milwaukee metropolitan sewerage district’s fiscal condition · 2019-06-05 · mmsd’s fiscal...

Milwaukee Metropolitan Sewerage District’s Fiscal Condition:

DOWNSTREAM ACCOMPLISHMENTS, UPSTREAM CHALLENGES

An independent third-party analysis

Public Policy Forum moving the region forward

ABOUT THE PUBLIC POLICY FORUM Milwaukee-based Public Policy Forum – which was established in 1913 as a local government watchdog – is a nonpartisan, nonprofit organization dedicated to enhancing the effectiveness of government and the development of southeastern Wisconsin through objective research of regional public policy issues.

PREFACE AND ACKNOWLEDGMENTS This report was undertaken to provide citizens and policymakers in the Milwaukee region and across the state with an independent, comprehensive and objective analysis of the fiscal condition of the Milwaukee Metropolitan Sewerage District. We hope that policymakers and community leaders will use the report’s findings to inform discussions during policy debates and budget deliberations at both the district and state level. Report authors would like to thank the executive director and staff of MMSD for facilitating our efforts to produce this report. We were provided access to numerous reports and financial materials, and MMSD administrative, financial and program staff spent several hours meeting with us to review many aspects of the agency’s operations. Finally, we wish to thank the Northwestern Mutual Foundation for the grant funding that made this research possible.

Milwaukee Metropolitan Sewerage District’s Fiscal Condition:

DOWNSTREAM ACCOMPLISHMENTS, UPSTREAM CHALLENGES

An independent third-party analysis

June 2011

(Updated June 30, 2011)

Study authors:

Douglass Day, Researcher Vanessa Allen, Researcher

Rob Henken, President

Editing assistance:

Anneliese Dickman, Research Director Jeff Schmidt, Researcher

MMSD’s Fiscal Condition Page 1

TABLE OF CONTENTS SUMMARY OF FIGURES AND TABLES ............................................................................................ 2 SUMMARY OF ICMA INDICATORS .................................................................................................... 3 EXECUTIVE SUMMARY ......................................................................................................................... 4 INTRODUCTION ...................................................................................................................................... 7 METHODOLGY AND DATA .................................................................................................................. 8 MMSD: BASIC FEATURES AND FINANCIAL CHARACTERISTICS ...................................... 10

Overview............................................................................................................................................. 10 Financial structure.......................................................................................................................... 11 Sewers and wastewater treatment .......................................................................................... 12 Changing strategies to improve water quality .................................................................... 14

ENVIRONMENTAL FACTORS AND INFLUENCES .................................................................... 16 Legislation and regulation ........................................................................................................... 17 The influence of public opinion ................................................................................................. 21

BUDGETARY SOLVENCY: OPERATING REVENUES ............................................................... 23 Major revenue sources .................................................................................................................. 23 Revenue trends ................................................................................................................................ 30 2010 and 2011 budgets ................................................................................................................ 31

BUDGETARY SOLVENCY: OPERATING EXPENDITURES ..................................................... 33 Privatization of MMSD operations ........................................................................................... 34 Operating expenditures ................................................................................................................ 35 Beyond contract and utility costs ............................................................................................. 40

LONG-TERM BUDGET SOLVENCY ................................................................................................. 43 Capital budget ................................................................................................................................... 44 Long-term planning........................................................................................................................ 46 MMSD’s 2035 Vision ...................................................................................................................... 49 2010, 2011 and 2012 budgets ................................................................................................... 49 Private property infiltration and inflow ................................................................................ 51 Long-term borrowing .................................................................................................................... 53 Maintenance of capital assets ..................................................................................................... 54 Retirement benefits ........................................................................................................................ 55 The future of privatization .......................................................................................................... 56

CASH SOLVENCY .................................................................................................................................. 58 MMSD: A NATIONAL FISCAL PROFILE ....................................................................................... 59 CONCLUSION ......................................................................................................................................... 65


SUMMARY OF FIGURES AND TABLES Table 1: 2009 fiscal profile of major Milwaukee-area governments .......................... 11 Figure 1: Separated storm and sanitary sewers ................................................................. 13 Figure 2: Combined sewer ........................................................................................................... 13 Figure 3: Impact of the Deep Tunnel on fecal coliform ................................................... 20 Table 2: MMSD operating revenues, 2009 ............................................................................ 24 Table 3: City of Milwaukee average household sewer charge, 2010 .......................... 25 Table 4: Average MMSD household user charge, by municipality, 2010 .................. 26 Table 5: MMSD municipal billings, 2010 ............................................................................... 27 Table 6: MMSD operating revenues, 2005 to 2009 ........................................................... 31 Table 7: Operating revenue budget, 2009 to 2011 ............................................................ 32 Table 8: Expenditures by major functions ............................................................................ 36 Table 9: Operating and maintenance fees ............................................................................. 37 Table 10: Utility fee and direct MMSD energy costs ........................................................ 38 Table 11: MMSD salary trends compared to

Milwaukee County and City of Milwaukee ...................................................... 40 Table 12: Health care costs as percentage of total fringe benefit costs ..................... 42 Table 13: Monthly health care premiums of major Wisconsin governments ......... 42 Table 14: 2005 to 2009 MMSD capital expenditures by account group ................... 46 Table 15: MMSD six-year capital financing plan, 2011 through 2016 ....................... 48 Table 16: Major capital expenditures by program, 2009 to 2011 ............................... 50 Table 17: Outstanding general obligations, 2009 .............................................................. 53 Table 18: MMSD's national fiscal profile: net capital assets .......................................... 61 Table 19: MMSD's national fiscal profile: sewer rates ..................................................... 61 Table 20: MMSD's national fiscal profile: long-term debt ............................................... 62 Table 21: MMSD's national fiscal profile: design and

daily used treatment capacity ............................................................................... 62 Table 22: MMSD's national fiscal profile: select effluent characteristics .................. 63 Table 23: MMSD's national fiscal profile: operation &

maintenance expenditures ...................................................................................... 64 Table 24: MMSD’s national fiscal profile: private contract expenditures ................. 64


SUMMARY OF ICMA INDICATORS

ICMA Fiscal Indicator 1: Operating revenues per capita ..................................... 30

ICMA Fiscal Indicator 2: Net expenditures per capita .......................................... 36

ICMA Fiscal Indicator 3: Employees per capita ....................................................... 39

ICMA Fiscal Indicator 4: Direct fringe benefits ....................................................... 41

ICMA Fiscal Indicator 5: Local tax revenue ............................................................... 45

ICMA Fiscal Indicator 6: Long-term debt ................................................................... 53

ICMA Fiscal Indicator 7: Capital improvements and repair and maintenance ...................................................................... 54

ICMA Fiscal Indicator 8: Liquidity ................................................................................ 58


EXECUTIVE SUMMARY The nearly nine inches of rain that fell on metro Milwaukee on the evening of July 22, 2010, unleashed both a deluge of rainwater on city streets, and a deluge of criticism on the Milwaukee Metropolitan Sewerage District (MMSD). Blamed for problems ranging from basement backups to the release of billions of gallons of untreated wastewater into area waterways, MMSD was forced to defend itself from charges that its huge investments in sewage infrastructure had failed when the region needed them most. Ironically, such public criticism of MMSD’s investments and performance runs counter to its reputation among national wastewater treatment experts, as evidenced by the district’s recent receipt of two Platinum Peak Performance Awards from the National Association of Clean Water Agencies. Many also would argue that it runs counter to a factual understanding of the many factors that contribute to basement backups and sewer overflows during periods of severe rainfall. Whether or not this criticism was justified, MMSD will need to confront its public perception head-on as it grapples with a series of major challenges. After spending approximately $1.3 billion on the Deep Tunnel, MMSD now must address its aging treatment facilities, while it also tries to convince municipalities and homeowners to do their part to improve the flow and collection of wastewater, and an entire region to embrace watershed-based approaches to reduce stormwater runoff. In this report, the fourth in a series of local government fiscal assessments, the Public Policy Forum seeks to provide financial context for deliberations over the scope of MMSD’s flood control and water quality improvement efforts. Using the same respected fiscal monitoring system employed for our previous reports, we analyze fiscal trends, comparative data, and programmatic challenges to assess MMSD’s fiscal condition and long-term outlook. We find an agency that has experienced few of the severe financial problems faced by other Milwaukee-area local governments. MMSD’s decision to outsource most of its operations has greatly reduced operating budget pressures and risk. Meanwhile, its capital program, while expensive, has benefited from careful planning and prudent debt management practices. Overall, as measured by commonly used fiscal indicators, MMSD enjoys sound fiscal health and appears well-positioned for the future. A closer look, however, also reveals a set of long-term challenges that may test the ability of community leaders to reach consensus on the desired level of water quality and the means by which to pay for it. Maintaining the existing sewer system and achieving MMSD’s water quality goals will require several billion dollars of new investment, and decisions must take into account both the totality and distribution of costs. In the end, how aggressive the agency chooses to be in implementing both basic infrastructure repairs and watershed planning strategies likely will determine the contentiousness of the public debate.


Key findings from our analysis of the Milwaukee Metropolitan Sewerage District: • Healthy operating budget: MMSD’s well-funded reserve accounts and long-term

operations contract with Veolia Water, as well as its user-based revenue structure, provide a level of operating budget stability not enjoyed by most local governments. MMSD also has escaped the burden of skyrocketing benefit costs because of manageable long-term retirement liabilities and a relatively small active workforce.

• Extensive and well-managed capital assets: The district’s capital assets are valued at nearly $3.5 billion, which means that residents have invested more in MMSD’s property, plant and capital equipment than in the facilities of Milwaukee County, the City of Milwaukee and the Milwaukee Area Technical College combined. In addition, our analysis of data from nearly 100 wastewater districts nationally finds that MMSD has among the highest asset value per resident. Not only are the district’s capital assets sizeable, but they are also well-maintained through sophisticated planning programs and emphasis on preventive maintenance.

• Sound performance: National data show MMSD has benefited from its financial

investment in sewage infrastructure and its comparatively high user rates. Its sewage and treatment capacity offers greater protection from sewage overflows than most other districts and provides higher-quality effluent discharges. MMSD also ranks high in comparisons on operating efficiency, ranking 65th in a survey of 89 wastewater treatment agencies nationally in terms of per capita operations spending.

• Capital improvement challenges: After decades of aggressive capital spending –

spurred in part by legal settlements and new regulatory requirements – MMSD’s capital projects likely will need to slow in the coming decade, in part to stabilize a rise in debt service expenditures, and possibly in response to state budget actions. This may hamper MMSD’s efforts to work with local municipalities to reduce stormwater runoffs and infiltration and inflow (I/I) from laterals on private property, and it already has required the district to delay projects contained in its 2020 capital improvements plan. In addition, a looming issue is the need to increase property taxes to support the district’s six-year capital financing plan at a level that likely will exceed state-imposed caps for other local governments.

• Privatization model: MMSD’s long-term operations contracts have been a financial

success and may be worthy of replication by other public entities. Commonly, contracting out services with a private firm takes place for specific functions or activities, such as janitorial or security services, and savings occur because of cheaper labor costs resulting from lower pay and benefits for private workers. In this case, however, MMSD has contracted out the core of its operations, and savings are attributed more to the contractor’s expertise and streamlined operations.

Completion of the Deep Tunnel and its extensions ushers in a new era for MMSD, in which it will be able to shift from a relatively narrow, legally-mandated agenda to one in which multiple emphases can be pursued at the discretion of its non-elected


commissioners. Those emphases include attending to the repair and maintenance needs of treatment plants and sewers that received less attention during Deep Tunnel construction and extension, and “green” projects aimed at reducing stormwater runoff and enhancing water quality. This increased flexibility, however, may bring increased conflict, particularly over the question of who should pay. For example, a recently announced program to partner with municipalities to reduce basement backups and improve infrastructure on private property raises new questions about the financial responsibility of both member communities and individual homeowners. And, under a new watershed planning approach, it may be argued that the responsibility for improving water quality lies generally with all residents of the region who contribute to non-point source pollution, as opposed only to the MMSD communities. In short, the Milwaukee region faces big decisions when it comes to the future of its sewer system and water quality. Given the district’s capabilities, it is not surprising that MMSD has put forward an ambitious vision for the region’s future. Ultimately, however, the cost of achieving that vision may test the ability of the community’s leadership to reach consensus on the level of water quality citizens desire and can afford.


INTRODUCTION

A series of recent historic rain storms and highly visible flood control projects have made the Milwaukee Metropolitan Sewerage District (MMSD) one of southeast Wisconsin’s most well-known government agencies. Yet, when it comes to the matter of MMSD’s internal finances – including questions about the adequacy of its revenue streams to pay for ongoing operations and capital needs – the type of public discussion that is common when it comes to Milwaukee County or the City of Milwaukee has been largely absent. This report – the fourth in a series of local government fiscal analyses – is designed to initiate such discussion and provide needed context for upcoming deliberations regarding the size and scope of MMSD’s investments and activities. Such an analysis also is important given that the district’s residents have invested more in its property, plant and capital equipment than in the facilities of Milwaukee County, the City of Milwaukee and the Milwaukee Area Technical College (MATC) combined. In addition, our analysis of data from nearly 100 wastewater districts across the country finds that MMSD has among the highest asset value per resident. Like the Forum’s previous assessments of the finances of Milwaukee County (March 2009), the City of Milwaukee (September 2009), and MATC (September 2010), this report employs the financial evaluation system of the International City/County Management Association (ICMA). Unlike many budgetary methodologies that rely solely upon a comparison of past trends and projected trajectories in revenues and expenditures, the ICMA system goes beyond budget balance. Instead, it provides a multi-dimensional look at underlying fiscal structures related to four types of solvency:

• Cash solvency, which refers to the ability to pay bills and meet payroll.

• Budgetary solvency, defined as the ability to generate enough revenues over a

normal budgetary period to meet expenditures and avoid deficits.

• Long-run solvency, which examines the future costs of current fiscal decisions.

• Service-level solvency, or the “ability to provide services at the level and quality that are required for the welfare of the community and that its citizens desire.”

The ICMA system examines trends in indicators pertaining to these solvencies. By showing the general direction in which financial indicators are moving, this approach identifies areas of concern and acts as a financial early warning system. The indicators provide information on basic questions such as the capacity of revenues to meet expenditure needs, the forces that are driving costs, and long-term financial sustainability. With a few exceptions, this report employs the same ICMA indicators used in the Forum’s other three fiscal reports. Those indicators are pertinent to the fiscal analysis of any taxpayer-funded government or institution, and we hope they will generate the same type of public understanding and deliberation as the previous three reports.


METHODOLGY AND DATA In order to provide a thorough and objective assessment of MMSD’s fiscal condition, this report relies on ICMA’s Financial Trend Monitoring System, the purpose of which is to:

• Examine local government financial condition – the forces that affect it and the obstacles to measuring it.

• Identify existing and emerging financial problems. • Provide insight into remedies for those problems.

ICMA offers the kind of evaluation that rarely is possible during time-sensitive budget deliberations. The analysis strives to take the temperature of a government’s finances by examining the critical fiscal forces that are shaping them. The ICMA system helps a public body better understand the nature of its revenues and expenditures and how they influence both service levels and budget solvency. The heart of the ICMA system is the selection of a group of indicators critical to local circumstances, and the collection of information relevant to those indicators. The analysis tracks selected indicators over a five-year period. ICMA does not provide a formula for interpreting the gathered information. Rather, the format organizes and presents data, and provides a context by which to reach considered opinion. As the ICMA handbook says: Evaluating a jurisdiction’s financial condition is a complex process…Not only are there large numbers of factors to evaluate, but many of them are also difficult to isolate and quantify. Relationships between the factors add to the complexity. Some are more important than others, but often this cannot be determined until all the factors have been assembled…No single indicator is conclusive. Per the ICMA model, this report draws on a broad range of material in order to assess MMSD’s fiscal health. Major data sources include:

• MMSD financial reports and fiscal documents, such as its annual budget and comprehensive annual financial report (CAFR).

• Unpublished financial data supplied by staff. • MMSD program information published by the district, displayed on the web site,

or provided by staff. • Published and unpublished data from the most recent 2008 Financial Survey

conducted by the National Association of Clean Water Agencies (NACWA). • Reports from the U.S. Environmental Protection Agency. • Secondary sources (including organizational web sites) pertaining to MMSD,

Milwaukee water resources and water quality, and the wastewater industry.


Data gathering was impacted by the fact that MMSD contracts with a private sector firm to conduct most of its operations. In 2008, MMSD signed a 10-year contract with Veolia Water, a global firm providing water and wastewater services to 650 communities in North America. Prior to contracting with Veolia, MMSD had a similar 10-year contract with United Water Services (UWS). Under the current arrangement, Veolia provides services for operation of MMSD’s sewers, two treatment plants, and the production of Milorganite®, an organic fertilizer produced from waste material. MMSD retains operations related to flood control management, capital construction, Milorganite® sales and distribution, planning, laboratory services, and a few other program activities. Given the size and importance of MMSD’s operations contract, our analysis explored many aspects of the agency’s financial relationship with Veolia. We had access to considerable information, including the Veolia contract and related performance and expenditure data, but because of the private status of Veolia and United Water Services, some information is necessarily proprietary in nature and was not accessible for this report.


