McKenzie:
Hi Folks! I’m McKenzie VanMeerhaeghe, and this is ‘Water You Talking About?!’ A podcast brought to you by WaterOne where we talk about the ins and outs of all things water. Today we are talking about our Budget. We are diving deep into what goes into our rate structure, where the money goes, and how we approach financial planning. Let’s dive into it!
Today I am joined by Shane Hoffman, who is the Supervisor of Financial Planning & Analysis in our Finance Division. Shane will be our expert on all things Finance for today’s episode. Shane, thanks for coming on, we are so happy to have you here today!
Shane:
Thank you. It's my pleasure.
McKenzie:
First, I want to start off by asking some questions about you so we can get to know who you are and what you do a little bit more. So how long have you been at WaterOne?
Shane:
I celebrated my 25 year anniversary this last December.
McKenzie:
Oh my gosh, congratulations! Can you tell me a little bit more about your background?
Shane:
I've been at WaterOne so long, it's hard to remember my background before coming here, but I lived in Kansas pretty much since I was five years old. Went to Kansas State University, got a bachelor's degree in finance and an MBA.
And after that, my first job was with a rental car agency, where I eventually managed an office in Tulsa. They eventually got bought out and shut down. Where I moved back to Kansas City, joined Allstate Insurance, and was a manager in their regional office for an administrative function. They reorganized and got shut down. And then I came to work at WaterOne.
McKenzie:
Awesome. What might a typical day at WaterOne look like for you?
Shane:
It can vary, but typically I'm going to be working on budgeting different accounts, updating financial models, maybe making some investments, reporting, performing some data analysis, or since I'm supervisor now, maybe reviewing others work.
McKenzie:
And what do you love most about the work that you do.
Shane:
Well I guess first the thing I love most is just the people I work with. I mean my staff is amazing. Knowing that I can come and interact with them every day makes it just worth coming in. But other than that, the other things I like about my job is the fact that I get to work with all levels of the organization, from first line employees all the way to the general manager. I also get to do a large variety of work, anything from just plain old data analysis and spreadsheets to giving presentations to conferences to developing presentations for someone else to get to the board, to participating in training programs, to participating in cross divisional teams, to work on projects. There's just a large variety of things that I get to do while being here.
McKenzie:
Yeah, there's so many things to love about WaterOne and what you said about the people really rings true for me. To the people who work here really shine and are really great people to work with. At WaterOne we're proud to be a well-managed nonprofit water utility built on a solid financial footing as a quasi municipal corporation. We think we draw from the best of both worlds. We apply business principles to the values of public service. And we proudly apply those principles to all 272mi² that we serve.
Prior to every fiscal year, WaterOne estimates the amount of funding necessary to meet payroll, provide benefits, maintain infrastructure, pay off debts, and many other needs. Then, based on the estimated water sales projected for the upcoming year, it sets the water rates needed to meet those needs. So, can you give us an explanation of how we determine our annual water rates?
Shane:
First, our rate structure is called peak management rates, and it's very unique and equitable. The most unique and equitable rate structure that I've seen and how it works is we measure our customer's usage for January through April. We take the average daily usage, then we add 25% on top of that. That is what we call block one. So if people use gallons within that amount, they say within block one. The other advantage for residential customers is they get to use the class in default, which is often times higher than their own work. So that's another buffer. We have to help make our rates more affordable, because we want people to be able to use water on a normal basis and not have to pay block 2 charges. We want to be able to take the showers they need, clean the dishes, do the laundry, water the plants, all the normal daily stuff that they do. We want those to be charged only to block one rates. And so we make sure that they have some extra room to spare
When they a customer goes beyond 125% they get into what's called block two where the rate is higher. This is because when customers use more water, it requires us to build facilities for that usage. And so that water then becomes incrementally more expensive. And so that's why it's called peak management rates. The block two is supposed to curtail people's usage a little bit to decrease the peaks of our system. In order for us to have to build less facilities over the long term.
After we determine our rate structure, we have to determine what the rates need to be. And to do that we have to go through a budget process. The budget process for us, the less the better part of ten months. It involves all the departments, all the divisions going through multiple meetings where we go through everything line item by line item. We're still a small enough organization to where we can do that, and we do take the time to do that. And when all said and done, we come out with rates that are based on a normal year. When we say that that means that our expenses and revenues can vary greatly by the weather. If it's hot and dry, our expenses go up, but our revenue also goes up. If it's wet, people water less, so our revenue goes down, but our expenses go down. But what we do is put budget on a normal year basis. So we assume that the weather is going to be normal
McKenzie:
What are our rates for 2025?
Shane:
For 2025. Block one is $5.41 per thousand gallons. Block two is $8.12 per thousand gallons. Our service charge is $11.25 per month. So for a typical customer that uses 7000 gallons, this would equate to about $54.05 per month.
