| Proposed New Orleans Contract Operations
Background
In 1998, the New Orleans Sewerage and Water Board (S&WB) settled a lawsuit filed by the U.S. Environmental Protection Agency to force the city‘s sewer system to comply with pollution control regulations. The settlement, in the form of an enforceable federal consent decree, started a 13-year process that will require about $455 million to fix New Orleans‘ aging sewer system. Federal grants are possible (but not guaranteed) for up to $100 million of this; the balance must be raised locally.
The strain of funding the consent decree comes at a time when the S&WB is pressured by other financial demands:
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Day-to-day maintenance of an aging infrastructure buried in unstable soils. Much of the 3,000 miles of New Orleans‘ water and sewer system is more than 50 years old. Drainage pumps and the electrical generating plant that powers them were built at the turn of the century, and are still in service.
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Major water treatment plant improvements to comply with new drinking water standards.
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Capital improvements to increase the drainage system capacity.
In October 1998, in response to the consent decree, the S&WB asked the New Orleans City Council to approve a 42% sewer fee increase staged in five annual increments: 17%, 13%, 4%, 4%, and 4%. The fee increase languished for a year and a half with no action by the council, putting the S&WB and the city government in danger of incurring fines as high as $10,000 per day for violating the consent decree. However, on March 2, 2000, and only after intense debate, the City council approved a one-step 30% sewer fee increase.
In a move unrelated to the consent decree, the S&WB also proposed a new drainage fee in October 1998 to generate the local match that would leverage over $300 million in federal funds for drainage capacity improvements. The City Council has not yet acted on that proposal.
Structure of the S&WB
The S&WB‘s ability to satisfy mounting financial demands is hampered by a cumbersome decision-making process that drains executive and managerial resources from the substantive work of the S&WB.
Although the S&WB is ostensibly an independent agency, its operation is tightly entwined with city government. Of the Board‘s 13 members, four are elected city officials, and seven others are appointed by the mayor with council approval. The remaining two are members of the Board of Liquidation, City Debt, appointed by the mayor on that board‘s recommendation. The mayoral appointees serve staggered nine-year terms.
Elected officials dominate the S&WB‘s leadership and committee structure. Currently, one councilman-at-large chairs the Board‘s Sewer and Water Committee; the other chairs the Drainage Committee. A district council member chairs the Finance Committee, and the mayor is the S&WB President. This dominance is amplified by the fact that major S&WB construction contracts must be approved by the City Council.
The S&WB‘s six committees require a large number of staff (up to 20) and consultants at each committee meeting. Disagreements over committee jurisdiction result in month-to-month delays as undecided issues bounce from committee to committee, then to the full Board.
State law requires the S&WB to set user fees, subject to the City Council‘s ratification. With four elected officials on the S&WB, electoral pressures can exert a strong influence to delay action on rate increases. When the S&WB voted in October 1998 to recommend increasing sewer fees by 42%, the three City Council members sitting on the S&WB voted "for," yet the City Council did not act on increasing fees until 18 months later.
The 1998 sewer and drainage fee proposals came at a politically inopportune time. They would have added to the burden of a new property service charge the city was seeking in 1998. The service fee was defeated by the voters.
Another entanglement between the S&WB and the city is a complex agreement governing responsibilities for subsurface drainage. The agreement addresses design and construction of water, sewer, and drainage lines when the city reconstructs a street, and sets up a system to account for the costs involved. The agreement was renewed most recently in July 1992.
Constructing drainage lines over 36" in diameter is the S&WB‘s responsibility while the city is responsible for constructing or reconstructing the balance. Despite this division of construction responsibility, the S&WB agreed to maintain the smaller lines "if the Board has funds available and the legal authority to use same." This maintenance responsibility is a contentious issue. The S&WB staff has recommended discontinuing this work as a cost-saving measure.
Historical Trends
Since 1989, the S&WB‘s revenue (excluding the proceeds of bond issues) has declined over 23% in real dollars. During the same period, inflation adjusted expenditures (including depreciation) have grown by about 13%. In a growing community, an expanding customer base typically yields increasing revenue without increasing rates. In contrast, the S&WB customer base has been stagnant at about 139,000 since 1993.
Service fees fund the sewer and water systems. Adjusted for inflation, the revenue from these fees has steadily declined over the last 10 years. See Figure B. Until the March 2000 fee increase, sewer rates had not changed since 1986. Water rates have remained unchanged since 1990. The Board has in reserve a 12% rate hike for the water system approved by the City Council in the early 1980‘s as the fifth of a five-step increase. The 12% was originally slated to become effective in 1990, but because some capital improvements were postponed, the Board has held the increase in abeyance.
