Study Results and Recommendations Unveiled for Alignment of City and Fayetteville PWC Services

AND

Functional Alignment Analysis- Financial and Operational

Analysis of Opportunities for Efficiencies and Citizen Service

DavenportLawrence. A Local Government Advisory Firm

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Functional Alignment Assessment: City of Fayetteville and PWC Page 2

City of Fayetteville Assessment Summary Report- 8.5.13

Approved by: Date: 8.5.13

Andy Honeycutt Managing Director, DavenportLawrence Jeff Davenport Managing Director, DavenportLawrence

Submitted by: Date: 8.5.13

Allen O’Neal Manager of Local Government Services, DavenportLawrence


Contents City of Fayetteville Functional Alignment Analysis- Financial and Operational ............................................................................................................ 4

Executive Summary .................................................................................................................................................................................................... 4

Organizational Authorities and the Charter .......................................................................................................................................................... 4

Phased Methodology for Analysis and Recommendations ................................................................................................................................... 6

Phase I: Project Infrastructure- Key Components for Effective Initiation ............................................................................................................. 6

Phase II: Research and Analysis- Existing Organizational and Operational Elements .......................................................................................... 8

Phase III: Establishing Opportunities and Priorities for Change: A Framework for Implementation .................................................................... 8

Project Goal: Organizational “Best Practice” Design ............................................................................................................................................ 9

City of Fayetteville and Fayetteville PWC: Overview of Fiscal Condition ............................................................................................................ 10

Stated Priorities: City of Fayetteville and Fayetteville PWC Cooperation ........................................................................................................... 12

Overview of Organizational Observations: Position Statements ........................................................................................................................ 13

Key Findings from Research and Analysis ................................................................................................................................................................ 15

Finding 1: Governance, Legal Services, and Communications: Combined Willingness, Mission Commonality, Shared Plan ............................ 15

Finding 2: Existing Agreements – City of Fayetteville and Fayetteville PWC ....................................................................................................... 18

Finding 3: Existing Shared Services Fleet and Purchasing Management ............................................................................................................. 25

Finding 4: Creation of a Shared Environment for Support Services ................................................................................................................... 36

Finding 5: Enterprise Resource Planning Utilization & Technology Integration (Applications and Infrastructure) ........................................... 38

Implementation Plan ............................................................................................................................................................................................... 49

Initiatives Plan (Suggested Implementation by Priority) ..................................................................................................................................... 50


City of Fayetteville Functional Alignment Analysis- Financial and Operational

Executive Summary The City of Fayetteville engaged the services of DavenportLawrence in February of 2013 to evaluate opportunities for alignment of financial operations between the City and the Fayetteville Public Works Commission (Fayetteville PWC/Commission). Our responsibility within this engagement is to provide pragmatic analysis and recommendations to the City that identifies opportunities to enhance operational efficiencies (reduction of functional duplication and overhead, leveraging of technologies) with a commitment to the interests of the citizen/customer. The foundation for our approach and conclusions are based upon answering the following questions in the affirmative: Do we maintain public trust in the process?

Does the change management process improve organizational cooperation and transparency?

Does our analysis provide neutrality and balance to the process?

Do the recommended actions reduce operational redundancy and associated costs?

Are the recommended changes measurable?

Are the recommended changes sustainable?

Do recommendations provide a roadmap for greater collective organizational stability and cooperation?

Is the methodology/approach expandable for even greater benefits to the citizen/customer?

With analysis and recommendations based on the foundational tests noted above, the City and Commission leadership as well as the public served by these organizations should have confidence that the pathway for success outlined herein is consistent with generally accepted public interests and public benefit, both now and in the future.

Organizational Authorities and the Charter Over the years there have been various legal and political opinions regarding the “technical” relationship between the City of Fayetteville and the Fayetteville Public Works Commission. Unfortunately these opinions become more and more valued by decision makers in order to arrive at the legal opinion that most effectively meets the need of their respective interests. In evaluating opportunities for operational cooperation we find the need for continual legal interpretation to be an unfortunate yet clear example of the evolution of autonomy between the City and the

Functional Alignment Assessment: City of Fayetteville and Fayetteville PWC Page 5

Commission. Stated another way- the lack of operational cooperation between the two organizations is operationally unhealthy and a disservice to citizens and customers. Nonetheless, the operational authority of the Commission resides fundamentally through the provisions of the charter creating the Fayetteville Public Works Commission as a “Commission of the City of Fayetteville”. Debate continues in the legal arena regarding classification of Fayetteville PWC as a “public authority” but given that the Commission Board is appointed exclusively by the Fayetteville City Council and that only the City has authority to approve contracts and budgets creates a clear distinction, in our opinion, of the Commission as a political subdivision of the City. This opinion is consistent with a most recent legal assessment of the relationship between the City of Fayetteville and the Commission issued by attorney Steve Levitas of Kilpatrick Townsend & Stockton, LLP in a May 20th, memorandum (Attached). The City is the owner of all assets managed by the Commission for utility service to its customers. Furthermore, the City holds all legal and financial responsibilities for the actions of the Commission and, therefore, is ultimately accountable to the public for the proper oversight and operational efficiencies and effectiveness of the Commission. The direct fiscal accountability of the Fayetteville Public Works Commission to the City is further evidenced by: PWC’s budget both before 1973 and since has always been presented to the City Council for approval and adopted by the City as part of

its unified budget ordinance and the City Council has ultimate authority to make final decision regarding adoption of the Commission budget (See G.S. 159-12)

PWC’s financial reporting is included in the City’s consolidated financial report As a component of the DavenportLawrence evaluation, we identified charter violations for required actions between the City of Fayetteville and the Fayetteville Public Works Commission. These areas are further examples of the evolution of autonomy between the organizations and involve:

No appropriation of moneys or expenditures or contracts in excess of ten thousand dollars ($10,000.00) shall be made by the said commission until the same shall have been approved by the city council provided no such appropriation, expenditure or contract shall be approved on the date on which it is submitted except by an affirmative vote equal to or greater than two-thirds of the members of the council. (Section 6.7 of Charter)

Said commission shall render a full report to the city council of the City of Fayetteville, not later than the second Monday of each

month (Section 6.12 of Charter)

PWC is obligated to pay over to the Treasurer of the City all balances in excess of necessary expenses and disbursements to said date (Section 6.12 of City Charter)


Phased Methodology for Analysis and Recommendations The phased methodology applied by DavenportLawrence for this engagement involved the execution of three distinct components of analysis in order to comprehensively arrive at recommendations that meet the foundational tests noted above. This phased approach is consistent with the Request for Proposals issued by the City for analysis seeking, “professional services to refine and analyze a plan to consolidate the operations of the City and the Fayetteville Public Works Commission…this will include the development of a phased implementation plan…” The areas of focus outlined by the RFP included information technology, finance, human resource development, corporate communications, and other administrative functions that are shared or duplicated between the City and the Commission.

Phase I: Project Infrastructure- Key Components for Effective Initiation Establishing a solid foundation for the City of Fayetteville/Fayetteville PWC functional alignment initiative was a critical first step in understanding the historical operational collaboration segregation between the City and the Commission. For success to be achieved within the functional alignment process, DavenportLawrence focused on the development of sustainable initiatives that could overcome political and cultural barriers to change. Beyond the matters of financial benefits (the Fundamentals of the Red and Black), DavenportLawrence established an understanding, within Phase I, of the internal and external environments of the City and the Commission that would influence the change management process. Through this collection of information and input, DavenportLawrence was successful in identifying the elements of the community that shape its culture and philosophies. Ultimately, we sought to understand how change through functional alignment would be supported or opposed by establishing the necessary infrastructure to address the Fundamentals of the Gray (unique organizational characteristics that contribute to the level of success and sustainability of organizational realignment initiatives).

