MSD Study

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Submitted: August 29, 2011

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Table of Contents Executive Summary ............................................................................................................ 1 Introduction ......................................................................................................................... 6 1.1 Overview of Water-Related Trends ...................................................................................... 6 1.2 Overview of Cincinnati and Water-Related Utilities ............................................................ 7 1.3 Rationale for this Comprehensive Feasibility Study ........................................................... 10

Strategic Goals and Objectives of a Jointly Managed Utility ........................................... 11 2.1 Realize Maximum Savings from Shared Services and Aligned Business Strategies.......... 12 2.2 Enhance Master Planning to More Effectively Support Regional Development Goals and Increase Operational Efficiency ................................................................................................ 14 2.3 Enhance Economic Development to Revitalize the Greater Cincinnati Region ................. 16 2.4 Enhance Sustainability across the Cincinnati Area to Control Costs and Lower Utilities’ Carbon Footprint ....................................................................................................................... 17 2.5 Facilitate Technological Improvements through Shared Expertise .................................... 18 2.6 Ensure Public Health and Safety by Managing Enterprise Risk ......................................... 18

Overview of Current Organizational Structures and Potential Shared Services............... 19 3.1 Metropolitan Sewer District and Stormwater Management Utility .................................... 19 3.2 Greater Cincinnati Water Works ......................................................................................... 20 3.3 Potential Areas of Shared Services ..................................................................................... 20

Analysis of Savings and Ten Year Financial Plan for Jointly Managed Utility ............... 21 4.1 Analysis of Savings through Labor Costs and Operating Efficiencies ............................... 21 4.2 Ten Year Financial Plan ...................................................................................................... 22

Projected Opportunities and Potential Challenges ............................................................ 24 5.1 Projected Opportunities....................................................................................................... 25 5.2 Potential Project Challenges ............................................................................................... 28

Impacts of Integration on Consent Decree........................................................................ 31 Proposed Framework for Transitional Organization ........................................................ 33 Structuring the Roles and Responsibilities of the Integrated Organization ...................... 34 Phased Implementation Roadmap..................................................................................... 34 9.1 Cross Functional Core Teams ............................................................................................. 34 9.2 Roles and Responsibilities .................................................................................................. 36 9.3 Processes ............................................................................................................................. 37 9.4 Human Capital .................................................................................................................... 37 9.5 Tools.................................................................................................................................... 38 9.6 Metrics / Reports ................................................................................................................. 39 9.7 Risk ..................................................................................................................................... 39

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati 9.8 Change Management........................................................................................................... 39

Proposed Phased Integration Timeline ............................................................................. 40 Resources Needed for Successful Integration................................................................... 40 “Getting to Yes”: Reviewing the Major Milestones Necessary for Integration ............... 41 Appendix I – Best Practices of Jointly Managed Utilities ................................................ 42 Appendix II – Assumptions Underlying Labor Analysis ................................................. 44 Appendix III – Proposed Integration Roadmap ................................................................ 44

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Executive Summary On April 27, 2011 the Cincinnati City Council passed a resolution requiring that the City Administration submit a comprehensive evaluation as to whether there should be joint administrative management of the City’s Departments of Water, Sewers, and Stormwater Utility, and to provide a plan for implementation. This resolution came at a time when not only is the City facing increasing budget pressures, but also at a time when a combination of trends in the United States are driving significant challenges and opportunities for public utilities. These changes include demographic shifts, water conservation efforts, high levels of unemployment, new economic opportunities, and national security needs related to securing the country’s critical infrastructure.

This feasibility study considers a number of critical elements, including: drivers for joint utility management across the country, with lessons learned and best practices from regions that have already undergone integration; the specific circumstances facing each of the three Cincinnati utilities; strategic goals for a jointly managed utility; financial benefits of integration; opportunities and challenges associated with integrating the utilities; and resources needed for successful integration.

The conclusion of this feasibility study is that a jointly managed utility would result in rates increasing at lower levels than they would otherwise, while also improving the level of service to customers. In addition, a jointly managed utility would enhance Cincinnati’s opportunity to continue to grow as a national leader in water resource management, which would inject growth into the local economy and create jobs for residents.

Therefore, the City Administration recommends that there should be joint administrative management of the three water-related utilities.

This report provides the rationale for the Administration’s recommendation. In addition, consistent with the Council’s motion, the report identifies a transitional organizational structure, an outline of efficiencies and synergies, and a timeline for full implementation of joint management of the utilities. The report also contains an analysis of the opportunities associated with the financial management, construction coordination, regulatory oversight and internal services including human resources, budgeting and information technology. Finally, the report includes a ten year financial plan demonstrating the projected annualized savings, and a legal opinion that such collaboration would have no adverse effect on the MSD consent decree.

Real dollar savings would be realized in two ways. The first is through the streamlining of the work functions, allowing for a reduction in the overall number of employees by not backfilling retirees and the elimination of some positions that are funded, but vacant without activity as of 31 July 2011. It is important to note that an assumption of the analysis is that no lay-offs will occur as a result of joint administration.

Using conservative estimates for the number of positions that could be eliminated, and the average cost of those positions, it is anticipated that a jointly managed utility would save approximately $68 million in labor costs over a ten year period.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati Second, a jointly managed utility has the potential to significantly improve operational efficiency, while providing a higher quality of service. Operational efficiencies will be driven by improvements such as an increased overall project management capability, better coordination of projects across the utilities, a common IT infrastructure that supports the full suite of needs of the utilities, and cross-training and enhanced utilization of personnel. Additional factors for operational efficiency savings include integrated purchasing capability, and a reduction in demand for staff supplementation. Using a conservative estimate for operational efficiency savings as compared to industry benchmarks, it is anticipated that a jointly managed utility could realize approximately $37 million in additional savings over a ten year period. These savings are dependent on the jointly managed utility overcoming a host of challenges outlined in this report.

Accordingly, this report estimates that the total range of savings of a jointly managed utility is between $68 million and $105 million over a ten year period. The graph below shows the potential savings through labor and efficiencies realized in core functions through 2021.

While these savings are significant, and provide justification for the recommendation to proceed with integration, there are many other benefits of joint administrative management of the full water lifecycle: x

Enhance Master Planning to More Effectively Support Regional Development Goals and Increase Operational Efficiency – Conducting coordinated planning between drinking water, wastewater, and stormwater would provide for comprehensive consideration of all the technological, financial, and regulatory practices that affect sustainable water resources and infrastructure for optimal delivery. A jointly managed utility enables a strategic planning process that better addresses the level of uncertainty in environmental and economic climates through end-to-end visibility of the water lifecycle.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati x

Enhance Economic Development to Revitalize the Greater Cincinnati Region – A jointly managed utility would be able to better leverage the local marketplace to provide increased governmental and private funding opportunities and offer a combined approach for economic development in the region, including: revitalization of urban areas by working with other public utilities to provide efficient, coordinated services; coordinated sustainability initiatives; local workforce development through training and expanded development opportunities; local area job sustainment in the form of 600 full-time construction employees for Capital Improvement Program (CIP) related construction projects; enhancement of the joint MSD-GCWW Inclusive Workforce Apprenticeship program; and a comprehensive small business approach, particularly in the areas of Construction Services, Professional Services, and Supplies/Services to further enhance local small business utilization.

In addition, a jointly managed utility will enhance Cincinnati’s ability to attract federal funding as part of the Water Technical Innovation Cluster, recently announced by the U.S. Environmental Protection Agency, creating additional job growth opportunities.

x

Enhance Sustainability across the Cincinnati Area to Control Costs and Lower Utilities’ Carbon Footprint – A jointly managed utility could more effectively capitalize on sustainable solutions, which can help control costs of the Wet Weather Improvement Program and lower the combined utility’s operational carbon footprint. Joint management would enable a reduction in energy use by optimizing high energy consuming activities, as well as accelerate the implementation of environmentally-friendly initiatives, such as integrating solar power and other alternative energy sources into its power structure.

x

Facilitate Technological Improvements through Shared Expertise – A jointly managed utility would enable cost savings and improved performance of technology investments such as automation, research and development, system integration, streamlined and consistent staff training, and more consistent and less costly financial and demand forecasting.

x

Ensure Public Health and Safety by Managing Enterprise Risk – A jointly managed utility would enable reduced risk of service interruptions and emergency response through the combined used of 24 hour emergency response capabilities, and through an integrated risk management program and risk registry which would provide executive leadership with a comprehensive view of risk across the entire utility enterprise.

In addition, the Water Sector – the combination of drinking water and wastewater infrastructure – is an element of the nation’s critical infrastructure as defined by the U.S. Department of Homeland Security (DHS). A jointly managed utility will be better able to respond to, and implement security directives and guidelines issued by DHS to protect the citizens in the region.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati An effective transition to a jointly managed utility requires a transitional organizational structure. This ensures that continuity of functions and overall performance measures, particularly metrics associated with the MSD Consent Decree and CIP planning process continue to be met while the transition is underway over 1 to 3 years and beyond.

A Transition Manager would be appointed with accountability for transition-related activities, while a Capital Enterprise Manager would manage day-to-day activities related to CIP. Business functions (outlined in the red box in the chart below) would be integrated over 1 to 3 years; core operations (outside the red box) would be reviewed for integration opportunities shortly thereafter.

Executive Director

Deputy Director, Operations

Capital Enterprise Manager Wastewater Treatment Division Wastewater Collections Division

Stormwater Division

Water Supply Division

CIP Planning

Design and Construction

Environmental Programs

Administrative Transition Manager Human Resources

IT

Regulatory Compliance

Training

Laboratory

Safety and Security

Industrial Pretreatment Backflow

Water Quality

Finance

Customer Service

County Capital Fund Management

Public Education

City, CIP, and Operating Fund Management

Communications

Accounting

Water Distribution Division

Billing

Integration Core Teams & Working Groups will be pulled from functional areas

MSD-SMU-GCWW Transitional Organizational Structure as a Jointly Managed Utility

It is important to understand that the key to realizing the benefits identified is an effectively executed implementation plan. Success will require full collaboration between the three utilities, as well as with the City and Hamilton County. In order to achieve many of the benefits, current policies and practices will need to be examined, and in some cases, modified. Examples include: reviewing job classifications and pay rates; reviewing the civil service structure to foster competitive promotions and an expanded recruiting pool; reviewing options for an integrated financial system; and a review of enhanced remote access to business systems.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati As with most integrations, the benefits will not be immediately realized, but will emerge over time. Initial benefits are expected to materialize 1 to 3 years after initiation of integration activities, when support functions have been integrated and can begin to realize efficiencies from shared services. Indeed, some investments will need to be made in the short-term, particularly around information technology, in order to enable the realization of synergies.

