Equipment Replacement Fund

Every municipality that has a Wisconsin Pollution Discharge Elimination System (WPDES) permit for wastewater treatment facilities, urban runoff treatment works, or structural urban best management practices (BMP) is required to properly operate and maintain the facilities, including maintaining adequate funding, as a condition of the WPDES permit, see chapter NR 205.07(1)(j), Wis. Adm. Code.

In addition, a municipality receiving a loan from the Clean Water Fund Program (CWFP) is required to establish an equipment replacement fund (ERF) to be used only for expenses incurred for equipment related to the municipality's wastewater treatment works, urban runoff treatment works, or structural urban BMP. Under the CWFP, "treatment work/s" has the meaning given in section 283.01(18), Wis. Stats., and includes the collection system.

Prior to preparing the municipality's Financial Assistance Agreement (FAA), the DNR loan project manager will review the municipality's user charge system (UCS). The UCS must include a proposed ERF schedule and projected ERF deposits. The ERF schedule and fund deposits must cover the entire treatment works or structural urban BMP.

FAQ

The following information is provided in order to help establish and maintain the municipality's ERF.

What Does Replacement Mean?

According to ch. NR 162.003(64), Wis. Adm. Code, replacement means "obtaining and installing equipment, accessories, or appurtenances that are necessary during the useful life of the treatment works or BMP project funded through the CWFP to maintain or improve the capacity and performance levels for which the treatment works or BMP was designed and constructed."

What Is The Intent Of The ERF?

A municipality may use funds on deposit in the ERF to pay costs incurred to replace mechanical or electrical equipment necessary for the operation of the WPDES-permitted treatment works or structural urban BMP. If the municipality includes installation costs when determining the replacement cost of the equipment, those costs may be paid out of the ERF, also. Major maintenance may also qualify as replacement, such as rebuilding an engine or pump to avoid replacing a piece of equipment.

What Are Inappropriate Uses Of The ERF?

The ERF is not intended to be used 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;
• improving or expanding a system design; or
• other municipal operation costs, even as an internal loan from the ERF to another municipal fund that would be repaid to the ERF.

How Is An ERF Schedule Set Up?

Two methods are acceptable for establishing and maintaining an equipment replacement fund: an itemized schedule, or a percentage schedule.

Itemized Schedule

The municipality establishes a list of equipment items and determines an amount to be deposited annually into the ERF for each item. The schedule must include the:

• type of equipment;
• purchase date;
• anticipated service life;
• purchase cost (including installation, if desired); and
• annual deposit needed to replace each piece of equipment.

Annual Deposit

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.

Minimum Balance Requirement

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.

Percentage Schedule

As an alternative, a municipality may choose to create an ERF schedule that is based on maintaining a balance in the fund that is at least equal to the required percentage of the utility's mechanical equipment value, as shown in the municipality's financial documents and the table below. This alternative may be especially attractive to larger utilities that own a lot of equipment. For a more detailed example of calculating the percentage schedule, see Sample C.

Timeline For Minimum Balance/Percentage Requirement

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.

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 whether using the itemized schedule or the percentage schedule.

Can The Municipality Make Changes To The ERF 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.

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.

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. A municipal collection system is operated under a WPDES permit and the owning municipality is required to submit a CMAR annually.

When A Municipality Receives A Loan To Modify Wastewater Treatment Works, Urban Runoff Treatment Works Or Structural Urban BMP, Does The New Or Revised ERF Need To Include Only That Portion O The Work Funded By The Loan?

No, the ERF must cover equipment for the entire treatment works or structural urban BMP.

If A Municipality Determines It Has An Excess In The ERF, What Should They Consider?

An "excess" is the amount of money in the ERF that exceeds the minimum required 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 WPDES-permitted utility. For example, municipalities may choose to set up a segregated account to fund future sewer utility costs such as pipe replacement. Excess funds may not be loaned to other parts of the municipal government.

Are There Penalties For Noncompliance?

Yes, there are penalties for noncompliance; see ch. NR 162.17, Wis. Adm. Code, Breach of Contract and ch. NR 162.18, Wis. Adm. Code, Noncompliance.

Does The Municipality Have To Continue Maintaining An ERF After The CWFP Loan Is Paid Off?

For wastewater treatment plants that received EPA grant funds during the Construction Grants Program in the 70s and 80s, the owners must maintain an ERF for as long as that facility is functional. This requirement comes from an EPA memo dated Feb. 17, 2000.

All other wastewater treatment facilities, those that have received Wisconsin Fund Grants or CWFP loans and no EPA grant funds, can choose to discontinue having an ERF after funding one throughout the loan term. However, the department Wastewater staff and Environmental Loans staff recommend that an ERF be adequately funded so that equipment can be replaced on a timely basis without creating a financial hardship or the need for a loan.

Contact Information

Dave Calhoon, ERF specialist

Bryan Patek, ERF specialist

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