Water system studies: merger not economically sound

December 15, 2012 Asheville , City - County Gov. , Leslee Kulba , News Stories 1155 Views
Water system studies: merger not economically sound

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By Leslee Kulba –

Taxpayers and water and sewer ratepayers would be served best by sharing the administration of the water and sewer systems. At least, that was the finding of a financial analysis conducted by the City of Asheville and a study of governance models commissioned by the city. At a city council worksession Tuesday, staff wished to stress how remarkable it was that the two independent studies reached the same conclusions, which differed from those of the Metropolitan Sewerage District’s study.

The studies were conducted at no small expense to taxpayers and ratepayers. Both the city and the MSD were complying with recent legislation requiring them to “negotiate in good faith” to prevent the state from forcing a merger of the water and sewer systems. Under the state’s plan, the joint operation would be run by the MSD.

The city’s analysis showed consolidation under the MSD would save water ratepayers $2.1 million, save sewer ratepayers $23.9 million, and cost city taxpayers $33.8 million. Consolidation under the city would save water ratepayers $27.7 million, save sewer ratepayers $32.8 million, and save taxpayers $13.6 million.

Presenting the findings of the study, Finance and Management Services Director Lauren Bradley explained that an all-out merger did not make economic sense. Although water and sewage treatment can be collocated, they cannot use the same treatment systems or the same delivery lines. Unable to “share idle capacity,” the only way the two systems could realize savings would be through merged administration.

Bradley indicated it was important to track full costs of operation in a fair analysis. For example, the city already handles billing for the MSD. Although savings could be realized by merging human resources, IT, and other functions, the process would involve up-front costs. The MSD study was faulted for not fully analyzing costs.

It was also criticized for not taking a realistic approach to assessing the value of the city’s assets. Doug Bean, who led the study conducted by Raftelis Financial Consultants commissioned by the city, rejected claims that the water system’s landholdings and capital assets could not be appraised. There were comparables for a market analysis, as large water systems had been sold in the state.

An income approach that evaluated the present values of future earnings was discounted by the MSD because it produced negative numbers. The negative numbers did not mean the model was flawed; it meant the scenario would run at a deficit.

Asset assessments also harbored flaws. Some analyses of replacement cost did not consider depreciation, some miscalculated depreciation, and some assumed no change in the value of the dollar. The net book value approach used by MSD is the approach used to evaluate investor-owned systems where a return on investment is expected.

With respect to governance, Raftelis concluded water and sewer customers would both benefit from a merger of administrative operations, but a comprehensive merger was not advisable. The best solution would be to enter into an agreement to share overhead.

Mayor Terry Bellamy pointed out that the concept of adding Henderson County’s water system, which has serious capital needs, was newly added to the merger plans. She asked that the study be revised to include the costs. Sounding as if the legislature had been disingenuous in its claims that the merger would be economically beneficial, Bellamy asked that the study also consider the efficiencies that could be realized by lumping all water systems in Buncombe and Henderson County under one authority. She recommended a “water-to-water and sewer-to-sewer” approach.

Councilman Jan Davis regretted how interested parties have forgotten how dysfunctional the last water authority was. The system fell into disrepair under a management system with no teeth.

Bean said the study was precedent-setting and of interest to various parties throughout the state because it was an indication of, in not so many words, what the heavy hand of the state could do when local governments are unable to settle disputes. The mayor added she wanted staff to compile a summary of all costs incurred to comply with the “good faith negotiation” requirement, for presentation to the legislature.

At their formal meeting that evening, Bellamy was hostile toward what Davis referred to as a “demon tweaked” version of the city’s conservation easement for the pristine watershed acreage at Bee Tree and North Fork. Again following the advice of the state legislature, the city agreed to update and clarify the contract.

Whereas Buncombe County is encouraging private parties to put their landholdings in conservation easements, and celebrating the forfeiture of property rights as a victory for the community; Bellamy did not like the idea of letting go. She complained that the contract gave the Conservation Trust for North Carolina final say and jurisdiction over vast rights that should be retained by the city. She and Davis argued the city had done a fine job of managing the land thus far, but in the end, council voted unanimously to submit.

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