The following implementation roadmap is based on industry best practices and has been tailored to the three utilities. It identified the key actions that need to be taken in the first twelve month, organized into eight categories: cross-functional core teams; roles and responsibilities; processes; human capital; tools; metrics and reports; risk; and change management. Execution of this implementation plan would position the jointly management utility to realize the benefits identified in this report.

Proposed Integration Roadmap

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Introduction The purpose of this report is to provide the results of a comprehensive study assessing the feasibility of jointly managing the administrative functions of Metropolitan Sewer District (MSD), Stormwater Management Utility (SMU), and Greater Cincinnati Water Works (GCWW). In addition to an initial analysis, a proposed transitional organization structure with an accompanying structured implementation plan has been drafted, complete with timelines and milestones for achieving integration. This report was requested via motion by the Cincinnati City Council and was administratively referred to MSD by the City Manager. This report was created through collaboration between MSD, SMU, GCWW, the City of Cincinnati, and Hamilton County.

1.1 Overview of Water-Related Trends A combination of trends in the U.S. including demographic shifts, water conservation efforts, high levels of unemployment, new economic opportunities, and national security needs related to securing the country’s critical infrastructure are driving significant challenges and opportunities for public utilities. In general, water usage across the U.S. is on the decline. During the 2008 billing year, the average household used 11,678 fewer gallons of water annually than an identical household did in 1978. 1 Several reasons for this decline exist. Firstly, there are more methods of water conservation, including: the proliferation of low-flow appliances, green methods in place at the utility and household levels, and stricter local conservation policies. In addition, rain fall has increased steadily in volume and frequency over the past three decades, which has led to a decrease in water usage for lawns and gardens. Finally, demographic shifts and homeowner trends, including declining city populations, fewer individuals per household, population shifts to more arid climates, and a prolonged economic downturn have driven changed habits around home size and utility usage. This is significantly impacting cities across the country, particularly in the Midwest.

These variables are creating difficulties for public water utilities in generating consistently useful pricing structures and models needed to ensure the continued revenue required for upgrades and maintenance. As such, the traditional practice of structuring prices based on 100 gallons per day per person is no longer valid. 2 The utility industry’s greatest financial challenge is to develop a pricing structure that reflects the true lifecycle cost of producing and delivering water.

The Water Research Foundation just concluded a major research project, examining new and changing water sector trends impacting utilities over the next ten years.

Research was conducted by reviewing relevant literature along with previous Water Research Foundation and other research organizations’ documents. These trends covered environmental; organizational and technological; economic and business; societal and political influences. Overall, findings revealed the following ten top trends that could be

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Thomas D. Rockaway, Paul A. Coomes, Joshua Rivard, and Barry Kornstei, Residential Water Usage Trends in North America. On the web at http://www.awwa.org/files/Resources/Waterwiser/JAW0211rockaway.pdf 2 Ibid.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati expected, regardless of geography and local circumstances, requiring adaptation by water and wastewater utilities: 3 1. Uncertain economic trends and financial instability 2. Decreased availability and adequacy of water resources 3. Aging water infrastructure and increasing capital investment requirements 4. Shifting water demands 5. Changing workforce and a dynamic talent life-cycle 6. Expanding application technology 7. Increasing customer/stakeholder engagement, with media influence 8. Increasing /expanding water regulations 9. Efficiency drivers and the need for resource optimization 10. Climate uncertainty

1.2 Overview of Cincinnati and Water-Related Utilities Like many cities across the U.S. over the past decade, Cincinnati has experienced a steady decrease in population due to outmigration. Census data from 2010 indicates that the city’s population declined by 10.4% from 2000. As recently as July 2011, the Cincinnati Metropolitan Statistical Area had slipped to the 27th largest metro area in the U.S., down from the 24th slot it held previously. 4 Cincinnati’s population is currently beginning to trend upward, but at a slower rate than the national average.

Figure 1: Cincinnati’s population growth 2000-2010 against the national average

Beyond this overall population decline, uneven population growth, lower incomes, depressed home values, an increase in single-person households (45% of all households

3

“Forecasting the Future: Progress, Change and Predictions in the Water Sector”, Trend White Papers; Water Research Foundation; 2011.

4 http://www.bizjournals.com/cincinnati/news/2011/06/24/cincinnati-falls-to-27th-largest.html

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati in Cincinnati are single-person), 5 high unemployment rates, and a general shift from a manufacturing and industrial economic base to service-oriented industries are also contributing to declining water consumption in Cincinnati. Coupled with the large amount of required capital upgrades, this decrease in consumption has resulted in potentially significant projected rate increases in order to pay for the operation of facilities and necessary upgrades to capabilities. Many cities faced with similar problems have combined their water-related utilities in order to decrease operating costs through integrating similar administrative functions such as accounting, customer service and IT. In doing so, they have been able to more effectively manage construction budgets that are higher than ever as a result of their Consent Decrees, while also improving operations and the ability of the utility to efficiently generate revenue.

Annual Billable Waste Water Volume (in CCfs) per account

260 240 220 200 180 160 140 120 100

Year Figure 2: Billable wastewater volume in greater Cincinnati shows a steady decline 6

MSD has approximately 580 employees serving over 800,000 customers across Hamilton, Warren, Clermont, and Butler Counties. MSD is responsible for a large amount of capital intensive work. Simple repair and maintenance of the aging infrastructure of the system is no longer adequate—significant investment will be required in the coming years. Further, projects required by the Consent Decree signed with the U.S. Environmental Protection Agency in 2004 have increased capital spending by an order of magnitude to levels higher than ever before.

In 1990, SMU integrated with MSD through a memo signed by the City Council and Hamilton County. Its mission is to manage the barrier dam, maintain the city’s catch basins and other separated storm system components, and conduct other activities required under the city’s National Pollutant Discharge Elimination System (NPDES) 5 6

U.S. Census American Community Survey, 2009.

Total MSD residential, commercial and industrial accounts

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati permit. While its operational unit acts autonomously, back-office functions are provided

by MSD. This successful integration resulting in joint management of two utilities provides a guide for MSD, SMU and GCWW. GCWW has approximately 600 employees serving 1.1 million people, a service area that includes the entire city of Cincinnati, most of Hamilton County, and additional areas in the adjacent counties of Butler, Warren, and Clermont in Ohio. Additionally, service has expanded to Boone County. GCWW’s service area has grown from 350 square miles to over 800 square miles in the last 15 years. Since the mid-1990’s GCWW has had an aggressive growth policy, resulting in adding water service to a new community on average every 25 months. GCWW’s current financial plan assumes continued growth and expansion of its customer base. This successful growth policy has helped offset declining consumption in core areas and enabled GCWW to maintain affordable water rates to customers. For example, water rates for Cincinnati residents are 20% lower today due to the successful service area growth that has occurred over the last 15 years.

However, future continued growth could be more challenging. While GCWW already has capital investment strategies in place to meet this responsibility, improvement investment needs are expected to grow in the near- to mid-term, especially within the geographic limits of the city of Cincinnati, where the oldest part of the infrastructure lies.

All three utilities have highly experienced workforces with a significant number of senior staff quickly approaching retirement age through 2014 and beyond. As seen in the chart below, Cincinnati water utilities are experiencing a similar trend occurring across the U.S., of significant retirements in the next 3-5 years. As indicated in the American Water Works Association (AWWA) 2008 and 2009 State of the Industry Report, over 50% of utility leadership is expected to retire in the near term. The structured loss of expertise at this critical time when capital investments continue to climb, and the need to maintain a competitive edge while developing existing talent and searching for new talent to meet tomorrow’s challenges make this an optimum time to consider the potential benefits, and challenges, of creating a jointly managed water utility.

Figure 3: Predicted Utility Retirements from 2008-2014 7

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AWWA State of the Industry Report 2008

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

1.3 Rationale for this Comprehensive Feasibility Study Due to the circumstances described, many cities across America have already moved to a jointly managed water utility structure. The table below lists other cities whose water-related utilities are currently operating under a joint management structure.

Table 1: Jointly Managed Water-Related Utilities Across the U.S.

The experiences and best practices that have evolved from these cities’ efforts have been used in this feasibility to highlight potential savings, opportunities and challenges such an integration might present. Similar best practices have been considered from utility integration that has occurred internationally in Canada, Australia and in the United Kingdom.

While operational efficiencies are key to managing rate increases, the potential benefits of a jointly managed utility expand beyond the obvious improvements in efficiency and effectiveness. Cincinnati has the opportunity to continue to grow as a national leader in water resource management, and as such, inject growth into the local economy and create jobs for residents. In 2011, the U.S. Environmental Protection 10

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati Agency (EPA) announced a Water Technical Innovation Cluster. It tapped Ohio, along with Kentucky and Indiana, to be the center of the cluster given the region’s history as a water innovator and hub for water research. This initiative is based largely on the evolution of a new water economy, with growth opportunities projected to reach $1 trillion in treatment technologies by 2020. Treatment methods are experiencing significant improvements and technology is evolving around the entire watershed, addressing water as a single integrated concept.

The combined vision for the jointly managed utility includes well coordinated and executed Capital Improvement Plans, well-maintained assets, and informed investment decisions that are aligned to strategic goals and objectives—all of which will ultimately support an enhanced master plan that will service the overall environmental, economic and social development of the city of Cincinnati. Effective water utility management is a cornerstone of sustainable communities, contributing to the creation of livable communities, affordable housing, economic competitiveness and transportation, and compliance with federal policies. In a jointly managed utility, maintaining clear asset ownership and proper accounting controls will be paramount. Although on a smaller scale, the success of the SMU-MSD integration highlights the potential for success of a water-related utility integration.

However, it is critical to note that this integration will only be successful if it is understood by all stakeholders to be a different organization, no longer “business as usual” for the three utilities. Such changes would necessarily include improved or new operational processes, increased collaboration, and new thinking around ways to improve service delivery as a joint entity. This dynamism present in a jointly managed utility would extend to staff training and talent management opportunities, giving staff the chance to broaden skill sets and increase flexibility across the organization.

Strategic Goals and Objectives of a Jointly Managed Utility The major strategic goals of a jointly managed water utility are numerous. The City of Cincinnati has the opportunity to optimize the three largest public water and wastewater utilities in the greater Cincinnati area. With such an administrative consolidation, these entities can become more efficient and support additional strategic objectives.

The goals listed below will be put into practice should the integration be approved, as part of a set of tangible metrics designed to show performance improvements over time.