Our Fundamental Approach The Fundamentals of the Red and Black are principles of organizational design with a primary focus on cost management through efficient resource utilization and technology application. The Fundamentals of the Gray are the organizational characteristics, both internally and externally, that influence operational behaviors. These characteristics include political and cultural diversities, historical influences, and financial disparities. (DavenportLawrence, Inc., 2012)


Project Infrastructure: Building a Solid Foundation

• Developing clear project purpose and openly communicating with clarity and frequency

• Understanding and managing within the organizational cultures of all involved

• Gaining historical context of organizations and initiatives

• Maintaining trust in the process by all involved

• Presenting alternatives to the preferred path of change

• Understanding interests of the participating organizations and their individual contributors

• Establishing organizational support of performance measurements

• Maintaining commitment to the customer/citizen with consideration to financial and service influences

Establishment of a Functional Alignment Project Team DavenportLawrence, in cooperation with the City of Fayetteville and Fayetteville PWC, established a Functional Alignment Project Team for the purposes of information gathering and interview planning, project plan reviews, financial and operational feedback, budgetary process updates, and organizational reviews. The Functional Alignment Team provided a platform for both the City and the Commission to be involved throughout the evaluation process and to participate in the process of information gathering and organizational design. While the level of active engagement was noticeably higher among City representatives, the process allowed both the City and PWC the opportunity to participate in the progression of the analysis through information dissemination.


Phase II: Research and Analysis- Existing Organizational and Operational Elements Phase II consisted of a current state assessment including independent interviews with governing body members, administrative managers, department heads, and key staff in order to compile a comprehensive understanding of the various functional processes and the historical makeup of organizational and process design. The intensive collection of financial, transactional, and process oriented documentation was mission critical for establishing a baseline for financial analysis and consolidated operational opportunities. The collection of information and processes provided the tools necessary to validate, test, and benchmark data for the analytical process. Key elements of Phase II included:

• Functional Interviews and Data Collection by Department

• Data Collection and Validation

• Asset and Human Capital Financial Analysis

• Customer Service Delivery Evaluation

Phase III: Establishing Opportunities and Priorities for Change: A Framework for Implementation The framework for implementation is established on the foundation of optimization and standardization. The recommendations contained herein are based on the results of the detailed analysis derived from data collection, benchmarking, performance metrics, and other empirical data. The purpose of the plan is to outline the project team recommendations for functional alignment and associated initiatives in a manner that provides a logical and practical implementation strategy for the City Council, administration, department heads, and other levels of City and Fayetteville PWC staff. Specifically, the project team focused on the following actions in development of priorities for change within financial operations and associated functions:

• Analytical Review of Functional Data Highlighting Operational Consolidation Values

• Implications Assessment on Priorities Derived from Data Collection

• Prioritized Functional Opportunities Based on Client Objectives and Organizational Needs


Project Goal: Organizational “Best Practice” Design Upon completion of information gathering, comparative analysis, implications testing, impact reviews, and sustainability evaluations the desired results should complement a “best practice” design balancing people, process/policy, and technology. The balanced intersection of these three elements will result in collaborative

Investments, Training, and Implementation

Alignment of Technology Design

Consistency of Processes and Policies

Resulting In… Proper Balance of People, Processes, and Technology


City of Fayetteville and Fayetteville PWC: Overview of Fiscal Condition To establish the basis for considering functional alignment of the City of Fayetteville and Fayetteville PWC, we must first understand the fundamental fiscal condition trends of each organization. It is fiscal health, through operational efficiencies/elimination of duplication, which energizes organizations to actively participate in the continuous improvement process. For the City of Fayetteville, we find the fiscal condition to be one of adequate reserves that are healthy and indicate responsible fiscal management. This measurement may be best identified within the City’s unassigned fund balance as a percentage of budget for fiscal year 2013. The City is within the fiscal condition range of its peers across North Carolina, with a cash reserve of almost 14%.

The most significant concern resulting from our analysis of fiscal health is whether the City has operating revenues sufficient to address service needs. The City of Fayetteville, in comparison to its peers across North Carolina, has the lowest per capita general fund revenue at $665 versus the average of $828 per citizen revenue. This number represents a significant challenge for the City to generate sufficient income in order to the meet the financial demands of service delivery to its citizens and to build public infrastructure. (City of Fayetteville revenues reduced to recognize annexation sales tax agreement transfer to Cumberland County)

$932 $762 $752 $665

$874 $811 $1,001

$828

PER CAPITA GENERAL FUND REVENUES FY 14


Growth Comparisons: The City of Fayetteville’s net asset trends contrast greatly in comparison to the significant annual growth realized by the Commission. The City has seen virtually no growth in net assets (total assets minus total liabilities) at $7 million since 2007, while Fayetteville PWC has increased its net assets by over $259 million over the same period of time. This overwhelming disparity between the municipality and its utility commission creates an operational environment that is, at best, status quo for the City and one of broad operational flexibility for the Commission.

General Government in 2012 adjusted for transfer of $21 million to new solid waste enterprise fund for comparability to prior years.

0

100

200

300

400

500

600

700

800

900

2007 2008 2009 2010 2011 2012

Net Assets Trending: 2007-2012 City and FPWC (in millions)

COF: General Government FPWC


Stated Priorities: City of Fayetteville and Fayetteville PWC Cooperation

2013 CITY OF FAYETTEVILLE STRATEGIC PLAN

Fundamental to any successful functional alignment/change management initiative between historically independent organizations is the willingness for both organizations to apply genuine interests in working collaboratively together to improve the manner by which service is delivered to citizens and customers. Fortunately for the City of Fayetteville and the Fayetteville PWC, the interests of cooperation are stated formally as a priority within the strategic plans of both organizations. This basis for cooperation provides an inherent willingness to look at methods for greater efficiency and effectiveness in the shared responsibility of public service. Critical to success for the initiatives included within this report and beyond is the realization that the City Council, the Fayetteville PWC Board, staff, must take actions that complement the collaborative process as a duty and responsibility of serving citizens and customers for they are, for the most part, one and the same.

FAYETTEVILLE PWC STRATEGIC PLAN ACTIONS AND PRIORITY: 2012


Overview of Organizational Observations: Position Statements DavenportLawrence deployed eight experienced consultants “on the ground” at both the City of Fayetteville and Fayetteville PWC facilities over a period of five months collecting data, validating work processes, and identifying consistencies of observation surrounding organizational culture and priorities. From these observations, DavenportLawrence has developed the following position statements regarding the over-arching existing organizational conditions:

• The Fayetteville PWC operates effectively and efficiently in the delivery of electric, water and sewer services with competitive rates to other regional utilities.

• The City of Fayetteville provides services to citizens in a fiscally responsible manner.

• Fayetteville PWC autonomy (operational independence) has expanded beyond, what we believe to be, originally granted (or intended) by charter and what is typical for a municipal utility.

• While possessing the assets of minimal transmission service and a generation plant within the electric utility, the Commission does not operate in a manner that is substantially different than its municipal utility counterparts.

• The autonomy of Fayetteville PWC has created an internal control culture and “private company” philosophy that reduces public transparency and support to the City as a Commission of the City.

• Current governance structure yields cooperation between the City and the Commission only to the level required to operate between the City and the Commission.

• The lack of cooperation between the City and the Commission erodes public trust and sustains an “us and them” culture.

• Fayetteville PWC utilizes its current autonomy to invest in external messaging and community relations beyond what is necessary for the purposes of utility operations and customer service by a public utility.

• Fayetteville PWC utilization of complex cost accounting methods are used as a basis for atypical fees and chargebacks to the City,

thereby unnecessarily impacting taxpayers.

• The City of Fayetteville maintains a strong cash reserves condition and is considered financially strong with its Aa1/AA+ rating.


• Fayetteville PWC routinely brands facilities and vehicles simply as “PWC” thereby further separating itself perceptually from the City.

