raftelis report on siemen's contract

8/9/2019 Raftelis Report on Siemen's contract

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1031 S. Caldwell Street

Suite 100

Charlotte, NC 28203

Phone 704 . 373 . 1199

Fax 704 . 373 . 1113

www.raftelis.com

February 27, 2015

Ms. Kishia Powell

Director, Department of Public Works

City of Jackson

200 South President Street

Jackson, MS 39201

Re: Phase 1 Final Report – Draft Final

Dear Ms. Powell:

The Raftelis Financial Consultants, Inc. (RFC) Project Team (RFC, Intel Business Solutions, and SOL

Engineering Services, LLC; and together, the Project Team) has completed our initial engagement for the

City of Jackson (City). The initial engagement evolved to include the following tasks.

• Task 1 – Strategic Financial Planning

• Task 2 – Revenue Sufficiency Analysis

• Task 3 – Billing System Data Review

• Task 4 – Siemens Contract Review

• Task 5 – Infrastructure Master Plan Development

•

Task 6 – Additional Efforts

We have accomplished the objectives outlined in our scope of work and have assisted on a number of

additional issues that have arisen during our engagement. The attached report, which consists of an

Executive Summary and four technical memoranda, summarizes our work and findings for the various

tasks.

We have appreciated the opportunity to work with you and your staff. As noted in the report, there are

a number of tasks that still need to be undertaken, and we hope to have an opportunity to continue to

work for the City and with you and your staff. Should you have any questions regarding the report,

please contact me at (704) 936-4433.

Sincerely,

Peiffer A. Brandt

Chief Operating Officer


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Draft Final ES-1

EXECUTIVE SUMMARY

The City of Jackson (City) engaged a project team led by Raftelis Financial Consultants, Inc. (RFC) and

including Intel Business Solutions (IBS) and SOL Engineering (together, the RFC Project Team) to provide

assistance with various financial and management issues which the City currently faces. There were six

tasks included in the engagement. As the project progressed, the scope within certain tasks evolved

from what was originally contemplated. For example, the two tasks related to the Siemens contract

were combined into a single task. There was also an Additional Task, which included three subtasks

associated with issues that arose during the engagement, and was incorporated accordingly. A

summary of each task is provided below.

TASK 1 –STRATEGIC FINANCIAL PLANNING

The Project Team participated in two strategy sessions with City of Jackson leadership. Based on these

sessions, we identified 37 tasks the City needs to undertake to enhance the financial and management

sustainability of its Department of Public Works (DPW). A few of these tasks were included in the initialscope of work. We prioritized all the tasks, categorizing them as requiring attention 1) within six

months; 2) in six months to a year; or 3) in a year plus. Of the 37 issues identified, 21 were categorized

as needing attention within six months. We prepared a brief technical memorandum (Technical

Memorandum 1 or TM1) summarizing our findings, which is part of this report. In addition, an Excel file

with the matrix of prioritized tasks has been provided to DPW. We anticipate this matrix being an

evergreen document of the City’s, with it being updated as new issues for DPW arise.

TASK 2 – REVENUE SUFFICIENCY ANALYSIS

The Project Team developed a financial plan for the water and sewer system. Even though the City wasable to provide most of the data needed, there were certain data that could not be provided so the

Project Team developed assumptions as necessary. The financial plan indicates that with the current

rates the City will just achieve necessary coverage in FY 2015 based on the assumptions made by the

Project Team. In future years, the City’s revenues will not be sufficient to meet the necessary debt

service coverage. The chart on the following page shows the revenue sufficiency challenge faced by the

water and sewer system.

The Project Team provided an overview of the financial planning model via a webinar for City staff. The

financial planning model, which is a deliverable of the task, can be used to evaluate different capital

plans, rate structures, levels of operating expenses, etc. Technical Memorandum 2, which is part of this

report, summarizes the financial results and the associated assumptions.

There is significant uncertainly regarding the level of metered consumption and magnitude of capital

and operating costs going forward for the water and sewer system. The City needs to refine the

assumptions used in the financial planning model as better information becomes available. Given the

size of the revenue shortfall in the out years, the City will need to restructure and may need to raise its

water and sewer rates, so the City should begin focusing on rate planning and structuring.


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Draft Final ES-2

Exhibit 1: Expenses versus Current Revenues

TASK 3 – BILLING SYSTEM DATA REVIEW

The Project Team completed an initial billing system data review. This effort commenced in late

October with data acquisition and was carried out through a series of independent large-scale billing

data reviews, interviews with Information Services and Customer Service staff, and on-site account-level

data forensics. We first compiled historical data on consumption, billings, collections, and

customers/accounts to reconcile the billing database logs with those numbers being reported to and

used by the City. Then we turned our attention to the active metering, billing, and collections data

stored in the legacy billing database.

The Project Team identified one major systemic issue, the misapplication of the minimum sewer charge,

and several inconsistencies between billing policy and data within the billing system. These included a

variety of accounts registering consumption but not being billed, exempted accounts, and vacant

accounts registering consumption. In an effort to review the advance metering infrastructure (AMI)

meter installation results, the Project Team also identified new AMI meters that were stuck at or near

zero, or were reading above a reasonable threshold. There were also large and frequent adjustments to

accounts, as well as accounts with very old accounts receivable that raised potential concerns. For each

of the ten categories of perceived inconsistencies or potential concerns, the Project Team developed a

sample of accounts for detailed review within the database’s production environment.


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Draft Final ES-3

Project Team members participated in three on-site sessions to conduct detailed account-level review

and to gain a more complete understanding of existing processes. In addition to verification of potential

policy misapplication, the Project Team found many data quality concerns to be related to non-standard

practices and procedures around account adjustments, estimated reads, account exemptions, and

enforcement standards.

Overall, the goal of this task was to identify the current revenue problems based on the symptoms

found through the data analysis and detailed on-site analysis. Based on our efforts to date, we have

grouped the issues identified within three classifications:

1. Unbilled Revenues – many accounts continue to receive services and are not timely or

routinely billed, primarily due to untimely meter shut-offs and significant water theft issue.

2. Ghost Revenues – many accounts fail threshold exception edits primarily due to meter reading

errors resulting in large and frequent adjustments.

3. Uncollected Revenues – many accounts are delinquent and have significant accounts

receivable balances. However, the city does not have an active/proactive collections process.

Going forward, the City will need assistance in remedying the problems identified. The Project Team

recommends implementing a series of improved standard operating procedures and oversight

procedures for common business practices such as calculating and applying adjustments, logging and

verifying work orders, and collections best practices. Additionally, the Project Team recommends that

the conversion to the new CC&B billing system include measures to verify that potential process-driven

failures identified within the existing system are not propagated into the new system. Testing for

conversion has begun and processes for flagging or remedying these exceptions should be included in

this exercise.

TASK 4 –SIEMENS CONTRACT REVIEW

The Project Team completed an in depth review of the City’s contract with Siemens and prepared a

technical memorandum (TM4) that summarizes the key terms of the contract and provides details

regarding the “guaranteed savings” that Siemens maintains will be realized by the City as a result of

work that Siemens performed under the contract. As pointed out in TM4, the majority of savings are

stipulated, which means they are assumed to occur. Since these savings are assumed to occur, the

contract does not identify a protocol for testing to determine if the savings are realized. The table and

chart below show the level of stipulated savings in Annual Period 2. There is a unique amount of

Guaranteed Savings for each annual period. We chose to show Annual Period 2 because it represents

the first year of full savings. As can be seen, the stipulated savings are 65% of the total savings. The

technical memorandum also touches on the actions that must be taken by the City in order to maximize

the benefits offered by the Siemens contract.


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Draft Final ES-4

Exhibit 2: Savings from Annual Period 2

Once Siemens completes the projects it is performing under the contract, the City will have a state of

the art water metering system and a new customer service/billing system (Oracle CC&B) with additional

capabilities. These two systems are the key drivers of the increased revenue and savings that Siemens

has promised to the City. However, as discussed in TM4, the City must first ensure that the meters and

billing system are properly installed and configured. Second, the City must also implement changes in

its metering and billing processes.