MMSD: BASIC FEATURES AND FINANCIAL CHARACTERISTICS Overview MMSD is a regional government that provides sewer services to a district comprised of 1.1 million residents of Milwaukee County and portions of surrounding counties. In total, the district covers 411 square miles. MMSD was statutorily created in 1982 as a reorganization of the sewerage district funded by Milwaukee County. Of the 19 municipalities in Milwaukee County, 18 municipalities receive services from MMSD and are considered members of the district (South Milwaukee is the exception, although it participates in the Household Hazardous Waste Program). Another 10 communities are outside Milwaukee County but within the boundaries of the district; they receive MMSD sewer services, but are not district members. MMSD has legal authority to levy taxes on property within the district boundaries. While the 28 communities are responsible for the cost of construction, operations, and upkeep of their own local sanitary and storm sewers, the district owns the “interceptor” and main sewers in the member communities to which the local sewers connect. Non-members, on the other hand, own the interceptors in their communities and connect to the district interceptors at the county border. The district also owns two wastewater treatment plants at Jones Island and South Shore. MMSD has the authority to make rules and regulations necessary for the effective operation and maintenance of the entire system. These rules and regulations apply throughout MMSD’s service area and have been determined to take “precedence over any conflicting ordinance, code, or regulation.” MMSD is governed by an 11-member commission. Seven of the commissioners are appointed by the mayor of Milwaukee, while the remaining four are appointed by the Executive Committee of the Milwaukee Intergovernmental Cooperation Council (ICC). The ICC is comprised of the chief elected officials of Milwaukee County’s 19 municipalities plus the county itself. Three of the mayor’s appointees and three of the ICC’s appointees must be elected officials. The core function of MMSD is to provide sewer services, but it also maintains a broader mission of striving “to cost-effectively protect the quality of the region’s water resources.” Examples of how the agency satisfies this broader goal include the collection of household hazardous waste at designated sites, and promotion of “green” strategies, such as the sale of rain barrels to minimize stormwater runoff into area waterways.

Since 1998, MMSD also has had discretionary responsibility for flood control management for the five rivers that flow through the district: the Milwaukee River, Root River, Menomonee River, Kinnickinnic River, and Oak Creek. Its flood control activities include buying and clearing houses and other buildings located in flood plains; constructing levees, retention ponds, and pumping stations; and reshaping river channels.


Financial structure MMSD has the usual fiscal powers associated with local governments, such as the power to levy taxes, assess user charges, and borrow money. Most financial decisions require a two-thirds vote of the board. MMSD’s operational expenditures are financed solely by user charges and sales. This makes it distinct from other major governments in Milwaukee, which draw from the property tax, state or federal funding, fee revenue, and/or sales tax revenue to fund operations. MMSD does levy property taxes, but unlike the other governments, it uses property tax revenue only to fund capital expenditures. Fiscal data for 2009 for MMSD and the other major Milwaukee governments is displayed in Table 1. This data shows that MMSD has the lowest level of operating expenditures of the five governments, but one of the highest levels of capital expenditures. In fact, MMSD is the only one of the five that spends more annually on capital needs than operations. MMSD also has by far the highest level of net capital assets, which consist of property, plant, and equipment. Table 1: 2009 fiscal profile of major Milwaukee-area governments (in thousands)

OPERATING

EXPENDITURES PROPERTY TAX

REVENUES CAPITAL

EXPENDITURES NET VALUE OF ASSETS*

MMSD** $79,206 $105,686 $243,452 $3,348,204 Milwaukee County *** $1,213,387 $260,724 $137,373 $996,556 City of Milwaukee **** $848,896 $238,832 $335,952 $1,725,187 Milwaukee Public Schools $1,365,471 $287,779 $29,136 $643,539 MATC $265,263 $146,074 $76,973 $152,204

* Property, plant, and equipment minus accumulated depreciation ** Capital expenditures are taken from the district’s capital budget; property tax revenues include those from member and non-member districts *** Includes mass transit and airport **** Includes water works, parking, sewers, and port Source: Comprehensive annual financial report and annual budget, 2009


MMSD BY THE NUMBERS - 2009 General information

Year founded 1982 District size 411 sq. miles Treatment plants 2 Miles of sewers 320 miles District member communities 18 Other communities receiving sewer services 10 Governing board members (appointed) 11

Full-time Equivalent Employees 238 Finances

Total annual operations expenditures $79 million Total annual operations revenues $85 million Total annual capital budget expenditures $243 million Property taxes (for capital costs only) $106 million Operating contract with Veolia Water Milwaukee $41 million

Sewers and wastewater treatment The region’s sewer system has three types of sewers: sanitary sewers, which transmit only wastewater from private sewer “laterals” (i.e. sewage pipes on the premises of private property owners) to municipal sewers and then to the district’s collector sewers; combined sewers, which mix sanitary wastewater from private laterals with stormwater runoff from street drains before transmitting them to collector sewers; and municipal storm sewers, which carry run-off from snow and rain directly into the region’s waterways. See Figures 1 and 2 on the next page for additional explanation. Today, only sanitary sewers are used in new construction across the United States. Combined sewers are found in nearly 1,000 older communities, located primarily around the Great Lakes states and in the northeast. Twenty-six municipalities in the MMSD district have only sanitary sewers, while combined sewers serve the southeast portion of Shorewood and the eastern and central part of Milwaukee. In total, municipalities own about 3,800 miles of sanitary and storm sewers, while private laterals total about 3,000 miles. The district has 320 miles of interceptor and main sewers. Under most weather conditions, the distinction between combined and sanitary sewers has little meaning for district operations. Both sewers convey wastewater either to the Jones Island or South Shore plants, where it undergoes a multi-stage treatment process that ends with release into Lake Michigan. Testing is done to ensure that biological and chemical processes result in processed wastewater that meets not only federal and state regulations, but also higher standards maintained by the district.


Figure 1: Separated storm and sanitary sewers

Source: MMSD Figure 2: Combined sewer

Source: MMSD


Under heavy rain and wet weather conditions, however, these two types of sewers function differently. Since combined sewers include stormwater runoff, they have a greater volume of wastewater at such times. How much more depends upon many factors, including the intensity, duration, and coverage of the rainfall and ground moisture. Sanitary sewers, theoretically, should be relatively unaffected by rainfall amounts since they are built to carry wastewater that comes from plumbing systems. During heavy rainfalls, however, the water flowing through both sanitary sewers and combined sewers can increase dramatically. The increased flow in sanitary sewers stems from multiple factors, including water pouring in from leaky basements and foundation drains (from about the mid-1920’s to the mid-1950’s, household foundation drains were purposefully connected to the sanitary sewers), illegal stormwater connections in the sanitary system, and infiltration due to cracks in the sewers themselves. The impact of this inflowing rainwater is considerable and places pressure upon the district’s treatment capability. MMSD calculates that “inflow and infiltration” (I/I) into the sewers represents about 40% to 50% of all wastewater treated in a given year. Of course, this unwanted intrusion does not occur evenly throughout the year, but only during periods of wet weather. MMSD’s Jones Island treatment plant treats an average daily flow of 120 million gallons of wastewater and can accommodate up to 330 million gallons per day. South Shore treats 100 million gallons and can expand to up to 300 million gallons per day. In a heavy rainfall, however, billions of gallons of water fall upon the district, and the rush of water can overwhelm both conveyance and treatment capacity. When this occurs, the district is forced to release raw sewage or, more commonly, sewage mixed with stormwater, into district waterways. These discharges are called sanitary sewer overflows (SSOs), or combined sewer overflows (CSOs), and they occur largely to minimize basement backups and prevent damage to MMSD facilities. Changing strategies to improve water quality In light of the potentially harmful impact of SSOs and CSOs to area waterways, a substantial portion of the district’s technical and regulatory efforts are directed at eliminating SSOs, as well as controlling the number and severity of CSOs. The district has spent billions of dollars on this problem. As a result, overflows have been reduced in number and their pollution effects curtailed. Nevertheless, for a variety of reasons that will be explained later in this report, they have not been eliminated and perhaps never will be. The Deep Tunnel represents the district’s forceful and expensive response to the challenge presented by aged and combined sewers and sewer overflows. The tunnel’s purpose is to increase sewage capacity by providing a system of large interconnected


sewers running below the existing interceptor sewers that can handle sudden surges in water flow. Construction on the major portion of the Deep Tunnel began around 1980 and ended in 1994. The tunnel is 17 to 32 feet wide in diameter and 19.4 miles long, and it added 405 million gallons of storage to district sewage capacity. Another 7.1-mile northwest tunnel extension, completed in 2006, added 89 million gallons. In 2010, the district completed its last planned expansion, a two-mile tunnel that holds 27 million gallons of wastewater. The district spent considerable sums not only for tunnel construction, but also for pumps, siphons, and control systems to optimize sewage capacity and integrate the storage tunnel into the overall sewerage system. Total MMSD expenditures associated with the Deep Tunnel were approximately $1.3 billion. MMSD continues to have a robust capital expenditure program as part of its long-range 2020 plan. Whereas previous long-range plans had centered on the construction and performance of the Deep Tunnel, however, the current plan embraces the Environmental Protection Agency (EPA) concept of “watershed planning.” That concept emphasizes the need to improve water quality in a targeted, cost-effective manner. MMSD’s application of this principle stems from its conviction that combined sewer overflows are no longer a major source of regional water pollution, and that any effort to improve water quality must now take into account research findings that indicate runoffs from urban storm sewers and other “non-point sources” represent the greatest pollution threat. Completion of the Deep Tunnel and its extensions, therefore, ushers in a new era for MMSD, in which it will be able to move away from a relatively narrow, legally-mandated agenda to one in which multiple emphases can be pursued at the discretion of its non-elected commissioners. These emphases include attending to the repair and maintenance needs of treatment plants and sewers that received less attention during the period of system expansion, projects that reduce energy consumption, and “green” projects aimed at reducing stormwater runoff. Beyond such diverse initiatives lie broader, long-term questions about regional water quality, the costs of future capital improvements, and the affordability of those costs for district residents. Also, there is the matter of who should pay. For example, under a watershed planning approach, it may be argued that the responsibility for improving water quality lies generally with all residents of the region who contribute to non-point source pollution, as opposed only to the MMSD communities. And, a recently announced program to partner with municipalities to reduce basement backups and I/I on private property raises new questions about the financial responsibility of both member communities and individual homeowners. The fiscal implications of these initiatives are significant and will be a focus of this report.


ENVIRONMENTAL FACTORS AND INFLUENCES In the short run, a local government’s fiscal condition is determined by how well it manages its finances and lives within its means. In the long run, however, fiscal health becomes a more complex phenomenon, and the environment in which a government operates can be determinative. The ICMA methodology dictates an environmental analysis, with a major focus on community needs and wealth to address the question of whether “environmental factors provide enough resources to pay for the demands they make.” ICMA recognizes that in some cases governments may be critically affected by less obvious, outside fiscal influences such as mandates, political culture, and even the potential risk of environmental disaster.

SUMMARY OF ENVIRONMENTAL INFLUENCES Our previous fiscal assessments documented that the Milwaukee metro area ranks lower than most of its peers in regard to income and wealth while ranking higher on indices of social distress (such as poverty, unemployment, and failure to complete high school). Many special purpose public agencies would find it difficult to increase expenditures and revenues in such a fiscal environment. That has not been the case with MMSD, in part because court agreements have determined the scope and size of its capital projects. From 1980 to 2010, MMSD operated under two legal settlements with the Department of Natural Resources: the Milwaukee Water Pollution Abatement Program and the 2002 Stipulation Agreement. Under these settlements, the agency agreed to undertake projects (such as the Deep Tunnel) that would increase sewer capacity and minimize untreated discharges into district waterways. In 2010, the last project under these agreements was completed. A new agreement is not anticipated, yet occasional sewer overflows continue to occur and could threaten regulatory compliance if storm intensity worsens. In order to reduce the risk of basement backups, improve water quality, and reduce sewage discharges, the district has increasingly emphasized the need to reduce stormwater runoff as well as I/I, goals that require abatement efforts often outside its direct control. To be programmatically and financially successful in those areas, the district will need broad public cooperation and support, something the agency often has not enjoyed in the past. The agency’s troubled public image reflects both its own particular history and the difficulties associated with effectively communicating matters of water quality to the general public.


Legislation and regulation A key part of an ICMA fiscal analysis is a study of an agency’s cost drivers. This involves examining the factors contributing to expenditure increases, and assessing whether they outstrip revenue growth and capacity. In cases where the cost drivers produce expenditure needs that exceed available revenue, a government is said to be in a condition of structural deficit. Often, such a state requires cuts in staffing and service levels to maintain fiscal balance. Unlike the other governments recently examined by the Public Policy Forum (Milwaukee County, City of Milwaukee and MATC), MMSD does not suffer from rapidly increasing health care or retirement benefits that threaten budget stability. As will be shown, the agency’s superior operating position is linked, in many respects, to its move to private management for a substantial portion of its operations. On the capital side, however, MMSD has not been free from expenditure pressures. In this case, it has been outside regulatory requirements, rather than internal factors, that have pushed up costs. The regulatory environment in which MMSD operates is a product of the Clean Water Act of 1972, the primary law that protects the nation’s rivers, lakes, and coastal areas. This ambitious legislation had the goal of making all U.S. waters “fishable and swimmable” by 1983, even though at the time only one third met that standard. The Clean Water Act (CWA) charged states with setting specific water quality criteria and developing pollution control programs to meet those criteria, focusing on point source pollution from industries and wastewater treatment plants1

Congress passed follow-up legislation in 1977, 1984, and 1987 to further strengthen pollution abatement efforts. These laws identified the means by which “publicly-owned treatment works” were to control discharges. They also addressed overflows from combined sewers, 70% of which occur in the Great Lakes.

. It also provided substantial grant and loan assistance to states and communities to help upgrade public facilities.

In 1994, EPA issued a CSO Control Policy, which laid out “a comprehensive national strategy to ensure that municipalities, permitting authorities, water quality standards authorities, and the public engage in a comprehensive and coordinated effort for control of CSOs.” The policy emphasized long-term planning, as well as the need to take immediate, cost-effective measures to maximize sewer capacity and effectiveness. An EPA report in 2004 showed the scope and seriousness of the problem, reporting CSO discharges nationwide at 850 billion gallons of wastewater, in comparison with SSO discharges of 3 to 10 billion gallons of raw sewage.

1 The Clean Water Act was less concerned with regulating agriculture and non-point source pollution, although the law did address some operations such as feedlots. In 1987, federal legislation pertaining to storm water discharge was enacted that required implementation of plans and best management practices but did not establish effluent standards or monitoring requirements.

http://cfpub.epa.gov/npdes/cso/cpolicy.cfm?program_id=5�


Milwaukee Water Pollution Abatement Program The Wisconsin Department of Natural Resources (DNR) is the state agency responsible for administering the CWA. The DNR develops rules, issues permits for overflow discharges and air emissions by treatment plants, and monitors enforcement of all sewerage districts in the state. After passage of CWA, the DNR ordered the Milwaukee district to reduce its sewage overflows. The district, in turn, sued to block imposition of the new state standards. The two entities eventually agreed to a legal settlement, known as the Milwaukee Water Pollution Abatement Program, or WPAP, under which MMSD would undertake specific projects to improve water quality. The three initial goals of WPAP, first articulated in 1977, were to upgrade treatment plants, improve and replace the sewage system, and select a means to reduce the level of discharges into Milwaukee waterways. In 1980, the district adopted (with DNR approval) a master facilities plan to implement these goals. WPAP projects continued until 1996 and were designed to meet facility needs through 2005. MMSD will pay off the last bonds used to finance WPAP in 2017. The WPAP revolved around the need to reduce CSOs that were occurring whenever there was a rainfall of ¼ inch or more. The district considered two alternatives: replacing the combined sewers with separate sanitary and storm sewer systems; or expanding sewage capacity to accommodate “wet weather events.” It ultimately chose sewage expansion and building the Deep Tunnel because it determined that option to be cheaper (by an estimated $469 million), and its construction would cause less disruption to residents and city businesses than would separating out the combined sewers. In determining how big to build the Deep Tunnel, the district reviewed more than 30 years of weather records. It decided to target capacity at a level that would accommodate the largest storm of record, a 1940 storm that had dropped six inches of rain in two days. With a tunnel big enough to handle such a downpour, MMSD expected to eliminate SSOs and to reduce CSOs from about 50 to 1.4 per year. The district’s state permits were structured on these major decisions regarding the Deep Tunnel. Under terms that continue to this day, the permit did not authorize any SSOs and allowed up to six CSOs per year, or the option of capturing and treating at least 85% of the total annual wet-weather wastewater collected in the combined sewer area, a standard the district has always significantly exceeded. Despite the apparent finality of this limitation, MMSD has some latitude in sanitary sewer discharges. Under the permit, a SSO is not considered a violation if “it is deemed necessary to prevent severe property damage and no feasible (cost effective) alternatives exist.” This language, not surprisingly, has left the district open to legal challenge when SSOs have occurred.


