C150002 Approval letter

• Contract/PO #: C150002
• Contractor Name: Grand Valley Water Users' Association
• Contract Type: Grant
• Water District: 0
• Bill Number: SB 97-8
• Loan Projects - Doc Type: Approval Letter

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MEMORANDUM

TO:

Randy Seaholm and Jan D1ian

FROM:

Bill Green

DATE:

June 12, 1997

RE:

Contract for Grand Valley Water Management Project

Following are some thoughts on the $1.25 million trust arrangement for the Grand Valley
Water Management Project from a financial perspective. The trustee may suggest a
different approach regarding trust operation. What I've tried to do here is to identify
some of the major parameters for dealing with the uncertainties inherent in 50 years of
inflation and investment return projections.

Beginning Assumptions

I understand that the Bureau is assuming $73,000 per year in O&M costs, 3.0 percent
annual inflation on the O&M, and a 7.0 percent rate of return on the amount invested each
year. I also understand that it is the desire of the Grand Valley Water Users Association
to set up an arrangement that pays out for 50 years.

In the first pass at this, I set up an operation study to payout $73,000 in the first year and
an inflation-adjusted equivalent amount in each of the following years. The results
indicate that the trust would be depleted at the end of 27 years. In other words, the $1.25
million isn't adequate to support an inflation-adjusted amount of$73,000 per year for 50
years at a 3.0 percent rate of inflation with a 7.0 percent return on the investment.

Second Operation

Another approach is to estimate the amount of annual payments that could be sustained
for 50 years. For this analysis, I recommend a long-term inflation estimate of3.5 percent
per year and an annual rate of return of6.50 percent which is equivalent to the current
yield on 1 O-year US Treasury Bonds. All of the following also assumes that the entire
fund is depleted (principal and interest) at the end of 50 years.

Using this approach, estimating how much could be paid out each year for 50 years,
indicates that the $1.25 million could support an inflation-adjusted annual payment of
$46,300 for 50 years assuming inflation at 3.5 percent and a return of6.5 percent on the
moneys in the fund. I have not estimated a management fee. The 50-year operation is
shown on the attached table.