PLANNING COMMITTEE November 14, 2012 12 p.m.

Chairman Al Root Members Jon Creighton Max Haner Esther Manheimer Chris Pelly Bill Stanley Jerry VeHaun Bob Watts

The Planning Committee of the Board of the Metropolitan Sewerage District met on Thursday, November 14, 2012 in the Boardroom of the Administration Building. In the absence of Chairman Al Root, Jerry VeHaun presided with the following Committee Members present, Jon Creighton, Max Haner, Esther Manheimer, Chris Pelly, Bill Stanley and Bob Watts. Others present were Steve Aceto, Jackie Bryson, Glenn Kelly, Tom Hartye, General Manager, William Clarke, General Counsel, Gary McGill with McGill Associates, PA, Catherine Traynor, John Mastracchio, Ryan Nagel and Julie Taylor with Malcolm Pirnie/Arcadis, Mayor, Terry Bellamy, Gary Jackson, Phil Kleisler, Florie Presnell, Audran Stephens, Ivan Thomas and Tony McDowell with the City of Asheville, Nelda Holder, David Forbes, Bill Rhodes with Mountain Xpress, Nick Dierkes with Brown & Caldwell, Doug Bean with Raftelis, Joseph Martin with Woodfin Sanitary Water & Sewer District, John Boyle with the Asheville Citizen Times, Adam Hillsbury and Sherrill Barber with WLOS, Marcus Jones with Henderson County, Katie Hicks with Clean Water for NC, Samuel Speciale, Barry Summers, Tim Peck, Bette Jackson, and MSD Staff, Stan Boyd, Ed Bradford, Scott Powell, Jim Hemphill, Peter Weed, Ken Stines, Mike Stamey, Matthew Walter, Angel Banks and Sondra Honeycutt. 1. Call to Order: Mr. VeHaun called the meeting to order at 12 p.m. and welcomed guests. He called on Mr. Hartye for a report on the draft Water/Sewer Consolidation Study. 2. Presentation of Draft Water/Sewer Consolidation Study: Mr. Hartye reported the MSD Board asked staff to hire a national consulting firm to study the potential impact of a water/sewer consolidation. He stated the study is in two phases. Phase I is looking at the City of Asheville Water System and Phase II is looking at the other entities that are interested; Biltmore Forest, Weaverville and Montreat. He introduced Consultants, Catherine Traynor, John Mastracchio and Ryan Nagel for a Powerpoint presentation on their findings. Ms. Traynor thanked the Board and the City of Asheville for providing some of the background information used in the draft study. She stated the purpose of the study is to assess the impact of the proposed merger of water systems within Bucombe County

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with the MSD. She further stated the potential legal, governance, valuation and asset compensation issues were beyond the scope of this study. She reported the City of Asheville Water System consists of approximately 125,000 people; 56,000 customers; 183 square mile service area. The assets include 3 water treatment plants, 40 pump stations, 32 ground storage tanks, approximately 1,660 miles of distribution pipe and a treatment capacity of 44 mgd, with an average daily demand of about 21 mgd. She further reported the first thing they did was conduct a condition assessment with field visits. They visited the 3 water treatment plants, some of the major storage tanks and pump stations, which appeared to be in good condition. However, an increase in the level of reinvestment in buried infrastructure is needed. Generally, the most recent draft of the Citys CIP appears to be reasonable given the age and condition of the assets. Ms. Traynor presented graphs showing the Citys Water System CIP spending which average $8.6 million per year. In comparison, MSD CIP spending average is $13.1 million per year for the same period and both showing years where major projects occurred. Ms. Traynor presented a color coded graph showing planned Water System CIP for 2013 through 2022 averaging $12.2 million per year and includes the following projects: NCDOT; Water Production; Water System Master Plan; Distribution System; Neighborhood Water Line Replacement, and Community Development (Sullivan Act). Ms. Traynor reported in evaluation of a potential consolidation/merger the following assumptions were made: MSD would retain all current City Water Department Employees; MSD would assume City water system indebtedness; MSD would keep water and sewer accounting separate, with no immediate impact to sewer customers or MSDs long-term business plan; All City water customers, including wholesale customers would remain unchanged and evaluation of legal, governance, and asset compensation issues were beyond the study scope. She further reported the Merger Impact Components include the following: City overhead costs would be avoided and replaced by the addition of 13 new MSD staff positions; Operational efficiencies could result in reduction in staff through attrition and retirements; Avoidance of Sullivan Act transfers that currently occur in the City budget, and avoidance of the Non-Betterment costs the City is now required to pay, but as a special District, MSD is not required to pay for those relocation cost. In addition, potential incremental costs include alignment of salary and benefits; Transaction costs (legal, engineering and financing); IT systems integration, and the City perform Customer Service in its Maintenance building and there would be some costs in the future for MSD. Ms. Traynor called on Mr. Nagel for a report on staffing analysis data and assumptions. Mr. Nagel reported that staff included in the consolidation analysis, all City Water Resources Department employees, including all of the funded vacancies currently in the budget. He stated that they were able to get information from MSD and the City on all