Many of these goals are derived from the 2007 American Water Works Association and the Water Education Foundation “Water Sector Collaboration on Effective Utility Management Fact Sheet” also known as the ten attributes of effectively managed water sector utilities. 8 8

The ten attributes of effective water utility management include: product quality; employee and leadership development; financial viability; community sustainability; stakeholder understanding and support; customer satisfaction; operational optimization; operational resiliency; infrastructure stability; and water resource adequacy. Source: American Water Works Association. Water Sector Collaboration on Effective Utility Management, May 2007.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

2.1 Realize Maximum Savings from Shared Services and Aligned Business Strategies As public service utilities, MSD, GCWW, and SMU’s ultimate objective must always be to meet the expected levels of service promised to rate paying customers. Efficiencies realized through shared services, construction coordination, and a common business vision and strategy recognizes that water and wastewater’s commonalities could provide significant opportunities for savings. In addition to potentially impacting rates by leading to lower rate increases than otherwise would occur if the utilities would remain separate, aligning business practices and integrating services where realistic creates an additional degree of efficiency for the customers.

2.1.1 Maintain rate increases at lower levels than they would be if the utilities are separately maintained. All three utilities are facing significant capital investments requiring additional funding, largely collected from rates. Because of this, it is forecasted that the rates of all three utilities will need to increase over time to provide continued, adequate funding of the capital programs. However, by forming a jointly managed utility, it is anticipated that the rate increases for each utility service will be lower in the future than they would otherwise be if the utilities continued to operate independently because of efficiencies realized through joint operating costs. While capital expenditures, and therefore, debt service payments, will continue to necessitate rate increases over the next 10+ years, lower operating costs can positively impact the level at which rates will increase. MSD, SMU, and GCWW have already undertaken significant efforts to find efficiencies within their organizations, but jointly managing administrative functions, and eventually core operations, will provide savings in operating costs currently impossible while separated.

By improving efficiencies and lowering operating costs, a jointly managed utility would be better positioned to increase the customer base. With an expanded customer base, the costs of new environmental and regulatory requirements, on-going fixed costs, and maintenance and repair of the aging infrastructure can be spread. This is an important precondition of keeping rate increases lower than they would have otherwise for current and future customers.

2.1.2 Shared services. Combining the services that are currently duplicated within each utility represents a major opportunity to substantially impact operating costs.

Some shared areas for consolidation are human resources, safety, training, accounting, finance, purchasing and warehousing, stores, laboratory services, engineering and planning, communications, regulatory compliance, information technology, customer service, and fleet and utility maintenance. While there may be initial investments needed to ensure compatibility, over time, additional delivery synergies will further reduce cost.

2.1.3 Employees. By sharing services, a jointly managed utility can realize employee efficiencies. MSD, GCWW, and SMU are currently in a unique position to realize employee efficiencies without layoffs, due to the number of staff eligible for retirement through 2013 and beyond, as well as the number of vacant, funded positions with no hiring activity as of 31 July 2011. These circumstances allow for 12

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati integration and operational efficiency with minimal impact to current staff. There is also an expectation that the use of supplemental staff, which are more costly than government employees, will decrease due to enhanced joint management of government human resources and increased flexibility resulting from shared services.

2.1.4 Procurement. A jointly managed utility would have the opportunity to create more efficient and effective procurement policies that support a larger variety of opportunities, such as small business enterprise inclusion, as well as create more streamlined bidding and contracting procedures. Administratively consolidated functions could proactively increase outreach and networking with minority business enterprises/woman-owned business enterprises to create more opportunities for those sectors of the community. A jointly managed utility would also generate additional efficiencies around warehousing of supplies, stores maintenance, combined material control procedures and systems, and, where possible, standard contracts with major vendors.

2.1.5 Savings through combined management of separated assets. There is a comprehensive asset management program already in place at MSD and GCWW. However, the goal of a jointly managed utility is to implement best practices and best-in-class performance, regardless of whether those practices currently exist within MSD, GCWW, SMU or none. A jointly managed utility would also be able to reduce spending through synergies in maintenance, asset replacement, reliability engineering, and examination of life cycle costs, benefits, risks and service levels.

2.1.6 Improved communication and customer service. A jointly managed utility will be able to conduct its customer and community outreach activities more effectively by providing customers a single point of contact for all water-related queries. For example, GCWW Customer Care Center currently answers billing questions of the citizens served by MSD as the primary billing agent for Cincinnatibased water utilities; however, some wastewater service questions must be referred to MSD, creating confusion and frustration for the customer. As MSD implements projects identified in the Consent Decree, communications to external stakeholders will grow and the use of a fully integrated Customer Care Center will become critical.

2.1.7 Consolidate financial management. A jointly managed utility could realize additional efficiencies and savings through consolidated financial management and oversight over budgets of the three utilities.

2.1.7.1 Financial policies and principles. Sound financial management policies, practices and procedures for water and wastewater are comparable, if not identical. A combined approach could help ensure common messaging of fiscal impact to the utilities’ customer base. All forecasts—operating expenses, capital improvement program (CIP) expenditures, and debt requirements—can be coordinated more effectively across the three independent rate models, and present a more consistent, clear, and defensible message to customers when rate increases do occur.

2.1.7.2 Stabilized bonding portfolio. Given the significant amount of bonded indebtedness that the utilities are required to incur for regulatory or asset management reasons, it is critical that bond rating, credit worthiness, and the 13

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati ability to secure low interest rates be sustained through sound rate-making philosophy, changing coverage, reserves and management policies as rating modifiers. The total assets of a jointly managed utility presented through the modified Governmental Accounting Standards Board Rule 34 approach— showing the true asset value rather than a depreciated book value—provides an attractive investment choice in the bond market.

2.2 Enhance Master Planning to More Effectively Support Regional Development Goals and Increase Operational Efficiency Capacity planning for urban watersheds, as well as the entire water cycle, is well understood at the utilities; the principles of environmental and civil engineering are fundamentally the same for each. Conducting coordinated planning between drinking water, wastewater, and stormwater would provide for comprehensive consideration of all the technological, financial, physical, and regulatory practices that affect sustainable water resources and infrastructure for optimal delivery. A jointly managed utility enables a strategic planning process that better addresses levels of uncertainty in environmental and economic climates through end-to-end visibility of the water lifecycle.

2.2.1 Provide more efficient management of the water cycle. A jointly managed utility would be expected to provide better management of the complete water cycle, from water reclamation through the treatment and delivery of high quality drinking water. This includes improving surface and ground water supply management and planning, reducing stress on groundwater basins, improving water quality, enhancing water conservation, continuing efficient use of surface water supply, and improving water quality. Total water management, a holistic approach to the water cycle, is predicted to become a more common practice to achieve sustainable water resources and sustain or expand existing water supplies. 9 2.2.1.1 Leverage talent and technical expertise. A jointly managed utility could leverage knowledge resources within its organization to implement effective and comprehensive water protection programs. A successful example of this is the Hamilton to New Baltimore Ground Water Consortium, which works exclusively to protect ground water resources. As a result, land use ordinances, extensive public education, source water monitoring, and research programs have been implemented to protect these ground water resources. Without leveraging the technical expertise of GCWW, these programs would never have come to fruition. 10 The regional presence of GCWW and the Consortium has gained national recognition and is frequently used by the Ohio Environmental Protection Agency as an example to other

9

“Forecasting the Future: Progress, Change & Predictions in the Water Sector (Water Research Foundation, Project #4232)”. Annual Conference and Exposition 2011, American Water Works Association, Washington, D.C., June 2011, Leadership Forum: ENVIRONMENT & SUSTAINABILITY for the Future.

10 Feasibility Study to Transition Greater Cincinnati Water Works to a Regional Water District, Prepared for Milton Dohoney, Jr., City Manager by the Greater Cincinnati Water District Study Group, April 13, 2009.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati communities as a best in class approach to comprehensively protect water resources from contamination and overuse. 11 2.2.1.2 Address Regional needs. Water industry surveys show several trends: water around the world is increasingly scarce; global freshwater use exceeds long-term accessible supply; water availability has been reduced due to pollution; and engineering practices have compromised sustainability. These, as well as potential impacts on human health, are all growing concerns across the water industry. 12 A broader watershed/basin approach to water management is growing in popularity as an attempt to combat some of these concerns (e.g., EU Water Framework Directive). The abundance of water in the Cincinnati region is a competitive advantage; a jointly managed utility can provide for better regional water resource management and environmental stewardship by providing future flexibility to manage the full water cycle in a manner consistent with community needs that will ensure the longevity of available water.

2.2.2 Improve construction coordination. A jointly managed utility would inherently provide more comprehensive communication and coordination between water, wastewater and stormwater construction efforts. Examples of successful coordination between the utilities and even other government and private sector organizations exist today (e.g., MSD, SMU, and GCWW coordination with the Department of Transportation and Duke Power on the Harrison Road re-alignment project, which produced considerable savings and significantly enhanced service for the residents). These successes will be greatly expanded under integrated management. The level of savings—in both dollars and reduced customer frustration—could be significant.

2.2.3 Improved relationship with regulatory oversight bodies. At times, the interests of wastewater utilities are at odds with water utilities. Consolidated administration would result in a unified voice to the regulatory agencies, with a balanced approach to watershed and water resource management and coordination on compliance and permitting. Future regulations appear to be shifting from specific contaminant regulations to regulations addressing a broad array of contaminants as a group based on potential health risks; from “end-of-pipe” rules to broad efforts that focus on the protection and conservation of healthy water resources; and towards strategy development on a national program and policy level by implementing watershed approaches and smart growth. A jointly managed utility would be best positioned to address these changes.

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Feasibility Study to Transition Greater Cincinnati Water Works to a Regional Water District, Prepared for Milton Dohoney, Jr., City Manager by the Greater Cincinnati Water District Study Group, April 13, 2009.

12 “Forecasting the Future: Progress, Change & Predictions in the Water Sector (Water Research Foundation, Project #4232)”. Annual Conference and Exposition 2011, American Water Works Association, Washington, D.C., June 2011, Leadership Forum: ENVIRONMENT & SUSTAINABILITY for the Future.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati 2.2.4 Improve infrastructure and service delivery. A jointly managed utility could improve regional infrastructure management by eliminating duplicate assets and streamlining asset management and maintenance, while maintaining the necessary separation of assets as per local regulations. A common platform would assist the City in: managing risks to infrastructure, meeting expected service levels, achieving lower life cycle costs, implementing reliability and performance requirements for the delivery of customer and environmental requirements, and better coordinating crossutility goals, strategies, and delivery. Combined, MSD, SMU and GCWW are responsible for more than $15 billion in infrastructure assets (estimated replacement costs). Effective use of these assets requires that rehab/replace decisions, as well as maintenance schedules, be made within the context of a solid asset management system, while still protecting the interests of the City of Cincinnati, Hamilton County, and regional customers.

2.2.5 Improve regional utility collaboration. A jointly managed utility could improve the ease of partnerships with other utilities, state and federal regulators, and major industrial and commercial customers to help manage changing water resources, water quality, and infrastructure needs. It is forecasted that in the future, utilities will have to consider alternative models in the provision of various water services such as public-private sector relationships and financing opportunities, public organization partnerships, and other coordinated regional collaboration initiatives in areas such as parks, urban development, transportation, and housing.