To ensure the City gets the greatest value from the contract, the City needs to enhance its oversight of

the Siemens contract. In addition, the City should quantify any unexpected costs or lost revenue

associated with the Siemens’ team performance under the contract.

TASK 5 – INFRASTRUCTURE MASTER PLAN DEVELOPMENT

The primary objective under this task was the development of the year 1 capital improvement plan (CIP)

for projects that may be funded using receipts from the Infrastructure Tax. The CIP must be approved

by the Commission before any of the funds from the Infrastructure Tax are utilized on projects. The

Project Team reviewed existing master plans for each of the utilities/assets (water, sewer, drainage,

streets, and bridges). Unfortunately, the City does not have recent CIPs for each utility/asset group. The

Project Team worked with City staff to prepare a draft CIP and revise the draft after comments provided

by City staff. Originally, the City was going to take the lead on this analysis, but due to limited staff

resources and time constraints, the Project Team led the effort to prepare the CIP that was presented to

the Commission in January.


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Draft Final ES-5

Another component of the task was to understand the policies and procedures associated with the

revenue from the Infrastructure Tax. The Project Team met with the City’s Finance Department staff

and discussed the Infrastructure Tax. As part of this discussion, we contacted the State to gain a better

understanding of the components of the Infrastructure Tax.

TASK 6 – ADDITIONAL EFFORTS

Following the initiation of the project, the City requested the Project Team to undertake three additional

tasks.

• Moody’s Rating Evaluation Support – Moody’s, who has rated the City’s debt in the past,

requested an opportunity to update its ratings on the outstanding debt. As the process

unfolded, the City asked the Project Team to help as possible because the City does not

currently have a Financial Advisor. This assistance involved compiling and reviewing data

requested by Moody’s, participating in internal calls and calls with Moody’s to discuss the

situation in Jackson and the data provided, and reviewing the ratings report and helping to crafta press release.

• Capital Funding Options Analysis – The City has significant capital needs. In order to maximize

the capital projects undertaken, the City needs to understand various capital funding options.

The Project Team provided a comprehensive overview of potential options available along with

some commentary as to the relevance to the City.

• Green Infrastructure Challenge Assistance – The Infrastructure Tax is going to provide revenue

for needed drainage projects. The City is interested in a mixture of green and gray solutions to

overcome drainage challenges. In an effort to leverage resources and better understand the

potential capability of green infrastructure applications to solve drainage issues, the City would

like to undertake a Green Infrastructure Challenge. This task involved attending meetings

related to the Challenge and producing materials, such as flyers, to publicize the Challenge.


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Draft Final TM1-1

Technical Memorandum #1

Strategic Planning Issues

The Strategic Planning task was the initial task of the Project Team’s engagement to provide financial

and management consulting to the City of Jackson (City). As part of this task, members of the Project

Team participated in multiple strategy meetings and discussions with key City staff, which aresummarized in this technical memorandum. During the initial meetings, the City staff and Project Team

members brainstormed about the various challenges facing the City. Primarily, the Project Team

listened as City staff enumerated various issues. The results of these brainstorming sessions were

captured and the Project Team aggregated issues as appropriate. Ultimately, we identified 37 issues.

These issues were categorized into the following five groups.

1. Financial Management

2. Human Resources

3. Infrastructure Investment/CIP

4. Regulatory/Compliance5. Service

After categorizing the issues, the Service category had the most issues (14), followed closely by Financial

Management (13).

The next step was to prioritize the issues. In particular, issues were grouped as needing focus 1) within

the next six months, 2) in six to twelve months, or 3) outside of a year. The initial prioritization was

based on the potential impact of the issue. There were 21 issues that were prioritized in the “within the

next six months” grouping. Some issues received multiple prioritizations. The reason for multiple

prioritizations for certain issues was the RFC Project Team believed the City needs to take some steps

associated with the issue immediately and some steps at a later date. A good example are two of the

Service issues related to Communications. Public outreach, for example, needs to occur to some extent

in the near term and the City should develop a long-term approach to public outreach regarding Public

Works issues. As the City’s situation evolves, it is likely that the prioritization may need to be modified.

The Project Team also identified additional information that should be included in the matrix over time.

The City should determine the fiscal impact of addressing the issue, both the direct cost of addressing it

and the potential impact from it being addressed. For example, the fiscal impact of providing refunds to

customers outside of the City includes the cost of calculating and dispensing the refunds and the total

amount of the refunds. The City should also identify the person on City staff that is responsible for

overseeing the issue (“City Staff Lead”). Being the lead for the issue does not mean that person has todo all the work resolving the issue, but that the person provides the oversight for the resolution of the

issue and has authority consistent with the responsibility. Thirdly, the City should identify the key

stakeholders for each issue.

The matrix is an Excel file that was originally developed in November and has been updated from time

to time. The worksheets from the current matrix are attached to this technical memorandum. The


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Draft Final TM1-2

Project Team recommends that the Excel file remain a living document for the Public Works

Department. Undoubtedly, additional issues will arise and should be added to the matrix.


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Category Sub-Category Issue Description

0 - 6

months

6 -12

months

> 12

months Fiscal Impact Status

Key Stakeholders

Involved

Assgned Cty

S taf f l ead N ot es

Regulatory/

Compliance Compliance

Address storm water permit

requirements X

Cost of effort (staff and possibly

consultant time) and potentially

higher expenses DPW staff, MDEQ

Next permit renewal is in 2017. Addressing

this might hinge on determining in-house

resource that will coordinate. In addition,

this can be addressed by Program

Managers funded through the

Infrastructure Master Plan.

Regulatory/

Compliance Compliance

Address consent decree

requirements X

Cost of effort (staff and consultant

time) and potentially higher capital

costs

DPW staff, MDEQ,

Program Manager

Addressing this might hinge on determining

in-house resource that will coordinate. In

addition, this can be addressed by Program

Managers funded through the

Infrastructure Master Plan.

Financial

Management

Contract

Management

Need to ensure contract compliance

and vendor invoice accuracy and

appropriateness X X X


time), but potentially offset by

reduced contracting costs

Identify universe of contracts that shouldbe assessed. Need to set a limit as to how

large a contract needs to be to focus on it.

All large contracts (such as Siemens, United

Water etc.) should be addressed short

term. Other major contracts can be

addressed mid to long term.

Financial

Management

Financial

Operations

Infrastructure Sales Tax Analysis -

policy, accounting and administration

is weak or lacking X Ongoing

RFC team and DPW

staff

Included in current scope of work with RFC

team - see executed scope for details of

what will be addressed

Financial

Management

Financial

Operations

Billing Issues - need to determine

cause of significant under collection

relative to estimates X



higher revenues Ongoing

RFC team and DPW

staff




Financial

Management

Financial

Operations

Need to identify alternative revenue

sources to ensure no obvious

revenue gaps and to optimize

revenue collections X X



higher revenues

Partially

ongoing

RFC team and DPW

staff

The optimization of revenue collections is

part of the objective of the data review that

is ongoing. Identifying and evaluating

alternative revenue sources should be a

focus later once things settle down a bit.

Financial

Management

Financial

Operations

Ensure compliance with bond

requirements, specifically revenue

sufficiency X Ongoing

RFC team and DPW

staff




Financial

Management

Financial

Operations

Refunds to customers outside

Jackson X


time) and cost of refunds; amount

of refunds to be determined Amendment 2

City needs to determine refunds to those

customers charged at a higher rate than

allowed by MS PSC; also need to determine

process for "paying" refunds.

Financial

Management

Financial

Operations

Significant Water losses - approx.

40% X X


time) and cost of implementing

measures to reduce water loss;

may result in lower operating

expenses in the future

Consider conducting a water loss audit to

verify and measure magnitude of water loss

in the short-term. The audit provides the

benchmark and then allows the City to

determine progress towards improvement.