2002 Stipulation Agreement The 2002 Stipulation Agreement was the second legally binding long-term settlement between the DNR and MMSD. The agreement originally mandated 145 capital projects for completion by the end of 2010 to strengthen the capacity and effectiveness of the sewage system (the final project will be finished this year). It also required the development of a new 10-year facility plan to cover the period after the agreement’s completion. Stipulated projects featured a major tunnel expansion on the northwest side to reduce the risk of basement backups and accommodate population growth, as well as efforts to control and move wastewater more rapidly and efficiently through the sewers to the treatment plants. The agreement resulted, in large measure, from a DNR lawsuit filed against the district following significant SSOs and CSOs that occurred from 1998 to 2000. Most of those were linked to storms with rainfalls that exceeded the 1940 storm of record, but MMSD also had sewer discharges when rainfall was below that threshold. These overflows brought to light problems of Deep Tunnel operation and the difficulty of preventing SSOs while minimizing the number and amount of CSO discharges. The DNR’s 2002 lawsuit charged that the SSOs violated the district’s permit, while the district defended its discharges as unavoidable and, therefore, permissible under terms of the permit. Cost and benefits of legal settlements By almost any standard, these legal settlements have been costly. The district incurred capital costs of $2.9 billion under WPAP (of which $1.1 billion was covered by state and federal grants), while the 2002 Stipulation Agreement produced costs of about $1.2 billion. As in many construction projects, the final expenditures greatly exceeded initial estimates. It was originally thought the Deep Tunnel, for example, would cost about $670 million. The final cost for the Deep Tunnel was $981 million. There has been considerable public debate about the effectiveness of these investments, particularly with regard to the Deep Tunnel. While a complete analysis of this issue is beyond the scope of this paper, three general conclusions seem unassailable. First, the Deep Tunnel has made a significant contribution to improving regional water quality and reducing water pollution. For example, in each of the four years before the tunnel’s completion (1990 to 1993), the district released between eight and nine billion gallons of untreated wastewater in CSOs and SSOs. From 1994 through 2010, the annual amount released averaged about 1.4 billion gallons. Second, as shown in Figure 3, levels of fecal coliform have fallen sharply, indicating that because of the Deep Tunnel, CSOs and SSOs are no longer the principle source of this regional water pollutant. Significant reductions also occurred in ammonia, phosphorus and other major pollutants.


Figure 3: Impact of the Deep Tunnel on fecal coliform

42,000 trillion

234,000 trillion

15%

85%

Pre Deep TunnelFecal Coliform

76%

23%1%

Post Deep Tunnel

Stormwater RunoffCSO & SSOOther

Source: MMSD planning records Third, because of improvements made by the district, the single most important factor determining CSOs today is the amount of rainfall and, in particular, the number of large storms the district receives. While this point remains a concern given some predictions that the number and intensity of large storms will increase, MMSD’s investments appear to have successfully addressed the CSO problem outside of severe wet weather conditions. The end of the nearly decade-long stipulation agreement frees MMSD from direct regulatory control over its major policy decisions. Because the scope and size of MMSD’s capital costs have largely been determined with the adoption of the 2020 plan, however, the agreement’s close is not likely to lead immediately to a substantial change in program initiatives. Nevertheless, new pressures and opportunities will continue to present themselves, such as the recent initiative for the reduction of I/I on private property that is intended to reduce the risk of basement backups. It also should be noted that the regulatory climate in which MMSD exists will continue to exert considerable and often unpredictable force on its finances. MMSD remains subject to many regulations and associated abatement efforts that are beyond the scope of this paper (such as restrictions on levels of heavy metals in treated effluent and nutrients now

42,000 trillion cells




under EPA review for phosphorus and nitrogen).2

This regulatory climate leads to rising costs as federal and state pollution standards and associated technological requirements continue to grow. At the same time, the agency must take care in its day-to-day operations to ensure compliance with regulatory standards and it must be wary of potential legal challenges from both private and public entities. Such legal constraints make it difficult for MMSD to engage in the kind of cost cutting that other local governments are now pursuing without incurring substantial legal and financial risk.

The influence of public opinion While all governments are influenced by public opinion, public perceptions of MMSD are particularly critical to its ability to carry out and finance its mission. For example, watershed planning and reducing non-point source pollution depend upon individual residents and property owners taking unprecedented action to reduce runoff from their property into streets and storm sewers. Also, successfully addressing the issue of I/I on private property may require residents to recognize that they have a financial responsibility for their sewer laterals. MMSD’s new $156 million private lateral program is a start, but the overall cost of reducing I/I could amount to several billions of dollars, a staggering sum even for a district that has grown accustomed to high-cost projects. To get the kind of broad public support needed to proceed with the costly endeavors described above would be a daunting prospect for any public agency. The challenge is particularly acute for MMSD, however, because of the rocky nature of its public image, which stands in contrast with the good opinion of the district shared by many wastewater professionals and government officials. Public criticism of MMSD dates back to the early 1980s and the “sewer wars” legal dispute over how to pay for district capital costs and the expenses of the Deep Tunnel. At that time, the district decided that capital expenses would be paid on the basis of property assessments. In contrast, suburban members, whose property values exceeded the district average, preferred to base capital expenses on sewer usage. The contentiousness of the issue was driven by the costs involved ($140 million), and by the 13 years in which the suit lingered. In 1996, a Wisconsin district court held in favor of MMSD, leading to an eventual settlement between MMSD and several of the suburban communities. The highly visible nature of CSOs also has negatively contributed to the agency’s public image. While the Deep Tunnel design anticipated 1.4 CSOs per year, many thought the Deep Tunnel would eliminate the problem, leading to criticism of MMSD when citizens learn about discharges into Lake Michigan in the aftermath of large storms.

2 In a summary of its 2020 plan, MMSD listed the “key regulations and stipulated agreements” affecting the district as 1) the 2002 Stipulation Agreement, 2) USEPA CSO Policy, 3) Wisconsin regulatory agreements, 4) MMSD Wisconsin Discharge Pollutant Elimination System, 5) MMSD surface water and storm water rules, 6) Wisconsin water use objectives and water quality standards, and 7) federal Clean Water Act requirements and federal regulations.


In the past three years, the number and severity of such storms increased, resulting in severe CSOs and thousands of basement backups, all of which received substantial media coverage. In the aftermath of such outflows, some have charged MMSD with mismanagement, since the number of CSOs has been beyond projected levels. More recently, there have been counterbalancing stories pointing out that the poor condition of many private sewer laterals is at least partially to blame. Public relations are complicated by differences in perspectives that underlie the agency’s and the public’s approach to water quality. MMSD tests and evaluates water quality according to the dictates of its regulatory requirements, reporting in great detail how pollutant readings are changing at multiple points along its waterways. The public obviously lacks such scientific information and depends upon its own experience or exceptional events – such as beach closings, CSOs or basement backups.3

MMSD’s success in communicating the successful impacts of its investments and activities will impact its ability to generate the support needed to make water quality improvement a community effort, rather than one that falls solely on its shoulders. An October 2010 Forum survey of public attitudes toward protecting regional waterways found that only 4% of respondents believed they “have a responsibility to future generations to protect the region’s water resources.” That finding suggests it may be difficult for MMSD to engender the degree of public involvement needed to advance its agenda, and that enhancing and improving its communications efforts may be a necessity.

3 A press survey conducted for the 2020 Facility Plan found that 40% of articles were about sewer overflows and that half of the articles “cast doubt” on scientific findings about the impact of these overflows on water quality.


BUDGETARY SOLVENCY: OPERATING REVENUES A key feature of any fiscal assessment is whether revenues are increasing at a rate sufficient to sustain existing levels of services and program operations. The ICMA handbook states that “under ideal conditions, revenues would grow at a rate equal to or greater than the combined effects of inflation and expenditure.” Since most local governments rely upon multiple revenue sources, ICMA emphasizes that solvency may reflect decisions not just about whether or how much to increase taxes and/or fees, but also about the nature and relative proportion of revenue streams. Whether an institution relies mainly upon the property tax, charges for services, or external state support can make a significant difference in its fiscal circumstances. The ICMA system, therefore, encourages close examination of a government’s revenue characteristics and highlights the importance of revenue flexibility and dependability.

Major revenue sources MMSD is classified as a “business enterprise,” meaning that its operating revenues come from user charges, as opposed to any source of taxation or state general purpose revenues. In 2009, as shown in Table 2, the district received $66.3 million (78%) of its

SUMMARY OF REVENUE FINDINGS MMSD’s operations are financed as a business enterprise, meaning that sources of support come mainly from program revenue. The district does not receive tax funds for operations. The two largest sources of incoming revenue are user charge billings and Milorganite® sales, which together constitute 87% of total revenues. Because of its financial structure and reliance on user charges, MMSD has not had the severe revenue problems experienced by other local governments as a result of sharp drops in property and sales tax revenues and state aids. User charge billings and resident sewage fees have benefited from the move to private sewerage system management and operations in 1998. The district has passed on operational savings in the form of lower user charge billings, which have risen by an annual average of 2% since 1997. Milorganite® production is a revenue producer for the district, but in recent years it has experienced steep challenges. Orders have dropped during the recession and production at times has exceeded sales. The district continues to explore options to increase sales volume.


operating revenues from charges to residents of communities receiving sewer services. Sales of Milorganite® – a biosolids fertilizer made from sludge produced at Jones Island – constituted another $8 million (9%) of operating revenues. Table 2: MMSD operating revenues, 2009 (in thousands)

2009 % of Total User Charge Billings $66,373 78% Milorganite® Sales $7,957 9% Reserve & Contingency Funds $6,682 8%

User Charge Stabilization Fund* $2,500 -- Equipment Replacement Fund* $1,044 -- Surplus Applied $3,138 --

Other Income $3,840 5% Total Operating Revenue $84,852 100%

* Amount applied from fund Source: MMSD annual budget documents User charges MMSD’s revenue structure has major implications for its fiscal health. From ICMA’s standpoint, dependence upon a single revenue source typically is considered problematic. In this case, however, MMSD’s reliance upon user charges means that its finances are more stable, in part because it is the only provider of sewer services to district residents, meaning it does not need to be concerned about competition in its fee-setting deliberations. It should be noted that this financial stability does not extend to Milorganite® sales, which face increasing competition from other fertilizer producers. MMSD’s independence from taxation as a means of financing its operations appears particularly fortuitous given today’s economic conditions. The City of Milwaukee, Milwaukee County, and MATC all have suffered from a decline in governmental revenues brought about by a declining property tax base and a decrease in income and sales tax receipts. In addition, state shared revenue payments and other state aids have shown no real growth in nearly two decades, diminishing their effective purchasing power and creating severe fiscal problems for the city, county and other local governments that rely heavily on state resources. MMSD is not without operational revenue issues, however. Loss of “wet industries” in Milwaukee and declining residential and industrial water use – part of a national trend toward water efficiency – have placed upward pressure on sewage rates. To some extent, the district can alleviate this problem by implementing cost savings as usage declines. Because wastewater facilities have high fixed costs, however, it is difficult for unit costs to remain constant or decrease with a fall in demand. In addition, MMSD does rely upon property taxes to fund debt service costs in its capital budget. Consequently, to the extent that capital demands require sizable increases in


property tax rates in a given year, MMSD board members may be reluctant to also adopt sizable increases in sewer charges to accommodate operational needs. Table 3 shows average sewer charges per household for the City of Milwaukee, one of the district’s 28 participating municipalities. The district collects this information only for city residents and it is part of MMSD’s data submission to the fiscal survey conducted by the National Association of Clean Water Agencies. As the table illustrates, only $121, or 27%, of the city’s total sewer charges pertained to MMSD operations in 2010, while MMSD capital charges comprised 38% and City of Milwaukee sewer charges made up the remaining 35%. Table 3: City of Milwaukee average household sewer charge, 2010

MMSD CHARGES MILWAUKEE TOTAL

USER CHARGE PROPERTY TAX CHARGES* CHARGES

$121.50 $169.82 $159.90 $451.22 *The City of Milwaukee charges include local sewerage and local storm water charges. The storm water charge is not included in the NACWA survey discussed later in this report. Source: MMSD and City of Milwaukee financial records The following two tables present information on charges for each municipality served by the district. Table 4 shows that average household user charges per municipality from the district amounted to $118 in 2010 and ranged from $93 for Caledonia to $126 for Franklin. Table 5 shows the total user and property tax billings for each community.


Table 4: Average MMSD household user charge, by municipality, 2010

MUNICIPALITY AVERAGE HOUSEHOLD

CHARGE* Bayside $115 Brookfield $122 Brown Deer $116 Butler $100 Caledonia $93 Cudahy $107 Elm Grove $113 Fox Point $113 Franklin $126 Germantown $112 Glendale $107 Greendale $116 Greenfield $112 Hales Corners $117 Menomonee Falls $111 Mequon $117 Milwaukee $121 Muskego $115 New Berlin $117 Oak Creek $124 River Hills $111 Shorewood $106 St. Francis $112 Thiensville $107 Wauwatosa $107 West Allis $108 W. Milwaukee $101 Whitefish Bay $118 DISTRICT WIDE $118

* For this comparative review, the table uses the district’s “transition” methodology; actual average district-wide household charges are somewhat lower at $112.


Table 5: MMSD municipal billings, 2010

MUNICIPALITY TAX LEVY USER

CHARGE TOTAL District members

Bayside $881,095 $224,542 $1,105,637 Brown Deer $1,436,835 $707,310 $2,144,145 Cudahy $1,403,940 $1,831,770 $3,235,710 Fox Point $1,502,665 $361,356 $1,864,021 Franklin $4,574,057 $1,826,778 $6,400,835 Glendale $2,554,782 $907,137 $3,461,919 Greendale $1,829,032 $703,185 $2,532,217 Greenfield $4,088,740 $1,937,600 $6,026,340 Hales Corners $882,123 $431,426 $1,313,549 Milwaukee $39,722,637 $40,189,475 $79,912,112 Oak Creek $4,294,254 $1,967,333 $6,261,587 River Hills $695,640 $86,186 $781,826 Shorewood $1,959,114 $667,205 $2,626,319 St. Francis $848,057 $387,942 $1,235,999 Wauwatosa $7,051,274 $3,060,360 $10,111,634 West Allis $5,624,665 $3,526,594 $9,151,259 W. Milwaukee $413,983 $1,137,406 $1,551,389 Whitefish Bay $2,695,107 $674,697 $3,369,804

Total members $82,458,000 $60,628,302 $143,086,302 Non-members*

Brookfield $3,015,849 $945,274 $3,961,123 Butler $275,006 $176,976 $451,982 Caledonia $44,800 $26,769 $71,569 Elm Grove $1,252,883 $319,046 $1,571,929 Germantown $2,219,014 $1,328,346 $3,547,360 Menomonee Falls $4,241,522 $1,713,663 $5,955,185 Mequon $4,362,603 $1,049,477 $5,412,080 Muskego $2,638,540 $999,457 $3,637,997 New Berlin $4,888,961 $1,785,533 $6,674,494 Thiensville $327,005 $184,633 $511,638

Total non-members $23,266,183 $8,529,174 $31,795,357 All municipalities $105,724,183 $69,157,476 $174,881,659

* Non-members’ capital billings are based on an ad valorem charge Source: MMSD 2010 annual budget A close reading reveals how these two different formulas impact respective communities. For example, West Milwaukee had the 11th highest user charge, but was fourth from the bottom in property-based charges. Fox Point offers a contrasting example, with its user fees falling near the bottom (22nd), but property tax billings close to the median (16th). MMSD’s methodology for determining user charges applies the same structure and rates to all users. Four factors make up the rate formula: flow volume; biological demand for oxygen (BOD); the amount of suspended solids; and the number of local connections to MMSD sewers. The first three factors are often clustered together and referred to as the volumetric rate. Total community billings are determined by applying these rates to the wastewater flow of three types of users: residential, certified commercial, and industrial.


Residential flows are based upon the district average of household water usage. Commercial flows are based upon wastewater characteristics particular to a type of business. For instance, dry cleaning establishments have sewage outputs that place more demand upon treatment facilities and their sewage charges reflect that fact. Non-certified commercial enterprises without such distinguishing features are billed at the residential rate. Each industrial user’s wastewater flow, BOD, and suspended solids are determined by samples taken four times per year at the industrial site. As required by court decision, the district reduces the rates of non-members for the costs of flood control projects that lie outside their watershed. Otherwise, flood control operations and maintenance expenditures are included in the cost pool to determine district rates. The pool also includes costs associated with inflow and infiltration, which cannot be assigned to a particular user. I/I costs are substantial since this source represents as much as 50% of all wastewater flow in a given year. The district estimates that treatment and storage of I/I will cost $19.4 million in 2011. One of the consequences of the district’s formula is that all participating members pay the same rate for I/I, yet not all communities have a serious I/I problem, as discussed later in this report. Milorganite® revenues MMSD’s second largest source of funding comes from the sale of Milorganite®, a product of the treatment process that the district hails as “the most cost effective and environmentally-friendly way to dispose of biosolids generated during wastewater reclamation.” Jones Island has produced an organic fertilizer since 1926 and was the first wastewater treatment facility in the U.S. to do so. Milorganite® is a revenue producer for the district, with an historic sales-to-cost ratio of at least two-to-one. In 2009, for instance, total sale revenues were about $8 million, and expenditures were $3 million. In recent years, there has been some fluctuation in Milorganite® revenue due to the impact of the recession on orders from homeowners and, in particular, professional customers (such as golf courses). The district also faces increasing competition from similar products made by other wastewater firms in the U.S. Due to changes in production processes and technological improvements, the quantity of Milorganite® in some recent years has exceeded sales, raising concerns about how the district should dispose of the excess if this situation were to continue. MMSD is now exploring strategies to promote the sales and profitability of its Milorganite® business. Options under consideration include product diversification, pricing optimization, co-branding, and brand licensing.