2.3 Enhance Economic Development to Revitalize the Greater Cincinnati Region A key strategic objective of a jointly managed utility would be to enhance economic development in the City of Cincinnati and across the region, within the limits of the use of restrictive funds. Water in this region is a widely available resource and can serve as a building block for communities of the future, of which Cincinnati continues to play a major role in shaping. MSD, GCWW, and SMU have all undertaken workforce development programs, such as Project Rebuild, designed to connect businesses, local government, and community agencies, in order to groom a future workforce that can address the challenges facing these utilities. A key component of this is not only creating jobs but also encouraging workforce development in a way that cultivates necessary knowledge, skills, and abilities in Cincinnati area residents in order to hire locally. A jointly managed utility with combined resources and a comprehensive development program can make this a top priority.

In addition, a jointly managed utility will enhance Cincinnati’s ability to attract federal funding as part of the Water Technical Innovation Cluster, recently announced by the U.S. Environmental Protection Agency, creating additional job growth opportunities.

Cultivating a local workforce that is able to support initiatives like this is critical in order to maintain the national attention the Cincinnati region is receiving and encourage future national investments.

By engaging combined efforts to meet this challenge, a jointly managed utility can impact and improve upon the local economy by building a competitive and dynamic workforce, creating jobs, reducing the degree to which contracts are outsourced beyond 16

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati the region, and encouraging small business opportunities. A jointly managed utility would be able to better leverage the marketplace to provide increased governmental and private funding opportunities and offer a combined approach for economic development in the region. Additional economic development benefits from consolidation include: x

Revitalization of urban areas by working with other public utilities to provide efficient, coordinated services

x

Coordinated sustainability initiatives

x

Local workforce development through training and expanded development opportunities

x

Local area job sustainment in the form of 600 full time construction employees for Capital Improvement Program (CIP)-related construction projects 13

x

Further development of the Joint MSD-GCWW Inclusive Workforce Apprenticeship program

x

Comprehensive small business approach, particularly in the areas of Construction Services, Professional Services, and Supplies/Services to further enhance local small business utilization.

2.4 Enhance Sustainability across the Cincinnati Area to Control Costs and Lower Utilities’ Carbon Footprint A jointly managed utility could more effectively capitalize on sustainable solutions.

MSD leadership believes that sustainable alternatives can help control costs of the Wet Weather Improvement Program and lower the utility’s operational carbon footprint.

MSD’s Communities of the Future approach to solving wet weather problems is becoming a model for state, regional, and national utilities to maximize infrastructure investments that create conditions to shape additional benefits for the community. It is forecasted 14 that in the future managing for sustainability will be the norm—investments will protect, restore and enhance the natural environment while maintaining critical infrastructure at the lowest life-cycle costs.

2.4.1 Reduce energy use. Water and wastewater operations are becoming more energy intensive as treatment levels increase, thereby increasing the utilities’ carbon footprints. To date, large utilities with access to capital markets have been in a better position to invest in new energy technology and efficient pumping equipment. Large systems can also minimize the amount of electricity used per gallon of water or wastewater pumped. Combining energy reduction efforts would lower operating costs and the potential for aggregating power purchases may be a cost saving opportunity.

13

Malcolm Pirnie, Contractor Capacity Analysis, performed in 2010.

“Forecasting the Future: Progress, Change & Predictions in the Water Sector (Water Research Foundation, Project #4232)”. Annual Conference and Exposition 2011, American Water Works Association, Washington, D.C., June 2011, Leadership Forum: BUSINESS MANAGEMENT for the Future.

14

17

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati x

Currently, the energy required to treat drinking water and wastewater can account for more than 30% of municipal energy costs. In addition, water and wastewater treatment systems in the United States are estimated to use more than 55 billion kilowatt hours of electricity in a year—approximately equal to the annual consumption of 5 million homes.

x

Providing safe drinking water and reliable wastewater services is an energy intensive activity. Electric Power Research Institute (EPRI) estimated that use in 2004 by the water and wastewater industries in the United States was approximately 107 billion KWH per year, or about 3% of electricity sales. Water and wastewater facilities typically consume 30-50% of energy used by municipalities.

2.4.2 Implement alternative energy effectively. A jointly managed utility is better positioned to implement environmentally-friendly initiatives, such as integrating solar power and other alternative energy sources into its power structure. Because of the economies of scale with electrical usage, every kilowatt of electricity generated through alternative energy sources provides a larger return than that same kilowatt for a smaller plant. A jointly managed utility also has opportunities and resources not necessarily available to a smaller utility. A single unified strategy for alternative energy for water utilities in the region will have a greater effect because of a jointly managed utility’s economies of scale.

2.5 Facilitate Technological Improvements through Shared Expertise Other benefits from a jointly managed utility include cost savings and improved performance of technology investments (automation, research and development, system integration, streamlined and consistent staff training, and more consistent and less costly financial and demand forecasting). In particular, in conjunction with the City’s Enterprise Technology Systems and Governance Board strategies, a jointly managed utility would strive to create a new security policy and model for the joint utility that leverages common requirements for a cyber-physical system security. This security model would increase effectiveness of controls, monitoring, and reporting to meet Water Sector Homeland Security objectives. In addition, an established security perimeter for the utilities which incorporates the new security model in its design, as appropriate, will better enable Water Sector security.

2.6 Ensure Public Health and Safety by Managing Enterprise Risk Overall, a jointly managed utility better positions the City and County to ensure that public health and safety obligations are met. The benefits of economies of scale, staffing, advanced technologies, research, and reporting can better meet public health responsibilities.

2.6.1 Reduce risk of service interruptions and emergency response. Combined approaches for these functions in utility operations should improve service provisions and reduce negative impacts to customers and the community. The jointly managed utility would coordinate efforts across all the water resources, making it more adept and responsive to emergencies. For example, GCWW currently has 24/7 coverage for water issues, while MSD has on-call personnel to address off-hour emergencies. A 18

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati jointly managed utility would enable expansion of the 24/7 coverage for all waterrelated issues, improving the service to the customers at a lower overall cost due to the elimination of overtime for on-call services.

2.6.2 Create an enterprise risk management program and risk registry.

Combining risk management approaches already in use separately at MSD-SMU and GCWW by incorporating the best practices of enterprise, program, and project risk management and also developing a combined risk registry, will give senior leaders strategic oversight into risks to water delivery, asset management, and financial planning. This will enable more defensible decision making as the true cost of risk is better understood.

2.6.3 Comply with Homeland Security regulations to protect critical infrastructure. Within the United States, the drinking water and wastewater infrastructure is collectively known as the Water Sector. Security directives and guidelines have been issued by the Department of Homeland Security and the EPA which are intended to mitigate risk to public health and to the environment.

Integrating management of the entire water lifecycle would better enable a unified approach to physical and cyber security management and thus will provide more robust solutions to achieving the regulatory compliance required under Homeland Security Presidential Directives.

Overview of Current Organizational Structures and Potential Shared Services This overview of the current structures of MSD, GCWW, and SMU outlines the current organization of each utility and highlights areas where synergies could be realized under a jointly managed utility. It also sets the stage for an analysis of financial savings as well as a transitional organizational structure described in later sections of this study.

The scope of this study is currently limited to administrative functions only. Although this study assumes there will be opportunities for efficiencies in core operations functions, this initial assessment primarily focuses on administrative functions as a way to streamline processes and create efficiencies in a jointly managed utility.

3.1 Metropolitan Sewer District and Stormwater Management Utility MSD, established as a sewer district under Section 6117 of the Ohio Revised Code, is the Cincinnati area’s wastewater utility. As a result of the 1968 Agreement, oversight of daily operations is managed through the City of Cincinnati Department of Sewers while approval of rates, CIP, budget, and rules and regulations are the responsibility of the Hamilton County Board of Commissioners. In addition, MSD is an enterprise fund, wherein the City recommends the budget and County approves it. Within MSD, there are eight divisions, depicted in figure 4.

SMU is the area’s stormwater utility; it is a city agency managed by MSD. SMU is an enterprise fund and its budget is managed by the City. In 1990, MSD and SMU integrated to create a single utility at the administrative level that allowed SMU to function independently at the operational level. SMU and MSD have operated effectively under this model since then, and should be seen as a positive indication of the future success of an integration of all three utilities.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Figure 4: Metropolitan Sewer District and Stormwater Management Utility Organizational Chart

3.2 Greater Cincinnati Water Works GCWW is the area’s water utility, fully managed and operated by the City of Cincinnati. It is an enterprise fund and its budget is approved by the city. There are seven divisions within GCWW, which are depicted in Figure 5.

Figure 5: Greater Cincinnati Water Works Management Organizational Chart

3.3 Potential Areas of Shared Services Through research of other jointly managed utilities across the country, as well as indepth, structured interviews with leadership and staff from the three utilities, a number of functional areas have the potential for integration at some level, either through joint management, partial integration, or full integration. These areas of potentially shared services are human resources, safety, security, training, accounting, finance, purchasing and warehousing, stores, laboratory services, industrial pre-treatment/backflow, planning, capital project delivery, communications, regulatory compliance, information technology, customer service, public education, fleet and utility maintenance. Should this proposal be accepted, determining the degree of integration will be an initial task, based on legal and financial restrictions, current responsibilities and the practicality of joint management.

Core operations such as Wastewater Collections, Wastewater Treatment, Water Distribution and Water Supply would continue to be managed as separate operations for the next 1-3 years.

It has become apparent that some of the aforementioned functions, including IT, human resources, accounting, safety, security, communications, customer service, purchasing, and stores, are sufficiently similar in operations that fully integrated joint management is not only possible but also beneficial. While compatible IT systems are critical to establish across the utilities, the organizational processes of these functions are 20

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati such that joint management is likely to improve all around efficiencies related to service delivery.

Some functions, while largely similar, require that various elements must be kept separate due to regulations or various systems compatibility. Included in this category are finance, engineering, planning, regulatory compliance, fleet, utility maintenance, training, lab services and Supervisory Control and Data Acquisition System (SCADA). In the case of functions such as finance, regulatory compliance and laboratory services, many capabilities and responsibilities overlap. Regulations stipulate that water and wastewater budgets must be kept separate and water and wastewater testing must also be segregated.

However, in both cases, administrative elements of each function, such as purchasing chemicals for treatment, can be jointly managed.

Within the remainder of these functions, some preliminary sharing is possible. At a certain point, however, the differences between water and wastewater utility management become apparent. For example, while water and wastewater can share some equipment, pieces may vary due to independent requirements. Or, early project planning and construction can be jointly coordinated to a degree, but when the technical details require attention, water planners may not have sufficient knowledge of wastewater projects and vice versa. However, there will be opportunities for project coordination, alignment of project schedules, and cross-training under a jointly managed utility to enable more efficient resource allocation.