Activities that will result in reductions of

water loss typically hinge on

billing/metering (passive losses), upgrades

to linear assets or response time to water

main breaks. These strategies are typically

implemented in long term window.

Draft Final TM1-A1


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0 - 6

months

6 -12

months

> 12


Key Stakeholders

Involved

Assgned Cty


Financial

Management

Financial

Operations

Grants/City Contributions/Indirect

Cost Allocations - Need to

understand all non arms length

transactions with the city and other

city agencies to ensure no

revenue/expense gaps X

The current flow of money between the

City, DPW and the water/sewer enterprise

funds needs to be identified; an

appropriate process needs to be developed

and documented.

Financial

Management

Financial

Operati ons Opt imize debt s tructure X



reduced debt service

FA, City staff, RFC

team

Evaluate current debt service structure and

discuss challenges/opportunities for future

debt structuring

Financial

Management

Operating

Efficiency

Need better handle on payroll costs -

OT and benefits; headcount; pay

rates, etc. X



reduced operating expenses

Since labor costs are the biggest

component of operating expenses, DPW

needs to get a better handle on its payroll

costs.

Financial

Management Policies

Review current accounting practice

that comingles operating and capital

costs. Implement change where

appropriate that ensures separation

of capital and operating costs. X


time)

The City needs to establish guidelines for

capital versus operating costs

Financial

Management Policies

Inadequate financial and budget

policies - Need to document/update

where appropriate X

The City needs to identify and document

key financial policies to guide future

budgeting and ratemaking.

Human Resources Morale

Identify and implement efforts to

enhance employee morale X X X

Cost of effort (staff time and

materials) DPW Staff

Happy workers are more productive so

DPW needs to focus on employee morale

Human Resources

Operating

Efficiency

Assess organizational structure to

ensure optimized organizational

outcomes X X


consultant time), but potentially

lower expenses

Need to address key position vacancies

within the dept. There is a short-term need

to fill some key vacancies, but a broader

reorganization should be undertaken once

things have settled a bit.

Human Resources

Recruitment and

Retention

Need to be able to recruit and retain

high-quality staff X


materials) DPW Staff

DPW should have a recruiting plan. Once

good employees are found, it is much less

expensive to keep them than to find new

ones, so retention efforts are critical.

Human Resources Staffing

Need to identify the level of staffing

necessary to meet the required

service levels and to define the

qualifications for this staff X DPW Staff

With out adequate staffing levels and

capable employees filling those roles, the

City will not be able to maintain

improvements.

Human Resources Training

Need to develop a comprehensive

training program for DPW staff X


materials), but hopefully lower

operating expenses with a more

efficient workforce DPW Staff

In order to have and retain high quality

staff, DPW will need to identify and offer

training opportunities

Infrastructure

Investment/CIP

Operating

Efficiency

Need to ensure technology is

optimally leveraged X


consultant time), but potentially

lower expenses

It may be possible for technological

enhancements to ultimately reduce

operating costs. Potential upgrades should

be identified and evaluated in the mid to

long term.

Draft Final TM1-A2


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0 - 6

months

6 -12

months

> 12


Key Stakeholders

Involved

Assgned Cty


Infrastructure

Investment/CIP Capital Program

Need to finalize Infrastructure Master

Plan, including: Service areas; Needs

and Costs; time frame (phase one is

only 1st year plan ; prioritization

(critical, availability of funding;

mayors demo projects etc.) X Ongoing

RFC team and DPW

staff



what will be addressed. This task is

essential for overall financial picture and

need to be primary priority. Phase 1 will

address immediate needs, including

creating funding for PMs.

Infrastructure

Investment/CIP Capital Program

Need to finalize Infrastructure Master

Plan, including: Service areas; Needs

and Costs; time frame ( 2 - 5 year

plan in phase two); prioritization

(critical, availability of funding;

mayors demo projects etc.) X


time); CIP funding approaches will

determine ultimate cost Amendment 2

Would be addressed by Program Managers,

once brought on board. Key component of

the year 1 Infrastructure Master Plan is

getting a PM on board.

Service Communication

Public Outreach - need to develop

program to effectively communicate

rates and impacts X X X


time); level of cost is a function of

level of outreach

Challenge is this needs to happen ASAP, but

it is not included in the RFC team scope.

The long range financial plan needs to be

developed before fully implementing as we

need to know what to communicate.

However, in the short term, some general

good practice communication tasks could

be undertaken to start to build goodwill

with customers and stakeholders.

Service Communication

Multiple stakeholders appear to want

to wrestle control from DPW - need

to identify, understand and respond

timely and effectively to various

Stakeholder Interests X X X


time); level of cost is a function of

level of stakeholder interaction

Goal should be to identify who the

stakeholders are and a plan for engaging

each one. It may make sense to engage

them together or we may want to engage

some separately. In the short term, we

need to identify the stakeholders and their

issues. Mid term and long term activities

can then be developed to address them, if

they are not already on this list.

Service

Contract

Management

Need to assess and ensure contract

performance X X X




Identify universe of contracts that should

be assessed. Need to set a limit as to how

large a contract needs to be to focus on it.

All large contracts (such as Siemens, United

Water etc.) should be addressed short

term. Other major contracts can be

addressed mid to long term.

Service

Contract

Operations

Siemens - WW facilities; contracted

operations - ensure oversight X



reduced operati ng expenses Ongoi ng

RFC team and DPW

staff




Service

Contract

Operations

United Water contract (contracted

WWT operator) - ensure oversight X




Initial thinking was the City needs to best

manage contract until it ends in about a

year, at which time the City would put

contract out to bid. However, it appears

that new and pressing issues related to

contract may require more immediate

action.

Draft Final TM1-A3


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0 - 6

months

6 -12

months

> 12


Key Stakeholders

Involved

Assgned Cty


Service

Contract

Operations

Siemens - Operating plan post

Siemens X Ongoing

RFC team and DPW

staff




Service

Operating

Efficiency

Need to ensure cost of Production is

in line with industry- treatment,

collection, distribution (chemicals,

electricity, people) X




Chemicals and electricity are typically the

largest costs behind labor, so these costs

need to be evaluated. One option is to

benchmark production costs with those of

peer utilities.

Service Policies

Ensure key operating policies and

procedures are in place X




DPW should develop operating policies to

help minimize operating expenses.

Service Service Levels Define appropriate level of service X

Cost of effort (staff and possiblyconsultant time) and potentially

higher expenses to meet

appropriate service levels

DPW Staff and City

Council

DPW should move towards budgetingbased on level of service. In order to do

this, it is necessary to establish the level of

service the community desires.

Service

Wholesale

Agreements

Issues with agreement - West Rankin

Utility Authority (WRUA); need to

address United Water audit issue X

Cost of discussions (staff and

consultant time) and potentially

refunds and less future revenue Ongoing

RFC Team, DPW

Staff, and WRUA

Review audit performed by WRUA and

determine what needs to be done to

address the issues and the potential impact

on the City

Financial

Management

Wholesale

Agreements

Potential issue with rates currently

assessed to utilities outside city limit X


possibly consultant time) and

potentially less revenue

DPW staff and

Wholesale

Customers

There appear to be a number of issues

between the City and its wholesale

customers. The first issue that should be

evaluated is the rate issue.