Contingency and reserve funds One of the defining financial features of MMSD is its use of contingency and reserve funds. The purpose and goal of these funds is to promote solvency, reduce risk, and smooth financial operations by minimizing swings in revenue and expenditure fluctuations. Three such funds are used to finance operating costs: the equipment replacement fund; the user stabilization fund; and the unallocated reserve. The equipment replacement fund is required by the federal government for any recipient of a loan from the Clean Water Fund. In addition, DNR administrative code establishes what equipment qualifies or does not qualify as “routine maintenance.” Under these regulations, the district must set up a schedule for equipment replacement and allocate funding to that account at a specified base level (in MMSD’s case, 5% of equipment value). Amounts above that threshold can be used for related annual expenditures. To meet these requirements, MMSD has set up a planned six-year schedule for machinery and equipment having a cost greater than $25,000 and a useful life of between 10 and 20 years. At the end of 2009, the balance in the equipment reserve fund was $16.1 million, which is $4.3 million more than the required amount. In 2009, the operating budget received $1 million from this fund. MMSD established the user stabilization fund at the time of its first private contract for operations with United Water Services in the late 1990s. According to MMSD, the fund was intended “to reserve some of the savings realized from the operations and maintenance contract with the United Water Services…[in order] to maintain stable user charges billings.” Under district policy, the budget office annually prepares and submits a schedule of proposed contributions or withdrawals from the user stabilization fund for a period of six years. The amount in the fund is to be set at a level no less than 2.5% of the current year’s revenues. In 2009, $2.5 million was budgeted to operations from this fund. The ending balance of the fund was $10.3 million, or 12% of 2009 revenues, which is considerably more than the 2.5% minimum level. Finally, MMSD has an unallocated reserve fund in its operating budget for the purpose of meeting “current year wage and salary adjustments and unforeseen costs.” Under MMSD policy, the annual budget is to set the unallocated reserve at a level between 2% and 3.5% of operating expenditures. In 2009, MMSD budgeted $2.9 million to the unallocated reserve fund, which represented 3.5% of operating expenditures. During the 2005 to 2009 period, MMSD did not draw upon this reserve account in two separate years (2008 and 2009), and only used one quarter of the $1.6 million budgeted in 2005. The recent relatively low usage of this account raises the question of whether MMSD has over-budgeted funds for this purpose. The agency reduced the level of funding to the unallocated reverse by $681,000 in 2011, however, and has indicated that potential fluctuations in health care and energy costs, in particular, justify that level of funding.


Other revenues Other types of revenue constitute about 5% of MMSD’s operating budget and amounted to $3.8 million in 2009. The largest of these revenue sources is the household hazardous waste program, under which MMSD contracts with municipalities for collection of wastes at three permanent sites. District members are charged $3.48 per resident for this program, which collected $1.1 million in revenues in 2009. MMSD also runs an industrial waste pre-treatment program, which is mandated by federal and state laws that require MMSD to monitor types and amounts of industrial discharges. Under the program, MMSD staff sample and test industrial effluents and report on their findings. Charges for this cost recovery program are calculated on the basis of sewer system usage. Other minor revenue sources include: interest income; lease income from MMSD property; and program income, such as the sale of more than 3,000 rain barrels in 2009. Revenue trends The ICMA evaluation system applies multi-year analysis to determine whether institutional finances are stable, improving, or deteriorating. Overall revenue trends are an important indicator of an institution’s capacity to continue existing levels of service, while individual revenue trends can provide insight into whether changes in a particular revenue sources are affecting a government’s operations. Trends in MMSD’s overall operational revenue are shown in Table 6, while ICMA Indicator 1 shows per capita revenue trends. These figures closely mirror one another since district population changed relatively little during this time. As previously noted, a five-year trend analysis does not provide a complete picture of MMSD finances because of the fiscal effect of the private contract for operations. An essential point is that costs and their associated user charges rose in 2008 as the district went from one 10-year contract with UWS to another 10-year contract with Veolia.

ICMA Fiscal Indicator 1 – Operating Revenues Per Capita Why it is important – Steady levels of revenue generally are associated with stable operations and levels of service. ICMA Warning Sign – Increases in net operating revenues per capita in constant dollars raise issues of program and service responsibility. MMSD Finding – This five-year indicator is not the best measure of MMSD’s revenue trends since user charge revenues are raised to support increases in expenditures, and more than half of all MMSD expenditures are linked to private contractor costs that change only once every 10 years. While operating revenues per capita increased at a level greater than inflation from 2005 to 2009, this was mainly due to the implementation of a new contract in 2008. In fact, user charges have increased at a rate of 2% per year since MMSD began contracting out management operations, making this a positive indicator of budget solvency.

* Per capita based on district population ** Adjusted to 2009 dollars Source: MMSD annual budget documents

$50

$60

$70

$80

$90

$100

2005 2006 2007 2008 2009

Operating Revenues Per Capita*

Actual DollarsInflation Adjusted**


Billings jumped from $47 million in 2007 to $66 million in 2009, an increase of 40%. [A complete analysis of the two contracts is provided in the next section of this report.] This increase in user charges should not obscure the fact that MMSD realized substantial cost savings when it shifted to private operations in 1998, which have been passed on to users in the form of lower user billings. When viewed from a longer-term perspective, user charge revenue increased from $54 million in 1997 to $66 million in 2009, a rise of just 2% per year. In regard to other revenues, Milorganite® sales rose by 36%, from $5.8 million in 2005 to $8 million in 2009. This income growth resulted from price increases, as the volume of sales actually fell from 42,100 tons to 39,200 tons during this time. Other revenue declined because of a drop in interest income. Table 6: MMSD operating revenues, 2005 to 2009 (in thousands)

REVENUES 2005 2006 2007 2008 2009

5-YR GROWTH/

LOSS 5- YR %

CHANGE User Charge Billings $44,782 $45,752 $47,008 $60,268 $66,373 $21,591 48.2% Milorganite® Sales $5,836 $5,193 $4,301 $7,272 $7,957 $2,121 36.3% Reserve & Contingency Funds* $6,360 $6,349 $10,955 $7,629 $6,682 $322 5.1%

User Charge Stabilization Fund** $473 ($9,930) $500 $500 $2,500 -- -- Equipment Replacement Fund** $1,410 $13,227 $3,436 $2,032 $1,044 -- -- Surplus Applied $4,375 $2,999 $5,244 $4,825 $3,138 -- --

Other Income $4,327 $4,958 $5,623 $4,981 $3,840 ($487) -11.3% TOTAL REVENUES $61,305 $62,252 $67,887 $80,150 $84,852 $23,547 38.4% *Total also includes revenues from a few other small accounts, such as carryover **Amount applied from fund Source: MMSD annual budget documents 2010 and 2011 budgets In contrast with other Milwaukee area governments whose budgets recently have been impacted by significant declines in tax revenue, MMSD’s operational budget, funded from program charges, experienced only moderate change in 2010 and 2011, as shown in Table 7.4

Operational revenues in 2011 are budgeted $3.4 million below 2010 projected revenue levels, largely because of a drop in user charge revenue and lower district water usage. That this change has had no real negative impact upon district finances is reflected in the fact that the 2011 budget makes an $869,000 contribution to the user stabilization fund, a move MMSD says will “strengthen reserves and make it less necessary to raise funds in the future.”

Milorganite® is one revenue source that has shown signs of stress. In 2010, the district budgeted a $1.7 million increase in Milorganite® revenue, but 60% of the projected sales growth failed to materialize, and revenue came in $1.1 million under budget. This is an ongoing source of concern and a trend that is expected to continue in 2011.

4 The potential impact of state budgetary changes proposed in the governor’s 2011-13 state budget is discussed in the long-term solvency section.


Table 7: Operating revenue budget, 2009 to 2011 (in thousands)

2009

2010 PROJECTED

2011 BUDGETED

GROWTH/ LOSS

% CHANGE

User Charge Billings $66,373 $68,733 $66,701 $328 0.5% Milorganite® Sales $7,957 $7,000 $7,750 ($207) -2.6% Reserve and Contingency Funds $6,682 $6,114 $3,672 ($3,010) -45.0%

User Charge Stabilization Fund* $2,500 $1,865 ($869) Equipment Replacement Fund* $1,044 $0 $1,150 Surplus Applied $3,138 $4,249 $3,391

Other income $3,840 $3,753 $4,126 $286 7.4% Total $84,852 $85,600 $82,249 ($2,603) -3.1%

* Amount applied from fund Source: MMSD annual budget documents


BUDGETARY SOLVENCY: OPERATING EXPENDITURES An organization’s fiscal stability is determined largely by whether its revenue-generating capacity meets its expenditure demands. The ICMA fiscal indicators discussed in this section are useful in analyzing the pace of expenditure growth. When analyzed in conjunction with the revenue trends laid out in the previous section, this information can provide a basis for evaluating the institution’s long-term fiscal condition.

MMSD is unique among the governmental entities previously assessed by the Public Policy Forum in that it contracts with a private entity to manage and conduct most of its operations. While the ICMA methodology aims to hone in on several major cost factors in order to assess expenditure trends, such a task becomes difficult when the entity being analyzed has most of its expenditures contained in a single line item – that indicating the amount of its operations contract. Despite this shortcoming, sufficient expenditure information was collected to present a clear expenditure picture for MMSD.

SUMMARY OF EXPENDITURE FINDINGS From 2005 to 2009, MMSD’s operating expenditures grew 41.5%. While this rate of growth may appear excessive, it is largely a byproduct of the transition between two long-term operations contracts during the period of the five-year snapshot. Indeed, the major expenditure spike occurred in 2008, when MMSD entered into a new 10-year contract with Veolia. This contract took into account developments that had occurred since MMSD’s original operations contract with United Water Services 10 years earlier. Contract expenditures encompass roughly half of all MMSD operating expenditures. Prior to the new contract with Veolia, MMSD had been sheltered from rapidly rising energy costs. The majority of that energy cost burden returned to the district under the Veolia contract, with direct energy costs now accounting for an additional 14.8% of MMSD’s total operating expenditures. Contract and direct energy costs increased by a combined $18 million, or 51.5%, from 2005 to 2009, accounting for 77.4% of MMSD’s overall increase in operating expenditures. Despite the cost increases incurred under the new 10-year contract, MMSD’s experience with privatization appears to be largely successful, as it has produced significant savings while maintaining quality performance.


Privatization of MMSD operations Any analysis of MMSD’s expenditure trends must begin with a description of the privatized nature of its operations. MMSD is one of the largest privatized wastewater management entities in the nation. Currently in the midst of its second 10-year operations contract, MMSD’s apparent success in achieving cost savings and the mechanisms it employs to monitor its private vendors have now made it a model for other jurisdictions. Prior to privatizing its operations in 1998, MMSD had continually outperformed its permit requirements, and there was no indication of a poorly maintained infrastructure or sign of financial distress. In fact, MMSD did not see privatization as a necessary recourse to meet performance goals and/or address significant fiscal problems, as is often the case with other entities considering such action. On the contrary, it could be argued that MMSD leaders proposed a private operations contract to make an already well-run organization even more efficient. Transition to privatized operations MMSD awarded its first operations contract to UWS in 1998. UWS beat out three other qualified vendors to win the contract, promising an anticipated savings of $145.8 million over the life of the 10-year contract, which amounted to a 30% reduction from the expenditures that would have been incurred if MMSD had maintained its operations in-house. Several years into the contract, MMSD found that savings were significantly greater than anticipated, at $164.6 million. The savings emanated from several factors. First, as a global player in the wastewater arena, UWS brought significant experience and expertise to the district’s operations, which it was able to utilize to improve operational processes and streamline operations. In addition, UWS appeared more willing to make staff reductions than MMSD. In fact, through attrition, UWS reduced staffing levels by approximately 100 positions. Finally, savings that accrued to MMSD reflected the protection it received under the contract from unanticipated increases in energy costs, which would have cost the district a projected $37 million if it had been required to absorb those costs itself. Approximately 290 employees transferred from district to UWS employment with the onset of the contract, representing more than half of the 570 positions employed by MMSD in 1997. MMSD administrators worked diligently to ensure that existing employees would be able to transfer to the private operator, and they inserted several provisions into the contract to further protect their workers. For example, the UWS contract included a no-layoff clause, guaranteed equal or greater fringe benefit levels for those employees who made the transfer to UWS, sustained participation for such employees in the City of Milwaukee’s pension system, and provided recognition of all four employee labor unions.


MMSD’s interest in providing such protections for employees – developed with continual consultation with labor unions – averted substantial pushback by those unions. Nor did UWS see the protections as a hindrance to achieving substantial cost reductions, in part because of its ability to generate savings by not filling vacated positions, and by providing any newly hired employees with a less generous compensation package. UWS entered into the contract anticipating that its ability to recognize greater efficiencies in MMSD operations would allow it to profit from the contractual arrangement, while also generating savings for the district. The company shortly realized, however, that it had inherited an already-efficient operation, which would limit its ability to implement cost-saving measures. Furthermore, UWS eventually faced unforeseen, rapid elevations in energy costs. Because the contract required UWS to hold MMSD harmless for energy cost increases, the UWS contract turned out to be favorable for the district, but a money loser for the private operator. The second 10-year contract The second round of contract negotiations garnered two qualified bids – one from UWS and the other from Veolia Water. Veolia – a French company with nearly 96,000 employees in 66 countries – ended up winning the contract. The benefit of hindsight and the awareness of rising energy prices had caused both bids for the second 10-year contract to be less favorable for MMSD, with UWS’ proposal equating to a 60% cost increase over the first contract, and Veolia’s reflecting a 40% increase. The most significant change in both proposals entailed shifting 75% of energy costs back to MMSD. MMSD predicted this adjustment early on and began warning users in 2005 of the anticipated increase in future costs. In addition to assessing the Veolia and UWS proposals, MMSD followed past practice and evaluated the favored bid against the possibility of returning to public operations. MMSD consulted union officials to determine what changes they might accept under a new publicly-operated scenario, including differences in staffing, wages, employee benefits, procurement discounts, asset management, and staff and process productivity. MMSD ultimately concluded that based on factors it could quantify, the Veolia option would save approximately $3.5 million annually. Operating expenditures Table 8 shows MMSD’s operating expenditures in 2009, broken down by major categories of expenditure. The Technical Services Division comprises the bulk of expenditures, as it includes the costs associated with the private operations and maintenance contract. This division also includes costs for the Office of Contract Compliance, which monitors and enforces contract provisions.


Table 8: Expenditures by major functions

FUNCTION 2009 % OF

TOTAL

Ex Director Office $5,677,811 7.2%

Legal Services $1,270,710 1.6%

Technical Services $54,914,310 69.3%

Water Quality $3,948,549 5.0%

Agency Services $6,448,732 8.1%

Fringe Benefits $6,946,203 8.8%

TOTAL $79,206,315 Source: MMSD annual budget documents MMSD’s total operating expenditures increased $23.2 million from 2005 to 2009, or 41.5%.5

As seen in ICMA Indicator 2, operating expenditures grew just slightly faster on a per capita basis, increasing by 43%.

The expenditure growth seen in this five-year snapshot is attributed largely to the major expenditure spike that occurred when MMSD entered into the new 10-year operations contract with Veolia. MMSD expenditures increased by a more reasonable 5.1% in 2009, after a 16.9% increase in 2008. While expenditures grew at a faster rate than inflation during this period, operating revenues exhibited similar growth. As discussed in the previous section, user charges provide the main support for MMSD operations, and MMSD has been able to increase those charges to align with expenditures. In 2008, for example, the $14.7 million increase in contract and utility expenditures was almost fully supported by a $13.3 million increase in user charge revenue. Whether potential decreased water usage may impact the elasticity of user charge revenue bears watching, however. Contract fees and utility costs Contract expenditures traditionally have encompassed roughly half of all MMSD operating expenditures. In 2009, for example, the $41.1 million spent under the Veolia 5 This increase includes a one-time amount accrued by the district in 2009 that went unspent in that year. In order to keep the focus on the major cost drivers, this accrual is not expanded upon within this report.

ICMA Fiscal Indicator 2_– Net Expenditures Per Capita Why it is Important – In a state of fiscal health, a government’s per capita expenditures in constant dollars should hold nearly level or increase slightly and should not exceed per capita operating revenues. A scenario in which expenditures increase too rapidly may cast doubt on long-term funding sustainability. ICMA Warning Sign – Imbalance between expenditures and net operating revenues or a large increase in expenditures in constant dollars. MMSD Finding – MMSD has seen a 43% increase in net operating expenditures per capita from 2005 to 2009, or 30% after adjusting for inflation. Revenue growth of 40% is just short of the rise in expenditure growth. However, this increase reflects a new expenditure base that resulted from enactment of a new 10-year operations contract. Annual per capita expenditure growth since the new contract (5.9% in 2009) has fallen below annual per capita revenue growth (7.3% in 2009). This recent trend data is a positive indicator of financial health.

