5-Year Operating Plan

Look through your annual operating budgets for recent years (or, if you are just starting up, create one first).  They should show your operating expenses and operating revenues. An annual operating budget is one of the most important tools you can have; one that every water system should complete with care as it will help inform not only operating decisions, but other planning documents as well.

Your annual operating budget should give you some idea of the items that you want to include in your Five-year plan. For example, if you are spending a lot of money on your electrical supply it may be a sign that you should replace an aging and inefficient pump in the next few years. 

Consider all aspects of your water system when preparing a Five-year plan. You can divide the system into ten parts:

• Water Source Reliability
• Water Quality
• Customer Satisfaction
• Personnel Development
• Operational Effectiveness
• Financial Viability
• Infrastructure Condition
• Operational Resiliency
• Stakeholder Support
• Community Sustainability

For each of these, you should set goals that outline what you want to achieve in the next five years. It’s a good idea to involve others in your goal setting process; you could include customers, health officials, consultants and financial advisors. Your long-range plan, if you have one, will also help you identify five-year goals. Complicated goals can be broken down into smaller, achievable steps. You can highlight milestones (with timelines) to keep you on track. 

Once you have a list of goals, you can identify specific objectives and results to help you reach those goals. Your goals will be broad; such as “provide reliable, safe water” or “remove our Boil Water Notice so we can provide safe water”. The objectives are those steps that get you to your goal, and should be specific and measurable. Objectives should have a timeline, so you can take each step towards your goal. For example, if your goal is to remove a Boil Water Notice, your objectives may be laid out over a longer time period. Your first objective could be to raise water rates so that you can pay for treatment, which may take a year. In the second year, your objective could be to send some of your personnel for training on this specific issue, and for the third year objective you may plan to install upgraded treatment equipment. Your timeline will vary depending on several factors:

• Where your system is now
• Where you want it to be
• How will you get there?
• How will you measure your progress?

Some of the objectives you identify may be reached by continuing to operate as you are currently, and without any additional expenditures. If that is the case, you do not need to include these objectives in the following steps, which are meant to help you budget for new expenditures only.

In order to achieve your new objectives, you’ll need to know how much they cost. You will also need to decide if the costs should be paid from your operating budget or your capital budget. For example, if the objective will lead to the creation of a physical asset such as a reservoir and the value will exceed $2,000, you may decide to consider assigning this cost to your capital budget. However, If the objective leads to a smaller expenditure, then it can be part of the operating budget. Some new objectives, such as providing operator training, will obviously be part of the operating budget. Once you have split your objectives into these two groups, you can start to prepare a cost estimate for each.

You can use a worksheet or create your own. You’ll want to list your specific operating objectives, together with your estimate of total cost over the five years. Show the estimated percentage of the work you plan to do each year towards the objective, and the annual cost for that work. To complete the worksheet, you must add up all the new costs for each of the five years. This sheet can be referenced in preparing your annual operating budgets and the long-range financial plan.

In the previous step you identified certain objectives as part of your five-year operating costs. Your second list, those associated with capital projects, belong in a separate worksheet showing your Five-year capital costs. You can tailor your worksheet in a way that suits you. As is the case with the operating objectives, you can sum the total of your estimated capital costs over the next five years and use this information in other worksheets.

In the first step, you assembled information about your current year budget and your revenues and expenditures for past years. Use this information to make an initial forecast which covers revenues and operating expenses over the next five years based on the existing administration and operating expenses. You will need to allow for inflation where appropriate. This information is your Five Year Operating Budget Forecast. You can use a pre-made worksheet or create your own. 

Note that your new operating expenses (those identified in Step 3) would be a separate line item; “New Operating Expenditures”. You will want to include “Contributions to Reserves” on your sheet (see step 6 below); this will be the amounts you have allocated for your reserve fund(s) each year. 

You can now calculate your “Total Annual Costs” over the next five years. You will also want to calculate your  “Total Revenues less Total Costs”.  

You may have to adjust your forecast of the revenues or the expenditures to make sure this amount is always positive. For example, if your initial forecast of revenues over the next five years results in Total Costs exceeding Total Revenues, you may have to increase water rates in the future. (see: Sustainable Rates & Charges).  Whatever the effect on water rates, it is important to continue communications with your customers so that they are aware not only of rate changes, but the activities these changes support. 

Creating a Five-year plan means having to think beyond your current annual budget, and consider the events of the coming years. As you think about your future needs and plans, the value of creating reserve accounts will really come into focus.

• Replacement Reserve: Water systems have expensive assets. Some may last a long time, but will still need maintenance and eventual replacement. A Replacement Reserve Fund is where you set aside money each year for the eventual renewal or replacement of equipment. Renewing assets systematically, rather than waiting for breakdowns, will reduce downtime and avoid extra costs. Your asset management plan will help with this.
• Operating Reserve: While we all hope for the best, there tend to be three scenarios for any give year: best case, worst case, and middle of the road. If you plan for the best case, but reality serves you the worst case, your operating funds will fall short. This is why you need an Operating Reserve. If you prepare projections for all three scenarios, you can figure out the difference between the annual expenditures for the worst case and the middle-of-the-road scenarios. This will give you an idea of how much you should set aside in an Operating Reserve fund. This approach encourages you to anticipate potential problems, and to plan for them.
• Emergency Reserve: Unexpected event will impact your finances. An established Emergency Reserve or Contingency fund with budgeted annual contributions (made until you achieve a target balance in the fund), will provide money for those events that you can’t otherwise plan for. It also gives you peace of mind, and increases the confidence of users in your ability to manage a sustainable water system.
• Construction Reserve: Your construction reserve is the fund from which you pay for capital construction projects. Capital projects are those which improve your system (as opposed to renewing existing parts and equipment; this is covered in the Replacement Reserve). For example, a capital project might be installing filtration for the first time or extending your distribution network to serve new customers. Income to the construction reserve fund might include the annual contributions you make from your operating budget, and any proceeds of loans you receive for capital expenditures. Expenditures from the reserve will include direct payments for capital projects, and the principal and interest charges in repayment of loans.