I hope to get some good advice from the fine financial minds of the Sig Forum brain trust.

A hundred and thirty years ago my great-grandfather was a participant in the establishment of an irrigation co-op, what we around here in my little corner of Idaho call a "Ditch Company". This group of farmers and ranchers dug a canal that moves water from the Portneuf River southward along the eastern side of our valley for some 15 miles or so past several small communities. The canal carries 55 cubic feet/second of water and it services dozens of farms and ranches. Established in the 1880's, it's one of the oldest water rights in Idaho.

A couple of years ago the ditch company upgraded by replacing the dirt canal with a pipeline. This eliminated what's called "shrink", the loss of water to ground seepage and evaporation. Since it's a pipe, not open channel flow, the pipe also delivers the water under gravity head, eliminating the need to pump the water into sprinkler systems. At my place, for example, the water at my outlets arrives at about 100 psi -- I have to use mechanical devices to reduce the pressure to about half that to safely use it in my sprinkler systems. The upgrade cost the stockholders of our ditch company a little over $4 Million.

The pipe has a 100-year design life, but it is by nature a mechanical thing; it will wear out and have to be replaced. So we want to set up a sinking fund in which to accumulate enough cash to pay for that eventual replacement.

Each year the members pay a "water assessment" to cover the cost of operating the company and maintaining the system. For the past two years we have set that assessment at $650/share and after deducting actual expenses that is leaving about $20,000/year to accumulate in the sinking fund. At this point we have about $40,000 above and beyond our estimated operating requirements.

That money is just sitting in a checking account.

Last week we held the annual stockholder's meeting, and I walked out of that meeting assigned the job of being the company treasurer for the next year. One of my tasks is to figure out the best way to invest that money to make it grow.

I'm a retired engineer and current rancher, not a money manager. But neither is anybody else in this outfit a money guru -- we're all farmers and ranchers.

So, can you guys give me a clue?

In summary: we anticipate accumulation of about $20,000/year for the next hundred years or so, we want to safely invest that money in a sinking fund. We want the fund set up in such a manner that it will make that money grow while also letting us access it to repair/replace the pipeline when needed.

Interesting quandary.
First of I am not a financial adviser but I would think depending on how the management of the money was determined by the COOP (it was wasn't it?) that your primary goal would be not to loose any of it.

Therefore, you would probably want to invest it in something very safe like T bills. After you have a significant amount of funds ( maybe over $100K) you could shift a small portion into some index fund.

My advise would be to ask a financial adviser that is licensed in Idaho for some advise.

How serious is the hundred year lifetime? If you seriously have a hundred years time horizon, you could take on a very long-term view and put a lot into equities.

You'd want to do cash budgeting so you keep some funds for planned maintenance and a generous safety margin so you aren't risking having to sell at a bottom (- as a historical example, someone doing this last decade who happened to run out of cash in the depths of Obama's depression would have had to sell stocks at exactly the wrong time.)

So part of the question is hard engineering - forecasting what may go wrong, when. Then comes cost estimates and inflation - how much will it cost to fix? And then some stochastic modeling - what is the likelihood this fails, and then that fails, and then the other thing, all at the same time?

That will help you figure out how much to keep liquid.

Personally, I'd put all the rest into low-cost US Index ETFs. SPY, for example, with dividend reinvestment turned on. The inflation that will affect your cost of repairs/upgrades/replacement will also tend to inflate the price of stocks.

Your successors, as the calendar moves on and after eighty years that hundred-year horizon shrinks to twenty-ish, will probably want to change the investment policy from all equity, but that'll be on them to figure out.

Thanks Smlsig and Joel9507! I appreciate your input!

I can't help with the investment side of your issue, however, someone above mentioned a budget. Does your co-op have a budget?

I am the CFO/Treasurer (non-paid) of a community water system (~350 members across 2 sub-divisions). We converted the water company to a 501(c)(12) non-profit 2 years ago. If I had to guess your ditch company is also a 501(c)(12) (if you are a non-profit). The budget is probably more in-depth than what you need, but you might find it helpful.

Let me know if you want a copy. It's in Excel, and it would take me a little time to remove some of our detail.

It seems to me what you are talking about is more properly referred to as maintenance reserves, rather than a sinking fund which is periodic payments to retire a fixed future obligation.

This is to be used for maintenance and replacement as needed, but not a complete rebuild in 100 years.

The requirements are for safety of principal and liquidity.

There are two components, regular periodic maintenance and foreseeable but unplanned replacement.

Maybe there is a way to forecast, based on expected useful life, some parts which wear out, pumps, etc. Pipe lasts many decades, usually. Maybe you can consult with the suppliers of the components to come up with a rational replacement schedule and a budget for routine maintenance, if there isn't one already.

As far as investing, stick to Treasuries with maturities dictated by your replacement schedule. Make sure you deal with extremely reputable large brokerages, not some smooth talking local whizkid, and have regular audits. You don't want to end up on American Greed.

T-bills spread throughout the hundred year expectancy. They are U.S. Guaranteed - your primary requirement. Second, they are liquid, and they will be negotiable should you need more for emergencies - even if staggering the due dates of multiple T-bills.

Bonds - TBills, etc. - have a good role for the fraction set aside for short-term planned maintenance and emergency reserves. Government issues don't have much default risk over normal time periods, and their values don't vary as much as equities(but they do vary - going down when interest rates rise, e.g. which matters if you have to sell them vs. hold to maturity)

Their problem is upside. There is none. Your best case is getting exactly what the bond note calls for. Which is your money back, plus some (taxable) interest.

Look at historical returns over time. Say you were doing this in 1928 - how would $100 put into stocks, bonds, and T-Bills in 1928 have done? Here's one data point.

Stocks: $328,645.87
T-Bonds: $7,110.65
T-Bills: $1,998.00

I picked this example because it was easy to find data in google-fu. Feel free to get other data sets, but be sure to get a long-enough consistent set of numbers to apply to your situation.

But even back when dinosaurs stalked the earth and I was getting my finance MBA, it was generally accepted that historical returns on bonds/treasuries lagged inflation, let alone historical returns of equities, especially when you factor in taxes on interest and the fact that gains on stock are only taxed when you sell.

Currently inflation is negligible....but that is an anomaly and not to be built into a plan that is supposed to be viable over decades. If you inflation-adjusted those NYU numbers in the example above... well I don't know what the inflation adjustment for irrigation equipment would be, let's just say that there's been a LOT of inflation since 1928 - and I would very much doubt that $7K in 2016 dollars from T-Bonds - let alone the $2K from T-Bills - would buy what $100 could have in 1928.

You are in this for the long haul. If you set it up so you won't have to 'sell low' by providing for adequate reserves and a rainy-day fund, the risks of holding US equities as a hedge against long-future-expenses denominated in dollars is pretty manageable. Look at what insurance companies do with funds they are holding for far-future expenses. Or, for that matter, look at what Warren Buffet does with his float. It's not 'buy T-bills'

And third, they pay next to nothing. They likely won't even cover inflation.

A lot will depend on what the projected cash outflows from the fund are? Do you have a capital plan for maintaining the system.

Are there any regulations, given the nature of the coop, as to what the funds can be invested in?

quote:

Originally posted by craigcpa:
T-bills spread throughout the hundred year expectancy. They are U.S. Guaranteed - your primary requirement. Second, they are liquid, and they will be negotiable should you need more for emergencies - even if staggering the due dates of multiple T-bills.