Finally, core operations will remain independently managed at this time. Wastewater collections and treatment as well as water supply and distribution are sufficiently unique with regards to both regulations and operational capabilities. Because of this, establishing integrated operations at this time is not a priority. However, if joint management is approved and implemented, integration should be revisited after the initial 1-3 years.

Analysis of Savings and Ten Year Financial Plan for Jointly Managed Utility Per the City Council’s motion, an analysis of savings was conducted to determine anticipated potential savings and synergies through 2021 as a result of integrating the administrative functions of MSD, GCWW, and SMU. All financial analysis is based on data related to operating expenditures gleaned from the ongoing rate studies for MSD, GCWW, and SMU, and as such, final projections may vary. Projected savings are based on “as-is� operations as of 2011, and do not reflect any future changes to regulations, service area, or operating of new facilities that may affect future operating costs. Therefore, projected operating costs for each utility individually, as well as the jointly managed utility, may vary from that shown if any such conditions arise. Additionally, costs associated with the capital program, e.g., debt service and cashfinanced capital are not included in this analysis.

All analysis is based on an integration start date of January 1, 2012.

4.1 Analysis of Savings through Labor Costs and Operating Efficiencies Analysis indicates that real dollar savings from integrating would be realized in two ways. The first is through the streamlining of the work functions, allowing for a reduction 21

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati in the overall number of Full Time Equivalent employees by not backfilling retirees and the elimination of some positions that are funded, but vacant without recent activity. It is important to note that an assumption of the analysis is that no lay-offs will occur as a result of joint administration. Using very conservative estimates for the number of positions that could be eliminated, and the average cost of those positions, it is estimated that a jointly managed utility would save approximately $68 million over a ten year period.

Second, a jointly managed utility has the potential to significantly improve operational efficiency, while providing a higher quality of service. Operational efficiencies will be driven by improvements such as an increased overall project management capability, better coordination of projects across the utilities, a common IT infrastructure that supports the full suite of needs of the utilities, and cross-training and enhanced utilization of personnel. Additional factors for operational efficiency savings include integrated purchasing capability, and a reduction in demand for staff supplementation. Using a very conservative estimate for operational efficiency savings as compared to industry benchmarks, it is estimated that a jointly managed utility would save approximately $37 million in additional savings over a ten year period. These savings are dependent on the jointly managed utility overcoming a host of challenges outlined in this report.

4.2 Ten Year Financial Plan As previously discussed, a jointly managed utility would provide the opportunity for efficiencies not possible under continued independent management. The development of a high level ten year financial plan illustrates the potential operational savings that could be achieved under joint management.

The projection of operating expenses for each utility under current operations is presented in the following graphics. As shown, all three utilities are anticipating continued growth in operating expenses due to general cost escalation.

MSDGC Projected Operating Expenses $160,000 $150,000 $140,000

$120,000 $110,000 $100,000 $90,000

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

$80,000

2011

($000)

$130,000

Figure 6: MSDGC Projected Operating Expenses

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati GCWW Projected Operating Expenses $160,000 $150,000 $140,000 $130,000

($000)

$120,000 $110,000 $100,000 $90,000 $80,000 $70,000

2019

2020

2021

2019

2020

2021

2018

2017

2016

2015

2014

2013

2012

2011

$60,000

Figure 7: GCWW Projected Operating Expenses

SMU Projected Operating Expenses $14,000 $12,000

($000)

$10,000 $8,000 $6,000 $4,000 $2,000

2018

2017

2016

2015

2014

2013

2012

2011

$-

Figure 8: SMU Projected Operating Expenses

While certain costs will always be inevitable, the creation of a jointly managed utility will provide opportunities for efficiencies that will reduce the total cost of operating the three utilities, as illustrated in the graphic below. The savings indicated in the graphic reflect those resulting from attrition and the elimination of vacant/funded positions that would not be necessary under a jointly managed utility, as well as potential additional savings due to identification of efficiencies in support functions as well as possible efficiencies in core business functions in the later years of the projection period. While the timing and total savings may vary somewhat from that depicted in the graphic, it illustrates the estimated average level of savings over the projection period. Additional savings due to potential future changes that may occur in the long-term are not included in this estimate. Based on the assumptions indicated above it is estimated that a jointly managed utility would enjoy a savings of $68 million - $105 million over the ten year projection period.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Figure 9: Possible Savings under joint utility structure

If it is determined that a jointly managed utility is the preferred direction, further analysis will be undertaken to determine a more precise estimate of savings over the tenyear projection period, including assumptions regarding opportunities for consolidation of services, staff vacancies, and retirements, and potential for improving efficiencies and/or lowering the cost of specific goods or services (e.g., power purchase agreements, chemical contracts).

Projected Opportunities and Potential Challenges Opportunities and challenges will necessarily arise from moving forward with integration; how well they are capitalized upon or mitigated will largely determine the extent of additional savings. Maximizing projected opportunities will enable savings to be realized in excess of the projected $37 million while, in contrast, failing to mitigate the potential challenges will likely result in less savings.

In order to best understand the expected benefits and potential challenges of establishing a jointly managed utility, significant research was conducted to review past trends and lessons learned from integrating utilities as well as considerations specific to the Cincinnati service area water utilities. This research comprises two parts; first, an extensive review of industry best practices and lessons learned from utilities that have integrated previously; and second, interviews, both individually and in group settings, with MSD, GCWW and SMU leadership and superintendents to understand the benefits and challenges facing these three utilities.

The information in this section has been organized into three high-level categories that speak to the primary areas on which this integration is focusing: operations/quality, financial, and customer service/public perception. Within each of these sections, best practices from industry research have been juxtaposed with Cincinnati-specific considerations in order to highlight similarities and differences. The opportunities and challenges that have been identified are considered the most critical factors that will either ensure the success of this integration or else contribute to a less effective outcome, in terms of operational efficiencies and savings.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

5.1 Projected Opportunities 5.1.1 Operational/Quality: Maintaining, and ultimately increasing, operational efficiency and quality is a necessary outcome of this integration. Jointly managing administrative functions will provide greater visibility into the entire water lifecycle, ensuring the utilities are operating in concert and are aligned under common strategic goals.

5.1.1.1 Best practices around jointly managed utilities show a number of improvement opportunities in the operational and quality spaces. In particular: x

The opportunity to deliver higher quality of service through more efficient master planning. The ability to collaboratively contribute to the master planning process means the suggested solutions serve the entire water cycle and equip planners to make more accurate, informed decisions.

x

Less redundancy in executing functions. A jointly managed utility will increase efficiency through allowing similar functions to be jointly administered, reducing the frequency with which common processes are repeated. This reduces the time lag in executing and turning over projects.

x

Better utilization of employee knowledge/skill. For example, combining Engineering staffs enables management to get better internal utilization and reduce the number of outside contractors (supplemental staff) along with cash outflow. It can also provide increased learning and career opportunities for employees.

x

Measureable improvements in project schedule performance (against original targets) through improved coordination of program and project management across the jointly managed utility. Research from similar integrations shows that the ability to coordinate across utilities tends to decrease diversions from project schedules, resulting in more accurate service delivery.

x

Some cost savings for capital through better coordination of projects across the utilities. Advance planning to coordinate water and wastewater projects will allow core samples to be taken once and analyzed for both waste water and water objectives, streets to be dug up once, and inspections to be conducted by one inspection team meeting all utilities’ requirements. Much of this coordination is already occurring between the utilities on one project, Lick Run, with demonstrated success.

5.1.1.2 While this information is derived from historical benchmarks, after reviewing the synergies and proposed areas for collaboration and shared services between MSD, GCWW and SMU, it is expected that a jointly managed water utility in Cincinnati will produce similarly positive results. In particular, the following opportunities for operational improvement were among those identified:

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati x

Asset Management. MSD, SMU, and GCWW have already worked together to share best practices around asset management. MSD has been working with GCWW on implementing reliability center maintenance, a best practice that has been in use at MSD. While asset segregation must be maintained in accordance with City/County requirements, the three utilities would benefit from shared tools and approaches to asset management.

x

Regulatory Compliance. GCWW undertakes extensive proactive research and testing to anticipate impending regulatory action. This deep understanding of the regulatory environment would contribute greatly to a united front with regards to working with regulators, including the U.S. EPA and DHS.

x

Joint planning and shared goals. While MSD has experience with strategic planning due to earlier development and implementation of their strategic plan, GCWW has solid water quality goals and objectives that would complement MSD’s strengths. The ability to see the entire water lifecycle will also support more efficient project planning. The coordinated effort across MSD, GCWW, and SMU on the Lick Run project is one such example, specifically the Harrison Road realignment, and the coordinated community outreach on the Guerley Road Reservoir project which led to a solution that will provide greater value to the community.

x

Long range water resource planning. All three utilities use sophisticated hydraulic and process models to develop their long range plans. A unified methodology in a jointly managed utility will more effectively manage water resources.

x

Shared services. Among the services that have been recognized as high priorities are a shared IT support structure, overlapping IT systems administration, a shared customer support center, shared security management, joint stakeholder management, and the potential for fleet sharing. Recognizing that a variety of IT infrastructure will need to be in place before integration can be implemented, fully synchronizing IT services have been acknowledged as having high potential for improving overall operations.

5.1.2 Financial: Both MSD and GCWW are under increasing pressure to demonstrate efficient spending and ensure that customers are receiving the most value for their dollar. Running a jointly managed utility provides the opportunity to reduce overall operating expenditures (OPEX) by realizing efficiencies and capitalizing on shared resources.

5.1.2.1 In particular, historical trends have shown that jointly managed utilities enjoy improved return on assets (ROA) through better asset utilization across combined businesses and improved prices for common purchases due to increased buying power and coordinated purchasing where appropriate.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati 5.1.2.2 The analysis conducted on MSD, GCWW, and SMU anticipates that in the first 1-3 years of joint administration, savings will be realized from 1) the strategic elimination of current positions as vacancies occur due to retirements in the shared service areas and 2) vacant but funded positions with no activity as of 31 July 2011. These will be the greatest contributors to savings through 2015. In the mid to long term (through 2021), savings will begin to be realized as a result of combined asset management, increased buying power, streamlined administrative functions, and streamlined core operations.

Proposed areas for savings between the three utilities included: x

Purchasing. An integrated purchasing capability will reduce the amount of time spent and the amount of resources needed compared to what is currently spent on this function. In addition, having insight into the entire water lifecycle will support more informed purchasing decisions in areas as appropriate under city regulations.

x

Reduction in demand for staff supplementation. Closer coordination on projects across the lifecycle will also enable the utilities to coordinate during “surge” periods (wet weather for MSD; cold, dry and hot, dry weather for GCWW), thus reducing the need for staff supplementation.