Service

Wholesale

Agreements

Issues with agreement - City of

Ridgeland X



potentially less revenue or higher

expenses

DPW staff and City

of Ridgeland

Identifying the issues may be short to mid

term, but typical strategies to address

would probably be long term

Service

Wholesale

Agreements

Issues with agreement - Madison

County X




expenses

DPW staff and

Madison County




Service

Wholesale

Agreements Issues with agreement - Hinds County X




expenses

DPW staff and

Hinds County




Service

Wholesale

Agreements Issues with agreement - City of Byram X




expenses

DPW staff and City

of Byram




Draft Final TM1-A4


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Draft Final TM2-1


Revenue Sufficiency Analysis

The purpose of the Revenue Sufficiency Analysis was for the Project Team to develop a financial

planning model for the City of Jackson’s (City) water and sewer system (System) which could be used 1)

to evaluate the System’s ability to meet debt service coverage under current assumptions and 2) to

address the System’s potential inability to meet debt service coverage in the future. The analysis was

required because the City did not meet its fiscal year (FY) 2013 rate covenant obligations associated with

the issuance of revenue bonds. The revenue sufficiency analysis also addressed the deficiencies noted

by Moody’s in their recent (November 2014) downgrade of the City’s bond rating, which were as

follows:

• Inability to meet debt service coverage requirements in FY 2013;

• Undeveloped financial plan;

• Declining unrestricted cash;

• Limited rate raising history; and

• Sizable consent decree which requires additional debt leveraging.

BACKGROUND

In 2013, the City issued revenue bonds (FY 2013 Bonds) for approximately $91 million to cover projects

to be performed by Siemens Industry under a performance contract, specifically for the implementation

of advanced meter infrastructure (AMI), improvements to the O.B. Curtis and J.H. Fewell water

treatment plants, and replacement of several major sewer collection lines. At the time the FY 2013

bonds were issued, it was projected that the City would be able to meet the obligations of the FY 2013

revenues bonds through operational savings and revenue enhancements stipulated by the performance

contract (totaling approximately $7.8 million per year once all the projects were finished and

operational) combined with moderate water and sewer rate increases. However, due to various

circumstances, as explained later in this memorandum, the City was unable to meet the obligations of

the FY 2013 bonds.

STUDY APPROACH

In order to provide a current financial picture of the Water and Sewer System, the City engaged the

Project Team in the fall of 2014 to develop a comprehensive revenue sufficiency study. To begin the

study, the Project Team requested and the City provided the following information:

• FY 2015 detailed operating budgets for both the water and sewer utilities;

• Historic data on operating expenses and revenues;

• Detailed amortization schedules for all outstanding debt including, revenue bonds, general

obligation bonds (GO), state revolving fund (SRF) loans, Mississippi Development Authority

(MDA) loans, and capital leases;

• Comprehensive annual financial reports;


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Draft Final TM2-2

• Official statements regarding bond issues;

• Historic customer information including number of customers by location and billable water and

sewer flow;

• Historic data on adjustments to billable water to determine collection rates;

• Overall consent decree project costs;

• Capital improvement plan for FY 2015; and• Infrastructure sales tax revenue available to be applied towards the System’s anticipated capital

improvement plan.

The Project Team reviewed this data in detail and developed a financial planning model using the

information obtained above. The Project Team has solicited additional information and clarification of

information from City staff several times throughout the development of the financial planning model.

RFC also made several assumptions, as explained later in this memorandum that impact the Revenue

Sufficiency Analysis.

Study Assumptions and Results

The Project Team projected the annual cash needs (revenue requirements) of the system for FY 2015

through FY 2020 and compared these costs to the projected revenues under existing rates. RFC also

calculated the debt service coverage ratios in each year to determine if the existing rates are sufficient

to meet the debt service coverage requirements. The assumptions used in projecting the annual

revenue requirements, revenues, and debt service coverage are explained below.

Revenue Requirements Assumptions

The Project Team identified the System’s annual cash needs, or revenue requirements, which include

operations and maintenance (O&M) expenses, existing and proposed debt service, and cash-fundedcapital projects, which are explained below:

• The detailed FY 2015 O&M budget was used to project future O&M expenses as follows:

Most line items were escalated by 3% based on input from City staff regarding

anticipated future costs.

The Department of Public Works is conducting a salary study to determine the impact of

minimum wage rates. Because this study was not finalized as of the date of this

memorandum, the Project Team has assumed personnel costs will increase by 10% in FY

2016.

In order for the City to provide the desired level of water and sewer service to its

customers, the City will incur additional O&M costs to eliminate water loss, address

reliability issues, and reduce the volume of leaks and breaks. Therefore, the Project

Team assumed O&M costs would increase by $250,000 in FY 2016 for water and for

sewer and then an additional $250,000 in FY 2017 and beyond (totaling $500,000 each

for water and sewer by FY 2017) which represent increased operating and maintenance

costs.


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It should be noted that RFC has not assumed any operational savings from the Siemens

performance contract in its forecast. (See explanation provided later in this

memorandum).

• Debt service schedules were used to identify the total annual debt service to be paid in FY 2015

– FY 2020.

• Because the Public Works Department is currently developing a five-year capital program, theProject Team had to estimate the capital improvement plan (CIP) and the funding sources as

follows:

The Project Team used the overall consent decree ($400 million over 17 years) to

estimate a level of sewer projects ($23.5 million per year).

The Project Team used the recently developed CIP for FY 2015 in which it identified

approximately $8 million in water projects. This amount was assumed to continue into

the future but will more than likely increase as the City addresses water loss issues,

reliability issues, and leaks and breaks.

RFC determined funding sources, which are estimates until the City engages a Financial

Advisor. The funding sources include a portion of the Infrastructure Sales Tax, GOBonds, Mississippi Development Loans (MDA), and State Revolving Fund Loans (SRF). It

should be noted the City does not believe that SRF Funds will be available until future

years (FY 2019 – 2020).

The City currently does not have an internal target regarding the level of the CIP that

should be cash funded versus debt funded. Cash funding a portion of the CIP allows for

stronger debt service coverage. RFC is recommending an internal target of cash

financing 15% of the CIP by FY 2020, which is incorporated into the study results.

Revenue Assumptions

The Project Team estimated annual revenues including revenues from retail customers, wholesale

customers, and miscellaneous services, as follows:

• To estimate revenues from retail customers, RFC obtained detailed customer billing

information for the past two years on each customer. However, due to the large discrepancy

between the City’s billable data and the amount of money that is actually received, RFC had to

use data on actual revenues to back into billable flow estimates. The City also provided RFC

with information on the total dollar amount of adjustments given in each year. RFC used this

information to estimate the City’s amount of billable flow and then the percent of uncollected

revenues (approximately 12%). RFC has assumed that the amount of uncollected revenues will

improve over the next few years as adjustments resulting from the meter change-out and

other reasons decrease, as the City begins to enforce cutting-off customers for non-payment,

etc. It is assumed that the City will achieve an uncollectable rate of 5% by FY 2020. (The

industry average is 1%). For now, RFC has assumed that there will not be an increase in billable

flow resulting from the Siemens performance contract (improved meter accuracy), nor has RFC

assumed any increase in the number of water/sewer customers or growth in water/sewer

flow. The industry trend is declining per capita consumption, which has been assumed to

offset any increase from enhanced meter accuracy. Even though we believe this is a


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conservative assumption, given the financial situation of the System, RFC believes it is prudent

to make conservative assumptions at this time.

• RFC estimated revenues from sewer wholesale customers by using the existing methodology of

each customer paying a portion of O&M, debt service, and capital costs based on their

proportion of sewer flow.

• RFC incorporated miscellaneous revenues from such items as cut-off fees, returned check fees,service connections, interest earnings, etc. and is assuming these revenues will remain

constant into the future.

Debt Service Coverage Calculation Assumptions

The Project Team calculated the debt service coverage for each year in the forecast. The debt service

coverage calculation is a two-pronged test which is as follows:

The greater of:

1) 120% (1.20) of annual debt service on Revenue Bonds +/- rate stabilization, OR

2) 100% (1.00) of sum of:a) Annual debt service on Revenue bonds and subordinate debt (GO, SRF, MDA,

capital leases)

b) amounts to paid during year for Debt Service Reserve System and the

Contingent System

c) any other charges or liens payable out of Revenues during the fiscal year not

otherwise provided in this subsection

Because of the two-pronged test, “the greater of” results in the debt service coverage requirement

being 100% of total debt (more than just revenue bonds) plus amounts required to adequately fund the

Debt Service Reserve System and the Contingent System. The City currently does not have an internal

target for its debt service coverage ratio. RFC is recommending an internal target of debt service

coverage of 1.10 of total debt (revenue bonds, GO bonds, SRF loans, MDA loans, and capital leases),

which is incorporated into the financial planning model.