• The City of Fayetteville has a historical lack of political cohesion that negatively influences its position as the “Parent Municipal Corporation” to the Commission.

• The City has participated in cost-sharing and “agreements” with the Fayetteville PWC that have directly impacted taxpayers through inequitable terms and conditions.

• The City of Fayetteville per capita revenue is less than that of its peer municipalities and significantly impacts its abilities to meet operational needs.

• The City generally funds operations at a “basic” level, thereby forgoing some efficiency gains, technology leverages, or enhanced customer service.

• Functional alignment between the City of Fayetteville and the Commission will succeed ONLY after the barriers of cooperation (history and culture) are eliminated and both organizations recognize acting in the best interests of the public transcends independent organizational interests.

Effects of Organizational Silos: City of Fayetteville and the Fayetteville Public Works Commission

Ineffective coordination within capital planning

Separate strategic planning goals and processes

“Us and them” culture between City and Commission

Budget process often conciliatory

Separate compensation plans and evaluations


Key Findings from Research and Analysis The scope of work within this engagement began with finance functions for functional alignment within the City and Fayetteville PWC as the City was already undergoing some evaluative processes within their own operations. This focus on finance was a “first step” in the comprehensive process defined in the RFP issued by the City that sought to evaluate all support services (non-utility) opportunities between the City and Fayetteville PWC. DavenportLawrence identified early conflicts in operations through disparate financial software platforms and underlying business processes of the two organizations, particularly, with Fayetteville PWC’s transition to the Oracle solution which did not offer an immediate opportunity to gain efficiencies and cost savings with aligning the two existing segregated processes and organizational cultures. Without integration of a common financial platform it became very evident that the most effective pathway for functional alignment and operational efficiencies involved a multi-faceted approach to achieve measurable and sustainable success. The recommendations for functional alignment are the result of the following five key findings:

Finding 1: Governance, Legal Services, and Communications: Combined Willingness, Mission Commonality, Shared Plan Governance defines the parameters by which organizations operate in service to citizens/customers, the organizational culture that is established, and the priorities and responsibilities of leadership. For any organization to effectively align with another, there must be a genuine interest in the collaborative change process (Combined Willingness), a vision of what benefits will derive from the process (Mission Commonality), and a defined process for accomplishing the actions required to achieve success (Shared Plan). Throughout our engagement with the City of Fayetteville and the Fayetteville PWC, we identified a stark contrast between the willingness of the City and the willingness of the Commission to actively support the mission. As such, the plan for implementation is based as much on changing the culture of autonomy between the City and the Commission as in the elements of the change management process.

Overview and Observations: Fayetteville PWC Culture The existence of Fayetteville PWC is at the behest of the City and therefore DavenportLawrence statements and observations of the current relationship and governance issues and opportunities that exist are based on that notion. “Company” Culture: Throughout our months of interviews and information gathering, we found it very common for Fayetteville PWC leadership and staff to refer to the organization as the “Company” almost seemingly intentional to separate itself from its “public utility” subdivision of the City. The actions and behaviors of Fayetteville PWC are more closely aligned with a private company rather than a public entity. While there are benefits to some of the operational best practices of Fayetteville PWC, the underlying concern is the continued migration away from transparency and operation on the basis of the “greater public good.” The governing board for Fayetteville PWC is appointed by the Fayetteville


City Council and, therefore, has very filtered interaction with customers, no direct legal accountability, and ultimately no financial responsibility. All accountabilities for the actions of Fayetteville PWC rest with the City. Barriers to Collaboration: From our information gathering, we have not seen evidence of planning and coordination activities between the City and the Commission that result in any measurable collaboration benefit for operations, fiscal controls, or service enhancements. Information requests by the City to Fayetteville PWC, as we understand it, are not often given to the City freely or in a timely manner. Throughout the information collection process by DavenportLawrence we were directed to submit all information requests through the General Manager or the Chief Financial Officer, and the information would be returned in the same manner. Furthermore all interviews involved participation by a member of the Senior Executive Team (most often the General Manager or the Chief Financial Officer) which, in our opinion, limited or filtered the responses by those participating in the interviews on behalf of Fayetteville PWC. This tight internal control for information release by a public utility is concerning in the interests of transparency, accessibility, and accountability. Legal Services The City of Fayetteville maintains both internal legal staff, as a member of the City Administration Team, and outside counsel as needed to represent the interests of the City. For the Commission, $320,000 has been appropriated (contained in the recommended budget) for Fiscal Year 2014 and $200,000 for the immediate past fiscal year specifically for legal services. While the Commission has authority to engage independent contractors and consultants for contracts less than $10,000 it does not have specific authority through the Charter for Commission directed legal counsel. As the owner of all assets operated by the Commission and the ultimate responsible party for all legal matters, it is both appropriate and necessary for the City of Fayetteville to assume legal oversight and accountability over the matters of the Commission as it assumes for all other functions of the City. Furthermore, the coordination of advocacy for State and Federal policy making should be coordinated with City Council to establish mutual purpose and collective benefit.

Communications and Citizen/Customer Service It is evident, through our observations, that the Fayetteville PWC is much more effective in external communication than its parent Municipal Corporation. The primary differential between the City and Fayetteville PWC is the availability of resources for communication staff, technologies, and marketing investments. For FY2014 the City of Fayetteville allocated $534,188 for communications, compared with the $1,075,900 budgeted for the utility. In addition to departmental funding by the Commission, there are special programs and services within the various departments of the organization that have marketing or communication funding specific to the initiative. Therefore it is challenging to fully gauge the investments in communication by Fayetteville PWC. Fayetteville PWC has a responsibility to provide customer relevant information to the over 112,000 locations that receive water, sewer, and electric service from the municipal utility, but the level of branding and marketing investments made by the public utility is extraordinary and arguably unnecessary. Furthermore, the level of public contributions by


Fayetteville PWC creates separation of financial support policies between the Commission and the City and emphasizes the “us and them” operational separation among citizens, customers, and community organizations. The Commission operates a very effective Customer Call Center that manages utility calls for the utility’s water, sewer, and electric customers through a balance of staff and technology resource utilization that is evaluated through effective use of performance measurements. In contrast, the City’s “Call Center” for 1Fay and other main line calls are assumed by the Environmental Services Department. This organization is under resourced in both staffing and technology with very manual processes and practically no automation of inbound calls. We find… The Commission has assumed almost full independent “rights” to issue external messaging through its Communications group.

The Commission Call Center effectively utilizes technology and operational processes for solid customer service.

The City Call Center is grossly under-equipped. Staff performs almost all data management through manual processes.

The City and the Commission operate independent geographic information systems that are duplicative in costs and operation.

While the Charter provisions grant certain operational authority to the Fayetteville Public Works Commission as it relates to the delivery of water, sewer, and electric service to customers of Cumberland County, there are no provisions, or intent from our analysis, allowing autonomous control of communications and messaging by the Commission. It is both appropriate and necessary that the City of Fayetteville establish and manage internal and external communications for purposes of establishing priorities, allocation of resources, continuity of messaging, standardization of process, and operational protocols.

Recommendations for Governance, Legal, and Communication The City should resume its responsibilities under the Chapter VI of the City Charter and eliminate all conflicts and actions out of

compliance with provisions consistent with the opinions rendered in the Levitas memorandum.

The Commission should transfer all existing contracted legal engagements to the City for assumption within the City’s existing internal Legal Division and the associated funding to support ongoing legal support services as allocated in the FY14 budget.


The Commission should cease all current and planned lobbyist service contracts unless otherwise authorized by the City Council as appropriate to represent the interests of the City and the Commission collectively.

City of Fayetteville should assume responsibility for all communication resources and the processes by which communication is managed and delivered that are currently controlled by the Commission independent of the City.