McKenzie:
Perfect. And why would we increase our rates?
Shane:
We increase our rates because our costs go up, our costs go up because we have to continually replace and maintain our infrastructure. The water utility business is a very asset intensive business. We have to replace miles and miles of pipe every year. We have to maintain our production assets to make sure they are producing high quality water in the water industry. Mistakes cannot be made. We can't make mistakes with our treatment. We can't make mistakes with our distribution. So our assets have to be working perfectly all the time.
McKenzie:
We are incredibly lucky to have resilient water sources in our area. The stability and security that our long-term water sources provide allow us to help keep our rates more stable. This is something that would impact rates if we weren’t so lucky to have reliable water sources. Just another reason to keep our local rivers and water sources in mind when taking care of our community. We rely on them just as much if not more than they rely on us.
WaterOne receives most of its revenues from water sales, and therefore weather can heavily influence its revenue in a given year due to the volume of water that is used for lawn irrigation. The continued inflationary environment provided financial challenges. The cost of doing business increased across the organization. With dry weather driving water sales higher than budgeted and higher interest rates increasing investment income, the higher operational costs were managed without affecting operations. In comparison to our neighboring utilities, how do our water rates stack up?
Shane:
So when comparing our rates to our neighbors, our rates stack up very well for 2025. When compared to our neighboring utilities, we are very close to the top. When just looking at a bill based on 7000 gallons, Olathe has a slightly cheaper rate than us. We also have another way we look at our rates, and that's in terms of affordability. We look at our rates as a percentage of monthly household income. And when we look at that, we are actually tied with Olathe.
McKenzie:
Yeah, we work hard to keep our rates as low as possible, and we take pride in being the most affordable in the area.
Now let's break down our expenditures aka where does all of the money go? Shane, what is the largest portion of our annual expenditures?
Shane:
Well, our largest portion of annual expenditures is operational maintenance, which is roughly about $70 million.
McKenzie:
And what does operations and maintenance include?
Shane:
Operations & Maintenance includes the salaries, the benefits of our personnel. It also includes the power in chemicals to treat the water. It also includes all the materials and supplies that we need. It also includes all of the software that we have to pay for every year that runs our ERP system, or in my system, and it also includes all the fuel that our vehicles have to use to go out and fix the infrastructure every day.
McKenzie:
And what are some of the other expenditures?
Shane:
Our other large expenditures that are built into our rights include our annual capital program. This has two parts. One our one is what we call the regular annual capital. So this is replacing things like vehicles and personal computers and any other of our I would call smaller assets that need to be replaced.
The other part of that is our T&E program, which is used to replace distribution main. It's used to relocate distribution main. It's also used for conditional assessment. It's used to fix main breaks is also used for transmission. Main assessment. The other large part of our expenditures includes our debt service. And this is the amount we pay to pay off our bonds. We issue bonds to pay for large assets that we don't have the cash on hand to buy.
The last large line I'm in our budget is called designated to master plan. This is where we put money aside from our annual budget, to send to our master plan program to pay for large projects.
McKenzie:
Yes, our master plan is incredibly unique. Our master plan horizon is 40 years. Can you talk a little bit about why it's important?
Shane:
Well, like I said, our industry is very asset intensive in the type of assets that we purchase, are very expensive and take a long time to build. And we have to have those assets in place when the demand is there. And so we have to become very, very good at planning and are we accurate 40 years out? No, but we continually update the plan as time goes along.
So we engage Black and Veatch to produce a master plan for us, which we then have meetings with Black and Veatch to work out all the details. This typically occurs once every five years, but we do have quarterly meetings with engineering and production and all the different stakeholders, along with Black and Veatch, to update that and make sure that it's accurate on an annual level so we can get our budget correct.
McKenzie:
At WaterOne we pride ourselves on upholding our values. Transparency is something that we highlight to ensure we are open with our community. We always publish our annual budget, where you can see a comprehensive breakdown of everything we are discussing today, and more. Visit waterone.org/budgets. This link will be listed in both the transcript and the descriptions of the episode.
Coming up, Shane and I will be discussing more about what goes into planning our annual budget. We will be discussing budget timelines, challenges, and some groundbreaking metrics that our finance team has developed. Stay tuned.
~Music Break~
McKenzie:
Moving on, I want to elaborate a little bit more on the amount of planning that goes into planning a budget. So how far in advance do you start planning the annual budget?
Shane:
Well, we usually get started when the previous year's books are closed, and this usually occurs sometime in the beginning of February, so in the beginning of February the previous year. Once books are closed, then we can start using that year's data to produce the coming year budgets. We will go all the way up until our work is mostly done after the public hearing in November. So it's about ten months
McKenzie:
Awesome. So you really are kind of living a year ahead every day in your job.
Shane:
Yes.
