Sewerage & Water Board of New Orleans
FY 2000
Budget Message

As the Sewerage and Water Board of New Orleans enters the next millennium and its second century of operation it faces new and unprecedented challenges. Principal among these challenges is the daunting task of rehabilitating our aging infrastructure. Our Carrollton Water Plant and many of our drainage stations were built almost a century ago. Likewise, much of our collection and distribution system is approaching the 100-year mark. Our "museum quality" electric power system – a tribute to sterling maintenance by our very talented technicians – is one of our most critical and challenging systems.

To address these challenges, the Board must provide adequate funding to achieve the rehabilitation program that has been outlined in previous years. This task must be executed in a regulatory environment that becomes more constraining each year as our customers and regulators demand a cleaner and safer environment. The Board has met the regulatory challenges to date – meeting or exceeding all EPA and DEQ requirements. To continue to be successful, the Board must seek and achieve higher levels of efficiency and quality in order to be competitive.

Achieving this in the timeframe demanded by our customers, regulators and competitors requires drastic change, innovation and improvements throughout our organization. Many changes have already been made by the Board and many are in process. The drive to control and reduce cost has been successful. Over the past two years, the Board’s staffing level has been reduced from 1650 to 1414, a reduction of almost 250 positions. This effort has reduced costs by $ 4,250,000 annually and allowed the Board to meet our customers’ rising demands for service and expansion and rehabilitation of our systems without additional rates.

More cost savings are possible and these are being pursued but even the most optimistic projection of savings cannot offset the growing demand for revenue to fund our capital rehabilitation program. The absence of rate relief over the past 14 years has taken its toll on our systems – especially the sewer system. During the past fourteen years, the cost of living, as measured by the CPI, has increased about 50%. Our cost for services, supplies and materials has increased by a like amount during that period but the price for our services has not changed by a single percentage point since 1990 for water and since 1986 for sewer. We have absorbed the 50% increase in the cost of our goods and services by improving our efficiency and by delaying many capital programs.

Some additional operations efficiencies are possible but we cannot generate the necessary funds for our massive capital rehabilitation programs only through cost control. Additional revenues are needed NOW for the sewerage system. The timing of increased net revenues for the water and drainage systems are not as critical. We have stratagies available in the drainage and water systems that will forestall the need for rate relief and additional fees during the upcoming year.

Revenue Projection and Budget Overview:

The revenue projections and budgets presented herein were developed by the Sewerage and Water Board staff in conjunction with the advice and recommendations of the Board of Directors. During 2000 we must establish a goal of increasing the net operating revenue of the three utilities. Net operating revenue is the amount remaining for debt service and capital construction after deducting operating expenses, including depreciation. Six years ago our net operating revenue was $18,255,250. It has decreased year by year and for year 2000 it is projected at $4,312,376. This trend reflects the dilemma the Sewerage and Water Board faces as its customer base remains static, while its facilities are expanded and upgraded driving up its cost of operations.

A review of the 2000-2004 income projections is such that the capital programs needed to upgrade the Board’s three utilities cannot be funded out of current revenue. New revenue sources are needed to fund our major capital programs. Fortunately, the Board has identified and secured major funding for portions of its sewer and drainage capital programs through the U.S. Environmental Protection Agency and the U.S. Army Corps of Engineers. However, matching funds are needed to utilize these funding sources. Our financial forecasts in the Sewerage Department indicate that the Board cannot meet the matching fund requirements of the EPA without additional revenue. Additional revenue is also needed in the Water Department to fund necessary capital programs. More than 76% of the financing for the 2000 Drainage Capital Program is budgeted from other government agencies including the U.S. Army Corps of Engineers, the State of Louisiana and Jefferson Parish.

We will continue our tight budgetary controls in 2000 to assure that sufficient income is generated to operate our systems. The recommended 2000 operating budget is $99,300,624 and the recommended 2000 capital budget is $198,196,000.

The strategic planning process focused on departmental strengths and weaknesses, external threats and opportunities and critical planning assumptions based on internal and external trends, led to the development of performance objectives.

This process focused on four Key Result Areas of importance to the Board: Customer Satisfaction, Employee Satisfaction, Cost Effectiveness and Training and Development. Accordingly, we developed our major initiatives for 2000:

All revenues are based on current rate schedules and millage rates. Product consumption and services are forecasted based on our analysis of trends projected by recognized business and university publications. Details of revenue assumptions and projections by system follow.