The Fayetteville PWC and the City of Fayetteville should develop an implementation plan for the consolidation of the Customer Call Center, currently operated by the Commission with the customer call functions of the City through effective use of the Commission’s existing interactive voice response (IVR) technology and Call Center processes and develop an implementation plan for consolidated payment channels (accounts receivable).

Combine the effective use of City and Fayetteville PWC Geographic Information Systems (GIS) and related spatial data management for enhanced citizen/customer information management (CIM).

Finding 2: Existing Agreements – City of Fayetteville and Fayetteville PWC Existing agreements and operational relationships between the City of Fayetteville and Fayetteville PWC provide a baseline understanding of the level of cooperation and collaboration between the two organizations. This “current state” review allows us to focus specifically on the areas of success (for duplication of process) and the areas of disconnect or conflict (as an indication of barriers to success). For this relational analysis, we evaluated three key examples where the City and Fayetteville PWC have entered into cooperative agreements and articulated our opinions on any benefits or liabilities of these business relationships.

Fort Bragg Water Supply In 2006, the City of Fayetteville, Fayetteville PWC, Harnett County, and the U.S. Government (Fort Bragg) entered into an agreement to extend water service to Fort Bragg. Elements of the Agreement The potential annexation of Fort Bragg and Pope Air Force Base into the City based on voluntary petition submitted by the Army and

approved by the City.


In the event of the approval by the City of the annexation, the City agreed to use 75% of the additional electric gross taxes (3.09% of Fort Bragg’s electrical purchases) received to pay toward an estimated $8.84 million in construction cost incurred by PWC.

A “sample” loan amortization schedule was based on the cost Harnett County and Fayetteville PWC acquired (less up-front payments) to install the water transmission infrastructure.

The sample loan schedule was based on the assumption that taxable debt would be issued by PWC and Harnett County to build the facilities. The projected interest rate of the loan, reflecting the taxable rate at the time, was 6.5% over a 25-year period. The City would be paying PWC, in place of the Federal government, the amount of increased gross receipt taxes to be applied toward the connection loan.

Loan Modification Exclusive of the City, in 2008, the Fayetteville PWC, Harnett County, and the U.S. Government revised the terms of the agreement permitting loan pre-payments (loan sum) by the U.S. Government, thereby potentially reducing its overall interest costs over the term of the loan. Provisions were also added to permit the U.S. Government to pre-pay the full amount of the connection charges. The modification also included a new loan amortization schedule that replaced the “sample” schedule in the 2006 agreement. This loan amortization schedule had an interest rate of 7.14% and referenced the use of revenue bonds and the cost of capital of internally generated funds as the sources Harnett County and PWC would utilize to fund the project. The total project cost financed by the loan was also changed with PWC’s share reduced to $7.6 million including construction period interest costs. The City of Fayetteville was not a party to the agreement modifications of 2008 and has been required to maintain the original term and rates of the agreement, even though it is customary, as an affected party in a contractual relationship (2006 contract), to be included when changes are made. The change in the loan amount and interest rate also impacted the City’s financial liability and, as a result, should have been pre-audited for availability of funds by the City’s Chief Financial Officer. The City of Fayetteville, as substitute payee for the U.S. Government, was not aware of, nor afforded, the opportunities to significantly reduce its interest costs. The interest rate of the loan, as calculated by Fayetteville PWC in the original agreement, significantly exceeded their borrowing rate at the time of construction (tax exempt vs. taxable debt) and no taxable debt was ever issued.


Loan Repayment The City began making payments for the Federal Government to PWC for the capital cost in January 2010, and through May 2013 had paid a total of $3,826,136 from the additional electric gross receipt taxes. Harnett County issued taxable debt to fund their extension of water service to Fort Bragg in May 2007 and in August 2008, for a total of $28,545,000. The Federal Government made connection charge payments per the agreement in FY 2009 and FY 2010, and then paid off the balance ($26,545,000) in FY 2011. Fayetteville PWC did not issue taxable debt for the project, but did issue a total of $15,225,000 in water and sewer tax-exempt revenue bond debt in January 2008 at a rate of 4.04%. Current Loan Status In April 2013, City staff requested a status on the connection charge loan and received a loan amortization schedule that indicated a 6.5% loan rate over a 25-year period for the repayment of $7,880,845, consisting of cost of construction costs and capitalized interest. The 7.14% rate was not used by PWC as the applied rate. The total payments due over the 25-year period per the amortization schedule were $15,963,608 with $8,082,764 in interest payments. Monthly payments of $53,212 that were due over the period from January 1, 2010 until May 1, 2013 totaled $2,141,693, with the City’s actual remittance to Fayetteville PWC totaled $3,826,137. PWC indicated that the full amount of the 25-year payments ($15,963,608) was due from the City, regardless of the amount remitted each year. Based on the payments made to date and a conservative estimate of the future revenue stream from the electric gross receipts tax, the effective interest rate paid by the City of Fayetteville’s General Fund will exceed 10% over the 16 years projected to produce the amount due. Agreement Impacts The City’s payments made from electric gross receipt tax for the Federal Government to pay for connection charges are being applied by Fayetteville PWC to a loan amortization payment schedule, based on a taxable revenue bond issue and an imputed cost of capital from the utility fund’s equity. No taxable revenue bonds were issued by the PWC, and the use of a cost of capital computation is an inappropriate rate for what is, in reality, an interfund loan between the City’s General Fund and the Water and Sewer Enterprise Fund. The loan amortization schedule in the 2006 document was labeled as a “sample” schedule and was later replaced in the Agreement Modification in December 2008 that was not executed by the City. If the loan rate was adjusted to the tax-exempt rate of PWC’s 2008 issuance (4%) and amortized over the same 25-year period, total interest paid would be reduced by almost $3.4 million over the term of the loan. Pre-payments made by the City are not being applied to the principal balance that would further reduce the total interest paid over the course of the loan. If City pre-payments were credited, as is the case in loans such as home mortgages, when received against principal balance, the loan would be shortened to less than nine (9) years, and total interest paid reduced to $1.4 million. In future years, over the $1.0 million in electric gross receipts tax would be available for City General Fund expenditures. PWC would be repaid in full for their construction cost at an appropriate interest rate. Under terms of the Agreement Modification with the Federal Government, the issuance of debt (taxable) for the project and the use of an imputed cost of capital were clearly contemplated, as were credit for pre-payments and the right of early pay-off by the Federal


Government. The impacts associated with the exclusion of the City of Fayetteville in the Agreement Modification is a clear example of the influences that current autonomy of the Fayetteville PWC has directly and negatively to the interests of the City and its taxpayers.

Agreement Applied Interest Rate

Term Annual Payment

Total Principal Interest Total P&I

2005 (Original) 6.50% 25 years $638,544 $7.88 million $8.08 million $15.96 million

2008 (Modification) Implications to City 7.14% 25 years $679,138 $7.91 million $9.07 million $16.98 million

Actual City Payments 10.09% 16 years $998,000* $7.88 million $8.08 million $15.96 million

Modification of Rate and Allowance for Pre-payment-Effective with Applied Amortization January, 2010

4.04% (Same rate as PWCs 2008 tax exempt issue)

9 years** Varied** $7.88 million $1.4 million $9.19 million

*75% of GRT received by the City-estimated using level payments without reductions in principle for larger payments made in 2010 and 2011 **Based on City staff projections using actual payments through April 2013 and projected quarterly electric gross receipt tax payments

Recommended Actions for Fort Bragg Water Services Agreement

Revise interest rate based on actual cost of borrowed funds

Apply historical “pre-payments” made by City beginning in 2010 to principal balance

Modify agreement with the City to be consistent with allowances extended to the U. S. Government for pre-payment of full balance. This would give the City the option of using available funds or a borrowing mechanism to pay off the loan, with PWC repaid for the construction cost and interest cost to date.