While the public may have the perception that S&WB bills have increased since then, the perception may be due to changes in sanitation/garbage collection charges imposed by the City of New Orleans (currently $11.00 per month). The S&WB merely serves as a collection agent for this fee, which is passed through to the city.
Drainage is funded with property tax, currently at 22.59 mills. The voters rejected an extension of a four mill tax in 1992, reducing drainage revenues by about $6 million per year. The only recent growth in tax revenue for drainage has been through a overall growth in the property tax base.
Current Financial Picture
The S&WB‘s total operating budget for 2000 is $99.3 million. By system, budgeted expenses are:
Sewer: $33.4 million
Water: 46.5 million
Drainage:19.4 million
TOTAL: $99.3 million
Although it is a single entity, state law requires the S&WB’s three main functions to operate as separate cost centers. Sewer, water, and drainage each have dedicated revenue sources that may be used only within that system. For each system, the net revenue after operating expenditures is available for debt service and capital improvements, but only for that particular service.
Sewerage Collection and Treatment
Approximately 76% ($44.1 million) of the 2000 sewer capital budget is to satisfy the consent decree. Another 15% ($8.5 million) is to upgrade the Algiers wastewater treatment plant to comply with an earlier EPA administrative order. The balance of the sewer capital budget is the sewerage systems’ share of general budget items and an emergency reserve.
Total Rehabilitation Capital Costs $455.8
Encumbered, through 2/9/00 45.6
New Funding Required through 2010: $410.2
The S&WB’s original estimate of $250 million for consent decree capital requirements proved far too low. Initial work in the Lakeview Basin indicates more breaks than anticipated, and that an economical trenchless repair technique is not feasible to the extent originally planned. Currently, the S&WB consultants estimate that it will take over $455 million to comply with the consent decree and to perform similar work in Algiers.
The S&WB‘s funding relief from the 30% sewer rate increase will be short-lived. By late 2001, sewer revenues available for capital improvements will be insufficient to meet consent decree commitments. Additional sewer fee increases will be needed in late 2001 and beyond. S&WB consultants estimate that under the status quo, an additional 12% increase each year will be necessary from 2001 through 2004. Cuts in S&WB operating expenditures can offset some of this, but even the most optimistic projections of privatization savings would not offset all of the projected increase.
Water Treatment and Distribution
The S&WB treats 143 million gallons of Mississippi River water daily, but collects fees for only about half of it. By statute, the S&WB must provide free service to a number of public entities. [Endnote 4] The largest single beneficiary of the free water is the office of the Criminal Sheriff ($939,662 in 1999). Firefighting and sewer cleanout operations constitute a significant
portion of the "free" water. The volume is unmetered, and, therefore, the cost is unknown. More troubling are leaks in the system. The S&WB does not have a reliable estimate of the value of water lost through leaks, but it appears to be a substantial share of the "free" water.
Existing revenues are sufficient to support the water system capital needs in 2000. Beginning in 2001, the water system will probably require improvements that its current budget will not support. The existing authority for a 12% water rate increase, even if exercised in the near future, might not be enough to fund future EPA clean water regulations.
Sixty percent of the water system’s five-year capital program is earmarked for advanced water treatment facilities in 2001 and 2002. Improvements are scheduled at both the Eastbank and Westbank plants in response to increasingly stringent EPA requirements to remove pathogens (disease-causing organisms) as well as carcinogens. The regulations are still in flux, so further treatment changes (and capital expenditures) may be required.
Drainage
With the distinction of being the only U.S. city below sea level, New Orleans could not have developed without an extensive drainage collection and pumping system. The existing system can remove roughly one inch of rainfall in the first hour, and an additional half-inch per hour after that.
Several so-called one-hundred-year floods in the past decade exceeded the system‘s capacity and inflicted hundreds of millions of dollars in property damage. Responding to this problem in 1996, Congress authorized the multi-year Southeastern Louisiana Urban Flood Control Program (SELA) to provide 75% federal funding through the Army Corps of Engineers, but only for projects that increase drainage capacity.
When combined with federal SELA money, the S&WB has $127.3 million available to fund the drainage capital projects in 2000, which is more than adequate. It is in 2001 and beyond that existing drainage revenues will be insufficient to match available federal funds to up-grade drainage capacity. The drainage service fee proposed by the S&WB in 1998 was designed to close this gap.
The S&WB is not required to carry out the SELA projects. However, the SELA program is an opportunity to be seized: for the 25% match, New Orleans will reap 100% of the benefits.
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