A look at life-cycle costs and financial implications to major purchases in the public sector

1. When $1 Today is Worth $2.50 Tomorrow
Brian Gongol
DJ Gongol & Associates, Inc.
June 7, 2017
Iowa WEA Annual Conference
Ottumwa, Iowa

2. The 5¢ Coca-Cola

3. 1900: 5¢

4. 2017: 50¢ in a pack

5. 2017: $1.00 from a vending machine

6. But...the 5¢ Coca-Cola Wasn't Really 5¢

7. Inflation makes an enormous difference

8. 5¢ in 1917 = $1.04 today

9. Inflation is unavoidable

10. Even a little amounts to a lot...over time

11. Compounding matters

12. How to get rich on 2%

13. How Buffett did it

14. How Buffett did it
 S&P 500 grew 9.7% per year (1965 to today)
 Berkshire grew 20.8% per year
 Difference: 11.1% per year

15. How Buffett did it
 S&P 500 grew 9.7% per year (1965 to today)
 Berkshire grew 20.8% per year
 Difference: 11.1% per year, but 1,959,878% over 50 years

16. How it applies to equipment

17. Some purchases are quick and dirty

18. Nobody buys a $10,000 pencil

19. Some up-charges are no-brainers
Extending a magazine subscription for $1 a year

20. But most big purchases require some thought

21. Considerations and costs

22. Purchase price

23. Operational costs
 Power/fuel
 Consumables
 Wearing parts

24. Warranty period

25. Maintenance costs
 Products
 Operator time

26. Extra benefits
Is it good for doing more than one thing?

27. Substitutions
Can
something
else do the
job in a
pinch?

28. Opportunity cost
The true cost of anything
is what you give up
to get it

29. Accounting principle
Ideally, you want to
match the cost of something
to the time over which you'll use it

30. A note on financing

31. We live in a very, very strange era

32. Inflation: Around 2% a year

33. 15-year mortgage rates: 3.25%

34. The real cost of borrowing is 1.25%
+3.25%
-2.00%
-------
+1.25%

35. Easy to justify borrowing at 1.25%
It's not quite "free",
but almost

36. Another note on financing

37. Great for borrowers, terrible for savers

38. Inflation: Around 2%

39. 12-month CD rates: 0.25%

40. The real return on saving is -1.75%
+0.25%
-2.00%
-------
-1.75%

41. Your task
Since households aren't getting
any benefit from "safe" savings,
anything you can do to invest wisely
for long-term returns in your utility
is good for them

42. Saving for the community

43. Municipal rates are usually very low
"Municipal bonds Ted, I'm talking double-A rating..."

44. They also rarely invest on their own behalf
It's worth considering the rate of return
for taxpayers if they kept their own money

45. Rewarding long-term residents

46. Rewarding long-term residents
Long-term residents benefit most
from life-cycle cost management

47. Who benefits from "cheap"?

48. Who benefits from "cheap"?
"Cheap" benefits transient residents and
punishes long-term community members

49. Two excellent times to borrow long

50. 1. Low "real" interest rates
Interest rate on paper
minus inflation rate
equals "real" interest rate

51. 2. High returns on investment

52. Variables to consider

53. Replacement period
How long will it really last?

54. Parts
Will some need to be replaced often
or with great difficulty?

55. Consumables
Giving away the razor
and selling the blades

56. More variables

57. Out-of-house maintenance
Is a service contract being
sold by stealth?

58. Energy
It takes a lot of kilowatt-hours to pay
for maintenance labor and downtime

59. Real labor costs
Multiply hourly wages by
1.5 to 2 for the true cost

60. End-of-life-cycle costs

61. Example: ISU Towers demolition

62. 39-year life cycle
 Constructed in 1966
 Demolished in 2005

63. Demolition cost: $3 million

64. Demolition cost: $3 million
"Both buildings have significant deferred maintenance"

65. Considerations and costs

66. Purchase price

67. Energy costs

68. Operational costs

69. Warranty period

70. Maintenance costs

71. Major costs

72. Extra benefits
But wait! There's more!

73. Financing and opportunity costs

74. Special considerations when buying

75. Can it be rebuilt to like-new condition?
Is there an intermediate step
between new and a
complete replacement?

76. Free puppies aren't really free
 "Free" when abandoned
by a neighbor

77. Free puppies aren't really free
 "Free" when abandoned
by a neighbor
 Needed $600 in dental
care immediately

78. Free puppies aren't really free
 "Free" when abandoned
by a neighbor
 Needed $600 in dental
care immediately
 Hidden costs: Walks,
housebreaking, new
shoes

79. Example 1: When cheap really isn't

80. Example 1: When cheap really isn't

81. Example 2: Ongoing costs will get you

82. Example 2: Ongoing costs will get you

83. Example 2: Ongoing costs will get you

84. How far ahead is too far ahead to buy quality?

85. Dangerous to assume proper maintenance

86. Consider whether tech may become obsolete

87. To recap
 Inflation happens
 Costs and investments alike can compound
 Sticker price is almost never the real life-cycle price
 How you structure your costs over time can reward or
punish certain types of customers
 Financing conditions affect the "right" decision
 Even "free" isn't really free
 Sometimes $1 spent today is worth $2.50 later

88. Questions?
 Thank you for your
attention!
 Brian Gongol
 DJ Gongol & Associates
 515-223-4144
 brian@gongol.net
 www.gongol.net
 Twitter: @djgongol
 Facebook.com/djgongol

89. Credits

Coca-Cola advertising image (public domain):
 http://www.loc.gov/pictures/item/2004671509/

CPI calculation:
 https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=.05&year1=191701&year2=201701
 CPI graph:

https://data.bls.gov/pdq/SurveyOutputServlet

CPI data:

https://fred.stlouisfed.org/graph/?g=dZrT
 15-year mortgage data:
 https://fred.stlouisfed.org/series/MORTGAGE15US

12-month CD data:

https://fred.stlouisfed.org/series/CD12NRNJ

Municipal bonds:
 https://fred.stlouisfed.org/series/WSLB20
 Alcatraz closure:

https://www.bop.gov/about/history/alcatraz.jsp

All other pictures and images are original work by Brian Gongol.

Copyright and all other rights reserved. Use by others is prohibited except by explicit written permission.