Financial Plan Results

The City will continue to be in a detrimental financial position if current water and sewer rates remain

unchanged. As shown in Exhibit 1, the current revenues are barely able to meet the revenue and debt

service coverage requirements of the System in FY 2015 and debt service coverage is compromised in

future years.


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Exhibit 1: Expenses versus Current Revenues

In order to meet the revenue requirements of the water and sewer utility, the City will need to

implement rate adjustments. However, the level of the rate adjustments will be impacted by the

following:

• Level of operational savings identified in the Siemens performance contract that is actually

achieved.

• Ability of the City to achieve the revenue enhancements identified in the Siemens performance

contract resulting from increased meter accuracy.

• Ability of the City to increase its collection efforts by addressing the number of adjustments

given to customers, enforcing the cut-off policy, etc.

• Modifications to the rate structure based on cost of service principles to enhance equity and

address affordability concerns.

While the level of rate adjustments will vary based on the factors listed above, the Project Team

recommends that the City set rates such that the City can achieve sufficient debt service coverage.

Exhibit 2 shows an example of proposed debt service coverage targets in each fiscal year that would

allow the City to meet the cash needs of the utility, which include O&M costs, capital costs, and debtservice targets.


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Exhibit 2: Debt Service Coverage under Existing Rates and Proposed Target

COMPARISON OF STUDY RESULTS TO ENGINEER’S PROJECTIONS

As mentioned previously, at the time the FY 2013 bonds were issued, it was projected that the City

would be able to meet the obligations of the FY 2013 revenues bonds through operational savings and

revenue enhancements stipulated by the performance contract and moderate rate increases. AppendixJ of the City’s official statement (OS) for the FY 2013 Bonds included a report titled Independent

Consulting Engineer’s Report (Engineer’s Report) which summarized the assumptions of the operational

savings and revenue enhancements, and provided a projection of cash flow for FY 2013 through FY

2017. The following table is a replication of the table provided in the Engineer’s Report. It should be

noted these represent 87% of the savings/enhancements to allow for unforeseen events (or 13%

variability), as explained in the Engineer’s Report. As shown in Exhibit 3, once the projects were fully

completed and operational, it was estimated that the City would achieve operational savings and

revenue enhancements of approximately $7.8 million per year.


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Exhibit 3: Replication from Engineer’s Report

Timing Event Impact

End of FY 2013 Most large meters installed (all meters

to be installed by the end of December

2013)

Large meter and deferred

maintenance savings of $1.5 million

by the end of FY 2013

End of FY 2014 All small meters installed (1/2 yearsreduction in deferred maintenance

expense assumed)

Large/small meter and deferredmaintenance savings of $3.4 million

in FY 2014

End of FY 2015 All meters installed (full year of

deferred maintenance expenses

assumed)

Large/small meter and deferred

maintenance savings of $5.6 million

in FY 2015

End of FY 2016 System upgrades complete (full year of

deferred maintenance and operations

expense assumed)

Large/small meter and deferred

maintenance and operational savings

of $7.7 million in FY 2016

End of FY 2017 Fully operational system Large/small meter and deferred

maintenance and operational savings

of $7.8 million in FY 2017

Exhibit 3 shows the anticipated timing and the magnitude of the operational savings and revenue

enhancements. In addition to these assumptions, the cash flow analysis in the Engineer’s Report also

assumed the following:

• Debt service coverage of 1.20 in each fiscal year, where debt service coverage is defined as 1.20

of annual revenue bond debt

• Increases in volumetric water rates of approximately 4% in FY 2015, 4.6% in FY 2016, 9.3% in FY

2017

• Increases in volumetric sewer rates of approximately 2.8% in FY 2015, 6.3% in FY 2016, 2.1% in

FY 2017

While the Engineer’s Report demonstrated the City’s ability to meet the obligations of the FY 2013

bonds, in actuality the City failed to meet its debt service coverage in FY 2013. Recognizing its inability

to meet coverage, the City implemented a rate increase (that went into effect on November 8, 2013) of

29% for the volumetric component of the water rate structure and a rate increase of 108% for both the

fixed and volumetric components of the sewer rate structure so that the City could meet its debt service

obligations in FY 2014. As of the date of this technical memorandum, the audit had not been completed

to determine if these rate increases were sufficient for the City to meet coverage for FY 2014. However,

based on RFC’s preliminary analysis, it appears the City may meet its coverage requirement for FY 2014

and FY 2015 but not in future years. Nonetheless, Moody’s downgraded the City’s bond rating from A1to A2 in November 2014 after reviewing the City’s financial information.

The disparity in the cash flow analysis in the Engineer’s Report versus the updated projections

developed by RFC is explained below and is also shown in the chart that follows the explanation.

• The timing of the project has varied significantly from the project schedule. For example, as of

October 2014, only 30% of the meters had been replaced which is in contrast to the initial


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schedule of having all meters replaced by the end of FY 2014. As a result, this has limited the

City’s ability to realize operational savings and revenue enhancements in FY 2013, FY 2014, and

will continue into the future until the project is completed.

• The debt coverage calculation in the original projections exactly met the debt coverage

requirement of 1.20 (of the annual debt service on revenue bonds only). This means that there

was no room for any variation in any of the assumptions (excluding the 13% allowed variabilityin the revenue enhancements or operating savings that was already incorporated in the

calculation). As explained previously in this technical memorandum, the debt service calculation

is a two-pronged test. RFC’s interpretation of the rate covenant is a more stringent test than

1.20 on senior debt service.

• The original projection escalated operating costs for water at 1% and 3% for sewer. In actuality,

the operating costs have and will likely continue to increase at much higher levels due to:

Higher chemical costs for water resulting from the well system shutdown and reliance

on the surface water treatment plant which requires more chemicals than the well

system.

Higher chemical costs for sewer due to having maximized current treatment of plantdischarge waters. In addition, the Siemens’ contract will repair Centrifuge #1 which

will put the discharge plant at full capacity once again. This increase in dried sludge

output will cause an increase in the amount of chemicals being used.

Higher electricity costs due to the surface water plant having to pump water further

since the well system is shut down.

Higher cost of operation at the new Presidential Hills facility.

Additional staff needed to provide necessary level of water and sewer service.

• The original projections did not incorporate any additional debt resulting from the City’s consent

decree or capital improvement projects related to water system replacement projects.

• The rate increases that were implemented (even at the much higher levels than under the

original projections) have not resulted in revenues increasing in proportion to the rate increases

due to a high level of adjustments to water use (some of which is attributed to the meters being

changed out and not registering correctly) and uncollectible accounts.

Exhibit 4: Comparison of Engineer’s Projections to RFC’s Projections

RFC's Revenue Sufficiency Analysis Engineer's Report - Projected Cash Flow

CAFR (1) Unaudited (2) Budget (3) Budget (3) Budget (3) Projected

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017

Total Revenues 44,186,000$ 68,431,191$ 68,431,191$ 68,431,191$ 68,431,191$ (1) 51,492,722$ 53,008,927$ 55,735,686$ 57,969,391$ 60,664,138$

Le ss: Total O&M Ex pense s ( 33, 187, 000)$ (39,203,069)$ (45,229,699)$ (47,582,084)$ (49,788,878)$ (2) (37,827,477)$ (38,200,280)$ (38,067,595)$ (36,823,253)$ (37,593,403)$

Revenues Available for Debt Service 10,999,000$ 29,228,122$ 23,201,492$ 20,849,107$ 18,642,313$ 13,665,245$ 14,808,647$ 17,668,091$ 21,146,138$ 23,070,735$

Revenue Bond Debt Service 12,641,000$ 12,641,000$ 14,986,710$ 17,925,216$ 19,479,741$ 11,424,804$ 11,738,238$ 14,667,492$ 17,605,999$ 19,160,524$

Debt Service Coverage on Rev. Bonds 0.87 2.31 1.55 1.16 0.96 1.20 1.26 1.20 1.20 1.20

Must be 1.20

Total Debt Service 18,382,313$ 23,467,072$ 22,778,731$ 26,222,279$ 28,789,563$

Debt Service Coverage on Total Debt 0.60 1.25 1.02 0.80 0.65

Must be 1.00 0.60 1.25 1.02 0.80 0.65

(1) From the FY 2013 Comprehensive Financia l Annual Report (page 131), with the (1) Includes enhanced revenues from performance contract and rate increases o

exception of the revenue bond f igure which is net of capital ized interest. I t should be 4%, 4.6%, and 9.3% for water and rate increases of 2.8%, 6.3%, and 2.1 % for

noted that FY 2012 revenues were $48.2 million. sewer in FY 2015, FY 2016, and FY 2017, respectively.