Phase V Annexation The Phase V Annexation agreement committed the City of Fayetteville to fund an estimated $90.3 million for the remaining areas of the 2005 annexation beginning in 2010 to be completed over a 14-year period. The City had contributed $3.1 million for the first phase of the 2005 annexation that was completed in 2011. The total Phase V project cost was estimated at $244 million, with City and Fayetteville PWC contributing equal amounts with the balance from assessments to property owners for connection to the utility system. The City’s annual obligation reduces the annual operating transfer from Fayetteville PWC to the City in the amount of $3.8 million in FY 14. This is not a typical arrangement for the state of North Carolina. The unique nature of the City and Commission Phase V Annexation agreement is indicative of the lack of symbiosis that exists between the two organizations resulting, in an agreement that negatively impacts the position of the parent municipal corporation.

Fiber/Broadband The Public Works Commission of the City of Fayetteville has constructed a fiber network in Fayetteville, as well in service areas external to the City. Construction on the system began in 1998 with expansion and capital investments continuing today. PWC has indicated they have 75 locations served by the network. These include various electric, water, and wastewater facilities as well as administrative sites. Statistics on the system include: Total Fiber Assets as of the end of May 2013 totaled approximately $10.3 million with a

net value (less accumulated depreciation) of $6.4 million Total fiber network is 244 miles in length with 187 of those miles within the City The network has 12 external customers, including the City of Fayetteville, that are served

at 150 locations Revenues from the external customers currently total $1.2 million per year. PWC

allocates $384,600 in fiber cost internally on an annual basis for a total of $1.6 million in annual revenues

PWC estimated maintenance costs for the year ending June 30, 2012 at $305,000


PWC indicated 6 Full Time Employees (FTE’s) are allocated for maintenance and administrative work related to the fiber network’s operation

PWC’s Capital Improvement Plan for FY 14 contains $400,000 for “Fiber Optic Cable Expansion” with an additional $2.7 million over the next five years

The fiber optic network is accounted for in PWC’s Electric Fund

City of Fayetteville Fiber Service City locations have been on the fiber optic network since 2002, with approximately 48 sites now being served with annual charges for fiber averaging over $250,000 in recent years. Most sites are billed $425 per month for an annual fee of $5,100. Since 2002, the City of Fayetteville has paid approximately $2.2 million in fees and charges for fiber optic service from PWC.

Fayetteville PWC indicated there was no formal agreement for fiber services to the City except for a schedule of charges, by location, that is signed by both parties on a periodic basis.

Fayetteville PWC indicated there was not a rate study or similar study available that established the basis for the rates charged the various fiber customers, both internal and external. This would normally include coverage of operating expenses as well recovery of capital costs and resources for future capital investments.

The fiber system provides reliable connections between PWC’s various facilities for communications and data transmission with quality and price under their control. The addition of the City and other users on the network allows the PWC to recoup their capital investment and produce a profitable income stream. Since no rate study was available and time did not permit requesting and analyzing detailed historic data on income and operating costs, an estimate of return on investment or operating profits are not available. However, at current net income levels compared to the capital investment to date, a discounted payback period can be roughly calculated. As a total system, this payback calculation would indicate a payback for investment in an 11-year time frame. If the external

Discounted Payback Analysis using full cost of system in 2013, and current cash flows from external/internal customers less maintenance cost:

Year Cash Net PV Discounted Cumulative

Flow Factor (6%) Cash Flow Disc Cash Flow

1 $ (9,630,000) 1 $ (9,630,000) $ (9,630,000) 2 $ 1,306,000 94.30% $ 1,231,558 $ (8,398,442) 3 $ 1,306,000 89.00% $ 1,162,340 $ (7,236,102) 4 $ 1,306,000 84.00% $ 1,097,040 $ (6,139,062) 5 $ 1,306,000 79.20% $ 1,034,352 $ (5,104,710) 6 $ 1,306,000 74.70% $ 975,582 $ (4,129,128) 7 $ 1,306,000 70.50% $ 920,730 $ (3,208,398) 8 $ 1,306,000 66.50% $ 868,490 $ (2,339,908) 9 $ 1,306,000 62.70% $ 818,862 $ (1,521,046) 10 $ 1,306,000 59.20% $ 773,152 $ (747,894) 11 $ 1,306,000 55.80% $ 728,748 $ (19,146) 12 $ 1,306,000 52.70% $ 688,262 $ 669,116


customers and net income resulting from their fiber optic services are allocated to the percentage of the locations (150 of the 230 locations), the payback period is in a 9-year time frame. Most of the fiber system fixed assets have a 30-year life cycle for depreciation purposes. Summary of Condition

• The City of Fayetteville has been served by the PWC network at many locations since 2002, shortly after completion of construction, and has paid over $2.2 million in fees and service charges through the end of FY 13

• Rates charged by PWC for City locations represent a good value for comparable private sector service but excessive for an otherwise self-funded internal service

• The provision of fiber optic service is not a core utility included in PWC’s mission per the charter • Continued expansion of the network and the addition of other external customers or locations will ensure a profitable income for

PWC, while continuing the primary purpose of supporting PWC operations • For the benefit of the City, in its mission to provide needed municipal services, the reduction of the charges for fiber optic service on

PWC’s network is warranted • The City has made a significant contribution toward the capital costs of PWC’s fiber network and should continue to pay an equitable

share of operating and maintenance cost but should not support expansion costs through depreciation allocations

The provision of fiber services is not one of the utilities cited in the City’s charter, yet is noted as Objective 6 of Goal 2 (Strong Core Businesses- Quality and Reliable Services) contained within the Commission’s 2012 Strategic Plan. The Commission’s Fiber Optic Utility, in the opinion of DavenportLawrence, is not a “Core Business” of the Fayetteville PWC as authorized by Charter, but it does provide critical infrastructure to the City, utility operations, and other external customers.

Recommendations for the Future of Fiber Services Functionally align the ownership and strategic planning of fiber services

Develop Internal Service Standards that detail fiber service delivery, capital and operational cost allocation, operational responsibilities, and infrastructure investments/extensions


Finding 3: Existing Shared Services Fleet and Purchasing Management

Shared Services: Fleet The City of Fayetteville and the Fayetteville Public Works Commission’s fleet maintenance operations were combined under an agreement executed in May 2005. The agreement called for a combined fleet maintenance function to be managed by Fayetteville PWC. The agreement included the transfer of City fleet maintenance personnel to the Commission, as well as shop equipment and parts inventory. A fee structure was established based on direct material costs, direct vendor costs, and direct labor with overhead. At the time of the execution of the agreement, an hourly rate of $64.48 was established. The agreement called for the City Manager and Fayetteville PWC General Manager to agree on the hourly rate on an annual basis. Included in the agreement were two other attachments, Key Initiatives and Fleet Service Level Agreement (SLA). These two agreements lay out the terms and conditions under which the Commission was to provide fleet maintenance service for the combined fleet of the City and Fayetteville PWC. According to records provided by Fayetteville PWC, the City’s current fleet consists of 1,243 units and Police vehicles comprise almost one-third of the City’s total fleet. In addition to licensed vehicles and trailers, this includes heavy construction equipment, tractors, portable generators, attachments to trucks, and other powered equipment that comprises 51.5% of total fleet units supported by the combined operation. Fayetteville PWC’s fleet consists of 884 vehicles and other equipment and comprises 41.5% of total units supported. The Fleet Maintenance operation at PWC currently has 43 employees, including 29 technicians. Budget Information Fayetteville PWC’s fleet maintenance operation is accounted for as an internal service fund. As such, it is designed to recover all costs of fleet maintenance, either direct or indirect, through the chargeback of services provided to City and Commission departments. This is normally done through a combination of labor rates, parts, and sublet work. The 2005 Fleet Agreement was based on recovery of expenditures, other than the actual cost of parts and sublet work, through an hourly labor rate that included all other expenditures, including overhead. The actual billing practice in place today was changed several years ago, with the City’s agreement, to include mark-up on parts and sublet work offset by a reduction in the hourly labor rate. Internal service funds must essentially “break-even” on an annual basis. Revenues are projected based on historic billing trends, with labor rates adjusted to account for changes in the adopted annual budget. If there is a shortage of revenues to cover expenditures, at year-end a “true-up” is calculated, and departments are then billed for the shortfall. Conversely, if revenues exceed actual costs, a credit is given to the departments against previous billings. This is known as a “charge-back system,” in which all users of the service are billed at the same rate for similar services.


