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Environmental Loans Equipment Replacement Fund (ERF)

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 s. 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.

Prior to preparing the municipality's Financial Assistance Agreement (FAA), the DNR 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 to help establish and maintain the municipality's equipment replacement fund (ERF):

What does "replacement" mean?

According to s. NR 162.003 (61), Wis. Adm. Code, "replacement" means "obtaining and installing equipment, accessories or appurtenances [accessories or associated items] 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."

What is the intent of the ERF?

A municipality may use funds on deposit in the ERF to pay costs incurred to replace 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 back to the equipment replacement fund.

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How is an ERF schedule set up?

Two methods are acceptable for establishing an equipment replacement fund: an Itemized Schedule, or a Percentage Schedule.

Itemized 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, 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 [PDF].

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 [PDF].

Percentage Schedule

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). For a more detailed example of calculating the percentage schedule, see Sample C [PDF].

* Amount prior to depreciation, for equipment only.
Mechanical Equipment Assets * Percent Required for ERF
$0 - $1,000,000 50%
$1,000,001 - $3,000,000 40%
$3,000,001 - $5,000,000 30%
$5,000,001 - $10,000,000 20%
$10,000,001 - $20,000,000 10%
$20,000,001 - $30,000,000 7%
Over $30,000,000 5%

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.

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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 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.

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.

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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 of 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 funds in the ERF that exceeds 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 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. See s. NR 162.18, Wis. Adm. Code, Breach of Contract; and s. NR 162.19, Wis. Adm. Code, Noncompliance.

Does the municipality have to continue maintaining an equipment replacement fund after the Clean Water Fund Program 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 equipment replacement fund for as long as that facility is functional. This requirement comes from an EPA memo [PDF] dated February 17, 2000.

All other wastewater treatment facilities, those that have received Wisconsin Fund Grants or Clean Water Fund Program monies and no EPA grant funds, can choose to discontinue having an equipment replacement fund after funding one for 20 years (life of the project or life of the loan, respectively). However, the Department Waste Water staff and Environmental Loan staff recommend that an Equipment Replacement Fund be adequately funded so that equipment can be replaced on a timely basis - without the need for a capital improvement project.

Contact information
Direct questions about the equipment replacement fund (ERF) to:
Dave Calhoon
ERF (equipment replacement fund) specialist
EL section, Bureau of CFA
608-266-4536

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Last revised: Thursday June 29 2017