5.1.3 Customer relations/perception: As public utilities, MSD, GCWW and SMU must handle customer relations and public perception delicately, understanding that perception is a critical success factor. The public perception of water and wastewater utilities tends to be of a unified “water service” that manages the entire cycle, reinforced by the single bill customers receive for water-related services. Thus, integrating MSD and GCWW will support preexisting perceptions and enable more efficient and holistic customer service efforts across the jointly managed utility. This integration will provide an opportunity to streamline the water cycle into a one-stop service and, in doing so, has the potential to alleviate customer confusion and increase satisfaction.

5.1.3.1 The following trends have been realized following other water utility integrations: x

At least 10% improvement in customer service levels as a result of more efficient operations.

x

Increased project and construction coordination facilitates improved customer service and lower customer frustration.

5.1.3.2 At MSD, SMU and GCWW, some tangible areas in which a jointly managed utility could add significant value have been identified: x

Customer Accounts/Service. The increased ability to have joint administrative rights over customer accounts will be an early positive adjustment that will improve customer service levels. A shared service center, coordinated customer service systems, and information and knowledge that enable any customer service representative to address specific account questions will have a positive impact on the public’s perception of water as a service in Cincinnati.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati x

Stakeholder relationships: The general consensus across the utilities is that MSD has a strong relationship with local unions, while GCWW has a highly positive relationship with regulators. Leveraging each utility’s strengths into a combined utility shows great potential for improving overall relations. Through a comprehensive stakeholder management program that spans both agencies, one utility presence is demonstrated and a common platform that includes unified communications and collaboration greatly increases accuracy and transparency.

5.2 Potential Project Challenges Initiating a water utility integration inevitably poses some challenges. However, if acknowledged and actively managed, these challenges can be mitigated and a successful integration can result. The success with which these challenges are mitigated during the integration process will have a direct impact on the level of savings able to be realized over the longer term. The challenges identified below, which should be considered during this initiative, are derived from historical research of utility integrations and discussions with MSD, GCWW, and SMU leadership.

5.2.1 Operational/Quality: Even as there are key benefits to be realized from increased efficiencies in operations and quality, some key challenges exist that must be addressed to ensure these benefits unfold. Research around integrations shows that full operational benefits are not always realized until 1-3 years following the initial steps towards integration. Keeping this range in mind will help manage expectations around projected near- mid- and long-term results.

5.2.1.1 Some of the key challenges to operations that have been presented in other integrations include: x

Integration must begin with realistic pre-integration analyses that do not overestimate the synergies between organizations. It is imperative to present regulators and staff with a clear picture of how the organizations function independently and how they will be able to function jointly.

Operational efficiency is likely to increase and operation costs will decrease, but the most important impact of the integration will be improved mission performance, customer service, and management of the increased capital expenditures required under the MSD Consent Decree and GCWW’s capital expenditures.

x

The full spectrum of functional areas must be considered for consolidation to realize the full potential of long-term benefits. While initially only administrative functions are being considered for joint management, if the utilities are not addressed as a complete entity in the future, the integration is not likely to achieve the complete range of benefits as anticipated.

x

Without a comprehensive change management plan, there is significant potential for gaps in execution and staff resistance to organizational change. A change management plan ensures that staff understands not only the value of the integration but also the changes that 28

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati must occur to blend the organizations. The implementation plan at the end of this study lays out a detailed change management approach. x

Risk of Knowledge Loss. There is a danger in losing critical knowledge that is tacit and possessed only by people close to retirement and those who are mobile. A rigorous knowledge management plan should be developed early in the process to address retention and dissemination of critical knowledge and skills. Staff needs time to mentor and transfer their knowledge to others and not deprive the organization of its use.

5.2.1.2 Overall, the ability to maintain service levels during the transition is critical. Through interviews, a number of specific challenges were identified as requiring careful attention in order to ensure the success of this potential integration with respect to service levels. Additionally, the ability to achieve needed flexibility in the areas of technology is crucial if efficiencies are to be realized. x

IT requirements must be compatible. There is a critical IT component to almost every organizational function within the three utilities. Ensuring these components are sufficiently synchronized and compatible will require close coordination between the utilities and potentially an investment of resources, especially at the outset. In addition, compatibility with the access to Information Technology systems among the three utilities will further enhance the ability to increase operational efficiencies.

Leveraging IT investment among the three utilities may be one of the single largest opportunities for savings over the mid-to long-term.

x

Silos must be overcome. Within MSD, GCWW and SMU, various silos, aligned to specific functional areas, have developed over time. A successful integration will be largely dependent upon the ability to move beyond these silos, both within each organization and, upon integration, between the three. Overcoming silos to form a more collaborative, jointly managed utility will be a challenge that, if overcome, will facilitate operational effectiveness across the organization.

5.2.2 Financial: The financial challenges to integration are critical to address. These challenges largely center on the risk of failing to manage expectations around timelines and sources of savings.

5.2.2.1 Some key considerations, which have posed challenges for other jointly managed utilities, include: x

The timeline along which savings will be realized must be acknowledged. While savings through labor attrition will likely be seen in the first 1-3 years, savings stemming from improvements to operational efficiencies may take longer, approximately 4-10 years, to become apparent.

x

One source of potential savings is unlikely to drive all benefits.

Savings through integration will be realized through multiple different 29

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati channels at varying intervals; failure to view all potential savings opportunities may create the perception that the integration is less successful than in actuality. x

Initial investments to support integration may be necessary. While initial savings will occur in some areas, in others, some up front expenses may be necessary. In particular, technology investments may be required to ensure compatibility between utilities. These initial investments, however, will produce savings through realized efficiencies in the future.

5.2.2.2 In addition, a balance must be maintained between the City and County roles in financial oversight—a challenge particular to Cincinnati water and wastewater utilities. This will require careful planning and management which can be achieved in a jointly managed organizational structure. Specific considerations relating to financial management have been identified: x

Separate funds must be maintained. Due to City and County regulations, water and wastewater funds must be used for water and wastewater projects respectively. Joint management of the finance function, with segregation of City and County budget processes and financial management, will allow clear separation of City and County funds while still enabling a full view of all expenditures.

x

A new integrated utility financial system should be explored.

Exploring ways to improve efficiency and financial tracking through a new, fully integrated financial system could yield benefits.

5.2.3 Customer Relations/Perception: Managing customer relations and perception is perhaps the greatest challenge facing this proposed integration. As public utilities, measures should be taken to ensure that all stakeholders are aware, informed, and engaged with the changes occurring across Cincinnati’s water utilities. Managing the expectations of the results this integration will produce in both the near- and longterm is critical to cultivating public support for the jointly managed utility.

5.2.3.1 Lessons learned from other water and wastewater utilities going through the integration process include: x

Expectations must be managed so stakeholders understand that savings and benefits may not start immediately. While rates that are lower than what they would be otherwise is an anticipated benefit of the integration, customers must understand that changes may not be immediately visible. Explaining the complexities of the integration in a transparent manner will bolster public acceptance.

x

The utilities’ leadership must clearly articulate the non-tangible benefits of integration, such as civic enhancement through a more concentrated and effective environmental sustainability program. As explained in the strategic goals section, joint administration of the entire water lifecycle will support a more comprehensive master planning process. In Cincinnati, efforts are underway to revitalize the city and encourage economic development. A holistic water program will support 30

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati sustainable initiatives that ultimately contribute to a greater quality of life in the Cincinnati area. x

In addition to customer reaction, dedicated attention must be paid to other stakeholders to ensure they are aware of all of the changes as they occur. A continuous, detailed communications plan that engages key customers will help support these efforts.

5.2.3.2 Customer relations should consider not only external stakeholders but internal, as well. While many opportunities have been highlighted in relation to external stakeholder relationships, potential challenges for MSD and GCWW have been highlighted around interactions with current staff. In particular: x

Buy-In from employees. A jointly managed utility will result in many changes for current employees. Managing expectations and ensuring employees are kept informed is a challenge that is critical to overcome.

x

Organizational culture. Concerns have been expressed over the differing organizational culture between the utilities. Effectively integrating these utilities may be a challenge if a comprehensive change management program is not implemented at the outset.

x

Career development opportunities. By combining staff and functions there will be greater cross-training and leadership development opportunities for employees through a broader range of collaborative efforts.

Impacts of Integration on Consent Decree The City Solicitor’s Office and external legal counsel reviewed the question of whether, in the event that MSD integrated its management with Greater Cincinnati Water Works, there would be any implication under the Consent Decree or the 1968 Agreement. Counsel reviewed the Consent Decree, the 1968 Agreement, and the enabling ordinances for the 1968 Agreement. Counsel did not see any implications to either the Consent Decree or the 1968 Agreement under the terms of those agreements. The Solicitor’s Office cautions that any change to the departments must be consistent with the City’s Charter and the City’s Administrative Code. The Director of the Water Works is designated in the City’s Charter in Article IV, Section 9. The Director of Sewers is designated in the City’s Administrative Code. Changes to the Administrative Code, which include the duties of the Director of Sewers, require a 3/4 vote of City Council.

The Department of Sewers responsibilities under the 1968 Agreement are codified in the Administrative Code.

Consent Decree The City of Cincinnati and Hamilton County are parties to the Consent Decree (referring to both the “Global Consent Decree” and the “Interim Partial Consent Decree” entered by Judge Spiegel on June 9, 2004). MSDGC is not a party to the Consent

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati Decree. 15 Therefore, as long as Defendant City of Cincinnati, however organized, continues to operate the sewer system, there is no implication or change regarding the Consent Decree obligations. x

The Consent Decree Section III describes how the obligations of the Consent Decree remain binding upon both Defendants unless, following the prescribed procedure set forth in the section that includes Plaintiff Regulator approval, a successor in interest is confirmed. Therefore, the City of Cincinnati cannot unilaterally alter its obligations under the Consent Decree.

1968 Agreement With respect to the 1968 Agreement and the enabling ordinances passed by the City at that time, they both direct that the Cincinnati Department of Sewers shall administer the agreement. Ordinance 147-1968 passed to effectuate the contract with Hamilton County establishes the Department of Sewers, to be administered by the Director of Sewers, with the duties to design, construct, repair, maintain and operate all sewers and sewage treatment facilities of the City, and to perform management functions for the County Sewer District assumed by the City per the contract. 16 The ordinance does allow the Department of Sewers to avail itself of the services and facilities of other city departments necessary for the discharge of the duties under the contract, but services of those other departments are to be paid for by the Department of Sewers at cost plus established overhead. 17 The 1968 Agreement defines the term “Department” to mean “the Department of Sewers of the City of Cincinnati specifically created for the administration of this agreement.” 18 The term “Department” appears in one other place in the agreement.

Section IX.3 discussing Transfer of Funds and Debts, provides that “Any revenue bonds issued or to be issued by the Commissioners under the provisions of Section 133.06, ORC, shall have a first lien on said revenues after the payment of reasonable cost and expense of operation and maintenance of the sewer system, including all expenses of the Department.”