In 1984 the Board, the City Council and the Board of Liquidation approved a five-year plan for annual water rate increases. Increases were implemented in January, 1985, 1986 and 1987. In December 1987 the Board voted to postpone the increase scheduled in January 1988. That increase was implemented in April 1990. The 12% water rate increase originally scheduled for January, 1989 has not been implemented. Cost control measures have reduced expenditures to conform to available revenues and Capital Projects have been postponed due to delays by the Environmental Protection Agency in issuing regulations. Additional revenues are expected but not yet budgeted resulting from the water leak detection and repair program now underway. As more data is developed a net revenue estimate will be presented.

Water consumption has been stable for the past several years and should continue to be stable. Revenues are projected to be adequate for operating and maintenance expenses and debt service needs in 2000. The Capital Budget for 2000 has been balanced by postponing projects.

The Board is experiencing a severe shortage of funds for operations and replacements in the Sewerage Department. Our existing revenue sources are not adequate to finance all of the work required by the EPA Consent Decree. The rate increase is absolutely essential and it is needed NOW. The last sewerage service rate increase was implemented on January 1, 1986. Sewerage revenues are stable but are not adequate to finance projected needs. The 1998 and 1999 Capital Budgets were balanced with bond proceeds. Our existing revenue is not sufficient to allow the sale of additional bonds. Without additional revenues, the cumulative projected shortages in the sewerage Department Capital Program total $252,963,000 over the next five years. The recommended Capital Program includes $46,000,000 in Federal Financing. If all of these funds are not received, our projected shortfall will be greater.

The Board has instituted a major multi-year Sewer System Evaluation Study to identify needed repair or replacements of our collection system. These repairs will follow an EPA Enforcement Construction Schedule. Depending on the results of this 10-year study, our replacement and capacity cost could escalate in future years and require additional funding.

A four mil Ad Valorem Tax, dedicated to the construction and extension of the Drainage System, expired in 1991. The revenue shortfall in the Drainage Capital Budget over the next five years, as a result of losing this tax source, is approximately twenty-eight million dollars. Cost control measures have reduced expenditures to conform to available revenues but many projects have been and are being postponed. We have managed to continue our participation in the City’s Rebuild New Orleans program by reaching an agreement under which the Board pays 100% of the cost for water and sewer lines in the repave streets and the City pays 100% of the drainage line costs for lines under 36" in diameter. This change has increased the charges to our water and sewerage utilities. Therefore, we have reallocated to those utilities State Revenue Sharing revenue, and plumbing fees which were previously dedicated to drainage. These funding sources total $1,050,500. Our remaining millages will provide sufficient revenues to pay operation and maintenance expenses and debt service through 2004. Unless the judgement in the Mossy case is reversed or reduced, the Board may be required to pay $6 million that we have not budgeted.

The outlook for the five-year period depends on our ability to secure an additional revenue source. Our capital needs in the Drainage Department total $546,458,000, of which only $379,767,000 is projected to be available, and this includes $297,053,000 from Federal Financing and other participation. The Corps of Engineers may authorize additional Southeast Louisiana (SELA) projects during 2000-2004. The SELA projects are funded 75% Federal, 25% S&WB.

In addition, the Board has received Legislative approval for $6 million of State Capital Outlay Funds, which has not yet been received. Additional funding is also expected from increased property assessments, but the new assessments have not been released to the Board. Unofficial estimates of additional millage are in the 10-15% range. If the Capital Outlay and millage funds are provided, the SELA Program local funding match will be met.

The revenue constraints identified above have driven the budgeting process throughout this year. The only increases authorized in the budget are those which are mandated or committed by existing contracts. 2000 will be a year in which additional operational evaluations will be made to determine if we are continuing to meet our cost effectiveness goals. It will be a year we will refine our revenue forecasts and our capital needs based on new EPA policy and regulations expected from EPA and resolution of current lawsuits.

The Board staff is committed to explore all competitive options to reduce operating expenses as a means of increasing net revenue to fund capital programs. Recommendations have been presented to the Board earlier this year to enhance revenues through:

This will be a demanding year but a year in which the staff is committed to the citizens of New Orleans to provide safe and affordable drinking water, cost effective and efficient waste water collection and treatment, and a responsive drainage system.

Yours very truly,

Harold J. Gorman, P.E.
Executive Director