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of the names and job descriptions of staff that are included in their respective budgets. With regard to the Water Resources Department workload, they anticipate no staffing increase for operational work not currently being performed. Also, they were able to obtain the FY 2013 salaries and benefits from both MSD and the City and used this to quantify the annual staffing cost currently on the books. The benefit inflationary rate was assumed at 3% for both salaries and benefits throughout the study period, but most important is the Salaries and Benefits Parity Analysis that was performed. Currently Water Department health care costs are about $2,700 per employee less than the health care costs MSD pays for its employees, so in FY2014 (the first year of the consolidated entity) the $2,700 health care benefit will be applied to City employees. In addition, Water Department Staff salaries will increase 3% annually (FY2014-17 to mirror MSD compensation adjustments) with an additional 6.4% over a 4-year period. With regard to eligibility for retirement, Mr. Nagel stated it was necessary to make some assumptions. They considered the cases of 30 years of service; 25 years of service at age 60 or age 66. Therefore, the only potential staff reductions considered were resulting from those projected retirements as well as natural attrition. With natural attrition, they looked at historical numbers and found that MSD had a 4.0% annual turnover since FY2004 and the Water Resources Department had an 11.4% annual turnover since FY 2005. For the attrition number outside of retirement they assumed it would be about 3% annually. He explained of those leaving outside of retirement, it was assumed that 75% of those positions would be hired back and 25% would not. He reported that 13 additional staff are needed at the outset of a consolidated utility; 2 for Financial Services, 2 for Human Resources, 3 for Information Technology, and 6 total for Fleet Maintenance, building Trades and additional administrative duties. He presented a slide showing the Water Resources Department organization structure. Mr. Nagel presented a breakdown of staffing levels and salaries/benefits under a merged scenario. The projection includes the number of full-time employees; retirement eligible; retirement positions rehired; natural attrition; natural attrition rehired, FY-end staff count and total salaries and benefits costs for FY2013-2017. He presented a graph showing the projected staffing levels as a consolidated utility from FY2013 at 293 employees through FY 2022 at 280 employees. Mr. Nagel turned the presentation over to Mr. Mastracchio for a report on the financials. Mr. Mastracchio reported that they first built a financial projection to show what the impacts of the merger might be. They started with the Citys rate model which was provided in October and built from that some scenarios in terms of the merger impact. The first Scenario assumes MSD transfers all of the staff from the Citys Water Department to MSD and maintains that level of staffing from FY2014 through FY2022. In Scenario 2, MSD transfers all of the staff from the Citys Water Resources Department

