The Sewerage and Water Board has served the citizens of New Orleans well for the past one hundred years. Our water quality exceeds all federal standards and consistently wins national awards for taste. Our sewerage treatment facilities have consistently won gold and silver awards for performance standards. Our drainage system is envied and copied worldwide. These services are the most reliable in the City. And because the Board generates its own electric power, we are able to maintain service even during hurricanes when other utilities such as electricity, telephone and cable television are interrupted.

The Sewerage and Water Board (S&WB) today is facing a major financial challenge in both its sewer and water systems. The primary problem is our lack of funds for necessary replacements of water and sewer lines. Many of these lines are more than 75 years old and have reached the end of their useful life. Our shortage of funds means that only a few of these lines can be replaced. Others will be patched. Some will continue to leak.

The basic cause of our financial crisis is the declining customer base and lack of revenue growth. Over the past thirty years, New Orleans has lost approximately a quarter of its population. In addition to the customer loss, there have been very few rate increases in recent years even though costs have risen 50% over the past 10 years. The sewer rate increase last March was the first sewer rate increase in more than fifteen years. Water rates have not been increased for more than ten years. The combination of these two factors has had a devastating impact on our ability to finance a Capital Improvement Program. At the same time, our capital needs are increasing due to an aggressive repair and replacement program, federal mandates and deterioration due to the age of our system. In recognition of these problems, the Board has hired a consultant to prepare an RFQ/RFP for privatization of the water and sewer systems. Since the employees will be allowed to bid for their jobs the process is now called privatization/managed competition.

The Board anticipates that the Managed Competition will offer an opportunity to obtain the current level of services at the lowest possible cost. The cost savings expected to result from the competition will in turn provide the Board an increase in net operating income. Improved net operating income can be used to offset the amount of future rate increases needed to fund our capital program.

Looking forward at this point, the budget presented herein was prepared based on the most recent information available on revenue projections and cost estimates for the coming year. It is not possible to budget estimated savings from the Managed Competition process because estimates of savings are not available at this time.

The driving force in our financial future is the enormous capital needs to replace and expand our collection and distribution systems and to a lesser extent the upgrade and expansion of our treatment and pumping facilities. We have recommended a five-year Capital Improvement Program of $1.06 billion. The projected funding available for this program is only $560 million.

The $500 million short fall will have to be covered through cost savings, increased revenues and new sources of revenue. The Managed Competition process is expected to provide some of the cost savings in the water and sewerage systems. Increased revenues are dependent on rate adjustments approved by the City Council. New revenue sources include grants and cooperative programs with other government agencies.

Included in the recommended operating and capital budget for FY 2001 are $1.876 million of new sewer revenues based on a recommended rate increase of 8% effective July 1, 2001. No increase in water rates for FY 2001 is recommended at this time. The drainage system funding is adequate for FY 2001; however beyond next year additional revenues will be required to support the SELA drainage improvement program. Total operating revenues for FY2001 are projected at $150,025,000 for the three systems. These revenues include a recommended sewer rate increase in July 2001 and a slight increase in millage collections.

The recommended operating budget expenses for FY 2001 are $100,041,347, an increase of $740,723 over FY 2000. This increase includes a one time increase of $1.6 million for consulting fees approved but not budgeted in FY 2000, $1 million for additional fees for our sewer plant operating contract and $0.3 million for energy fuel adjustment increases over FY 2000 levels. This $2.9 million increase was offset by $2.2 million of budgeted reductions in many departments throughout the Board.

All recommended capital programs for FY 2001 in sewerage and drainage can be funded, provided the proposed 8% sewer rate is enacted in July 2001. The Water Capital Budget can only be funded at 49% of the recommended level unless the Board chooses to enact a 12% rate increase, which was previously authorized by the City Council in 1984. The Water Capital Program is important and the Board should enact a rate increase after it receives Managed Competition bids later next year if sufficient cost savings are not obtained from the Managed Competition bid.

The budget recommended herein is possible because of several major cost containment projects which have been in place over the last several years and new projects coming on line in FY 2001. These are listed below.

· Staff Reductions ; Over the past three years a management-imposed hiring freeze has reduced the number of Water Board employees from 1650 to 1313.

· SCADA; The installation of a SCADA remote monitoring system at all sewerage pumping stations allows us to detect and correct problems before damage occurs.

· Contract Reductions; All contracts are reviewed for possible savings. The machining contract in the Facility Maintenance Department has been eliminated. Contracts for skilled labor and security services have been reduced.

· Acquisition of State and Federal Funds; The Board is aggressively and successfully seeking State and Federal funds for its Capital Program. The Environmental Protection Agency has provided $36.8 million in sewerage infrastructure grants. The Corps of Engineers is funding contracts for more than one hundred million dollars in drainage improvements under the SELA program. Millions more are being obtained from the State under a Flood Control Program.

· Debt Financing; Over the past three years, the Board has issued more than one hundred million dollars in bonds at very favorable interest rates.

· Satellite Offices During the past year, the Board has opened three satellite customer service offices, which improve our service to our customers. Because these offices are located in Entergy Payment Centers, the cost to the Board has been minimized.

· Energy and Utility Audits; Consultants have been hired to audit our payments for utilities. The consultant’s fee is a percentage of savings realized or refunds obtained. The result has been rate reductions and at least one large refund.

· Customer Account Audits; A consultant was hired to review customer accounts and payments and conduct field investigations to ensure the Board is fully compensated for its services. The consultant’s fee was a percentage of additional revenue actually collected. Our revenue increase has been several million dollars.

· Energy Consumption; The Board has a program of reducing energy consumption wherever possible. Over the past few years, we have installed high efficiency lighting in our buildings. Energy savings will pay off the installation expense within two years producing substantial long-term savings.

· Consumer Price Index (CPI); Contracts have been revised to eliminate automatic CPI increases in multi-year contracts.

· Reengineering the Networks Division; A consultant has been hired to redesign the organization of this division. The purpose of this redesign is to improve service and efficiency while reducing costs, particularly overtime. This is a $1.2 million program scheduled for completion in the second quarter of next year.

· SCADA; The monitoring system that has been so successful in our sewerage pumping stations is being expanded to include our drainage pumping stations.

· Staff Reductions; The hiring freeze continues. More than 220 vacant positions were removed from departmental budgets last July. These positions were abolished and cannot be refilled by Department Heads. Improved training and cross training of employees is enabling the Board to function with a smaller staff.

· Automation of Selected Drainage Facilities; Installing automatic switches in some of our smaller drainage pumps enables us to operate the system with a reduced staff.

· Water Main Leak Detection Contract; The Board now has a consultant/contractor who uses modern technology to find underground leaks before they are apparent above ground. Many leaks have been detected and corrected and some of them were large. One leak under a canal was reported to be wasting a million gallons a day and since the lost water was going into a canal it was not visible and would may not have been found without this service.

The Sewerage and Water Board is entering its second century facing a critical need to upgrade, replace and expand its critical infrastructure. This challenge, measured in our recommended five-year capital program of $1.05 billion, is a challenge faced by every major utility in the nation. Our challenge is greater than other cities because of the age of our system, our topography and soil conditions and limited incomes of our customers. We must be more creative than others in finding new revenue sources and more demanding in controlling our operating expenses. We have taken the necessary steps in that direction. We have been very successful in obtaining new revenues of over $100 million in grants for our capital projects in sewer and drainage. We have reduced our operating costs through a significant 20% reduction in staffing. We have accepted the challenge of managed competition. We are ready for the challenge of our second century of operations.

Yours very truly,

Harold J. Gorman, P.E.
Executive Director