Capital budgeting & procurement

2. Raleigh Institute – July 23 & 24, 2019 Neuse River Resource Recovery Facility Capital budgeting & procurement Why Is Everyone In My Business Presented by Barry Shearin

3. So who’s the king (or queen) when it comes to buying my city stuff? City Attorney City Council City Manager Internal Audit Procurement Manager Finance Manager

4. Capital budgeting overview

5. Budget = operating costs + debt service (+ paygo) Operating Costs are costs for Personnel, Chemicals, Electricity, and other day to day costs of operating Debt Service is the annual debt payment on money borrowed for capital program (i.e. – Mortgage Payment) PAYGO is available cash resources to help fund capital projects.

6. Capital funding types • Bonds • Revenue • General Obligation • PAYGO (Departmental Cash) • Commercial Paper • State Revolving Fund (SRF) Loans • Grants • Earmarks

7. Bonds Bonds are really a loan. Cash is received immediately, and interest starts accruing immediately. • Revenue Bonds • Used by most larger NC utilities • Secured by annual water/sewer revenue projections • Approved by City Council – no voter approval • General Obligation Bonds • Used primarily for non-water/sewer projects (schools, roads, city buildings, parks, etc.) in North Carolina • Secured by tax revenues • Requires voter approval (referendum)

8. paygo • PAYGO is using the departments cash reserves to pay a portion of capital projects. • Cash reserves built up through a bond requirement to generate “additional cash” each year to ensure debt payments can be made, or • A designated fund in the overall budget each year to be generated from revenues. Commercial paper • Essentially a Line of Credit or Construction Loan • Cash only received as needed to pay contractors and interest only accrues on money used. • Usually set up for a year or two then must be “converted” or cashed out through issuance of bonds to pay off the construction loan.

9. Other funding types State Revolving Fund (SRF) • Program of federal funding administered by State of NC • Primarily low interest loans. Very limited grants. • Various types of “applicant qualification” required Grants • Generally are not required to be paid back. May require matching. • Very few available Earmarks • Funding through congressional action • Difficult to get funded. Requires authorization and appropriation.

10. Debt big brother • Not Necessarily… • Must get local government commission (LGC) approval LGC ACTS AS BIG BROTHER TO CITY COUNCILS ON DEBT • Created during depression when cities borrowed more than they could pay back • North Carolina was one of the worst states in the country

11. Srf loans vs bonds • SRF Loan • $20M @ 1.5% for 20 years • $1.16M/yr = $23M repaid • Bonds • $20M @ 3% for 30 years • $1.02M/yr= $30M repaid Savings = $7M

12. Bond rating Three rating agencies – Moody’s, Standard & Poor, Fitch Rating affects interest rates Raleigh has the highest rating at AAA For Example: $100 million in bonds with 30 year payback • If AAA = 3%, annual payment is $5.0M • If AA = 4%, annual payment is $5.7M Why It Matters

13. Capital and rates

14. Financial cycle example Major Lift Station Improvement Project Council Action in Red

15. Rate impacts of capital example • Need an additional $10M for new water project • Bonds at AAA rating are at 3% for 30 years • Equates to $42,000/month in debt payment • For 183,000 customers = $0.23/customer/month • If you assume $30/month for average bill = 0.8% rate increase

16. All that info is Nice but why didn’t I get my Project!! All the Project Money Seems to go to ….. • Wastewater Treatment • Water Treatment • New Development Growth projects • ??? ………………. Who and How are Decisions on What Projects Are In and Out Being Made??

17. What’s Your #1 CIP priority 1. Replace All Clarifier Drives at Neuse River RRF - $35M 2. Admin Building Renovation - $10M 3. New sewer line to Zebulon for new industry - $15M 4. Replace Sewer line along Crabtree Creek - $21M 5. Filter Rehab at Benton Water Plant - $18M

18. What’s Your #1 CIP priority …. The Rest of the story 1. Replace All Clarifier Drives at Neuse River RRF - $35M • Clarifiers operating fine but 20 years old and TJ thinks that’s too old for his liking. 2. Admin Building Renovation - $10M • Admin Bldg roof leaking, hvac not working, and doesn’t meet fire code 3. New sewer line to Zebulon for new industry - $15M • New wet industry to employ 700 people in 3 years with $50K/yravg salary 4. Replace Sewer line along Crabtree Creek - $21M • Sewer line overflows at any rain event greater than ¼ inch and numerous pipe structural defects found 5. Filter Rehab at Benton Water Plant - $18M • Filters operating well but Whit saw new filter bottom at AWWA conference he wants to try out.