Minutes Page Four to MSD and reduces staff through attrition and retirements. Scenario 3 incorporates potential reductions in MSD staff through attrition and retirements directly related to the merger. He explained that some the premise that their analysis was based on included retaining all of the employees of the Water Resources Department, assuming that MSD would take all the Water Systems current outstanding debt which corresponds to about $71 million dollars and MSD would retain all of the Water Systems customers. He stated they did not factor in any compensation for the Water System assets and assumed that once the consolidation occurs the Water and Sewer functions would essentially be operated as separate enterprise funds. The analysis is based on the premise that the current sewer business plan would not change, so any of the costs and savings that are shown are on the Water System side in order to see an apples to apples comparison under the merger scenario. He further explained that for the baseline, they started with the Citys financial plan and rate model, which assumes flat customer accounts and customer demands, and did not incorporate any growth in the system. It assumed a 3% increase in operation and maintenance expense over the forecast period and $121 million in CIP. Also, there was some additional debt projected in the Citys model that was included in the baseline and scenarios and there are some financing assumptions that are similar to what the Citys model had. Mr. Mastracchio reported that Merger Scenario 1 shows a $2.2 million dollar reduction in overhead costs which is offset by the addition of 13 positions (salary & benefits) of $1.3 million and some cost avoidance for the Water System in the elimination of Sullivan Act transfers included in the Citys CIP of about $1.9 million by the end of forecast period. In terms of infrastructure, MSD would need to house staff associated with the Water System with space for the Customer Service building and Maintenance Building needs at a net cost of about $6 million dollars. Additionally is the cost associated with the integration of Information Technology Systems (hardware and software) at a cost range of $480,000 to $1.7 million projected in the first year of the forecast period. Other transactional costs include legal, engineering and financing estimated at $700,000 in the first year. The savings through FY2022 is about $10.3 million; an average of $1.1 million per year of savings. Merger Scenario 2 factors in a reduction in salaries and benefits cost (Water staff attrition) with the reduction of 14 positions for a savings of $135,000 during the first year and $1.4 million after the 10-year period. The combined savings are now $16.8 million through FY2022; an average savings of $2.4 million per year, but the annual savings under this scenario exceeds $3 million/year by 2022. Merger Scenario 3 factors in the potential of reduction in salaries and benefits cost in both Wastewater and Water staff attrition, which corresponds to about 10 positions at a savings of $162,000 during the first year and up to $1 million dollars in 2022; an average savings of $2.4 million per year, but the annual savings under this scenario exceed $4 million/year by 2022 and beyond. Mr. Mastracchio presented a graph showing water rate increase impacts for each scenario, which is based on the Citys rate model financial projection over the 10-year

Minutes Page Five period. The rate increases that are projected currently are on the order of 1.5% or less over the forecast period. He explained that Scenario 1 keeps staffing at the same level, but adding the 13 staff for support services. The first three years the rate increases are the same, and from 2017 on, they project a decrease to maintain the same financial plan as the baseline scenario. Under Scenario 2 they factored in some attrition in staff reduction potential. There is no rate increase projected under this model beyond 2016. In scenario 3 there are two years of rate increases in 2014 and 2015 and no increase beyond that. He presented a graph showing a comparison of scenarios and projected year end balances. In addition, he presented a graph showing a comparison of scenarios and projected debt service coverage ratios. He stated that in the baseline, the debt service coverage number does not drop below 1.5; the legal requirement is 1.2. Mr. Aceto asked if the assumption is based on the 50/50 pay-as-go policy MSD currently has. Mr. Mastracchio said yes. He called on Ms. Traynor for the report summary and conclusions. In summary, Ms. Traynor reported there is the potential for significant savings to water customers from the merger with greater than $10.3 million and to as much as $21.9 million over 9 years. In addition, staff reductions from operational efficiencies are possible but only from retirements or natural attrition, and MSD will need to continue to re-invest in the system to preserve and prolong the life of the water system assets. She further reported the benefits of a merged system includes the following: A unified front for economic development; Regional board representation; Enhanced ability to coordinate/manage water and sewer pipe replacements; Elimination of subsidy by noncity water customers (transfer to General Fund); Coordinated and unified customer service and communications; Uniform rate policies and structures, and staff opportunities for career advancement with a unified organization. She further reported that additional considerations include a potential significant challenge associated with conversion of billing and CMMS systems and data; Ownership and control of Citys reservoir lands (lease option could be considered); Alignment of miscellaneous fees with MSD billing and customer service policies and potential savings could be realized by switching to contract paving, and integration of cultures of City and MSD organization (e.g., cross training, safety, and work practices). Ms. Traynor called for questions or comments. Mr. Haner asked if the projected rate increases would include the average $8.6 million per year Water CIP. Ms. Traynor said it includes the Citys current projected plan. Mr. Haner noted there are some adjustments that need to be made that may not be under the benefits column. Mr. Aceto asked what the significant impacts of a merger would be on the MSD ratepayers and MSD itself. Mr. Mastracchio stated that when looking at the cost benefits of a merger, they modeled it on the water side, but when looking at potential efficiencies, those efficiencies could be spread between water and sewer. Mr. Aceto stated both entities are operating at a level of efficiency, but the report did not go into whether or not there would be any change in policies or procedures. Mr. Nagel stated what they typically find when water distribution and sewer collection come together is that a lot of the activities