( 2) B ased on unaudi ted i nf ormati on provi de d by Ci ty staf f and i ncl udes rate ( 2) I ncl ude s operati onal savi ngs f rom the perf ormance contract.

increases implemented in November 2013 of 29% for water and 108% for sewe r.

(3) Based on FY 2015 budget provided by City staff but assumes no rate adjustments.


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NEXT STEPS

• The Project Team recommends that City staff continue to use the revenue sufficiency model

developed by RFC as a financial planning tool and incorporate updated information into the

model as it becomes available so that debt coverage ratios can be monitored and met in future

years, and so that rate adjustments can be identified over a long-term planning period to avoid

rate shock. The financial planning model should be updated annually to reflect any operational

savings and revenue enhancements from the Siemens performance contract, other factors that

affect operational expenses such as the City’s ability to reduce water loss, etc., demand

projections that are impacted by weather, collection efforts that are impacted by adjustments

and cut-off policies, etc.

• The Project Team also recommends that the City perform a comprehensive cost of service

analysis to determine the optimal rate structure that will allow the City to balance rate

adjustments with affordability and equity concerns. For example, the City could have a different

rate for each customer class (residential, commercial, etc.), or tiers for residential customers

that could include a lifeline rate for those customers with low water use. The cost of serviceanalysis could also determine the level of costs to be recovered from the fixed component of

the rate structure versus the volumetric component that varies by water/sewer flow.

Depending on the results of the cost of service analysis, the rate adjustments would impact

customers differently. A comprehensive cost of service analysis would allow the City to balance

rate adjustments with its rate structure pricing objectives including, but not limited to,

affordability and equity.


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Billing System Data Review

OBJECTIVE

In recent months, the City of Jackson (City) has recognized a lower than expected level of water andsewer revenue in light of the recent rate increases. The collection rate fell significantly between 2012

and 2014, and current revenues are materially below expected totals. The Project Team was contracted

to perform a variety of financial support roles, one of which was to identify patterns in billing and

collections that may explain low revenue figures using active and historical billing system data. As

defined in the project scope regarding potential billing data inaccuracies, the Project Team sought to

determine:

• Who is affected?

• How it is occurring?

• Why it is occurring?

• How much revenue is potentially at stake?

The approach to this was to examine the billing data from meter readings to incoming payments to

identify any process disconnects, data quality concerns, incorrect application of rates or billing policy,

fraudulent activity, or other drivers behind the reduction in revenue. Armed with that data, the Project

Team sought to find eligible revenue sources wherever possible by identifying accounts not being billed

when they should be or not being charged the correct amount.

The Project Team had the additional objectives of supporting financial planning with live billing data and

determining the extent (if at all) of incorrect billing to a group of customers outside the City.

As the City goes through conversion to automated metering infrastructure (AMI) and a new billing

system, identification of any issues is critical to limit their perpetuation into the new environment and to

resolve any outstanding revenue sources before those data are potentially lost in the transition. This

transition process has been temporarily suspended, but is expected to continue. Even with an extended

delay, improvements to data quality and data management processes can increase billing and

collections in the current environment as well.

PROCESS

Data AcquisitionThis effort commenced in late October with data acquisition and interviews with Information Services,

utility management, and Customer Service staff. The Project Team obtained an extract copy, dated

October 17, 2014, of the legacy billing system to be restored in our Oracle environment. We also

obtained daily history files generated on a nightly basis as a record of all changes to the billing data from

1999 through November 7, 2014. To support review of these data, the Project Team received

documentation including lookup codes for billing system data, entity relationship diagrams, and SQL

scripts used by staff to perform regular and ad hoc queries against the database.


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During this initial visit, the Project Team held discussions with Information Systems and Customer

Service staff on relevant billing policy information and data structure, and learned of some known

problems with data and processes as well as some problems already being addressed. These included:

1. Hung accounts due to outstanding work orders;

2. New AMI meters that are stuck;

3. New AMI meters causing dramatic billing increases;

4. Accounts registering consumption with no present occupants; and

5. G/E code accounts that are exempt from enforcement actions.

Data Structure

The legacy billing system includes a number of tables, but only about 10 that are used to manage day-to-

day customer, consumption, and billing data. Of these, the majority of available billing information is

stored in the Meter Detail table, with 1,027,980 records representing the last 12 reads and bills for every

meter. In our extract, this table included read and bill information from October 2012 to October 2014

for most customers. The Accounts and Meters tables each have 85,665 records. Meters are related with

accounts and customers through a series of cross-reference tables.

The daily history files contain a wealth of information including logs of every bill generated, every

adjustment made, every payment made, and most user edits. For reference, the following table shows

the number of records in each of the following categories, representing transactions from 1999 through

November 7, 2014.

Table 1. Amount of data contained in daily history files

TABLE NUMBER OF RECORDSADJUSTMENTS 138,554

CHECK PAYMENTS 3,184,815

BANK DRAFT PAYMENTS 301,415

CASHIERING PAYMENTS 1,572,836

USER EDITS 3,487,316

BILLS 5,546,163

High Level Review

To gain a high-level understanding of utility finances, the Project Team used daily history file data

including every bill generated and adjustment recorded. These data were used to drive the review as it

extended back to 1999 and gives a rich history, whereas only two years are typically available in the live

billing system data due to constraints on the system. With the daily histories of bills generated and

adjustment activities, the Project Team pieced together long-term trends on consumption, billings,

collections, customers/accounts. From this perspective, the Project Team was able to visualize the

reduced revenue, seeking an obvious driver for the problem.


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These data showed that the number of accounts has been decreasing slightly over time, though

consumption is holding nearly steady. Billings, before any adjustments are applied to accounts, have

been rising steadily over time and have steep increases aligned with the timing of rate increases. At the

same time, adjustments have followed a similar trend, increasing drastically even normalized for rates.

These adjustments are mostly related to water charges rather than sewer, sanitary, or meter charges.

As a result, adjusted billings have not increased as much as expected (see Figure 1).

Figure 1. Total Unadjusted Charges, Adjustments, and Adjusted Charges by Year

Payments, though increasing, have not been tracking with expectations for the past few years. This is

especially evident with cashier payments. While it is understandable that the proportion of cashier

payments may decrease over time as more customers use alternate payment options, the revenue from

these other options, mailed checks and bank drafts, has not made up the difference. As a result,

outstanding balances are on the rise and the collection rate is decreasing. Generally, increased

adjustment activity and decreased collections are the major drivers for the reduced revenue stream.

These figures are summarized in the table below.