19. procurement I Want What I Want – Isn’t That Good Enough Reason?

20. The players City Government Structure

21. The procurement food chain City Council City Attorney City Manager Internal Audit Asst City Managers Department Heads Procurement Staff

22. Player responsibilities

23. City council responsibility • Fairly represents the public that elected them • Decisions represent best public interest • Responsible for setting overall policies and guiding principles • Generally should not intervene in day to day management or personnel issues

24. The public (city council)

25. mayor • May be appointed or elected – Raleigh elects • City decides if they can always vote or just tie-breaker – Raleigh Mayor is a voting member – Not a tie-breaker and No VETO

26. City manager • Administers the policy direction from City Council • Works for the Council and deals with them as a body • Responsible for day to day policies and procedures in accomplishing work of the City.

27. The law (city attorney’s office) • Reports to the City Council • Interprets the Law for Council and Manager • Provides opinions on legal risk

28. The gatekeeper (procurement) • Overall Role to Efficiently procure: • What is needed • When it is needed • At the lowest possible cost

29. THE GATEKEEPER (PROCUREMENT) Now The Other Side of That Coin…. • All true provided the process meets: • The law • The policy • The goals of Council and organization

30. Role of procurement staff • Obligated to procure in the proper manner (laws and policies) • Foster Open Competition • Prevent Favoritism • Protect/Save Public Funds

31. Interesting tidbit If a City Official enters into a purchase contract without verifying funds are available to pay the purchase, they can be held personally liable for the debt. GS 159-28(e)

32. The armchair quarterback (internal audit) “The Internal Audit Office promotes efficient, effective, and accountable city government. The office conducts financial, operational, and compliance audits of all city departments, divisions, and programs.”

33. conflicts in policy/process • MWBE Opportunity vs Economy of Scale • Quality vs Cost • Growing Existing Businesses vs New Businesses

34. You decide (Based On True Events But Slightly Revised For Brevity) Need contract to clean up contamination event Two vendors Selection focuses more on qualifications than price Project advertised on City and State Websites Mandatory Pre-proposal meeting to propose Vendor A • Been working on plant site for years. • Performs good work. • Almost daily/weekly communications with staff at plant. • Submits complete proposal. Vendor B • Known but minimal experience with City or Plant Staff • Asks Engineer PM about project status – called Plant Manager • No return call from Plant Manager • Employee monitoring websites left company • Missed mandatory meeting and disqualified What would you do?

35. The law and the policy Answer: Maybe Law generally sets the minimal requirements such as: • Requirements for advertisement of various procurements • Award process by staff vs Council Policy maybe more restrictive • Can subdivide approval thresholds under the legal threshold • Increase advertising requirements Are They The Same?

36. Fair competition? You decide • Project at Wastewater Plant needs Control Valves (CV), Mixers (MX), and Sludge Pumps (SP). • All have similar values of about $100,000 each • Contractor buying equipment so you don’t see actual prices • There are 3 vendors of some or all this equipment • You’ve sole sourced the mixer to one brand

37. Where’s the complaint? Complaint #1 - My mixer (A) is just as good as mixer (B). Complaint #2 - Whit has an unfair pricing advantage by having a sole sourced piece of equipment. He can have lower price on other two items and make up the gap in the mixer. Based on a real example (not Raleigh) where City Manager’s office sided with vendor on Complaint #2.

38. Moral of the story PROCESS WILL ALMOST ALWAYS WIN OVER PRICE IN THE END. Source: The World of Procurement According to Barry 

39. Discussion