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and equipment used are similar in nature, so the only efficiency projection made were to look at those people who are scheduled to retire in distribution and collection, and based on their experience with other utilities going through the same process, they made assumptions as to whether or not those positions would need to be replaced with like positions. Mr. Aceto asked if they carried the assumptions through in terms of staff cost when adding the Citys proposed CIP to MSDs more aggressive CIP; assuming the same level of supervision. Mr. Nagel stated they increased the Citys health care benefits to match MSDs and there was a 6.4% discrepancy in raises over the last 4 years ($3,500 per employee) which they phased in over a 4-year period, but did not go into detail on job classification or compensation analysis. Mr. Aceto asked in their experience if there is a difference between water and sewer employees in how it approaches its CIP. Mr. Nagel said it is somewhat dependent on the level of construction going on at the time and the type and quantity of treatment that takes place. Mr. Mastracchio stated that different philosophies on how that type of work is done from one organization to another can differ, which can affect staffing levels and cost structure as well. Mr. Aceto stated his concern is whether there may be additional costs to MSD in bringing the Citys level of construction, supervisory and engineering to match that of MSDs to do the same job. He asked if recent proposals to the Citys Finance Committee regarding its CIP were factored in and whether there are additional CIP expenditures the City is contemplating that are not included in the assumptions. Mr. Mastracchio stated they built in the latest CIP provided which included a series of projects that showed a more costly CIP. Mr. Aceto asked if they included the CIP in the unified rate structure. Mr. Mastracchio stated they did not look at water rate structure, but at the overall rate increases and changes to that. Mr. Aceto asked if they saw anything that surprised them. Ms. Traynor said no; nothing unusual. Mr. VeHaun asked if there were any comments from the Planning Committee. Ms. Manheimer stated that the cooperation between the City and the MSD is notable and appreciated. Mr. Hartye stated that a copy of the Planning Committee packet and Executive Summary can be found on the MSD website as well as a copy of the full report. Mr. VeHaun called for public comment and recognized Mr. Barry Summers. Mr. Summers asked if there are any cost figures as to the MSD leasing, operating and management rights to the Watershed that was reported at the October meeting. Mr. Hartye stated there was some preliminary discussion, but it went no further. Mr. Aceto asked Mr. Summers if he saw anything that was left out of the report. Mr. Summers referred to Mr. Hartyes comments from the March meeting where he said you would expect that MSD would want to accelerate the CIP program and that there would be additional rate increases to accommodate an accelerated maintenance program and expansion. Mr. Hartye stated at the time this was discussed, the City had a 5-year, $36 million CIP, and now they have brought to their Finance Committee a 10-year, $121 million CIP and MSD agrees with what they put forth. Mr. Summers stated a major concern for him is in looking at the way this was presented to the public. So far, its

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presented as a potential savings; that rate increases will drop and there will be millions in savings, when there is potentially a major cost hanging out there that is not factored in. Mr. Aceto asked Mr. Summers what cost he is talking about. Mr. Summers said the lease of the Watershed. Mr. Aceto asked Mr. Summers if he sees anything he thinks was missed other than the lease and compensation costs. Mr. Summers stated nothing beyond the potential impacts of bringing in other systems as part of the second phase, and whether this is a game changer on a lot of the facts and figures presented. He further stated there are more questions than answers like the compensation issue and what other communities will be brought into this such as the City of Hendersonville and feels its premature to suggest what the General Assembly does will lead to something that will result in cost savings. Mr. Aceto asked Mr. Summers if MSD should use the same method in looking at other systems. Mr. Summers said its a wonderful method and is completely adequate for the purpose, but is premature and is potentially misleading the public as to the potential outcome when those bigger questions are being kicked down the road. Mr. Aceto stated he does not see anything misleading about this. Mr. Summers stated the MSD, the City and other communities are responding to a situation that is being thrust on them, which will not lead to a good result to the public down the road and feels the whole process is seriously flawed. Mr. Specials asked if the lease option is off the table. Mr. Nagel stated the Referendum only referred to sale or lease of the Water Distribution System and the Water Treatment Plant; not the Watershed. Ms. Hicks asked if this goes forward, what kind of mechanism do water and sewer customers have as far as input into this decision that MSD is making about some of these efficiencies. Ms. Manheimer stated the study does not specifically address a different governance structure other than the one currently in place and set up by Statute for the MSD. Mr. Aceto stated MSD has both Board and Committee meetings that are open to the public and most of its members are elected officials so there is a direct and indirect way to impact what MSD does. 3. Other Business None 4. Adjournment: With no further business, Mr. VeHaun called for adjournment at 1:10 p.m.