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Billings Adjustments Adjusted Bills


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Table 2. Summary of High Level Data

YEAR BILLINGS ADJUSTMENTS

%

ADJ

ADJUSTED

BILLS CHECKS DRAFTS CASH RECEIPTS

%

COLL

#

BILLED

ACCTS

1999 23,029,867.37 (2,326,493.71) 10% 20,703,373.66 14,383,678.49 $836,959.71 4,226,444.30 19,447,082.50 94% 65,69

2000 48,247,048.87 (5,445,588.17) 11% 42,801,460.70 29,805,917.52 $1,867,040.39 8,915,791.76 40,588,749.67 95% 67,60

2001 38,402,584.45 (4,497,069.42) 12% 33,905,515.03 23,591,948.94 $1,401,105.28 7,797,002.50 32,790,056.72 97% 66,95

2002 56,753,862.31 (5,600,952.03) 10% 51,152,910.28 36,934,634.94 $1,999,840.60 12,339,446.37 51,273,921.91 100% 67,10

2003 56,587,856.06 (8,499,363.39) 15% 48,088,492.67 33,166,028.51 $1,812,692.99 11,540,326.87 46,519,048.37 97% 66,56

2004 56,581,223.32 (7,087,090.84) 13% 49,494,132.48 32,506,980.96 $1,954,803.87 13,201,977.92 47,663,762.75 96% 66,30

2005 63,710,498.81 (9,073,461.72) 14% 54,637,037.09 35,234,866.46 $2,115,425.67 12,876,349.74 50,226,641.87 92% 66,04

2006 61,422,308.90 (8,797,588.37) 14% 52,624,720.53 33,866,342.29 $2,071,952.58 16,087,833.33 52,026,128.20 99% 65,70

2007 60,481,050.54 (8,259,673.39) 14% 52,221,377.15 31,964,535.59 $2,041,538.74 17,530,588.90 51,536,663.23 99% 64,71

2008 67,916,162.21 (11,497,746.82) 17% 56,418,415.39 32,768,787.23 $2,111,619.58 16,956,346.66 51,836,753.47 92% 64,23

2009 66,261,029.90 (13,871,447.53) 21% 52,389,582.37 29,398,409.67 $1,836,450.16 17,854,046.15 49,088,905.98 94% 64,38

2010 65,101,024.67 (11,088,840.49) 17% 54,012,184.18 32,016,889.07 $1,985,247.46 17,551,258.58 51,553,395.11 95% 64,02

2011 71,323,964.23 (14,109,562.55) 20% 57,214,401.68 36,677,896.50 $2,146,939.19 16,623,617.54 55,448,453.23 97% 63,54

2012 73,038,101.34 (16,566,067.84) 23% 56,472,033.50 36,003,024.74 $2,026,614.66 15,291,882.30 53,321,521.70 94% 62,59

2013 74,560,102.15 (14,932,747.34) 20% 59,627,354.81 39,001,206.03 $2,192,379.71 13,045,818.91 54,239,404.65 91% 61,90

THRU NOV

7, 2014 95,777,131.41 (26,773,241.38) 28% 69,003,890.03 45,061,498.44 $2,676,389.43 12,903,999.69 60,641,887.56 88% 62,81

2014 PROJ. 110,143,701.12 (30,789,227.59) 28% 79,354,473.53 51,820,723.21 3,077,847.84 14,839,599.64 69,738,170.69 88% 62,81


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Bulk Billing Data Review

A bulk analysis of billing data in the live billing system was performed to supplement this finding with

specific data quality concerns that could be leading to unbilled accounts or accounts requiring

adjustments. Based on known rates, billing policies, and data structure, the Project Team used customer

and consumption data in the billing system as of October 2014 to replicate account water and sewer

charges before and after the November 2013 rate change. This exercise resulted in the identification of categories of accounts where the customer charges were not as expected, where bills seemed to be

going out or not going out unexpectedly, and where poorly maintained customer information could

result in unenforceable circumstances. These circumstances could be symptoms of a systematic

misapplication of billing policy or simply of poor data quality and limited quality control measures. The

results of this analysis are described further below.

Field Audit

Based on the bulk billing data review, RFC developed sample data for further investigation by project

partners, IBS. This investigation took place on site over three separate visits, during which IBS staff has

worked with City Information Systems and Customer Service staff to research individual accounts anddetermine whether the exceptions noted during bulk review were justified, or whether other similarities

exist between accounts exhibiting the same unexpected circumstances.

Field visits were conducted on December 9th and December 18th and 19th, 2014, and the week of January

5th, 2015. The findings from these visits are summarized below and a detailed report is included as

Appendix A.

FINDINGS

Billing Data Accuracies

The Project Team could replicate the vast majority (approximately 97%) of water charges to accounts

within the City. Many of those that were not replicable were not receiving bills, which is addressed

below. This is not to say that payments are made to all correctly charged accounts, but that the Project

Team found the billing system data related to water charges to be mostly accurate.

Billing Data Inaccuracies

Data Validity

While reviewing the data in bulk, the Project Team found many instances of invalid entries throughout

most tables and fields. For example, there are accounts within the City with both inside- and outside-city

flags in different fields. Rates are determined based on a meter’s location (inside vs. >1 mile outside the

city) and having conflicting information on the same account could confuse the calculation process,especially as it is converted to the new billing system.

Similarly, there are entries that make the billing policy difficult to accurately implement. Residential

properties with multiple units are supposed to be billed per unit. In the legacy system, there are two

fields that denote this set-up. First, the Apartment Code should be “0” for single family properties (one

unit) or “A” for multiple units. A subsequent field is supposed to contain the number of units where the


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Apartment Code is “A.” The Project Team found 38 other unique values other than other than “0” or “A”

included in the Apartment Code field of 173 accounts. The Project Team also found 13 instances where

more than one unit was noted with a “0” single family residential property, and 386 instances where “A”

multi-unit properties were listed with 0 or 1 as the number of units. All of these are invalid combinations

that could result in the miscalculation of per unit water and sewer charges.

Across the board, there were invalid data that hindered bill replication by the Project Team, but more

importantly caused concern about data maintenance and data quality as it relates to correct bill

calculation at the City.

Adjustments

Given that adjustments appeared to play a large role in the reduction of revenue in 2014, two groups of

accounts were identified to examine recent adjustments. All large adjustments, defined as a single credit

or debit of more than $400, and all frequent adjustments, defined as four or more adjustment instances,

over the past two years were pulled out and sampled for further review. As of November 2014, there

were 3,391 large adjustments totaling $(41,204,999) and 141 accounts with many adjustments, totaling$(2,562,740). The project team found no systematic evidence of accounts being adjusted by values

greater than the account balance, except in cases where payments had already been made.

From the field audit, the root cause(s) of the adjustments issue appears to be mostly human errors from

meter readers. The readings are fixed through a re-compute system process, but before this occurs they

are already registered in the system incorrectly, causing an adjustment to appear on the record. Another

root cause is meter leaks, which are addressed by a manual calculation to determine a corrected bill

based on past consumption. In this case, only a monetary adjustment is made, and no consumption

adjustment is done in the system.

The City does have a leak adjustment policy and a standard process for meter error adjustments. All the

adjustments sampled were processed in accordance with policy as described and were properly

authorized. It appears that adjustments of any level are signed off by supervisors before being

committed to the system.

The Project Team noticed that in many cases, several adjustments were made to an account at a single

time, seemingly as a series of attempts to get the calculation to end up at a desired result. That, paired

with reported supervisory authorization for each adjustment, suggests that more stringent supervisory

review and more carefully calculated adjustments should reduce this value. The billing system does not

have any validation rules or checks on an adjustment before it is committed. Going forward, these are

highly recommended. The City needs to instate a process or improve existing processes to address datainaccuracies before they go into the billing system.

ManyAdjustments

For the field audit, the team identified a sample of 159 accounts with more than four adjustments over

the most recent two year time period for further analysis. Of those, the team received additional work

order information for 52 (33%), representing adjustments of $1,011,722. 44 (85%), which were


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associated with work orders to address meter reading errors, and 8 (15%), which were associated with

work orders for meter leaks.

LargeAdjustments

For the field audit, the team identified a sample of 61 accounts with more than four adjustments over

the most recent two-year time period for further analysis. Of those, the team received additional workorder information for 30 (49%), representing adjustments of $1,367,876. 16 (60%), which were

associated with work orders to address meter reading errors, and 2 (7%), which were associated with

work orders for meter leaks.