* Per capita based on district population ** Adjusted to 2009 dollars Source: MMSD annual budget documents

$50

$55

$60

$65

$70

$75

$80

$85

$90

2005 2006 2007 2008 2009

Expenditures per capita*

Actual dollarsInflation adjusted**


contract amounted to 54.8% of MMSD operating expenditures. This amount represents two components: an operating and maintenance fee and a utility fee. Those fees are largely fixed and grow by a limited amount annually as prescribed by contractually set adjustment factors. Operating and maintenance fee The operating and maintenance (O&M) fee generally represents all of the costs associated with the vendor’s operation of MMSD’s facilities and services with the exception of utility costs. Increases in the O&M fee made up 34% of the overall increase in MMSD’s operating expenditures during the 2005 to 2009 timeframe. As shown in Table 9, the O&M fee increased $7.9 million during the period, or 27.9%. Table 9: Operating and maintenance fees

2005 2006 2007 2008 2009 5-YEAR

CHANGE Vendor UWS UWS UWS Veolia* Veolia Operating & Maintenance fee $28,319,928 $29,127,954 $29,652,257 $34,282,666 $36,220,987

Difference $808,026 $524,303 $4,630,409 $1,938,321 $7,901,059

% change 2.9% 1.8% 15.6% 5.7% 27.9% * The Veolia contract began March 1, 2008. Source: MMSD The 15.6% increase that occurred in 2008 is attributed largely to the new contract with Veolia. Several factors likely contributed to the increase, though it is not possible to determine precise causal impacts due to the proprietary nature of vendor operations. For example, enhanced knowledge of the true costs associated with MMSD operations and a lack of competition are two factors that may have produced greater O&M costs in MMSD’s second contract. As previously mentioned, UWS took over MMSD operations anticipating possibilities of significant cost-cutting measures, only to later find that those were somewhat limited. Vendors interested in bidding on the second contract had more information based on UWS’ experience and recognized the need to recalibrate their proposed fees in order to avoid losing money, as was the case with UWS. In addition, the number of vendors interested in bidding decreased, with only two vendors providing bids in 2007, down from four vendors in 1997. Insistence by MMSD on greater precision in the second contract also may have contributed to higher O&M fees. For example, under the UWS contract, MMSD did not dictate a minimum level of staffing, which allowed UWS to reduce staffing during the life of the contract from the 290 positions that originally transferred from MMSD, to 197 positions. That staffing level was cited as potentially insufficient for proper operations in 2004 by the Mayor of Milwaukee’s Independent MMSD Audit Committee, which influenced MMSD to institute a minimum staffing level of 217 positions under the Veolia contract. MMSD also detailed more specific requirements for maintenance and repairs in the Veolia contract, in response to concerns that UWS had allowed certain minor, non-essential maintenance and repairs to go unaddressed.


Over the life of the contract, established adjustment factors guide year-to-year increases and help protect MMSD from significant annual cost fluctuations. In the current contract, annual increases to the O&M fee are limited to the lesser of a Base Cost Blended Index (BCBI)6 or 3.5%. If the BCBI increases beyond 5.5%, the district pays 3.5% plus any amount beyond 5.5%. In 2009 and 2010, MMSD faced annual O&M fee increases under the current contract of 3.3% and 0.8%, respectively.7

Utility fee MMSD’s recent exposure to changes in energy prices accounts for 46% of its overall increase in operating expenditures from 2005 to 2009. Under the first contract, all energy costs were borne by UWS as part of a pre-set utility fee. The Veolia contract, however, establishes that the vendor is responsible only for 25% of energy costs under the pre-set fee, which means MMSD bears most of the risk for higher-than-anticipated energy cost increases. As shown in Table 10, in the 2005 to 2009 timeframe, the utility fee and MMSD’s direct utility costs increased by $10.6 million, or 175%. Table 10: Utility fee and direct MMSD energy costs

2005 2006 2007 2008 2009 5-YEAR

CHANGE Vendor UWS UWS UWS Veolia* Veolia Utility fee $6,034,912 $6,185,377 $6,297,129 $4,426,273 $4,855,690 ($1,179,222) Direct MMSD energy costs $0 $0 $0 $12,380,868 $11,760,116 $11,760,116 Total energy expenditures $6,034,912 $6,185,377 $6,297,129 $16,807,141 $16,615,806

Annual difference $150,465 $111,752 $10,510,012 ($191,335) $10,580,894 Annual % change 2.5% 1.8% 166.9% -1.1% 175.3%

* The Veolia contract began March 1, 2008. Source: MMSD

6 The BCBI is dependent on a combination of the Bureau of Labor Statistics Employee Cost Index and the Consumer Price Index. 7 In order to reflect the annual changes in the Veolia contract alone, the 2009 increase assumes Veolia operated a full year in 2008.


While rapidly rising energy prices appear to be the norm nowadays, UWS did not forecast steep growth when drawing up its bid in 1997. The fact that the contract sheltered MMSD from the significant rise in energy costs that actually occurred over the contract’s 10-year duration ultimately made the contract unprofitable for UWS. In fact, MMSD estimates that the district saved approximately $164 million under the UWS contract, of which $37 million was due to its avoidance of escalating energy costs. Though this arrangement was beneficial to the district, it recognized long before 2008 that its good fortune would not extend into a second contract. Under the current contract, the utility fee paid to Veolia is based on 25% of estimated total utility costs. The estimate reflects MMSD’s consumption patterns and the price of energy at the time of the proposal. Every year, the fee is altered according to an adjustment factor that is dependent on the regional CPI for utility gas and electricity. Though the adjustment factor takes energy prices into account, it does not adjust for swings in annual consumption. Consequently, Veolia gains if MMSD uses less energy in any given year, and loses if consumption trends upward. Nevertheless, for the first three years of the Veolia contract, the utility fee has closely mirrored actual energy costs and has allowed Veolia to realize a small overall gain of $98,708. Now that MMSD bears much of the risk for fluctuating energy prices, the district has undertaken efforts to mitigate this risk. For example, it hedges natural gas prices and has undertaken a significant capital investment to pipe landfill gas from the Emerald Park landfill in Muskego to the Jones Island reclamation facility, where it will produce electricity to power the facility and contribute to powering the sewage sludge dryers. The district also is pursuing other capital projects that are intended to produce additional energy savings.

ICMA Fiscal Indicator 3 – Employees Per Capita Why it is Important – Employees per capita has implications for budget solvency because of the significant impact of personnel costs on local government and institutional budgets. An increase in employees per capita may have long-term growth implications and may indicate that the institution is expanding operations, becoming more labor-intensive, or that productivity is declining. ICMA Warning Sign – Increasing number of employees per capita. MMSD Finding – MMSD’s total actual full-time-equivalent (FTE) employees increased 3.6%, or 8.3 positions, from 2005 through 2009. On a per capita basis, this is a relatively flat change. The added positions required additional salary outlays of roughly $540,000. Because the district has had the revenue flexibility to support these additional positions, this is a positive indicator of financial health.

* Per capita based on district population Source: FTEs calculated by authors using payroll data provided by MMSD

0.00

0.05

0.10

0.15

0.20

0.25

0.30

200

205

210

215

220

225

230

235

240

245

2005 2006 2007 2008 2009

Employees per capita*

Total FTEFTE per 1,000 population


Beyond contract and utility costs Remaining MMSD expenditures – other than contract and utility costs – increased 14% during the 2005 to 2009 period. The majority of this increase was due to increases in salary and fringe benefit costs for MMSD’s employees. Salaries grew by 16.5%, surpassing the 9.8% rate of inflation. Fringe benefits surpassed inflation as well, growing by 11.9%. MMSD is the first of the local government entities recently assessed by the Public Policy Forum to have salary growth outpace that of fringe benefits. Staff and salary expenditures MMSD has direct staff of 238 full-time equivalent positions (FTEs), which is roughly equivalent to the number of staff working under the Veolia contract. Total salary expenditures increased $2.4 million, or 16.5%, to $17.1 million. As shown in Table 11, the rate of growth in MMSD’s salary expenditures from 2005 to 2008 surpassed that experienced by Milwaukee County, the City of Milwaukee and MATC. Table 11: MMSD salary trends compared to Milwaukee County and City of Milwaukee*

2005 2008 4-YEAR

CHANGE AVERAGE

ANNUAL CHANGE Salary expenditures

MMSD $14,711,000 $16,659,000 13.2% 4.4% Milwaukee County $243,615,000 $261,531,000 7.4% 2.5% City of Milwaukee $322,942,000 $352,826,000 9.3% 3.1% MATC $104,359,000 $116,197,000 11.3% 3.8%

*While there are typically 26 pay periods in a year, occasionally there are years in which government entities realize 27 pay periods. In this comparison, both MMSD and the City of Milwaukee realized 27 pay periods in one of the years presented – MMSD in 2008 and the City of Milwaukee in 2005. For comparison purposes, salary figures for these entities have been standardized to reflect 26 pay periods. Source: Data provided by MMSD staff; Milwaukee County financial data system; City of Milwaukee financial records; MATC financial records MMSD’s comparably high salary increase was caused, in part, by an increase in the district’s workforce from 2005 to 2009. As seen in ICMA Indicator 3, $540,000 of the increase in salaries during the period was caused by the filling of an additional 8.3 FTE positions, a staff increase of 3.6%. MMSD provides a contrast to the other government entities in this regard, each of which saw a decline in workers. The remaining $1.9 million is attributed to annual salary increases, which averaged 3.2% annually. In fairness, MMSD’s increase in salary expenditures may reflect its need to attract and retain high-skilled workers, which arguably is more pressing than for other governments given the highly technical and professional nature of MMSD’s workforce. In keeping with that need, MMSD implemented two initiatives in 2005: the institution of merit-based pay; and efforts to bring certain employee salary levels up to the levels that exist in the regional employment market. The new pay-for-performance system applies to all management and non-management employees. It was intended to provide an annual pay raise based on performance, but it is


also dependent on funding approved by the Commission for the merit pool. Prior to 2009, this policy provided for merit-based salary increases ranging from 1.5% to 3.75%, depending upon whether the position was above or below market. MMSD contracted for independent compensation analyses in 2003 and 2009, with both providing a detailed review of its salary structures relative to the overall employment market. The studies found that MMSD fell slightly behind salary levels seen in the overall market for management and non-represented employees, but above-market for represented employees. While MMSD has made structural adjustments to rectify some of the noted salary lag for non-union employees, it recently restricted salary increases to a flat 3% in 2009, 0% in 2010 and 2.25% in 2011 regardless of performance or market comparisons. Meanwhile, according to the union contract, represented employees have averaged 3% pay increases annually through 2009, though increases dropped to 0% in 2010 and 1.5% in 2011. The recent divergence from the 2005 compensation initiatives reveals dueling pressures. On the one hand, MMSD aims to maintain a quality workforce and compensate accordingly. On the other hand, however, there is pressure for the district to fall in line with other public entities that are more restricted in leveraging additional salary dollars. Fringe benefits Unlike several other local governmental entities, MMSD has successfully mitigated fringe benefit expenditure pressures. As seen in ICMA Indicator 4, from 2005 to 2009, fringe benefit expenditures grew by $1 million, or 11.9%. This equates to a roughly 3% increase annually, much lower than that seen in most other governments. Health insurance is MMSD’s largest fringe benefit cost category, encompassing 72% of all fringe benefit expenditures. As seen in Table 12, health care costs have declined

ICMA Fiscal Indicator 4 – Direct Fringe Benefits Why it is Important – Direct fringe benefits typically include employee health, pension and life insurance benefits and represent one of the largest and fastest-growing items of expenditure in the public sector. In recent years, many local taxpayer-funded entities have seen increases in health care and pension costs far surpassing the rate of inflation. This expenditure increase has had a debilitating effect upon budgets and fiscal condition. ICMA Warning Sign – Increasing fringe benefits as a percentage of salaries and wages and operating expenditures. MMSD finding – From 2005 to 2009, fringe benefit expenditures grew by $1 million (11.9%) and constituted 11.5% of overall operating expenditures in 2009. As a percentage of salary and wages, fringe benefits expenditures decreased from 55% in 2005 to 53% in 2009.

Source: MMSD, annual budget documents

$7.0

$7.5

$8.0

$8.5

$9.0

$9.5

2005 2006 2007 2008 2009

Fringe benefit expenditures (in millions)


generally and as a percentage of overall fringe benefit costs. This trend existed even prior to a significant increase in MMSD’s pension contribution in 2009. Table 12: Health care costs as percentage of total fringe benefit costs

YEAR HEALTH CARE

COSTS TOTAL FRINGE

COSTS HEALTH CARE AS A % OF OVERALL FRINGE COSTS

2005 $6,812,210 $8,148,011 84% 2006 $6,663,789 $7,962,265 84% 2007 $7,281,842 $8,755,481 83% 2008 $6,671,655 $8,065,113 83% 2009 $6,561,732 $9,121,222 72%

Source: MMSD MMSD offers only one health care option to its employees, a preferred provider option that had a 2009 premium rate of $1,638 for a family plan and $606 for a single plan. As seen in Table 13, MMSD’s premiums are lower than those for PPO plans in some of the region’s other large public entities. MMSD’s premium costs also are generally on the low end when compared to HMO plans offered by these other entities. Table 13: Monthly health care premiums of major Wisconsin governments, 2009

MONTHLY PREMIUMS

PPO HMO

Family Single Family Single

MMSD $1,638 $606 n/a n/a MATC $2,312 $852 $2,101 $796

City of Milwaukee $1,922 $853 $1,825 $668

State of WI $2,682 $1,074 $1,746 $700

Milwaukee County $1,766 $1,065 $1,582 $565

MPS $1,985 $897 $1,370 $522 MMSD has engaged in a variety of proactive efforts to control health care costs. In addition to working with consultants on health care cost containment strategies, the district created a Benefits Review Committee in 2006 to evaluate its health care plans and develop alternatives to mitigate costs. Recent changes include decisions to drop one of two self-funded insurance plans; change provider networks to bring in greater network discounts; increase employee premiums, prescription drug co-payments, doctor visit co-pays, and out-of-pocket maximums; encourage wellness visits; and create a pilot program to incentivize employees to opt out of the district’s health care plan. MMSD not only provides health insurance for active employees, but also has a generous retiree health care benefit for employees who have accumulated several years of service. In addition, district employees are members of the City of Milwaukee’s Employee Retirement System, and MMSD has paid the 5.5% employee contribution on behalf of its workers per Commission policy. The characteristics and impacts of these retirement benefits are discussed in the next section of this report.


LONG-TERM BUDGET SOLVENCY The ICMA system provides an excellent tool for examining long-term solvency, an inherently complex topic. Central to ICMA’s methodology is the question of whether a government is “currently paying the full cost of operating, or is postponing costs to a future period when revenues may not be available to pay these costs.” To address this question, the ICMA format explores individual cost categories that can have a major effect on future spending levels, such as retirement, long-term borrowing, and capital maintenance. It also examines the cumulative impact of changes in these costs.

MMSD’s long-term financial picture is guided to a large extent by considerations concerning its capital budget. In fact, MMSD is unusual among Milwaukee-area local governments in that its capital budget is substantially greater than its operating budget. The capital budget establishes the scale and scope of MMSD’s infrastructure program and determines how the district will finance long-term projects and associated costs. This budget determines which major projects are pursued and the appropriate mix of long-term borrowing and property taxes to support them, as well as the level of support for upkeep and replacement of the district’s huge inventory of capital assets.

SUMMARY OF LONG-TERM SOLVENCY FINDINGS Analysis of long-term solvency is especially important to an assessment of MMSD’s fiscal condition given that about two-thirds of its revenues and expenditures are long term in nature. Those involve capital construction projects and programs that can take a decade or more to complete, with debt service financed through property tax revenues. MMSD employs a variety of sophisticated program and financial mechanisms to ensure that future costs are appropriate and that it has the capacity to pay off its debt. Those include long-term planning, stringent procedures governing infrastructure repair and maintenance, and policies requiring 25% cash financing of capital projects and limiting outstanding debt. Also, district employees participate in the City of Milwaukee’s retirement system, one of the most secure state and local retirement systems in the nation. While debt per capita has increased substantially over the past decade, the district’s long-term fiscal position is strong, as reflected in its excellent credit rating. Some long-term capital budget issues remain somewhat unsettled, however, as the need to fix aging treatment facilities and embrace watershed planning constitute large potential costs for the district and its residents. Meanwhile, on the operations side, the district faces a need to accommodate growing retiree health care costs, and its ability to wring additional savings out of the private operations contract may be limited.


To frame and inform these key budgetary decisions, MMSD relies heavily upon long-term planning, which aims to identify the major water quality issues facing the region, as well as the central programmatic strategies MMSD will employ to address them. It is in this planning context that the conflict and struggle between aspirations and means is most readily apparent, as the district contends not only with the hard task of formulating a financially realistic long-term plan, but also with new problems and issues that present themselves after initial plans are established. Capital budget MMSD’s capital budget allocates resources for the purchase and construction of infrastructure and equipment and provides the financial blueprint for the planning, design, and construction of MMSD’s many water quality improvement projects. During the past five years, the capital budget has totaled a little over $1 billion, or an average of $207 million per year. The budget is funded by three major revenue sources: state loans, bonds, and the property tax. The largest source is the federal Clean Water Fund (CWF), which is managed by the State of Wisconsin as a revolving loan fund. MMSD has made increasing use of this resource because of its low interest rate. In fact, the district’s outstanding CWF loans grew from $228 million in 2000 to $611 million in 2009. District bond obligations, in contrast, grew from $188 million to $281 million over this time. MMSD uses property taxes exclusively to fund capital budget expenditures and to finance its debt service. Taxes are uniformly levied based upon the equalized value of property within the district. Technically speaking, there is some difference in the funding mechanisms used for district members and non-members. Member communities are assessed a property tax, while non-members are billed a specific amount that they then charge to residents on their property or user charge tax bills. Tax levy increases require a vote of at least two-thirds of all district commissioners.8

8 If a full funding resolution is not adopted by October 15th of any year, by a simple majority vote, the district may raise up to $40 million in tax levy “in addition to the amount of any irrepealable tax previously levied for principal and interest payments on district general obligation indebtedness.”


