for large expenditures is currently proving to be extremely problematic, as we are continuing to look for financing for our current Stormwater and Roadway Project.  There aren't a lot of banks lining up to provide a small beach with financing for capital projects.

SHARED SEWERS

For the shared system, the calculations at the top of the schedule are based on the entire system, and then you will notice that we multiply this by OLS' percentage of the shared system, or 21.1%.

So the estimated capital reserves of $3 million over 20 years ($150k per year), are for all the beaches, not $3 million per beach.

Based on previous e-mails in this string, we probably should be thinking about whether this is enough of a reserve, as opposed to too much.

Happy to hear thoughts on the appropriate level of reserves for this system.  I provided some research, in my previous e-mail.  If others have other research or industry knowledge, please feel free to share.

Marty

[Jay Moynihan]

5/17-25

Hi:

A note about sewer rates…

Just a point to all that when our annual sewer 

rates are ultimately developed they will likely be a 

reflection of both O&M and system depreciation. 

As some may recall, I have previously 

noted that as the project moves toward completion 

we should consider incorporate a “Rate Specialist”

to help us develop annual sewer rates which reflect system 

needs for both the present and future needs of the system. 

Having previously worked to develop utility rates - it is quite a process 

Honestly, it is too early to engage in actual rate design. 

Thanks 

Sent from my iPhone

On May 17, 2025, at 9:47 AM, Martin Merritt <mjmerr...@gmail.com> wrote:

Al,

To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/2e6a046c-5d0f-4a09-a92c-0c660aeb012fn%40oldlymeshores.org.

[Alfred Roy]

Marty-

Yes, there is a lot to know and learn; This coming from someone with a 45 year utility operations, maintenance, and management background who completely immersed himself in our wastewater project details for over 3 years.

The entire subject of inspections, maintenance, repairs, and establishing reserves, etc. will require input from industry experts and adoption of industry best practices.  Based on my current  level of understanding, your estimates appear quite high.

Well see!

To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/2e6a046c-5d0f-4a09-a92c-0c660aeb012fn%40oldlymeshores.org.

[John Cunningham]

None of this discussion is germane to the issue being placed before us on 5/24/25 - voting on the bond resolution for the capital expenditure. 

[Alfred Roy]

I agree wholeheartedly.  

Sent via Galaxy S20

To view this discussion visit https://groups.google.com/a/oldlymeshores.org/d/msgid/bond2025.g/d1ca3ef8-b994-47d5-a5cc-8759b3e93337n%40oldlymeshores.org.