Equipment Replacement Fund

Clean Water Fund Program

A municipality receiving a loan from the Clean Water Fund Program (CWFP) is required to establish an equipment replacement fund (ERF) for the municipality's sewerage system or storm water system. A CWFP project manager will review the user charge system (UCS) prior to preparing the municipality's Financial Assistance Agreement. The UCS must include a proposed ERF schedule and projected ERF deposits. The ERF schedule and fund deposits must cover the entire sewerage system or storm water system.

Following is information to help establish and maintain the municipality's ERF:

1. What does "replacement" mean?  According to s. NR 162.003 (61), Wis. Adm. Code, "replacement" means "obtaining and installing equipment, accessories or appurtenances that are necessary during the useful life of the treatment works or structural urban best management practice (BMP) to maintain the capacity and performance for which the treatment works or structural urban BMP were designed and constructed."

2. What is the intent of the ERF?  A municipality may use funds on deposit in the ERF when needed to replace equipment necessary for the operation of the sewerage system. Installation costs may be included when determining the replacement cost of the equipment. Major maintenance may also qualify as replacement, such as rebuilding an engine or pump, to avoid replacing a piece of equipment.

3. What is not the intent of the ERF?  The ERF is not intended to be used to pay for:
   • architectural or engineering fees (except those associated with the equipment being replaced);
   • routine maintenance costs;
   • replacing the entire treatment plant or collection system;
   • buildings (bricks and mortar);
   • pipes, and other non-mechanical items; or
   • improving or expanding a system design.

4. How is an ERF schedule setup?  Two methods are acceptable for establishing an ERF:

   Itemized Schedule: A schedule of equipment items is established for determining an amount to be deposited annually into the ERF. The schedule must include the: type of equipment, purchase date, anticipated service life, purchase cost including installation, and annual deposit needed to replace each piece of equipment. Each individual annual deposit is calculated by dividing the purchase cost by the years in the anticipated service life column. The cumulative deposit total for all pieces of equipment will determine the required total ERF annual deposit.

   For a more detailed example of calculating the annual deposit, see Sample A. (PDF, 8KB)

   The Minimum Required ERF Balance can be determined by multiplying the required annual deposit for each piece of equipment by the number of years the equipment has been in service, and then summing the results for all equipment on the schedule.

   For a more detailed example of calculating the Minimum Required ERF Balance, see Sample B. (PDF, 9KB)

   Percentage Schedule: A municipality, with an annual budget for capital improvements, may choose to maintain an ERF balance that equates to the required minimum percentage of the mechanical equipment balance shown on the municipality's internal financial document or annual audit (equipment value).

   Mechanical Equipment Assets* $0-$1,000,000 $1,000,001-$3,000,000 $3,000,001-$5,000,000 $5,000,001-$10,000,000 $10,000,001-$20,000,000 $20,000,001-$30,000,000 Over $30,000,000

   Percent Required for ERF 50% 40% 30% 20% 10% 7% 5%

   *Amount prior to depreciation, for equipment only

   The municipality has a maximum of three years from the first principal payment on a CWFP loan, or three years from the year they switch from the Itemized Schedule to the Percentage Schedule, to achieve the required minimum balance/percentage. When ERF funds are used, the municipality has a maximum of three years from the installation year to reach/return to the required minimum balance/percentage.

   For a more detailed example of calculating the percentage schedule, see Sample C. (PDF, 8KB)

5. How often must the ERF be reviewed?  CWFP loan recipients are required to review their UCS at least every two years. This includes all related items funded under the UCS, including the ERF. This applies to using the Itemized Schedule or the Percentage Schedule.

6. Can the municipality make changes to the equipment replacement schedule?  Yes, adjustments should reflect changes in expected equipment life and cost, identify new equipment, and remove obsolete or retired equipment. As a loan recipient, the municipality is required to update its UCS at least biennially, and the replacement schedule should be reviewed as part of this update. If using the percentage schedule option, the value of equipment is examined and updated annually as part of the audit function.

7. Must the municipality file a report on ERF transactions?  Yes, municipalities with WPDES permits are required to complete and submit the Compliance Maintenance Annual Report (CMAR), which includes financial information that summarizes the activity in the ERF. The municipality must be able to fully account for all ERF fund transactions.

8. Does a municipality with only a collection system need to establish and maintain an ERF?  Yes, the ERF should cover equipment associated with the collection system, such as lift stations, standby generators, and sewer cleaning equipment. Not included are the pipes. Beginning for the 2005 reporting year, collection systems will be operated under a WPDES permit.

9. When a municipality receives a loan to modify a treatment plant, storm water system, or collection system, does the ERF fund include only that portion of the work funded by the loan?  No, the ERF must cover equipment for the entire sewerage system or storm water system.

10. If the municipality determines they have an excess in the ERF, what should they consider?  An "excess" is the amount of funds in the ERF that exceed the Minimum Required ERF Balance. This can occur under either the itemized schedule or the percentage schedule. These funds may remain in the ERF or be used for any legal purpose of the sewer utility. For example, municipalities may choose to set up a segregated account to fund future sewer utility costs such as pipe replacement.

11. Are there penalties for noncompliance?  Yes. See s. NR 162.18, Wis. Adm. Code, Breach of Contract; and s. NR 162.19, Wis. Adm. Code, Noncompliance. (See Statutes and Codes.)