From 2005 to 2009, MMSD’s property tax levy increased by a modest 7%, as shown in ICMA Indicator 5. When adjusted for inflation, the levy decreased by 3%. The tax rate fell from $1.42 to $1.28 per $1,000 in equalized property value during this time. Under the district’s preliminary six-year capital financing plan, no property tax increases are budgeted for the next two years, but an increase of up to 4% is being evaluated for the years that follow. As shown in Table 14, MMSD capital expenditures fall into five categories: debt service; wastewater treatment; sewers; flood control; and other expenditures (these include costs such as facilities planning, machinery, and equipment). Annual levels of expenditures reflect district plans and priorities, as well as the timing of long-term construction projects. Debt service consumes the largest share of expenditures, constituting 32% of all capital spending in 2009. During the 2005 to 2009 timeframe, annual debt service increased 34%, from $58 million to $78 million. Reflecting the priorities of the 2002 Stipulation Agreement, more money was spent on sewer capacity and performance ($385 million) than on wastewater treatment facilities ($107 million) during the past five years. Flood control consumed another $128 million, mainly for projects in the Milwaukee River watershed (Lincoln Creek, in particular) and the Menominee River watershed (at Hart Park and the Milwaukee County grounds). The impact of those projects extends beyond the boundaries of the municipalities in which they are located to other communities throughout the region.

ICMA Fiscal Indicator 5 – Local Tax Revenue Why it is Important – Property tax revenue is used by MMSD to finance a large portion of its capital budget, which funds infrastructure improvements and repair and replacement of district assets. User charges support operating costs. ICMA Warning Sign – A trend of increasing tax revenues in constant dollars raises questions of program and service responsibility. MMSD Finding – From 2005 to 2009, property tax revenues increased by only 7%, which amounts to a 3% decrease when adjusted for inflation. In response to Governor Walker’s biennial budget recommendations, MMSD has announced that it does not intend to raise property taxes in 2012 and 2013. However, MMSD does plan annual property tax increases of up to 4% in the three years thereafter under its six-year capital financing plan. Given the size of these projected increases and future long-term capital costs, this is an area of the budget that will require monitoring in the future.

* Adjusted to 2009 dollars Source: MMSD annual budget documents

$94,000

$96,000

$98,000

$100,000

$102,000

$104,000

$106,000

$108,000

$110,000

2005 2006 2007 2008 2009

Local Tax Revenue (in thousands)

Actual Dollars

Inflation Adjusted*


Table 14: 2005 to 2009 MMSD capital expenditures by account group (in thousands)

2005 2006 2007 2008 2009 GROWTH/

LOSS %

CHANGE Debt Service $57,980 $64,963 $70,739 $73,790 $77,695 $19,715 34.0% Wastewater Treatment $19,735 $16,552 $23,077 $28,419 $19,178 ($557) -2.8% Sewers $54,626 $68,226 $78,450 $86,035 $98,169 $43,543 79.7% Flood Control $19,855 $38,486 $27,016 $8,069 $34,974 $15,119 76.1% Other $13,145 $17,528 $14,542 $14,306 $13,437 $292 2.2% Total* $165,341 $205,755 $213,824 $210,619 $243,452 $78,111 47.2%

* Total may differ slightly from the sum of categorical expenditures Source: MMSD annual budget documents Long-term planning As noted above, the foundation for MMSD’s capital budget is long-term planning, a management process undertaken with thoroughness and a high level of sophistication. Long-term program and facility planning is a necessity for wastewater treatment agencies because of the cost and time associated with sewer construction, and because many projects are interrelated. Furthermore, the Clean Water Act requires each treatment facility to have a plan that determines the sources of point and non-point pollution, and that identifies how the facility owner intends to address pollution problems and meet water quality goals. The DNR also mandates that districts formulate a facilities plan, which must be approved by the DNR prior to its review of construction projects. Three major planning processes are especially relevant to district finances: the 2020 Facilities Plan; the Six-Year Capital Financing Plan; and the Capacity, Management, Operation, and Maintenance Program (CMOM). 2020 Facilities Plan The 2020 Facilities Plan is a “long-range comprehensive planning document” that identifies the improvements needed to protect the district’s water resources and provide for regional growth and development. The plan considers population and land use changes and related needs for sewer, treatment facility, and flood control projects. The district’s 2020 effort was developed under a broad planning process, known as the Water Quality Initiative, begun in 2002 in cooperation with the Southeastern Wisconsin Regional Planning Commission (SEWRPC). Under this coordinated effort, the regional commission focused on water quality management for six watersheds within southeastern Wisconsin, and MMSD focused on facilities, programs, operational improvements, and district policies. The recommendations of the 2020 Facilities Plan, which took six years to complete, proceed from its four major water quality findings: The water quality data and modeling show that bacteria (fecal coliform) is the

primary pollutant of concern.


Non-point pollution (e.g. stormwater runoff) is the largest source of fecal coliform bacteria.

Reducing (or even eliminating) SSOs will result in little or no water quality

improvement on an annual basis. Significant improvements to water quality can only be achieved through regional

implementation of extensive measures to reduce pollution from non-point sources. The 2020 plan promotes the philosophy of “watershed planning,” which advances the twin principles that water quality improvement should work off the best scientific information and should be cost effective. Watershed planning is a new approach both for the district and the EPA, and MMSD is now cooperating with the Southeastern Wisconsin Watersheds Trust, Inc. on development of a national demonstration project that “potentially combines point and non-point source pollution under a single permit.” Despite the new emphasis on watershed planning, the 2020 Facilities Plan continues to focus upon keeping the district in compliance with its regulatory permit. As the district has stated, the “key 2020 recommendations are for a five-year level of protection (LOP), which means a projection of one event each five years on the average, or a 20% chance of a SSO in a year…and adequate treatment under the projected 2020 population and land use conditions.” MMSD acknowledges that improvements providing enhanced protection from SSOs will “result in little or no water quality improvement” for the region, but it does anticipate that local municipalities’ I/I reduction efforts – as well as runoff management initiatives – will benefit water quality.

Some have challenged the LOP goal of the 2020 Facilities Plan, arguing the district’s permit prohibits any SSOs whatsoever. In response, MMSD argues such an approach would offer little water quality improvement and be very expensive, and that the plan was approved by the DNR with this LOP in 2007. The 2020 Facilities Plan includes a “wet weather control plan” and associated capital investments to achieve the five-year LOP. Plan improvements include increasing pumping capacity from the Deep Tunnel to Jones Island, expanding treatment capacity at the South Shore plant, “holding the line” on I/I so that this problem does not become worse during the life of the plan, and financing other projects that “address a variety of wastewater treatment plant and conveyance system issues.” While the 2020 Facilities Plan lays out MMSD’s capital investment goals, the district modified the plan to address the issue of affordability. Its more modest Adaptive Implementation Plan (AIP) follows the 2020 plan’s methodology, but uses lower growth population and land use projections deemed more realistic. As a result, some projects in the 2020 Facilities Plan are delayed and others are eliminated in the AIP. The district has argued this approach “is reasonable because it is based upon proceeding slowly on costly new expenditures to prevent building facilities which may not be needed before 2020.”


MMSD estimates that the adjustments contained in the AIP have reduced the cost of recommendations from $699 million to $319 million. Consequently, the annual property tax increase needed to support these costs in the 10-year plan was lowered from 8% to 4% (other adjustments to planned property tax increases were made later, as explained below). Six-Year Capital Financing Plan The six-year plan is built on a more fully developed estimate of project costs and the financial resources available to support such costs than either the 2020 plan or the AIP. The more precise plan allows MMSD to respond to unanticipated changes, such as a change in regulations, by adjusting financing and project schedules to maintain funding for its programs and priorities. Each year, MMSD commissioners approve a new six-year financing plan as part of the capital budget resolution. Table 15 displays the district’s current six-year capital financing plan. Expenditures under the plan total $1.3 billion, ranging from an annual high of $255 million in 2011 to a low of $173 million in 2016. The structure of this plan partially reflects the fact that debt service to finance previous capital projects will continue to rise during this period. To keep the budget affordable, the district has reduced project expenses, backloading the recommended projects from the 2020 Facilities Plan to the years following the six-year capital financing plan, when debt service funding is anticipated to decline slightly and the district will have greater financial flexibility. Table 15: MMSD six-year capital financing plan, 2011 through 2016 (in thousands)

BUDGETED PROJECTED 6-YR

TOTAL % OF

TOTAL 2011 2012 2013 2014 2015 2016 Beginning balance $48,394 $65,356 $51,985 $48,818 $40,134 $32,552 Total revenue $255,235 $223,472 $222,099 $199,786 $177,998 $173,051 $1,251,642 100.0%

Tax levy $85,674 $90,814 $96,263 $102,039 $108,161 $114,651 $597,602 48.4% Non-member billings $25,145 $26,310 $28,019 $31,009 $33,809 $36,154 $180,446 14.6%

Federal and State Aid $5,642 $1,603 $1,643 $1,629 $1,726 $1,170 $13,413 1.1%

Loans $108,073 $72,218 $47,438 $12,890 $8,114 $2,271 $251,004 20.3% Interest & Other $1,663 $3,429 $3,172 $3,011 $2,768 $2,672 $16,715 1.4% District Bonds $46,000 $15,726 $42,397 $40,524 $15,836 $14,668 $175,151 14.2% Use of Additional Funds ($16,962) $13,371 $3,167 $8,684 $7,583 $1,465 $17,307 1.4%

Total Capital Expenditures* $255,235 $223,471 $222,099 $199,787 $177,998 $173,051 $1,251,642 100.0%

Net Debt Service $99,653 $92,887 $115,602 $124,233 $129,407 $135,055 $696,837 55.7% Treatment Plants $65,707 $66,361 $42,630 $20,727 $9,947 $3,688 $209,060 16.7% Sewers $44,234 $19,824 $12,112 $11,232 $6,127 $6,930 $100,459 8.0% Flood Control Projects $15,301 $6,765 $21,364 $12,990 $5,172 $925 $62,518 5.0%

Other $30,341 $37,635 $30,389 $30,605 $27,345 $26,453 $182,767 14.6% * Total may differ slightly from the sum of categorical expenditures Source: MMSD, 2011 annual budget


Capacity, Management, Operation, and Maintenance Program (CMOM) An effective long-range financing plan must provide for ongoing and short-term capital maintenance needs, since large projects can be thrown off schedule by the costs required to fund unexpected sewer problems and plant breakdowns. Responsibility for asset upkeep falls to the district’s CMOM and its complementary Asset Management Program. This coordinated effort analyzes district and Veolia equipment and performance, and identifies needed areas of improvement. The CMOM also periodically reviews the district’s conveyance and flood control assets, and provides ongoing “root cause analysis” that examines unanticipated equipment and service problems. MMSD’s 2035 Vision In December 2010, MMSD announced its 2035 Vision, a document that provides a framework for future planning efforts.9

The statement reads:

MMSD envisions a healthier Milwaukee region and a cleaner Lake Michigan accomplished through its leadership in attaining zero overflows, zero basement backups, and improved storm water management. MMSD will be a model in its management of climate change impacts on wet weather and its focus on energy efficient and sustainable operations.

Achieving this bold and ambitious vision will take several decades and the expenditure of vast sums of public resources. The vision document suggests that the financing of such costs will be a shared responsibility, saying that “MMSD will continue to expand its leadership role in developing regional approaches to protecting and improving water quality.” It also pledges that the district will “work with MMSD’s partners to strive toward zero basement backups” and “work with MMSD partners to achieve, to the extent feasible, zero sanitary sewer overflows and zero combined sewer overflows.” The overriding strategy for achieving this vision is “Integrated Watershed Management,” which is defined as “a healthy balance between two types of infrastructure: grey and green. Grey infrastructure is comprised of pipes and treatment plants that store, convey, or treat water. Green infrastructure uses management approaches and technologies to infiltrate, evaporate, capture, and reuse water to maintain or restore natural hydrology.” 2010, 2011 and 2012 budgets MMSD enacted robust capital budgets the past two years, with expenditures of $250 million anticipated in 2010 and $242 million budgeted in 2011. These budgets support projects that complete the 2002 Stipulation Agreement and begin the 2020 Facilities Plan. Consequently, as demonstrated in Table 16, they show a shift in emphasis from sewer expansion and capacity maximization to treatment facility upgrades and projects aimed at 9 The full 2035 Vision can be accessed at http://v3.mmsd.com/NewsDetails.aspx.

http://v3.mmsd.com/NewsDetails.aspx�


reducing energy costs. In response to economic conditions, MMSD did not increase the tax levy in 2010, even though the six-year capital financial plan previously had called for a 4% levy hike. To compensate for the revenue loss, several projects have been delayed or postponed until after 2020. Table 16: Major capital expenditures by program, 2009 to 2011* (in thousands)

ACTUAL

2009 PROJECTED

2010 BUDGETED

2011 Net Debt Service $77,695 $75,333 $86,196 Treatment Plants $19,178 $43,419 $65,707 Sewers $98,169 $60,681 $44,234 Flood Control Projects $34,974 $48,909 $15,301 Other $13,437 $21,528 $30,341 TOTAL CAPITAL EXPENDITURES $243,452 $249,870 $241,779

*Total expenditures in 2011 differ from the six-year financing plan because of MMSD accounting procedures. Source: MMSD 2011 annual budget The major feature of the 2011 capital budget is a new $156 million Private Property Infiltration and Inflow (I/I) Reduction program, described in detail below. The 2011 budget is supported by $108 million in state loans from the Clean Water Fund and property tax revenues of $111 million. The budget contains a tax levy increase of 3.9%, increasing the tax rate from $1.32 per $1,000 of equalized value in 2010, to $1.44 per $1,000 of equalized value in 2011. The governor’s proposed 2011-2013 state budget includes a number of fiscal changes that would impact MMSD, causing the district to make several adjustments in its capital budget in anticipation of their approval. MMSD believes the budget’s recommendation to limit local government property tax increases to zero (except for new construction) does not apply to the district per se. However, it does apply to member and non-member communities that pay the district’s bills. Consequently, the district has indicated it will only increase the property tax levy in 2012 and 2013 up to an amount equivalent to the percentage growth in net new construction, while it will continue to budget up to annual 4% increases under its long-range capital finance plan from 2014 to 2016. The governor’s budget also increases the rate of interest charged on state loans from 60% to 80% of market rate. Taken together, the property tax limits and state loan recommendations will affect MMSD by reducing the funds available to support district projects. As a result, in March 2011, the district decided to modify its long-term capital finance plan by making a $165 million reduction in sewer, flood control, and facility treatment projects, and by rescheduling and delaying the implementation of other projects to stretch available dollars. As described below, those reductions have negatively affected the district’s new project for reducing I/I on private property.


Private property infiltration and inflow One of MMSD’s most far-reaching and ambitious efforts is a long-term $156 million capital budget program to stem problems caused by private property sewer laterals.10

Private property sewage problems have multiple causes, but two stand out: aging and damaged sewer pipes, which allow “infiltration;” and foundation drains that empty into sanitary sewers (as opposed to stormwater drains), which is deemed “inflow.” The new MMSD program is intended to fund “remedies for I/I in order to reduce the amount of flow that must be stored, conveyed and treated by the District thereby reducing the risk of basement backups.”

