The True Cost of a Guarantee

Risk is a part of our lives.  But understanding risk and knowing how to use is something that few people are willing to learn.  Coming next will be a series of posts discussing risk and how most peoples faulty perception of risk can affect your financial health.

The article: The True Cost of a Guarantee talks about one component of risk, the impression that we need to have a guarantee to "protect" us.

When Does $10,000 equal $9,900 ?

There is a simple piece of information that will continually separate those who are financially healthy and the rest of the people: The effect that “inflation” has on the purchasing power of money.  The average American’s failure to learn and accept this principle will guarantee that they will forever be locked out of enjoying the benefits of financial health.

When I speak of inflation, I am not referring to one of the complicated financial models and formulas used by the Federal Government, investment firms, or what is often talked about in the media.  The “inflation” that I am talking about is how the value, (purchasing power), of money decreases as time goes by.

Remember when you could buy a full sized candy bar for 10 Cents?  How about a loaf of bread for 35 Cents?  How about the commercial where a large hamburger chain advertised that you could buy a “burger, fries, and a drink” and get “change back for your dollar”? 

So why are candy bar prices now approaching $2.00 and fast food “value meals” are getting into the $4 and $5 range?  That is the long term loss of purchasing power caused by Inflation.

If you attempt to measure inflation over short periods of time, (1 – 4 years), it is very hard to predict it’s effect on your money.  But measured over a longer period of time, (10 – 20 years), we find it’s effect is essentially constant.  Over the last 30 years in America, the purchasing power of your money has been decreasing at a rate of about 3% per year on average.

The reason this is important is if you are trying to save or invest money to use at a future time, (such as retirement), you need to understand how inflation affects your money.  If your money is not growing at a rate that is faster than inflation, you are losing purchasing power.

If you retired at age 65 and were living on $50,000 a year income.  After 20 years, at age 85, your money would purchase a lifestyle equivalent to about $25,000 a year.

Imagine taking what you earn today, cut it in half, and then trying to live on that reduced amount.  This is what is happening to so many Americans now.

I hope you aren’t one of them.

Proposal to Santa Paula City Council

Here is the text of the proposal that was blocked tonight by the city attorney.

Santa Paula Water LLC, PERC Water, and PERC Solar are interested in negotiating with the City of Santa Paula in order to accomplish the following objectives:

§         Provide liquidity to the City

§         Identify new revenue sources for the City

§         Reduce costs for the City without impacting City jobs

Santa Paula Water LLC, PERC Water, and PERC Solar propose the following:

1. Make available up to $2.5 million in cash for the City to use in the general fund. This money would come from the purchase of the City’s hard assets, i.e, property, buildings, infrastructure, and vehicles.  The purchase would include provisions for the city to lease back the purchased assets.  The city would also repurchase the assets by a specified date.  The amount of the lease payment and the repurchase price would be negotiated and based on available cash-flows within the City.

2. PERC Solar would like to negotiate a 20-year lease of the property next to the water recycling facility currently under a ground lease with Santa Paula Water.  PERC Solar would build and operate a solar electric generation facility.  The electricity produced by the facility would be purchased by the City for use in the wastewater treatment facility.  The lease payments would be accelerated and paid “up front”.  Depending on the nature of the agreement the accelerated lease payment could be as much as $500,000.  At the end of 20 years, the City would own the solar generation facility.

3. PERC Water will review the operating and maintenance costs of the City’s sewer collection system to identify cost savings and efficiencies for the City, including the possible purchase of the City’s vactor truck.  Santa Paula Water would also review the existing collection system for a potential concession agreement that could include an upfront concession payment.

4. PERC Water would partner with the City to develop customers and infrastructure to allow for the sale of reclaimed water generated by the water recycling facility.  The City and PERC Water would share in the income and profit.

5. Santa Paula Water understands that the City of Santa Paula has a problem with excessive amounts of chlorides present in the water.  It is currently not clear when and how the chlorides are being introduced into the water.  Although, Santa Paula Water and PERC Water recognize that the City of Santa Paula is responsible for resolving the problem, they propose to help the city with this issue in the following way:

1. First: Santa Paula Water could fund a study to determine the source and cause of the high levels of chlorides currently found in the water that is entering into the City’s wastewater collection system.

2. Second: Santa Paula Water and PERC Water would work with the city to develop a program so the City can offer to exchange resident’s old water softener systems with new modern systems.  Note: This exchange/maintenance program has the potential to become a monthly revenue source for the city.

3. Third. Santa Paula Water and PERC Water would work with the City to implement a program of reducing chloride levels at the source of water supply, thereby providing better quality water to residents and reducing the overall level of chlorides in the water supply.

6. Santa Paula Water has the opportunity to purchase and bank large quantities of fresh water at extremely discounted rates.  They would like to work with the city to take advantage of the lower cost of water. This is a short-term opportunity that would allow the city to realize a financial benefit.

7. PERC Solar would work with the city to develop a program to install solar generation on the rooftops of city-owned buildings.  This would provide revenue for the City.

8. Santa Paula Water and PERC Water would work with the City to ease the stress of payment for the outstanding change orders on the water recycling facility by financing such change orders over time..

Santa Paula Water LLC, PERC Water, and PERC Solar may also consider ways they could assist Santa Paula to finance the construction of:

9. A police firearms training and practice facility.  Such a facility’s services would be made available to other agencies in the area and would generate revenue for the City.

10. An animal shelter/holding facility.  Such a facility’s services would be made available to other cities in the area and would generate revenue for the City.