Counsel finally determined that from the perspective of the 1968 Agreement itself, nothing prevents the City of Cincinnati from organizing the Department of Sewers itself or within the City structure in any way that it best determines will carry out the requirements of the Agreement.

Limitations Legal counsel did not review the history of the “Department of Sewers” since 1968 by tracing any relevant ordinances, functional changes or re-organizations over time, such as MSD’s assumption of the City Stormwater fund and utility. A comprehensive analysis of the requirements under the City of Cincinnati Charter that must be met to effectuate the proposed reorganization was not undertaken. Administrative Code changes will depend on the form of the newly constituted organization. Changes to the 15

Section II of the Consent Decree See, Ordinance 147-1968, Sections 1-2.

17 See, Ordinance 147-1968, Section 3.

18 See, 1968 Agreement, Section I.7.

16

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati Department of Sewers and/or the Water Works will likely require changes to the Administrative Code, as set forth above.

Proposed Framework for Transitional Organization Should this proposal be approved, a transitional organizational structure can be established relatively quickly, following leadership decisions to appoint personnel to manage and execute the transition. Detailed steps to move into the transition are described in the Implementation Roadmap section below.

The position of Transition Manager should be established, reporting directly to the Deputy Director. The Transition Manager would be accountable for overseeing the effective and efficient integration of the business support services. The position of Capital Enterprise Manager, which also should be established, and will report directly to the Deputy Director, would be accountable for overall performance of the Wet Weather Improvement Plan (WWIP. The Capital Enterprise Manager would assume responsibility for all project planning, design, and construction activities.

After this first wave of integration of shared services has been completed— anticipated to be 1-3 years from approval—additional opportunities and synergies associated with core operations will be evaluated for feasibility. Though the focus will initially be on other areas, wastewater collection and treatment and water supply and distribution will continue to work together much in the same way that they are today on projects such as Lick Run. Executive Director

Deputy Director, Operations

Capital Enterprise Manager Wastewater Treatment Division Wastewater Collections Division

Stormwater Division

Water Supply Division

CIP Planning

Design and Construction

Environmental Programs

Administrative Transition Manager Human Resources

IT

Regulatory Compliance

Training

Laboratory

Safety and Security

Industrial Pretreatment Backflow

Water Quality

Finance

Customer Service

County Capital Fund Management

Public Education

City, CIP, and Operating Fund Management

Communications

Accounting

Water Distribution Division

Billing

Integration Core Teams & Working Groups will be pulled from functional areas

Figure 10: MSD-SMU-GCWW Transitional Organizational Structure as a Jointly Managed Utility

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Structuring the Roles and Responsibilities of the Integrated Organization An integrated, jointly managed utility will need clear leadership, roles and responsibilities, and accountability, particularly during transition periods as functions merge, job descriptions are amended to reflect changing responsibilities, and organizational cultures are blended.

Executive leadership. Strategic direction setting across the range of activities impacting the entire water cycle will be enhanced through a consolidated executive leadership team. This team will be able to manage the full range of needs as a consolidated portfolio of activities Roles and responsibilities. In the jointly managed utility, new roles and responsibilities must be made clear. This is an effort that is already underway at MSD and GCWW, but it becomes significantly more critical with an integration of organizations. Employees from all three organizations should be engaged to clearly define roles and responsibilities for executing the combined mission.

Accountability. Accountability is enabled through the clear definition of roles and responsibilities, and a combined and streamlined management structure will enable a higher degree of accountability.

Phased Implementation Roadmap Should this proposed integration be approved, implementation would take place initially over 1-3 years, with milestones for specific, prioritized recommendations to be achieved, full accountability vested in designated individuals and teams, and a thorough review process complete with performance metrics. The recommendations are divided into eight categories that address the areas most critical to successful organizational change: cross-functional core teams, roles and responsibilities, processes, human capital, tools, metrics, risk, and change management. The recommendations are broken into steps in the diagram in Appendix III.

9.1 Cross Functional Core Teams 9.1.1

Establish Executive Steering Committee, Integration Core Team, and Working Groups through charter to manage and oversee the integration of designated functions. These three groups will be responsible for the strategy and execution of the integration. Defining the roles and responsibilities of these three groups that represent all levels of the utilities in a charter shows all stakeholders to whom they should turn with questions or considerations for the integration once it is underway.

9.1.1.1 The Executive Committee is comprised of the senior-most decision makers of the utilities, responsible for the integration strategy and approach as well as oversight of all integration objectives. It serves as the final arbiter on major decisions related to the integration, and as the body to which metrics are reported. The Executive Committee includes a Transition Manager, who has accountability for the success of the integration.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati 9.1.1.2 The Integration Core Team is comprised of senior personnel representing the functions targeted for integration. It is responsible for operationalizing the strategy, identifying areas for review and analysis where relevant and presenting options to the executive steering committee for decision. The transition manager leads the core team.

9.1.1.3 Working Groups are small groups of mid- to senior-level personnel in the functions targeted for integration. They are responsible for executing the strategy by performing analyses of options as directed by the core team, outlining training needs, and identifying issues at the execution level for the core team, and ultimately, for the executive steering committee. Working groups will be set up for the following functions:

Finance

Engineering (incl. Planning)

Regulatory Compliance

Purchasing

Accounting

Human Resources

Communications

Stores

IT

Safety

Fleet

Lab Services

Customer Service

Security

Utility Maintenance

SCADA

9.1.2 Define major integration objectives and a clear strategic vision for the future state organization. Successful integrations begin with clear, measureable strategy with well-defined and understood objectives. This strategy is communicated to stakeholders early in the integration process, thus enabling staff, the City, the County, and ratepayers to understand why decisions regarding the integration are made.

9.1.2.1 Developing Core Strategic Vision. Core Strategic Vision defines the strategic boundaries while answering three key questions: x

Where are we going?

x

How will we get there?

x

How will we measure success?

Core Strategic Vision identifies the internal and external factors that will define the organization’s success:

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Figure 11: Core Strategic Vision

9.2 Roles and Responsibilities 9.2.1 Establish clear management oversight structure for post-integration. One of the primary responsibilities for the core team will be to work with both the executive steering committee and the working groups to define the final integrated structure of the jointly managed utility. This includes outlining roles and responsibilities for management of the integrated functions.

9.2.2 Outline roles and responsibilities for the integrated functions. Each function’s integration process will proceed differently depending on considerations such as whether the entire function will be integrated or whether separate departments will be maintained with integration occurring at the management level. Developing Accountable, Responsible, Consulted, Informed (ARCI) matrices for these integrated functions provides a clear outline of which functions, departments within functions, and roles and responsibilities will be wholly or partially integrated.

9.2.2.1 The ARCI Matrix. An ARCI matrix defines the functions of an organization on the x axis and the activities of an organization on the y axis, to indicate which function is either Accountable, Responsible, Consulted, or Informed for each activity. This provides guidance for all staff as to their level of ownership for each activity in which they have a role. ARCI matrices are typically used in integrations to outline changes to roles and responsibilities of newly joined organizations.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Figure 12: Sample ARCI Matrix

9.3 Processes 9.3.1 Create processes to guide integration and future state operations. Clear processes allow staff and leadership to understand how the integrated functions will operate. All relevant processes under the functions being integrated should first be reviewed by the working groups to identify which processes should be changed, and which new processes will need to be drafted.

9.3.1.1 Integration Processes. After the executive steering committee, core teams, and working groups are established and the strategy and objectives are codified, the core team is responsible for generating work processes for approving organizational changes, with signoff by the Executive Steering Committee.

9.3.1.2 New and Updated Processes. Each Working Group will identify and draft new or updated processes that reflect the joint aspects of the functions for review and signoff by the core team and other organizations (such as Legal) as appropriate.

9.3.1.3 Implementing Processes. Once processes are drafted and approved, each working group should create a detailed timeline of execution with realistic dates of completion, the assignment of task owners, and periodic reviews.

9.4 Human Capital 9.4.1 Draft amendments or new job specifications as needed for integrated functions.

As a result of integrating support service functions, some job specifications may need to be altered to reflect new management responsibilities, new qualifications, and other such details. Working Groups will work with HR to identify which job specifications 37

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati need to be amended and then to alter the specifications under HR’s oversight as needed.

9.4.2 Review job classifications for suitability under jointly managed utility, beginning with the Engineering job family. A jointly managed utility will require a dynamic and adaptable workforce. Job classifications should be reviewed, with recommendations presented to the City, to ensure that they are in line with market trends and enable a jointly managed utility to recruit and retain top talent. Job classifications in the Engineering job family have already been reviewed by MSD; this work should be revisited as a model for other job family reviews, and reconsidered by stakeholders. The core team will review the Engineering job reclassifications, make changes reflecting the integration, and later determine which other job families should be reviewed by the relevant working groups.

9.4.3 Create a talent management program to address shifts as a result of integration.

Talent management will be a cornerstone of a broader change management strategy outlined below. Staff is more likely to support a new organization if opportunities are presented to broaden skill sets or better make use of existing ones. The core team should identify one of the working groups to focus on talent management, documenting existing skills, needed skills and certifications, while also taking in training requirements for the new organization.

9.4.3.1 Training. Cross-training and certification will be a key enabler of successful integration. The working group should identify what new training is required across the organization as well as what training is currently available across all organizations and can be repurposed with minimal effort.

The group should also recommend the size of the training budget as well as a training calendar.

9.5 Tools 9.5.1 Identify redundant resources as well as missing resources critical to the success of the integration. Developing a common technological backbone, integrating and synchronizing the use of tools, and developing an integrated IT support organization will be critical to realizing the potential synergies in other functions. The working group should catalogue all resources, including personnel and assets, and determine which resources are redundant and where resource gaps exist. The working group should then work with the training working group to identify any training necessary to allow personnel to move from redundant positions to fill capability gaps.

9.5.2 Develop plan for phased approach to adopting or merging new technologies, along with timelines, budgets, and processes. The working group should also develop detailed plans for synchronizing technologies and tools. While the utilities have many of the same tool sets including PeopleSoft and Primavera, they are implemented in very different ways, and integrating the tool sets will take time and effort. In addition, there are several business support tool sets which are not common, and the working group will need to develop migration plans to get to common technology implementation.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

9.6 Metrics / Reports 9.6.1 Set measureable short- and long-term goals to track integration progress that aligns to strategy. Progress through the integration should be measured through metrics that reflect milestone achievement and can be tracked back to the strategic goals outlined by the executive steering committee and the core team.

9.6.1.1 Use a 1-3 year window to gauge results. When generating metrics around integration, time horizons must be reasonable to ensure that they will record real progress. It is anticipated that the first wave of integration of shared services will take approximately 1-3 years; the selected metrics should reflect this time span.