Below is a table with the charges billed to the City and PWC for fleet services on an actual basis, from FY 2009 thru FY 2012, and budgeted for FY 2013 and 2014. This includes any end-of-year “true-up” charges or credits. City fuel revenues are not included, as they offset the actual expenditure for fuel purchases.

FY 2009 FY 2010 FY2011 FY 2012 FY 2013 FY 2014

CITY SERVICES 3,718,105

4,158,957

4,628,484

4,679,037

4,371,100

4,453,400

FPWC SERVICES 2,119,670

2,088,207

2,134,790

2,037,759

2,278,400

2,444,000

TOTAL SERVICE CHARGES

5,837,775

6,247,164

6,763,274

6,716,796

6,649,500

6,897,400

CITY % OF TOTAL 63.7% 66.6% 68.4% 69.7% 65.7% 64.6%

Note: FY 2013 and 2014 are estimated amounts from PWC’s budget. The City has budgeted 69% based on actual FY 2011 and 2012 charges. Analysis and Findings In this review, an analysis of fleet maintenance cost for the City was conducted. The primary tool was comparison of the cost of maintaining a diverse but similar fleet with a number of North Carolina cities. The comparison is important in that the City of Fayetteville faces the same, if not greater, challenges in providing quality municipal services with severe revenue constraints, as do these other municipalities. A comprehensive fleet study, commissioned by PWC, was completed by a consulting firm in 2009 that looked at all aspects of PWC’s fleet maintenance operation. Our analysis was not intended to be a comprehensive evaluation of the fleet operations, but to serve as a means of documenting resources the City currently dedicates to fleet maintenance, and how the operations today meet the terms of the 2005 agreement. As a part of an annual statewide performance and cost data program conducted annually by the School of Government of the University of North Carolina at Chapel Hill, various benchmarks are established for a number of services and activities provided by municipalities in North Carolina. One of these benchmark studies is fleet maintenance. Currently, 14 cities participate in the fleet study. While there are many performance indicators in the report, one is particularly relevant to our review- Cost per Vehicle Equivalent Unit (VEU). Also, as will be discussed later in the report, other performance measures of fleet maintenance operations included in the UNC study are not maintained by PWC. Cost per Vehicle Equivalent Unit (VEU) is a widely used measurement in fleet management. This methodology allows fleets with various types of equipment to be measured by cost of maintenance on a comparative basis. The basic unit is a passenger vehicle used in the ordinary course of business and would represent one (1) VEU. A solid waste truck would represent 8 to 9 VEU’s – average annual maintenance being 8 to 9 times greater than that of a basic passenger vehicle. The assignment of VEU’s to a particular class of vehicle may vary based on the age and use of the


vehicle. Fayetteville PWC has developed a VEU schedule for the City fleet. The 1,243 vehicles of the City fleet were determined to equal 2,958 VEU’s. Annual Maintenance Cost per VEU This chart represents the Annual Maintenance Cost per VEU for the year ending June 30, 2012. Cities with rolling stock fleet over 800 are shown individually with the overall average from the 14 participating cities also included. As is indicated by the chart, the City’s cost per VEU was higher than any of the participating cities and well above the average in the benchmark study. There are a number of factors that contribute to higher-than-average cost of fleet maintenance. One is the age of the fleet – older fleets normally incur higher cost when they have exceeded the normal replacement cycle. The average age of the City’s rolling stock is well above some of the other cities, but is actually less that a number of others, and is essentially average age for the overall study group. Thus we find the predominant cause of the higher maintenance cost per VEU in this shared services environment is the high cost labor rate and overhead applied by Fayetteville PWC. Labor Rate, Overhead, and Markup The cost of fleet maintenance is driven by the labor charge per-hour and by the mark-up on parts and work that is sublet to outside vendors. The fleet maintenance provider determines the amount to be recovered from each of these components. As noted on the table below, some of the cities in the UNC study use a mix of all three components, or either recover most of their costs through the labor rate. Fayetteville PWC applies a 20% administrative fee to all three components. Since this mark-up on labor is not used by any other organization in the survey, it has been added directly to the labor rate for comparability. The labor rate charged to the City was the higher than any indicated in the survey. The parts and sublet mark-ups were comparable to cities using substantially lower rates. It should be noted that the rates and mark-up charged for City repairs is still significantly less than those charged by commercial auto and truck maintenance providers.


Labor and Mark-up Rate Comparisons

City Hourly

Labor Rate % Markup

Parts % Markup

Sublet Other Fees Asheville - Light vehicles $ 50.00

30%

Asheville - Vehicles > 1 Ton $ 60.00

30%

5% Cary $ 60.00

19%

0%

$19 flat rate on sublet

Greensboro $ 52.00

25%

5% High Point $ 60.00

0%

0%

Charlotte $ 50.55

22%

14% Winston Salem $ 50.00

26%

13%

Fayetteville/FPWC $ 73.39

20%

20% Note: PWC's billed labor rate is $61.16 but is subject to a 20% administrative fee. It was added to the stated labor rate for comparability to the other cities which do not have labor markup.

The Fleet Services adopted budget totaled $7.8 million for FY 2013. Included in the budget is $800,000 in City fuel purchases, which are billed on an in and out basis and, therefore, do not represent a fleet maintenance expenditure. Personnel costs totaled $2,893,300 of which $1,251,000 represented the estimated cost of benefits. While PWC and the City differ on how certain compensation is classified, for example, sick and vacation pay are treated as salaries by the City and as benefits by PWC, on an equalized basis, PWC’s benefits exceed the City’s by over 16%. On a per employee cost, the health insurance cost in Fleet Services is approximately $12,650 per employee. The City’s average medical insurance per employee is less than $7,000.


Service Level Agreement

The 2005 Fleet Agreement contained an attachment in which the City and PWC “agree to pursue and implement process improvements as outlined” within a 12 month period and identified five Key Initiatives. One of the initiatives was to develop a Service Level Agreement between the two parties. The following table lists the key initiatives and the status of those stated initiatives at the present time. A service level agreement (SLA) was included at the time of the execution of the fleet agreements, with certain follow-up actions to be completed in the following 12 months. The Scope of Work was broken down into three major areas: Standard Services, Service Monitoring, and Performance Goals. The table to the right lists the various components of the SLA and their current status, and represents shortcomings in the execution of the standards of operation outlined in the original terms and conditions. These shortcomings in compliance of the SLAs are indicative of a lack of clarity in governance, absence of performance measurements for sustainability, and operational disconnects. SLA Omissions

1. Lack of any current City-wide management of the City fleet. SOP’s are developed by departments versus a City-wide approach. Fayetteville PWC has detailed SOP’s for operator responsibilities, connection to job performance, etc.