As discussed earlier in this report, I/I is a serious problem for the district that lowers its effective storage capacity and contributes to basement backups, CSOs and SSOs. The problem was dramatically illustrated in March 2011, when snow melting into cracked sewers increased by four times the wastewater flowing to the South Shore treatment facility – a plant that is only connected to sanitary sewers – threatening to overwhelm its treatment capacity. This massive influx occurred even though there was no rain or snow falling at the time (though a substantial snow event had occurred weeks earlier). Under MMSD’s new program, the district will allocate funding annually to member and non-member municipalities for eligible activities that reduce I/I and basement backups caused by private laterals. The district is prohibited by state law from directly funding construction, maintenance, and repair costs of municipally-owned sewers. To be eligible, a municipality must submit a plan either for design, planning, and investigative work (for which funding is limited), or for remediation work. The district expects municipalities to give priority to local areas that “do not comply with the district’s rules on Peak Flow Rate Reduction….on areas with basement backup issues, on areas with a history of municipal or district overflow activity, and other areas identified as source of high I/I because of age and type of infrastructure.” The program would last for 10 years, with $9 million approved for the first year in 2011. Funding for later years is somewhat uncertain, however. Under the original plan, the district had budgeted $17 million in 2012 and $15 million in 2013, but a recent revised scenario reduces funding to $5 million in each of those years. Depending upon future financial conditions, district officials estimate that total program expenditures may need to be reduced from the original $156 million to $54 million through 2020, though the full $156 million may be spent beyond that time period. Revenues for this program are generated by the property tax, and each community is eligible to receive project funds up to the amount of its related property taxes. Also, unexpended funds in one year can be carried over to the next year. The district “encourages” but does not require a municipal funding match. Low “I/I municipalities,” i.e. those with primarily post-1970 construction, can use their funding for “alternative 10 Since the district’s private property I/I initiative was not part of the 2020 Facilities Plan but a later addition, the new program has changed AIP from a 10-year to a 13-year planning horizon.


activities designed to reduce flows to the sanitary sewer system, improve sanitary sewer system, improve water quality, and maintain I/I levels into the future.” The district will review requests for alternative projects on a case-by-case basis. No exact estimate has been made of the cost of repairing all private property I/I. Analysis conducted for the 2020 Facilities Plan, however, calculated that the district would need to spend $6-$7 billion to eliminate SSOs and CSOs solely via an I/I reduction strategy. MMSD officials report that for the municipalities just to “stay even” with I/I inflow, they would need to incur costs of $400 million each decade. MMSD officials state that their new program is an attempt to encourage municipalities to reduce private property I/I. It is noteworthy that, until this time, few municipalities in the district have done anything about private property I/I, yet almost all now are cooperating in this effort.11

Still, despite this progress, the district’s program does not appear to be financially sustainable in its current form. Given the magnitude of total I/I reduction costs, a mix of public and private funding sources likely will be required. Yet, the policies put in place to date do not require local property owners to contribute to the costs of repairing their laterals, and municipalities are only encouraged to financially participate. As a result, it is hard to be optimistic about the financial support that will be forthcoming in the future from the district’s private and public partners. MMSD had circulated an early policy draft that set deadlines for the disconnection of foundation drains to sanitary sewers and established financial obligations for private residents with incentives and penalties for non-compliance. Those provisions were removed from the final policy document, however, because of community objections. Another potential sticking point is that private property I/I is not a problem that affects all municipalities equally, yet under the current program all communities are billed equally to resolve it. Since all member and non-member communities would seem to have sewer needs and water quality concerns that can be addressed through the $156 million program, this mismatch between funding source and program needs is perhaps not an issue at this time. In the long run, however, it seems inevitable that communities with serious private I/I problems will have to take on a greater share of the financial responsibility for resolving them.

11 One municipality that has taken action is Fox Point, which has an ordinance that requires homeowners to unhook foundation drains and downspouts to laterals.


Long-term borrowing As a result of debt incurred to finance the MPAP and 2002 Stipulation Agreement, MMSD’s total general obligation debt has grown during the past decade, from $417 million in 2000 to $892 million in 2009. Similarly, debt per capita has grown from $447 to $980 during the same period. As Table 17 indicates, MMSD has the largest amount of outstanding general obligation debt among the region’s major metropolitan governments, which is not surprising given the comparatively large size of its capital budget.12

To prevent an unacceptable rise in debt and debt service payments, borrowing is curtailed substantially under the district’s six-year capital plan, with revenues from loans and bonds falling from $154 million in 2011 to $17 million in 2017. In order to finance the district’s long-term capital priorities, the 2020 Facilities Plan projects a substantial rise in borrowing in the later years of the plan, with bond and loan revenues estimated to climb to $92 million in 2020. Table 17: Outstanding general obligations, 2009 (in thousands) GOVERNMENT AMOUNT MMSD $892,726 Milwaukee County* $868,547 City of Milwaukee** $779,555 MATC $94,630

* Includes Pension Obligation Bonds ** Includes loans and bonds from all government activities including business enterprises Source: 2009 CAFR Despite the district’s level of debt and debt growth, outstanding obligations are deemed to be supportable based on the district’s financial capacity, and its finances receive strong

12 The Milwaukee Public Schools are not included in the table since most borrowing is done through the auspices of the City of Milwaukee. The Milwaukee Schools Comprehensive Annual Financial Report for 2009 lists $12 million in outstanding general obligation debt.

ICMA Fiscal Indicator 6 – Long-term Debt Why it is Important – Credit agencies routinely examine a local government’s debt load in setting a bond rating. Increasing debt is one possible indication of a deteriorating fiscal condition. ICMA Warning Signs – • Increasing direct debt as a percentage of assessed valuation • Direct debt exceeding 2.5% of equalized valuation MMSD Finding – While MMSD’s debt has risen since 2005 and throughout the entire decade, its existing debt represents 1.37% of equalized valuation, considerably below the warning level. MMSD planning and financial management practices protect it from an unexpected surge in future debt, offsetting concerns that might arise from recent debt level increases. Overall, long-term debt management is a positive indicator of the district’s fiscal health. Long-term debt

Year Equalized

Value

Total General

Obligation Debt

% of Equalized

Value

District Debt Per

Capita

2005 $55,434,188,028 $725,020,252 1.31% $790

2006 $62,260,061,536 $741,994,272 1.19% $810

2007 $65,642,217,041 $768,559,326 1.17% $839

2008 $66,735,584,066 $906,720,697 1.36% $988

2009 $65,340,474,863 $892,725,569 1.37% $980 Source: 2009 CAFR


evaluations from credit rating agencies. As shown in ICMA Indicator 6, outstanding debt was 1.4% of equalized property value in 2009. In April 2011, Moody’s Investor Services recalibrated MMSD’s bond rating from Aa1 to Aaa. Fitch’s rating for the district is AAA and Standard and Poor’s AA+. In its credit report, Moody’s indicated that its high rating is based on “the district’s sound financial operations that benefit from substantial financial flexibility and healthy liquidity levels,” as well as its diversified tax base. Standard and Poor’s rating report echoes that praise, but also notes that “offsetting these factors are the district’s adequate but below-average income level and large capital program with substantial additional debt needs.” Maintenance of capital assets Proper maintenance of capital assets is an ongoing responsibility that requires continued vigilance. Failure to adequately support maintenance activities not only reduces the value and usefulness of assets, but also can lead to costly repair emergencies and higher long-term capital costs. Nevertheless, as ICMA has observed, many governments have not been willing to fully fund such costs and have discovered that underfunding capital assets is “a relatively painless way to temporarily reduce expenditures and ease financial strain.” MMSD has an extensive and sophisticated capital maintenance and repair program in both its operating and capital budgets that strengthens its fiscal condition. The capital program is rooted in a highly developed capital maintenance planning process that was initiated in 2002 as part of the Stipulation Agreement. As described in IMCA Indicator 7, MMSD's operating budget provides funding for repair and maintenance needs. Although MMSD treatment and sewer operations -- as well as Milorganite® production -- are managed by Veolia, MMSD has in place a variety

ICMA Fiscal Indicator 7 – Capital Improvements and Repair and Maintenance Why it is important – Capital-related expenditures provide an indication of whether capital needs are being addressed. ICMA Warning Sign – A three-year or more decline in capital maintenance and improvement expenditures. MMSD Finding – MMSD has an extensive capital repair and maintenance program that is rooted in a sophisticated planning system that considers both operating and capital costs. Repair and maintenance for sewage and treatment operations are the direct responsibility of Veolia and are specified under the 10-year contractual agreement, which is closely monitored by MMSD. Costs related to repair and maintenance for operations under MMSD’s direct control are identified in the table below. They show the amount spent by MMSD on such expenditures changed little during this period. Overall, MMSD’s repair and maintenance efforts are a positive indicator of fiscal health.

Source: MMSD financial records

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2005 2006 2007 2008 2009

Capital Maintenance Expenditures (in millions)


of oversight agreements and compliance processes to ensure that its operating equipment is well-maintained. For example, MMSD expects its private contractor to maintain assets in the same condition during the life of the contract (except for wear and tear), and the contract includes bonuses and penalties to ensure compliance. Retirement benefits MMSD’s fringe benefit costs include other post-employment benefits (OPEB) for retirees, which consist of both health care and life insurance benefits. Retiree health care costs are by far the largest piece and account for nearly 60% of the district’s total health care costs annually. This rather large proportion reflects the fact that MMSD lost a significant number of employees after privatization, but continues to pay health care costs for many of those employees who have since retired. A small portion of these OPEB costs, (roughly $400,000 in 2009 but anticipated to increase annually) is supported by payments from UWS and Veolia for retirees that spent time with either company. MMSD pays between 30% and 50% of health care premiums for management and non-represented retirees under the age of 65 who accumulated at least 15 years of service, with coverage ending at age 65. Represented employees who retire at age 55 with 20 years of service receive health care benefits at the same monthly contribution as active employees until age 65. Until recently, represented employees also received a Medicare supplement at age 65, which was fully paid by the district. However, represented employees hired after March 8, 2010 no longer receive this district-funded supplement. MMSD funds its OPEB obligation on a pay-as-you-go basis, meaning that the district only pays the costs incurred in a given year, and does not pay down future liabilities. The district’s total unfunded OPEB liability stood at $142.7 million at the end of 2009. This is a much smaller liability than other large government entities, yet it represents nearly six times the district’s annual payroll as a result of its loss of half its workforce to privatization. If the district pre-funded this OPEB liability, it would need to spend $10 million annually, or more than twice the amount currently expended. Consequently, this is a long-term budget item that merits attention. MMSD employees receive pension benefits through the City of Milwaukee’s Employee Retirement System (ERS), a defined benefit pension system. The city’s pension system has been deemed one of the most well-funded pension systems in the country, ranking second best in 2009 when compared to 89 public pension systems by R.V. Kuhns and Associates, a national investment consultant. Prior to the severe stock market downturn in 2008, MMSD typically did not need to make a contribution to the ERS beyond the 5.5% employee contribution it pays on behalf of all employees, as the system has traditionally maintained an overfunded status (the ERS had a 131% funding status in 2008). However, the dramatic 2008 stock market decline created an unfunded liability in the ERS, which required MMSD to contribute an additional $1.1 million in 2009.


An employer contribution was not required in 2010, but MMSD anticipates a contribution of $1.6 million in 2011. Given that City of Milwaukee budget officials anticipate that they will need to make a significant employer contribution beginning in 2013, this also is a long-term budget item that bears watching. It is possible, however, depending on the outcome of the budget repair bill legislation in Madison, that MMSD also could benefit in the future from a requirement that its workers pay for the employee share of the contribution. The future of privatization As discussed throughout this report, MMSD’s experience with privatization appears to be largely successful from both a financial and operational perspective. It should be noted, however, that the substantial savings associated with private operations were realized with the first contract. Consequently, as MMSD grapples with risks associated with diminished water usage and the realities of a potential small bidding pool, it must recognize that its future ability to wring financial savings out of its operations contract may be limited. While the existing Veolia contract does not expire until 2018, it is possible that MMSD officials may soon begin contemplating a return to public operations. If the budget repair bill ultimately becomes law, then MMSD, like most other public agencies in Wisconsin, would be freed from the requirement to collectively bargain with employee unions on any employment matter other than wages. Even wage negotiations would be limited, with annual increases capped at the growth in the Consumer Price Index. While the district’s previous comparisons of private contractor bids with a public sector option found cost savings from privatization, the new public sector labor environment may alter that determination. For example, the budget repair bill provision that would require MMSD employees to pay the 5.5% employee pension contribution would save approximately $1 million annually. Changes such as this may cause the savings in prior estimates to disappear. The following describes some of the additional factors – both positive and negative – that may come into play when the issue is next deliberated by MMSD. • Transparency – Because of practices designed to protect proprietary information, it

is typical for private sector operators to restrict the release of financial and operational information, even to their customer. Consequently, other than energy costs, MMSD has little knowledge of the precise breakdown of expenditures within its operations contract or of trends observed in various financial accounts (i.e. salaries, fringe benefits, chemicals, etc.). MMSD does receive those costs as translated into operational processes, however, and the contracts have required vendors to provide an annual audit to MMSD that provides broad actual cost information as a percentage of original budgets.


• Competition – Because there are few vendors in the wastewater arena that operate in the region, MMSD has attracted a limited number of contract bids, which may have impacted the quality of those bids. There are outside factors that mitigate this possibility, however, including access to audits, which allow for retrospective evaluation of financial terms. Also, for a vendor like Veolia, whose sister company, Veolia Environmental Services, has partnered with MMSD on building the landfill gas pipeline, there may be more of an incentive to maintain fair pricing and good rapport with MMSD in order to keep and grow business.

• Institutional knowledge – A large privatization initiative has the potential to drain an institution of valuable internal knowledge. MMSD has attempted to combat this threat through a variety of mechanisms, including constant contact and discussion with Veolia. The district’s four-person Contract Compliance Division, for example, engages in continuous regulatory reporting, inspections and quality control, and MMSD and Veolia work closely on asset management. In addition, if MMSD were to take back operations, it is probable that a majority of the Veolia employees would work for MMSD, bringing with them the knowledge and training acquired under Veolia and helping bridge any gap in knowledge.

• Risk – By entering into a contract with a private vendor, MMSD has largely sheltered

itself from the risk of large, unanticipated operational expenditures during the length of the contract. Its willingness to again assume such risk would need to be weighed against other potential benefits of public sector operations.

• Asset management/procurement – According to MMSD officials, before

privatization, the district had a tendency to over-maintain old equipment as a means of putting off repair or replacement. This is a common problem in the public sector, where limited resources lead to short-term fixes rather than long-term solutions. Moreover, contracts with private vendors have monetary penalties if maintenance or replacement is deferred. Such penalties are impossible to implement under public operations.

• Expertise – Large, global corporations like Veolia have the advantage of employing

an array of employees with expertise in focused topic areas, any one of whom can be consulted or flown to Milwaukee if a need or crisis arises. Of course, if MMSD did return to public sector operations, it would not be precluded from contracting with a company like Veolia for periodic consulting.


CASH SOLVENCY Cash solvency refers to the ability of a government to pay its bills. Two ICMA measures for cash solvency pertain to liquidity and cash on hand. Liquidity examines the flow of money in and out of the governmental entity. If liquid assets are available to meet near-term financial obligations, a government has positive liquidity. Fund balance refers to cash on hand, which provides an indication of a government’s ability to maintain short-term solvency, as well as to meet unanticipated emergencies. As shown in ICMA Indicator 8, liquidity trends for the 2005 to 2009 period displayed little substantive change for MMSD. Cash and short-term investments grew by about 28%, from $21 million in 2005 to $27 million in 2009. Current liabilities increased at a somewhat higher rate of 43%, from $12 million in 2005 to $17 million in 2009, but those changes were not sufficient to impact the liquidity ratio, which remained essentially the same. MMSD has two administrative policies that pertain to working capital on hand. The first policy – for the operating budget – calls for the district to have a working capital balance of between 60 to 90 days of needed expenditures. The second policy – for the capital budget – establishes a working capital balance of between 90 and 150 days of expenditure, with a target of at least 90 days. The operations policy is strengthened by the establishment and funding of three reserve accounts, described earlier in this report, for equipment replacement, user charges, and surplus funds. Rating agencies have commented favorably upon MMSD’s cash solvency. Standard and Poor’s, for instance, identified the district’s “strong liquidity” as one of its fiscal strengths and noted that at the end of 2009, MMSD had a “strong 105 days cash on hand.” Likewise, Moody’s cited the district’s liquidity as one of the positive factors contributing to its high credit rating, and concluded that “we believe current levels represent ample liquidity levels for a system with significant revenue raising options.”

ICMA Fiscal Indicator 8 – Liquidity Why it is Important – A key measure of short-term fiscal condition is liquidity. ICMA defines liquidity as the ratio of cash and short-term investments to current liabilities. Assessing liquidity is complicated by the flow of payments in and out an institution’s coffers in the course of the year. For this reason, evaluation of liquidity should take place at the same point in time, as we do here. ICMA Warning Sign – A decreasing amount of cash and short-term investment as a percentage of current liabilities; and three or more years of a ratio of greater than 1 to 1. MMSD Finding – MMSD’s liquidity ratio has remained about the same from 2005 to 2009. This ratio is a positive indicator of fiscal health. Liquidity Ratio

YEAR RATIO

2005 1 to 0.6

2006 1 to 0.4

2007 1 to 0.5

2008 1 to 0.5

2009 1 to 0.6 Source: MMSD CAFRs


MMSD: A NATIONAL FISCAL PROFILE Wastewater management facilities constitute an enormous fiscal enterprise in the United States. The amount invested in sewers and treatment has totaled hundreds of billions of dollars, and hundreds of billions more likely will be invested in the coming decades. Undoubtedly, this spending has had a positive impact on U.S. water quality. Yet, substantial obstacles and challenges remain to reducing water pollution, and many waterways do not yet meet the goals of being fishable and swimmable, as established by the CWA nearly 40 years ago.

According to a 2007 study conducted by the Mayor’s Water Council of the United States Conference of Mayors, local and state government spending constituted about 95% of all spending on sewers and sewer services in 2005. The Mayor’s Council found that in that year, local governments spent $35 billion and state governments about $1 billon, which represented a 75% increase over the combined $21 billion spent in 1991. Total local and state government spending on sewers from 1991 to 2005 was $386 billion. The federal government originally provided substantial grant funding for sewer construction to help implement the Clean Water Act. In 1990, federal grants were eliminated, however, and a federal loan fund program was established in its stead.