AMI Meters

City staff mentioned that the installation of new AMI meters had been causing a number of billing issues

to be reported by customers. Primarily, the new meters either were causing no consumption to be

billed, or dramatic increases to be caused in bills. These two issues were examined in the billing data and

subsets of accounts were identified for detailed examination, as explained below.

StuckAMImeters

The issue of stuck AMI meters has been addressed in part by the meter installer through improved

quality control measures. However, more instances than were acknowledged by the installer were

found in the billing data. The Project Team identified a set of 283 AMI meters linked to active accounts

with a history of steady consumption that drops drastically (to or near 0) after the meter is replaced.

During the field audit, the Project Team found that the standard for stuck meter resolution is 8 weeks,

though no policy or service level agreement was provided. Our review revealed that about 90% meet

this standard based on service order notes in the sample group. As of the date of the audit, only 2

accounts (10%) on the sample list were still unresolved. While this process seems to be improving, the

service order process within the legacy system is open-ended and there are many opportunities for

service orders to fall through the cracks. The service order entry and follow-up process is described

more fully below.

ReadingaboveThreshold

Another claim regarding the new AMI meters is that some appear to be miscalibrated or reading in the

wrong unit (gallons instead of cubic feet). Theorizing that these problems could be teased from the data,

the Project Team developed a list of 3,371 new meters whose readings after being replaced with AMI

meters were two standard deviations above mean consumption prior to the replacement.

During the January 2015 field audit, the Project Team discovered that DPW was experiencing a high ratethreshold exceptions, averaging approximately 53% of all billed accounts needing review. The field

auditors sampled 30 accounts. Twenty-one (70%) of the exceptions appear to be triggered by incorrect

meter reads due to meter reading errors and not leaks. This large exceptions rate appears to have a

direct correlation with the high levels of adjustments discussed in the previous section.


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Meter reading error rates appear to be consistent with both standard and AMI meters, thereby

eliminating AMI as a primary driver for the high exception rates overall. There are currently no quality

assurance standards deployed during the meter reading process (although the current handheld system

has some built in functionality that, if used, could help). As a result, bad meter reading data is uploaded

into the billing system and putting tremendous pressure on staff to catch large variances prior to bill

mail out. There is an existing manual process by which daily threshold exception logs are reviewed by 3or 4 edit clerks. Once identified, the high bills are pulled prior to mail out and reviewed. The bill is then

adjusted and estimated bills are sent out. Because of the manual process and the high volume of

exceptions, it is unlikely that most of the exceptions are addressed prior to mail out. A large percentage

of customer bills are rendered incorrectly and require adjustment.

Concurrent with the Project Team Review, the City also obtained separate information from the AMI

meter installation contractor suggesting that a number of meters were using gallon units. The majority

of these identified meters were installed after the time of the Project Team data extract. Those that

were installed prior to the extract had not registered unusually high consumption.

Misapplication of Billing Policy

MinimumSewerCharge

The most critical finding by the Project Team is the incorrect calculation of the minimum sewer charge.

The City’s Code of Ordinances, Division 2, Sec. 122-235 regarding minimum monthly sewer charges

states:

(a) The schedule of minimum sewer service charges is as follows:

(1) Each customer with a five-eighths-inch meter whose water consumption is 300 cubic feet or less

shall be assessed a minimum monthly charge of $13.41.

(2) Each customer with a one-inch meter whose water consumption is 670 cubic feet or less shall be

assessed a minimum monthly charge of $29.95.(3) Each customer with a one and one-half or two-inch meter whose water consumption is 1,510

cubic feet or less shall be assessed a minimum monthly charge of $67.50.

(4) Each customer with a three-inch or larger meter whose water consumption is 2,710 cubic feet

or less shall be assessed a minimum monthly charge of $121.14.

Customers are billed bimonthly, and the monthly minimum sewer rate as described in the ordinance is

in fact charged only bimonthly, meaning that all users below the minimum threshold are charged only

half the expected amount. This lost revenue equates to at least the following levels of lost revenue

between Nov 8, 2013 and Oct 17, 2014.

Table 3: Lost Revenue from Billing Misapplication

METER SIZE LOST REVENUE

5/8” $ 630,394

1” $ 100,546

1 1/2” AND 2” $ 150,052

>2” $ 35,615


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TOTAL $ 916,607

In Figure 2, below, the number of 5/8” meters charged $13.41 and the number of times each account

received this charge between Nov 8, 2013 and Oct 15, 2014 (nearly a full year after the rate increase) is

plotted. This amount should never be billed, but it happens thousands of times. Rather, twice the

monthly charge, or $26.82 for 5/8” meters, should be minimum charge found on a bill.

Figure 2. Instances of Half Minimum Sewer Charge for 5/8" Meter

HungAccounts

City staff also mentioned that the billing system was set up in such a way that accounts could be set to

non-bill status even though water service may still be available. Hung accounts are those that that are

listed as active but have multiple instances of consumption greater than zero, and no charge for water

and sewer. The Project Team identified 73 accounts in the legacy billing system where this happened

continuously between January 2013 and October 2014. These accounts represented 1,374,318 cubic

feet of unbilled consumption over this period, which based on current rates would be about $45,000.

Upon further review during the field audit, the consultant team found most hung accounts to be

resolved. As of the date of the audit, only 20% of accounts on the sample list were still unresolved.

According to Information Systems staff, intensified efforts have been recently placed on resolving hung

accounts as part of the data cleanup for conversion.

VacantPropertieswithRegisteredConsumption

The Project Team noticed when reviewing the billing data in bulk that there are many instances of

incomplete or inaccurate customer information, which could lead to unenforceable collections

circumstances. Specifically, there are accounts where the customer is “No Present Occupant,” not

receiving a bill, but with consumption registering regularly. The Project Team generated a list of 1,304

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1 2 3 4 5 6

N u m b e r o f M e t e r s

Number of $13.41 sewer charges over 6 billing cycles of 2014


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“No Present Occupant” accounts representing 2,850,201 cubic feet of unbilled consumption during the

last two-month period of the legacy billing system. The time constraint on this is meant to avoid any

issues related to a change in customer status over time, since the customer information is just a

snapshot as of the time the Project Team obtained a copy of the billing system.

The team identified a sample of 40 accounts and received additional information on 38 of the 40requested samples, of which only 23 (58%) were still in NPO status at the time of the field audit.

Seventeen (74%) had been closed out as part of the standard NPO process, while 6 (26%) hadn’t been

closed out. Twenty-one (91%) of the 23 accounts had outstanding balances, which means the vacating

customer didn’t settle their final bill.

Non-BilledAccounts

There are several types of non-bill status in which an account can fall. They are:

• Off- Customer Request

• Customer moving (off)

• Off- Delinquent Bill

• Off- Bad Check

• Off- Seasonal

• Returned mail

• Special Payment Plan

These categories relate to circumstances in which a bill should not be generated because no

consumption is allowed. However, the Project Team found 410 instances of non-bill accounts with

consumption activity between September 1, 2014 and October 15, 2014. This activity totaled 769,734

cubic feet of consumption or $53,417.

The field audit included a sample of 43 accounts, from which the consultant team identified a lack of

follow-up on the cause of non-bill status to be the main driver. After an account has been classified as

non-bill status, it appears that accounts go unread for upwards of a year after last billed date. It also

appears that field actions to pull meter or tie-in also take a considerably long time. So, if an account is

shifted to “Off- Bad Check,” for example, it could be a long time before a field technician actually shuts

off the meter (if ever). Secondarily, the process for moving accounts to non-bill status is being exploited

by customers. Customers that are delinquent on their payment get switched to a non-bill status and so

stop getting billed. Since field work orders to shut off account are not closely monitored to confirm that

actual shut off happened, customers continue to get free service for extended periods of time.

Although, meter reads continue to confirm usage on these accounts subsequently, actions to bill orterminate service physically, still doesn’t happen for extended periods of time. Even when physi

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