HMC has a ballot vote coming up next month, asking the membership what to do about funding the replacement or repair of the island’s assets. The Finance Committee had a very challenging task proposing some options. I took a look at their analysis, which was well done given the monumental task, and have come to some conclusions of my own. You can read more about the background leading up to this work here or review their funding models here. I really liked that they attempted to forecast expenditures through 2030, which is a fiscally responsible thing to do.

The reality is that there are several expenditures coming up over the next 20 years. To analyze their financial models, I used the discounted cash flow (DCF) model. The basic premise of this method is to value each plan (1, 2, 3) by looking at all future cash flows, inlays and outlays, and discounting those values to get their present values (PV) using the concept of the time value of money. The sum of all PVs is the net present value (NPV), which can be viewed in a normalized manner. Or in other words, it’s a way to look at these plans in an apples-to-apples fashion to come to a conclusion. NOTE: I used a discount rate of 8%. See this Wikipedia entry for more information on DCF.

My models can be found here in an Excel 2007 file (summary included as well). I did add a model where I looked at the NPV of doing nothing (stick with the status quo). I also played around with some other models, but I found that the three models that the Finance Committee proposed covered the spectrum of options fairly well. I looked at several factors and variables to come to a conclusion about which plan I felt was the most pragmatic.

1. I broke down the reserve contribution on a “per assessment” basis by year and calculated the average reserve contribution as well as the standard deviation. This tells me what I should expect to pay each year, on average, if I own one assessment. The standard deviation gives me an indication as to how much that average varies over the course of 20 years. The smaller the standard deviation, the better, or another way of thinking about, if it is smaller, you would not expect big spikes in reserve contributions at a given point in time.

2. I calculated the net present value of all of the reserve contributions for each plan, including status quo. This roughly tells me the present value of all of the money I would contribute to the reserve fund given I have one assessment. Ideally, the lower the value, the better.

3. I calculated the net present value of the total reserves and the total expenses for each plan and took the difference. This tells me if there is an excess or deficit of reserves. If the value is negative, then this implies that the island has not contributed enough to its reserves to cover expenditures. If the value is positive, then this implies that we have contributed enough, actually more than needed, to cover the cost of future expenditures. I figure some excess is okay so we continue to have reserves past 2030.

PLAN 1 | PLAN 2 | PLAN 3 | STATUS QUO | |

Average | $265.00 | $246.87 | $246.82 | $76.92 |

Standard Deviation | $126.95 | $261.07 | $451.48 | $0 |

NPV per Assessment | $3,034.33 | $2,855.21 | $2,747.85 | $755.24 |

NPV of Reserves | $1,403,909 | $1,334,093 | $1,292,225 | 515,106 |

NPV of Expenses | $1,157,462 | $1,157,462 | $1,157,462 | $1,157,462 |

NPV Difference | $246,487 | $176,631 | $178,694 | ($642,355) |

See PDF version here.

Right away, it is clear that doing nothing is not a viable option. The NPV of doing nothing is largely negative, which means that we would not contribute enough in the reserves to cover the cost of repair or replacement of HMC assets.

The standard deviation of Plan 1 is the lowest, suggesting that we would have relatively consistent contributions to the reserves. However, the NPV difference is the largest of all options, which leads me to believe that we are likely contributing too much overall in that plan. Of the remaining two options, Plan 2 and Plan 3, Plan 3 has a really high standard deviation which means there are times over the course of 20 years that our contribution to the reserves spikes (big special assessments). That’s a tough pill to swallow for me. I’d prefer to pay a little bit more over time rather than have to come up with a big check every so often. So although the NPV per assignment is slightly higher in Plan 2 and the ending NPV difference is slightly lower than Plan 3, I think Plan 2 seems the most palatable of all the options presented.

Per the Finance Committee documentation, Plan 2 is where “HMC funds infrastructure repairs and replacement primarily through a combination of Special Assessments and annual increase to Reserve Accounts.” Our average additional contribution to the reserves is kept relatively constant with a couple spikes, but not nearly as large as Plan 3. Over the lifetime of the contributions, on a per assessment basis, I would contribute less than Plan 1 by about $180 ($3,034-$2,855). Plan 2 seems to be a broad approach to funding our reserves without feeling like we are being overburdened.

Feel free to play with my spreadsheet to come up with your own model in the “Models” tab. Adjust the contribution values in lines 72 and 73 to see if you can make the NPV Difference value (Cell B84) positive while minimizing the NPV per Assessment (Cell B88).

I hope to post another analysis about the ferry fee proposal on the ballot as well very soon.