SUMMARY Published and unpublished information from the roughly 100 publicly-owned wastewater treatment facilities responding to the 2008 Financial Survey of the National Association of Clean Water Agencies (NACWA) offer context for MMSD’s fiscal profile as compared to other members of the clean water industry. The information shows that MMSD, a larger than average wastewater treatment district when assessed by population and sewer infrastructure, has the fourth highest net capital assets among surveyed members and the highest net capital assets per capita, with the exception of two small districts. MMSD has been able to finance such capital expenditures and sewer services because of its greater long-term debt, access to subsidized state loans, federal construction grants, and higher rate charges. The average Milwaukee household paid $338 in sewer charges in 2007, the 26th highest charge among the 79 NACWA respondents. This charge total incorporates both district and City of Milwaukee sewer charges in accordance with NACWA methodology. MMSD’s investment in sewer construction and services has enabled it to have greater treatment capacity than most other districts, which affords it better protection against combined sewer overflows. MMSD also has better effluent


Despite this level of spending, sewage districts continue to have major financial and program needs. A 2009 study by the American Society of Civil Engineers found that the nation’s wastewater infrastructure was in very poor condition, awarding it a grade of D-. The study also cited a 2002 “EPA Gap Analysis” that estimated the need for $390 billion in expenditures on wastewater infrastructure systems over the following two decades.

To determine how MMSD fits into this picture, and how its sewer system and finances compare to other sewage districts, we examined information from various sources. A prominent source was the National Association of Clean Water Agencies (NACWA). Founded in 1970, NACWA is a national association of publicly-owned clean water agencies that has been reporting on industry management and financial trends since 1981. NACWA’s 2008 Financial Survey is a compilation of data from a voluntary survey of its membership. Responses were received from 101 agencies serving 67 million people, including some of the largest sewage districts in the nation (e.g. New York City, Chicago, and Los Angeles), as well as districts from medium- and small-sized cities. NACWA conducts the survey because “the data are useful for comparative purposes and are indicative of trends.” However, because of various factors, including the diversity of association membership, NACWA warns the data should not be used as a definitive study for some analytical and management purposes, such as rate setting. Presented below are a series of tables comparing MMSD with other NACWA survey respondents in regard to assets, sewer rates, debt, treatment capacity, water quality and expenditures.13

The data are for the 2007 fiscal year. Taken together, the tables show MMSD has invested more heavily in infrastructure than most other districts, and has had larger revenue streams to pay for such costs. The data also show that MMSD has benefited from this financial investment, as its sewage and treatment capacity offers greater protection from sewage overflows, and provides higher-quality effluent discharges.

In financial terms, perhaps the most striking finding is that MMSD ranks fourth in net capital assets among the surveyed group, as shown in Table 18. The three districts that rank higher – New York, Chicago, and Detroit – serve considerably more people and have a more extensive sewer infrastructure. Going beyond these three, the data indicate that only 17 districts had net capital assets that exceeded $1 billion. In a related statistic, net capital assets per capita, MMSD ranks third at $2,970. However, the two districts that rank higher are quite small, and only five districts besides MMSD had net capital assets in excess of $2,000 per capita. In sum, the data indicate that MMSD is particularly well-equipped in capital assets compared to other wastewater treatment districts nationwide.

13 It is important to note that MMSD is a larger than average district among those who responded to the NACWA survey. MMSD ranks 21st out of 98 districts in population, 19th out of 92 that reported in square miles, and 26th out of 82 that reported in sewer length.


Table 18: MMSD's national fiscal profile: net capital assets (in thousands)

NET CAPITAL

ASSETS NET CAPITAL ASSETS

PER CAPITA AMOUNT RANK* AMOUNT RANK*

MMSD $3,152,683 4 of 77 $2,970 3 OF 75 All NACWA respondents

Highest $11,245,774 $4,080 Lowest $20,298 $220 Average $784,509 $1,110 Median $341,749 $950

* Highest to lowest Source: 2008 NACWA Financial Survey Table 19 indicates that MMSD has a greater than average income stream and employs higher user rates. In order to facilitate comparative study, NACWA groups together district and municipal sewer rate charges and presents them for an average household in the principal city in each district. This methodology is followed because of the wide variation among districts’ financial and billing systems. One disadvantage of this approach, however, is that it obscures a district-by-district comparison, as district charges are blended with municipal charges. As previously noted, the MMSD figure reflects charges for the average household in the City of Milwaukee. Household charges for other municipalities in the MMSD district differ from this amount. Table 19: MMSD's national fiscal profile: sewer rates

ANNUAL RATE RANK* MMSD** $337.85 26 of 79 All NACWA respondents

Highest $693.55 Lowest $80.40 Average $300.87 Median $278.28

* Highest to lowest ** Includes City of Milwaukee sewer charges Source: 2008 NACWA Financial Survey; City of Milwaukee financial records Loans and general obligation bonds are vital resources used by virtually all sewage districts. Table 20 shows that MMSD ranks higher than average when compared to other districts in regard to total outstanding long-term debt, but perhaps not as high as might be expected given its level of capital investment. The district’s cash financing policy likely contributes to this finding. Also, interest-subsidized, state revolving loans represented 67% of all MMSD debt in 2007, but only 18% of the debt of all reporting districts. Many districts finance capital costs through revenue bonds that have higher interest rates. NACWA reports rising debt and debt service payments are a national trend which, as discussed previously, also holds for MMSD.


Table 20: MMSD's national fiscal profile: long-term debt

LONG-TERM DEBT

(in thousands) LONG-TERM DEBT

PER CAPITA AMOUNT RANK* AMOUNT** RANK*

MMSD $768,559 16 of 89 $725 26 of 85 All NACWA respondents

Highest $10,310,471 $2,939 Lowest $0 $0 Average $460,272 $547 Median $111,462 $396

* Highest to lowest **The per capita debt amount for MMSD cited in this table differs from that cited in Indicator #6 because of a different methodology used by NACWA Source: 2008 NACWA Financial Survey NACWA data do not provide a clear answer to the question of how much MMSD benefits from its high level of capital investment, but the data indicate that MMSD and its residents do enjoy certain advantages. As shown in Table 21, the capacity of the district’s two treatment plants (600 million gallons per day) ranks near the top of the NACWA survey group (4th of 98 reporting). Only New York, Chicago, and Detroit have greater treatment capacity, and only 13 districts have a capacity that exceeds 300 million gallons per day. Another favorable indicator is that MMSD’s designed daily treatment capacity is much greater than its average daily flow. In other words, MMSD uses less of its treatment capacity, and unused capacity can be called upon in response to wet weather flows. As Table 21 shows, only four other sewage districts use less of their treatment capacity than MMSD. Of course, MMSD needs such capacity because of its combined sewers and leaky municipal sewers. Yet, the NACWA data indicate that other older cities with combined sewers use more of their treatment capacity than does MMSD. An examination of cities somewhat similar in size to Milwaukee that also have combined sewers finds that no city of this group (which includes, for instance, Detroit, Las Vegas, Seattle, Cincinnati and Kansas City) approaches Milwaukee’s low usage rate. Table 21: MMSD's national fiscal profile: design and daily used treatment capacity

DESIGN

CAPACITY AVERAGE DAILY

FLOW

DAILY FLOW/DESIGN

CAPACITY AMOUNT* RANK** AMOUNT* RANK** PERCENT RANK** MMSD 600 4 of 98 185 10 of 97 31% 93 of 97 All NACWA respondents

Highest 2,506 1,344 384% Lowest 6 3 11% Average 157 101 70% Median 57 37 69%

* In million gallons daily ** Highest to lowest Source: 2008 NACWA Financial Survey


These NACWA statistics do not provide insight into storage capacity, nor does the NACWA database include information on the number and volume of CSOs. A number of U.S. cities have storage tunnels, and an inventory of tunnels and tunnel projects conducted in Atlanta identified more than 47 such examples in the U.S. and around the world. Those ranged in size from 7 feet to 33 feet in diameter and from 2 miles to 33 miles in length. Milwaukee’s Deep Tunnel is an average of about 20 feet wide and is 28 miles long. Milwaukee was fortunate in that tunnel construction was undertaken at a time when the district could receive substantial outside grant assistance. Today’s tunnel projects are financed through long-term borrowing. The available information on treatment and storage capacity supports the American Society of Civil Engineer’s finding that sewage overflows are a major source of pollution in cities with combined sewers. Somewhat dated information, collected by MMSD in 2002, found that Portland, Cleveland, Pittsburgh, St. Louis, Detroit, Boston, and Indianapolis all had had more than 30 annual average overflows, and that a number of these cities, pushed by the EPA, were undertaking costly construction projects to improve water quality. The NACWA data indicate that MMSD’s treated effluent (shown in the “out” columns in Table 22) is of better quality than most districts. MMSD readings for phosphorous place the district in the top quarter, while readings for suspended solids, bio-chemical oxygen demand (BOD), and ammonia are not as good, but still show MMSD is equal to or better than the average or median sewage district surveyed by NACWA. Table 22: MMSD's national fiscal profile: select effluent characteristics

BIO-CHEMICAL

OXYGEN DEMAND SUSPENDED

SOLIDS AMMONIA PHOSPHOROUS IN OUT IN OUT IN OUT IN OUT MMSD

Reading 213 7 223 7 14 0.5 4 0.45 Rank* 33/60 22/54 52/94 48/95 10/66 32/81 14/51 15/60

All NACWA Respondents

Highest 557 14 516 103 300 32 8 6 Lowest 95 0 93 0.3 8 0.03 0 1 Average 219 15 230 10 25 6 7 1.6 Median 206 8 221 7 21 1 6 1.3

* Rank and number reporting, best to worst effluent quality Source: 2008 NACWA Financial Survey Table 23 shows that MMSD’s 2007 expenditure amount of $64.5 million on overall operations and maintenance placed it in the top quarter of all NACWA respondents. On a per capita basis, however, MMSD appears to have a more cost-effective operation, spending at a lower per capita level than almost 75% of respondents. The same holds true when total plant flow is considered, as MMSD spends just over half the average amount spent by survey respondents on each gallon that flows through its system. The fact that MMSD stretches these operating and maintenance expenditures beyond treatment, and toward several other endeavors not typically taken on by wastewater management facilities, suggests that MMSD has found ways to do more with less.


Table 23: MMSD's national fiscal profile: operation & maintenance expenditures

OPERATION & MAINTENANCE EXPENDITURES

O&M EXPENDITURES

PER CAPITA

O&M EXPENDITURES

PER MG AMOUNT RANK AMOUNT RANK AMOUNT RANK MMSD $64,478,000 19 of 92 $61 65 of 89 $971 67 of 82 All NACWA Respondents

Highest $432,800,000 $226 $6,738 Lowest $1,249,230 $25 $594 Average $47,503,203 $82 $1,786 Median $23,224,879 $79 $1,540

* Highest to lowest Source: 2008 NACWA Financial Survey Privatization seems to be the major force behind MMSD’s cost minimization. As shown in Table 24, MMSD is the most privatized agency among respondents, with 57% of its operating and maintenance expenditures dedicated to private contract expenditures. The district spent $37 million on private services in 2007, the sixth highest among all survey respondents, and the fourth highest on a per capita basis. Table 24: MMSD’s national fiscal profile: private contract expenditures

PRIVATE SERVICE

EXPENDITURES

PRIVATE SERVICE EXPENDITURES

PER CAPITA

PRIVATE SERVICE EXPENDITURES AS

% OF TOTAL EXPENDITURES

AMOUNT RANK AMOUNT RANK AMOUNT RANK MMSD $37,006,000 6 of 71 $34.93 4 of 68 57% 1 of 69 All NACWA Respondents

Highest $67,644,000 $44.71 57% Lowest $23,665 $2.49 3% Average $8,598,240 $12.92 16% Median $3,410,512 $9.05 13%

* Highest to lowest Source: 2008 NACWA Financial Survey The above data, taken in total, indicate that MMSD differs from the NACWA surveyed group in many key respects. The sad state of the nation’s sewer districts described by the American Society of Civil Engineers and others does not appear to apply to Milwaukee. Indeed, the evidence suggests that MMSD’s claim that it is a national leader among wastewater facilities has considerable factual basis.


CONCLUSION ICMA urges local government entities to assess their fiscal condition by focusing on four categories of fiscal solvency. Our research and analysis finds that when measured against those four categories, MMSD is in sound fiscal condition: • Cash solvency – The district’s dedicated, well-funded reserve accounts, policies that

ensure adequate levels of cash on hand, and favorable liquidity ratio are indicators of a strong cash position.

• Budgetary solvency – MMSD’s move to a long-term private management contract for

sewer and treatment operations – as well as its secure revenue base predicated on user charges – has provided operating budget stability. MMSD contrasts with many other local and state governments, whose rising benefit costs have led to structural deficits that threaten budgetary solvency.

• Service solvency – MMSD has upgraded services by improving water quality and

initiating new programs, including flood control, reduction of I/I on private property, and the promotion of green infrastructure. These and other service improvements have occurred without compromising fiscal solvencies.

• Long-term solvency – Long-term finances are well-managed and contained through

sophisticated planning programs that determine the scope, timing, and funding of major capital projects, as well as the level of repair and maintenance of extensive capital assets. After decades of high capital expenditures, the number of capital projects will slow in the coming decade, in part to stabilize a rise in debt service expenditures. MMSD enjoys strong bond ratings even though long-term general obligations doubled over the past decade. A looming issue, however, is the need to increase property taxes to support the six-year capital financing plan. MMSD’s property tax levy is projected to increase by up to 4% annually from 2014 to 2016 – not an exorbitantly high annual increase by historical standards, but one that may significantly exceed state-imposed caps for other local governments.

While MMSD’s finances are healthy, a long-term perspective suggests the district is not yet out of the fiscal woods. The types of enormous capital investments that distinguish MMSD from other local governments and wastewater treatment facilities may need to continue because fundamental water pollution problems remain. While CSOs have been reduced in number and severity with the construction of the Deep Tunnel, MMSD and local municipalities have just begun to grapple with other major issues, such as reducing polluted stormwater runoff and I/I from laterals on private property. These water pollution problems are dynamic in nature, as are their costs, a fact that is far from reassuring. Each year the problem of aging sewers gets worse. Moreover, sewage flows, SSOs and CSOs are weather-dependent, and some climatologists predict the intense rainstorms of recent years may become more common. If the CSOs experienced


by MMSD continue at recent rates or get worse, pressures on the district from both regulators and the public are likely to rise accordingly. The financial cost to repair and replace district and municipal sewers is immense, amounting to many billions of dollars. Although the public is unlikely to be presented with a bill for such costs in the immediate future, the policies, principles and goals that will determine the size of future district efforts are now being established through the district’s 2035 Vision and its program for I/I reduction on private property. It is important to note that MMSD must grapple both with the total cost of its future capital endeavors, and with the difficult issue of distributing those costs. Both issues will be impacted by how aggressive the agency chooses to be in implementing both infrastructure repairs and watershed planning strategies. With regard to I/I, MMSD should be commended for starting down a path that few wastewater districts have yet to travel. Yet, it is doing so by making the matter of private property laterals a public expense without any assurance that private households will contribute to the effort, and it gives complete flexibility to local municipalities to attend to such details. Moreover, it is questionable whether the funding mechanism the district is using will be sustainable, given that the problem of I/I is centered in the district’s older communities, while the financial resources allocated to this program are drawn and returned equally from all communities based on equalized property valuation. Fortunately, several years remain to work on these issues before the district’s new long-term planning process begins. As such matters are deliberated, MMSD should broadly involve members of the metropolitan community. MMSD’s costs are too large to be simply a sewer issue, and they have fiscal implications for other local governments as well. In particular, an important consideration in determining whether to continue an aggressive capital spending program geared toward improving water quality is how that might impact the capacity of other governments to invest in transportation, education, parks or other needs. In other words, the question of where MMSD’s capital priorities fall on the spectrum of the community’s larger investment needs should be debated given the limited capacity of property taxpayers to fully fund those needs. Finally, in reflecting on MMSD’s relatively sound fiscal condition and management, it is impossible to ignore its long-term contract for operations, which presents a different model for contracting out services than most governments employ. It is not clear whether the MMSD model would work for any other local government. Given the potential fiscal benefits, however, the matter is worth consideration. Commonly, contracting out services with a private firm takes place for specific functions or activities, such as janitorial or security services, and savings occur because of cheaper labor costs resulting from lower pay and benefits for private workers. In this case,


however, MMSD has contracted out the core of its operations, and savings occur largely because of the contractor’s expertise and streamlined operations. It is clear that Milwaukee faces big decisions on the future of its sewer system and water quality, and it should address them with an understanding of how its district stands in relation to other wastewater treatment utilities, and what it has achieved. The information collected for this report shows that more has been invested in MMSD’s assets than most other sewer systems in the nation, a finding that may not be popular with some residents and policymakers, and that may cause some to question the non-elected status of its governing board. At the same time, however, the information shows that MMSD compares quite well with other districts in regard to the scope of its programs and services, treatment capacity, effluent quality, and efficiency. Given the district’s capabilities, it is not surprising that MMSD has put forward an ambitious vision for the region’s future. Ultimately, however, the cost of achieving that vision may test the ability of the community’s leadership to reach consensus on the level of water quality citizens desire and can afford.

milwaukee metropolitan sewerage district’s fiscal condition · 2019-06-05 · mmsd’s fiscal...

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