McKenzie:
Interesting. And when looking into a budget, what are the largest factors that come into play?
Shane:
Some of the large factors that come into play would be what's our master plan of doing? Will we have a bond issue this coming year? Other factors include how much should we increase employees wages? Should we make any adjustments to their benefits? What are the costs of chemicals going to be? How are the power rates? Will BPU -which is our primary power provider- will they raise their rates or will they stay the same? What's the cost of fuel going to do if the cost of fuel goes up? That adds it can add hundreds of thousands of dollars to our budget.
McKenzie:
When planning a budget, do you have a goal in mind to accomplish.
Shane:
The goal with our budget is always to produce the lowest rates that will allow operations to run the utility smoothly. We do not want to have rates so low that operations has to be constrained in how they operate our system. We want them to be able to operate our system in the safest, most reliable and most efficient manner possible, and we have to have the funds available for them to do that
McKenzie:
So what is your favorite part of financial planning at WaterOne? What gets you excited about planning a budget?
Shane:
My favorite part of planning a budget is when I am able to work on the 20 year model, because the 20 year model is what actually produces our rate increases every year. And so with a 20 year model, you get to see all the moving parts, all the pieces come into play to produce the plan that your board approves and that your customers are paying for every day.
McKenzie:
Yeah, it really seems like it's such a big moving puzzle that you have to make fit in order to keep rates as low as they can, while keeping water quality as high as it can. It's really impressive to see.
Shane:
It's like a Rubik's Cube.
McKenzie:
Yeah! And then when putting together a budget, what would you say are the biggest challenges?
Shane:
Well, the biggest challenges are always the competing needs. There's always more stuff that we can do and not enough funds to do them. So we have to always prioritize, and we have to make sure that the top needs or the ones that get funded, the things that are making sure that our water safe and things that are making sure that our assets are working properly, the funding it takes to hire people and to keep competitive wages, we have the very best people working in our in our company.
McKenzie:
Yeah, absolutely. And as we've been discussing, you and your team put a ton of effort into financial planning. And this is shown by the number of amazing awards you and your team have won over the years. WaterOne has been recognized with the Government Finance Officers Association's Distinguished Budget Presentation Award (That's a mouthful) for Water One's 2024 budget. This achievement is the highest form of recognition and governmental budgeting, and reflects the commitment from WaterOne's board and staff to meeting the highest principles of governmental budgeting. We've been awarded this award a couple of times, actually.
So how many times have we been awarded the Distinguished Budget Presentation Award?
Shane:
We have been awarded the Distinguished Budget Presentation Award eight times. We send our budget document into GFL, a and a panel of experts reviews that document And make sure that it meets all the requirements that Geoffroy has laid out to receive the award.
McKenzie:
Wonderful. I think I can speak for many when I say how impressive your achievements have been. It is such a great feeling to know that we have a dedicated, hard working team working for our community to help us achieve our goal of ensuring financial stability and predictable rates.
What are some other awards that your department has earned that reflect your achievements?
Shane:
So while it's not actually an award, Moody's Investors Service and Standard Poor's rate our bonds as Triple-A. It tells investors that we have the highest credit rating possible. And what that says is that we are a very well run organization, both financially and operationally.
McKenzie:
In addition to this, your team has also worked on developing an affordability metric that is now widely used by many organizations. Can you talk to us a little bit more about this?
Shane:
This metric was developed by Natalie Morrison and Cassandra Gunther. And so what this metric does is it measures household affordability in terms of income after basic needs. So it takes the 20th percentile income and then it strips away money that you might need for housing, for food, for health care, for taxes. And it looks at what's left over after that. And then it takes our rates as a percentage of that. It was amazing idea from Natalie and from Cassandra to work on this, because, you know, we live in a very affluent county and it would be easy for us to ignore affordability. But like so many other things we do here at WaterOne, we are trying to stay ahead of the curve. We are trying to look at things like this before it becomes a problem.
McKenzie:
That is absolutely incredible and super impressive. Well, I believe that is all the time we have for today. As always. Thank you so much to all of our listeners for tuning in. We appreciate you all so much and could not continue without your support. Please take a moment to subscribe and share our podcast with your friends and family. And Shane, thank you so much for coming on to talk to us about the budget today. I appreciate you taking the time out of your busy schedule.
Shane:
Thank you. The pleasure was mine.
McKenzie:
Just a reminder to view our budget reports you can visit waterone.org/budgets. Our next episode will be about our education and outreach programs. Also, I want to take a moment to let you know that early registration for our annual Tower 2 Tower 5K is open. This year's theme is 80’s! Run or Walk for a totally tubular cause.
All proceeds are donated to water for people, a charity who helps provide water for those in need. We are so close to raising $100,000 for this charity, so visit Tower2Tower.org and sign up today. We can't wait to see you there. Thank you for listening and we'll see you next time on. What are you talking about?