2. No responsible party at the City for Fleet through Fayetteville PWC to lead resolution of fleet related issues 3. City abandoned Fleet Replacement Fund three years ago because it was not broad enough in the vehicles that were paying in on an

annual basis 4. If the way to reduce fleet costs is to potentially change (PWC would argue diminish) fleet maintenance services as a trade-off to bringing

the cost to be more in line with other cities, should that option be recognized – or emphasis evaluation of current services and processes to lower current levels


Number Agreement Yes No Opportunities/Gaps/Recommendations

2005 Fleet Agreement

1 Whereas, these functions shall be provided by PWC for an amount agreed upon annually by the City Manager and PWC General Manager

Recommendation from Governance section of project, Steve and Ted should have an annual meeting to discuss all agreements and arrangements between COF and PWC

2005 Fleet Agreement-Attachment A

1

PWC will bill for services rendered on a monthly basis by work order, by department, using the following cost components: 1. Direct vendor costs 2. Direct labor and overheads $64.48/hour 3. Direct materials

Direct vendor costs and direct material costs are now charged an extra 20%. No known amendment exists that states the agreement for the City to pay this overhead fee

2005 Fleet Agreement-Attachment B

1

Perform customer satisfaction surveys

Customer satisfaction surveys are not performed

2

Develop service level agreement with COF and PWC

No SLA has been developed; Performance metrics should be set, recommendations will be made as far as ideal PM's for PWC and COF to adopt

3

Integrate COF fuel system and ancillary fuel processes to the PWC Faster Fleet management system electronically

4

PWC to provide access of repair status information in the PWC Faster Fleet management system to selected COF management representatives

Access does not exist at this time

5

Management of COF Acquisition/Replacement/Disposal Project will include development of Replacement Schedules for the COF Fleet vehicles and equipment

2005 Fleet Agreement-Attachment D 2.1.1 Plan, prioritize and manage Fleet activities 2.1.2 Manage COF Acquisition/Replacement/Disposal project 2.1.3 Manage the Maintenance and Repair program

2.1.4 Develop a formal management reporting system Not currently in place

2.1.5 Facilitate meetings between City and PWC staff Infrequent except for acquisition and replacement program

3.1.1 Equipment availability Not available when requested

3.1.2 Vehicle utilization No regular formalized utilization reporting

3.1.3 Equipment cost summary by department No regular reporting

3.1.4 Work order summary by department, by vehicle/equipment No regular reporting

3.1.5 Work order summary by department, by type of repair No regular reporting

3.1.6 On time preventative maintenance report Schedule for PM's with missed PM's included; Not ongoing report on on-time PM's

Performance Goals-To be established within 12 months of agreement

Fleet management did not provide any performance measurements that are currently tracked as a basis for setting of goals


Findings Fleet maintenance services for City exceed costs benchmarks reported for other North Carolina cities. The annual cost per VEU for 2012 for City vehicles was approximately 44% greater than the overall average of the UNC benchmark report. The cost was, however, within ranges generally used on a national level for private sector fleets to evaluate fleet performance.

City Feedback on Fleet Service

Most users indicated generally positive performance in terms of turnaround time on repairs and on quality of work. There were some

exceptions noted, particularly on turnaround times for seasonal equipment, where availability was critical. All indicated that they did not get detailed information reporting on their fleets – they had at one time, but this had been discontinued.

Without this information, it was more difficult to identify operator abuse or equipment unsuited for current use They had little control over what they were charged for fleet repairs – understood that any shortfall in revenues would be billed at year-

end. Some felt that the fleet maintenance charges were essentially a “flat” annual fee that would be assessed regardless of any increase or decrease in the number, or type of, repairs

Several reported that periodic meetings with PWC fleet staff had, over time, largely been discontinued and little, or no, feedback on fleet performance was given

They did indicate PWC staff was generally helpful and cooperative in the annual budget process related to fleet replacements and additions

Performance Management: A number of the recommended indicators below are cited in the UNC performance report and, along with others, are used by fleet maintenance providers nationwide. They provide benchmarks and can be used as a basis for setting performance goals and identifying opportunities for process improvements. We recommend Fayetteville PWC adopt the following indicators of performance management: Annual repair cost per Vehicle Equivalent Unit (VEU) Fleet availability rate: The % of units available and in service on a daily basis Turnaround time: The % of repairs completed in 24 hours, 48 hours, etc. Repeat repair rate: How often vehicles return for previously diagnosed work Technician productivity: Tracks the % of available hours that are billed out


Recommendations for Fleet Operations Functionally align the operations of fleet and shift operational “management” to City, in order to significantly reduce personnel cost

related to Fayetteville PWC’s higher fringe benefit rate and payment of indirect costs to the City for support service.

Overhead or indirect charges should be calculated on a cost basis similar to that prescribed in OMB Circular A-87. Support services (Payroll, HR, Purchasing, etc.) provided to the internal fund is documented and actual cost to provide those services is calculated.

Develop detailed Internal Service Standards for the fleet maintenance operation

i. Quantified performance measures – a series of measurements that can be used to track and compare Fleet Maintenance to benchmarks and internal goals, specific examples include those previously mentioned

ii. Framework for the City and PWC to work cooperatively to initiate process improvements in fleet maintenance and set performance goals

iii. Identify all services provided by Fleet Maintenance to ensure that both the City and PWC pay for those received iv. Develop a process to measure customer satisfaction for fleet services v. Establish a management framework with City-PWC participation in monitoring and improving fleet maintenance services


Purchasing

The City of Fayetteville and the Commission of the City of Fayetteville entered into an agreement in February 2005 to consolidate their respective purchasing functions. The Commission was designated to manage the merged function and be located at a Fayetteville PWC facility. The consolidated function has continued since that date. Employees of the City’s purchasing operation became PWC employees as of the merger. The annual fee paid by City, beginning in March 2005 for the purchasing services, was $258,845. The agreement included several initiatives that were to be completed within 12 months. The amount to be paid by the City to PWC for managing the City’s purchasing function was to be determined on an annual basis by agreement of the City Manager and PWC General Manager. The amount has not changed since FY 2007, when it was set at $24,053 per month, or $288,686 on an annual basis. PWC proposed a new fee in the budget process but no agreement was reached, and for the current fiscal year (FY 14) the amount remains the same. The Fayetteville PWC’s proposed fee would have increased the monthly amount to $37,153 or $445,840 on an annual basis. This was based on analysis of the workload that resulted in an allocation of 61% of the work being performed designated as City-related and 39% for PWC operations. It is also based on a three-year period. The City Finance staff’s analysis of the workload identified an error in how the elements of the workload (Purchase Orders/Contracts) were weighted and averaged, finding that the majority of the workload should actually be allocated to the Commission. They also proposed that the cost sharing be based on the latest fiscal year rather than a three-year average.


DavenportLawrence’s analysis of the workload also indicated that the workload allocation should have been 53% PWC and 47% City over the three-year period. Allocation of additional overhead rates in the proposal was incorrect – it should have been applied only to regular salaries not to total personnel that included overhead already applied. Adjusting the overhead calculation would result in an annual cost to the City of approximately $313,389 which is an additional savings of over $25,000 per year.

Purchasing Workload Analysis and Cost Allocation Actual Actual Actual 3 -Year Weighting Equalized COF 2010 2011 2012 Average Factor Volume Purchase Orders 1877 1805 1839 1840

1 1840

Contract Bids 67 36 52 52

8 413 Total

2254

Actual Actual Actual 3 -Year Weighting Equalized PWC 2010 2011 2012 Average Factor Volume Purchase Orders 2128 2424 2427 2326

1 2326

Contract Bids 25 24 42 30

8 243 Total

2569

Total Equalized Volume 4823

% City of Fayetteville 46.73%

% PWC 53.27%

Cost Proposal for FY 14 Annual Cost per PWC Worksheet $ 731,908 $ 671,570*

Allocated to PWC $ 389,882 $ 357,741 --------------- --------------- Allocated to COF $ 342,026 $ 313,829 Current City Fee $ 288,636 $ 288,636 Difference $ 53,390 $ 25,193

*Corrected Application of Personnel Overhead Correction to application of personnel overhead cost. Personnel expense used on PWC's purchasing cost proposal for FY 14 applied 35% of personnel overhead charges (30% for medical insurance) to actual 2012 personnel expenses. These personnel expenses included other overhead charges - such as FICA, retirement expense, longevity pay, sick/vacation pay, etc. Additions to overhead should have not been applied to these items.