9.6.2 Determine what regular reporting will be required and develop dashboard format for reports. After the metrics are set by the core team and approved by the executive steering committee, they should be measured at regular intervals depending on their criticality and formatted as a dashboard for review by the executive steering committee and other stakeholders as needed.

9.7 Risk 9.7.1 Identify risks to the integration plan and develop a risk management plan for potential integration risks. The core team should develop a risk management plan to determine the risks to a successful integration of the three water utilities. This risk management plan will be instrumental in addressing legal, financial, operational, and cultural risks, many of which were outlined as project challenges, in order to maximize savings. The transition manager should be the individual responsible for overseeing the transition risk management.

9.7.2 Develop a program to identify and manage risk to the jointly managed utility, connecting enterprise, program, and project level risk. Managing risk throughout the transition process will lay the foundation for a comprehensive risk management program across the jointly managed utility. In order to be effective, this program must have a high-level enterprise risk management approach that is in line with program and project level risk management efforts. To build a risk aware culture that is able to manage risk, senior leadership must make risk management a priority.

9.8 Change Management 9.8.1 Create a cultural assessment of MSD, GCWW, and SMU. MSD, GCWW, and SMU have distinct cultures that affect how the utility manages everything from daily work to organizational change; how communications are handled, and how each organization interacts at the staff, management, and leadership levels. Documenting these cultures through a structured process will highlight the major differences in culture between the three utilities and will show potential “red flag� issues that could present challenges to successful integration.

9.8.2 Develop a stakeholder communication strategy and communication plan to support consistent messaging to internal and external stakeholders. Regular communication is critical to change management, as plans can be derailed by a lack of information and the rise of rumors. Research conducted on integrations shows that 39

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati the most successful efforts are accompanied by regular, honest, and open communications. Stakeholders at all levels within and beyond the organizations should be kept informed of progress. A communications plan may be broken into two phases, short-term and long-term; as the integration progresses beyond the first 100 days, communications may be scaled back somewhat, but should still be continued at regular intervals.

9.8.2.1 Short-term (first 100 days) internal and external communication plan. Create a messaging map to address who communicates what information when and how, and to whom.

9.8.2.2 Long-term (post-100 days) internal and external communications plan. Establish two-way communications processes (town halls, newsletters, interactive voting, and function-level meetings) to provide answers and ask questions of staff.

9.8.3 Integration assessment and adjustment—use feedback and learning to continually adapt integration plan. As the integration progresses, it may be necessary to adapt the integration plan. This should be raised to the core team level, which can assess what, if any, changes are needed, and approved by the executive steering committee.

Proposed Phased Integration Timeline The proposed integration timeline for the first year is in Appendix III. This timeline depicts the steps listed above that are necessary to prepare for integration. This timeline represents year 0-1 but does not outline activities for years 1-3, which is the expected transition timeframe. One of the ongoing tasks for the core team will be to review the timeline and update as appropriate across the three-year window.

Resources Needed for Successful Integration The City has an opportunity to effect real and lasting change in the way the public utilities do business. Through joint management, if approved, core teams will look at all shared service processes and look for strategic areas for improvement or process reengineering. Detailed resource requests will be developed by a core team, consisting of representation from the three utilities, and reviewed by the executive steering committee.

The list below is an example of resources already identified, but should not be considered exhaustive as additional resources may be needed once the integration is underway. x

Review of job classifications, beginning with engineering job family structure followed by a review of HR, finance and other administrative jobs.

x

Review of civil service structure to foster competitive promotions, expanded recruiting pool

x

Flexibility in IT platform functions to leverage latest technologies utilized by private enterprise, and to lower the cost of utility operations.

x

Ongoing legal review

x

Regulatory review 40

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

“Getting to Yes”: Reviewing the Major Milestones Necessary for Integration The graphic below depicts a summary of the steps that would be taken during the transition to ensure that the integration path is well understood, and that progress toward achieving a jointly managed utility is transparent and clearly communicated.

Figure 13: “Getting to Yes”: Achieving Transitional Integration

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Appendix I – Best Practices of Jointly Managed Utilities As integrating wastewater, water and stormwater utilities around the country is becoming an increasingly common practice, a number of lessons learned and best practices have been identified as leading to a successful implementation of a jointly managed utility. The best practices outlined below are drawn from academic and industry studies as well as after action reports of utility integrations.

Integration Process Best practices that align to the integration process aim to ease the transition between separate and jointly managed utilities through ensuring clarity of goals, transparency of actions, and communication. The following best practices fall within this category: x

Ensure vision and objectives are clearly stated and agreed upon before the proposal announcement is public. Ensuring all three utilities, as well as the City of Cincinnati and Hamilton County, are in agreement with the vision and objectives of the integration will foster external support. Presenting a unified front will solidify the practicality of the merger to the public.

x

Consider a cross functional team to review service options and guide the integration process. Engaging a cross functional team to guide the integration will ensure all three utilities are on an even plane as the integration progresses. In addition, a participatory process that engages representatives from all three utilities will ensure needs and capabilities from all three organizations are understood. The team will also oversee the change management process required to bring the two organizations together around business processes and organizational culture.

x

Engage key personnel and inform the public through regular and consistently messaged communications. In any integration, timely, clear, and comprehensive messaging is a critical success factor. When employees and customers feel informed of the changes, they are more likely to perceive the changes as a positive move that is in their best interest.

Managing a Recently-Integrated, Jointly Managed Utility The best practices within this section speak to operational, organizational, and financial considerations that will not only keep the utilities running smoothly during the transition period but will also set them up for success as a jointly managed utility.

Operational x

Maintain focus on continuity of business operations during integration. Much attention will be paid to the transition process and the future state of the organization. However, as a service-oriented utility, it is critical that attention to daily operations not get overlooked. Effective and timely communications will encourage employees to maintain focus on daily activities with the knowledge that appropriate information will be communicated.

x

Integrate real-time measurement criteria to understand integration progress.

Developing metrics to gather data throughout the integration process will provide 42

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati real-time insight into successes and challenges of the integration as well as information on where resources are being used.

Organizational x

Establish a transitional organization structure. A transitional organization structure is critical to the success of the integration. The transitional org structure may not project the final structure of the jointly managed utility but will help guide the integration, with equal representation from all three utilities, to ensure that service levels are maintained throughout the process.

x

Establish a proposed post-integration organization structure with clear management oversight roles for the jointly managed utility. Even as a transitional org structure is guiding the daily progress and operations of the integration, it may not be representative of the final organization of the jointly managed utility. Clearly delineating the future state of the jointly managed organization will enable employees to see the big picture of the integration and how the utilities will work together in the future.

Financial x

Use a 1-3 year window (or longer) to gauge results. While some financial savings will be realized immediately, more substantive savings may not be apparent until 1-3 years after the integration is initiated. Efforts to increase efficiencies will yield financial savings but will take time to enter into formal processes. In addition, some up front investments may be necessary to facilitate the investment, such as technology synchronization, which may detract, superficially, from the overall savings.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

Appendix II – Assumptions Underlying Labor Analysis The projected savings in shared services under a jointly managed utility is in large part due to the opportunity to reduce staff. Given the large number of those eligible to retire through 2015, as well as current vacancies, staff reductions can easily be made through natural attrition.

The labor analysis looked at the sources of the reductions (where the eligible employee currently resides on the organizational chart) but makes no assumptions regarding the capacity needed to do the function. For example, 25 administrative support-type functions were identified for elimination, but no assumption was made as to the number of administrative support personnel that would be needed in each shared service area.

In estimating the potential savings through reductions several assumptions were made and are summarized below.

Inclusion in Analysis The starting point for the labor analysis was collecting a master list for consideration. x

All positions in “shared services divisions” currently filled by employees eligible to retire by age or service through 2015 19

x

All vacant positions in “shared services divisions” with no activity as of 7/31/2011

MSD

GCWW

Office of the Director

Business Services

Wastewater Administration

Commercial Services

Division of Industrial Waste

Water Quality

Project Delivery

Engineering

Project and Business Development

IT

x Shared services divisions in MSD and GCWW only - SMU was not included in the analysis as the staff is very small and it was assumed that all positions would be replaced

IT

19

Utilizing the “Group” analysis as outlined below, not all employees eligible to retire by 2015 are assumed to retire during that time frame

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati First Year of Savings Each position was analyzed to determine the first year of potential savings. All vacancies are considered savings in 2012 (assumed first year of new structure). All retirements are assumed at last day of the year with savings beginning in the following year.

Given the recent changes in the rules in the retirement system, the eligible employees were divided into four groups: Group 1 – Eligible by Service or Age as of 6/30/2011 x

Assume retirement at 36 years service or age 67 whichever is earlier

Group 2 – Eligible with at least 30 Years Service between 7/1/2011 and 12/31/2013 x

Assume retirement at 12/31/2013

Group 3 – Eligible with between 20 and 30 Years Service between 7/1/2011 and 12/31/2013 x

Assume retirement at 12/31/2013

Group 4 – Eligible by Service or Age after 12/31/2013 x

Assume retirement at 36 years service or age 67 whichever is earlier

Selecting the ‘No-Fill” Vacancies by Function There were two overarching assumption used in determining the “unfilled” functional positions. x x

Jointly managed utility would need fewer positions in shared services areas Overall, a higher skill level will be needed in the future

In general, the following illustrates the rubric that was used by functional area to determine the unfilled positions eligible to count towards future savings: 20 Engineering: Given the large capital program of the three utilities, it was assumed that all engineers and construction inspectors should be filled. A portion of the Civil Engineering Tech positions would not be filled.

IT: Fill no positions left vacant by retirements.

Accounting: Fill only advanced positions.

20

Note: During this analysis, decisions were made by function, not by Department and Division.

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Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati Administrative staff: Fill advanced positions only (e.g. Supervising Management Analyst) Security: Fill supervisory staff and half of the security positions Savings per Vacancy Left Unfilled Loaded Pay Rate per Employee: $79,600 (calculated by taking an average of all “no-fill” positions) x

Current vacancies – lowest step in classification

x

Retirement vacancies – current annual salary

x

Assume escalation rate of 3.67% (includes escalation of both wages and benefits)

x

Assume burden rate of 1.50 (average of 2008-2011 total benefit budget/total wage budget plus an additional percentage for general overhead)

Additional savings Since much more analysis is needed to determine detailed estimate of savings beyond that realized through the shared services staffing reductions, it was conservatively assumed that a 1% annual savings would be realized in the core functions beginning in 2015 and culminating in a 7% annual savings in 2021. This is well within the 2-10% savings seen nationally in similar types of integrations.

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Appendix III – Proposed Integration Roadmap

Feasibility Study for the Integration of the Departments of Water, Sewers, and Stormwater Utility for the City of Cincinnati

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