Conclusions There are elements of the key initiatives that are not currently in place, including conducting customer satisfaction surveys and

developing a service level agreement for purchasing function Interviews with staff from various City departments indicated general satisfaction with the procurement services provided and the

cooperation shown by the PWC staff. There were exceptions identified, where either they did not feel that the product they needed was being purchased or that the procurement process was too lengthy

Workload calculations and the allocation of personnel overhead rates need to be reviewed and agreed upon by both parties to establish a new and accurate cost sharing arrangement

In comparison to the cost of purchasing services for a number of other North Carolina cities, the amount based on a revised workload analysis and costs appears to be within the range of the staffing levels and cost of those comparable cities

Recommendations for Shared Purchasing Functions Complete compliance with existing internal SLAs, including customer satisfaction measurements, creation of a JD Edwards (JDE) internal

user group, and establishment of performance measurements

Develop revised internal SLAs consistent with functional alignment model

Review workload calculations and allocation of overhead rates and amend cost sharing arrangement as necessary


Finding 4: Creation of a Shared Environment for Support Services Consistent with existing shared functions between the City of Fayetteville and Fayetteville PWC, and recommendations for additional functional alignment opportunities, the key elements influencing the effectiveness is defined governance and clarity of service levels and responsibilities of each operational division. Under the management of a shared Support Services Department, the duplicative support functions of the City and the Commission would be aligned for efficiency, effective service delivery, and performance management. This approach would be a significant deviation from the current segregated operations of the Fayetteville Public Works Commission and the City of Fayetteville, and requires the collective commitment of leadership in order to achieve success. The design of a shared operational Support Services Department establishes a management plan that is accountable for the highest levels of internal services and a continual improvement culture.

Key Elements of Support Services Department Provides roadmap to support services alignment, implementation and restructuring

Both parties must share responsibility in the service delivery model

Sound governance is imperative in building trust, facilitating transparency, and ensuring customer service is a priority

This is a merger of services in which both parties should be seeking to leverage resources to provide a higher level of service at a more efficient cost, in order to serve the community in the most effective and efficient way

Existing Service Level Agreements (SLAs) should be transitioned to Internal Service Standards (ISS), which clearly stipulate the accountability and responsibilities of functions and services that the Support Services Department will provide. The Internal Service Standards are intentionally not called agreements, contracts or any other similar term, in order to begin the process of creating a shared culture of trust and communication

The Internal Service Standards will provide a clear understanding of each party’s role in the provision of service, in addition to the

benefit of each service being clearly articulated. Basis for Support Services Department The basis for shifting to a singularly aligned Support Services Department is the elimination of duplication in areas of internal support including Finance, Communications, Information Technology, Audit, Organizational Development, and enhanced functional benefits in the existing shared services of Fleet and Purchasing. The functional alignment process through a Support Services Department would drastically reduce overhead


and operational inequities between the City and the Commission, thereby lowering labor-related costs for parallel functions. These inequities can be clearly identified by conducting a comparison of starting pay between same class positions at the City and at Fayetteville PWC, as shown below. The City of Fayetteville has starting pay positions that average 15.6% lower than those of similar positions within the Fayetteville PWC, a commission of the City. DavenportLawrence recommends establishing a Support Services Department that holds responsibility for effective and efficient service delivery for Organizational Development, Finance, Fleet, Purchasing, Audit, Communications, and IT. Internal Service Standards shall be established through a management team established by the City with active participation within the leadership of Fayetteville PWC. SALARY COMPARISIONS

COF - PWC NON-UTILITY POSTIONS COF Starting PWC Starting %

COF Position PWC Position Annual Pay Annual Pay Difference Administrative Secretary

Senior Administrative Asst. $ 33,108

$ 39,633 -19.71%

Senior Programmer Analyst

Senior Programmer Analyst $ 48,211

$ 55,084 -14.26% Budget Analyst

Budget Analyst

$ 41,651

$ 45,056 -8.18%

Network Administrator

Network Administrator $ 48,211

$ 56,635 -17.47% Human Resources Analyst

HR Advisor

$ 48,211

$ 53,738 -11.46%

Accountant

Accountant

$ 44,738

$ 45,056 -0.71% Asst. HR Director - OD/Training

Training Manager $ 56,931

$ 71,821 -26.15%

Budget and Evaluation Manager

Budget Manager

$ 56,931

$ 71,821 -26.15% Assistant HR Director

Sr HR Advisor

$ 56,931

$ 61,149 -7.41%

Internal Auditor

Internal Audit Supervisor $ 56,931

$ 82,450 -44.82% Accounting Technician

Accounting Technician $ 30,420

$ 34,841 -14.53%

Safety Officer

Safety Specialist

$ 48,211

$ 51,488 -6.80% GIS Manager

GIS Coordinator

$ 52,301

$ 55,084 -5.32%

Average -15.61%

Median -14.26%

The differences in salaries along with an estimated 16% difference in the fringe benefit rate combine for substantial increase in personnel cost compared to the City of Fayetteville.


Finding 5: Enterprise Resource Planning Utilization & Technology Integration (Applications and Infrastructure)

Application Through evaluation of the functional alignment within financial operations of the City and the Commission, the greatest opportunities for efficiencies were rooted in the ability of both organizations to manage their necessary databases on the same instance (a set of memory structures). Shared Support Services functions provide effective management of back office operations, supporting both City and Commission service delivery, through a consolidated platform. The Fayetteville PWC has undertaken a massive implementation of an Oracle suite of solutions that will encompass practically all of the financial and field operation database management needs, with an investment between $13 million to $17 million. Beyond the cost of licensing, the most significant costs to the Commission are rooted in the change management and business process components of integration. This requires dedicated staff of Fayetteville PWC employees and a team of contract implementation professionals to work almost 24-7 for a period of 24-36 months. There are a number of benefits and barriers to the City’s inclusion on the Oracle platform noted in the following lists and charts. DavenportLawrence recognizes the fundamental necessity of a shared application in order to gain any sustainable efficiencies between the City and the Commission, but also recognizes the pathway for implementation is complex, challenging, and requires a fundamental adjustment in organizational culture to support the change management process. Benefits Ability to secure data by responsibilities at the user level Facilitates a Support Service business allowing users to

transact by organization based on security level Ability to support business growth Ability to consolidate financial reports by the use of

consolidated ledger Ability to support multiple Legal Entities/Tax IDs and Bank

Accounts Ability to support responsibilities that can transact in one or

all organizations Ability to support multiple Charts of Accounts by company Single point of maintenance

Barriers Requires PWC to be fully functional before adding

additional organizations Additional Patch Testing because of multiple charts of

accounts, legal entities, etc. Introduction of Automatic Testing Tool (Mercury);

additional cost for implementation & training Not enough information of PWC customizations and the

impact on the city integration Enterprise Resource Planning (ERP) and Utilization and

Technology Integration

Single instance can support multiple companies

Current State of Application and Business Process The current solution in place for the City of Fayetteville creates a great deal of challenges internally, and will drive up costs and complexity associated with a shared services organization if the status quo is maintained. It is our belief that many of these issues need to be addressed prior to a functional alignment effort, to support the possibility of a successful solution. The current solution is depicted below:


Issues with Current State (Separate Platforms) General

• Methodology associated with implementing the existing solution has not taken into account business integration needs for the City and, therefore, the solutions are not currently optimized for a shared services environment

• Separate interfaces between PWC and the City limit the ability for the organizations to share information and create inefficiencies in processing with Purchasing, Fleet and Financial Transactions

• Cost associated with the need to maintain many unique solutions for training; IT support, hardware and maintenance • Infrastructure and support cost associated with maintaining multiple solutions • Need to have staff knowledge of multiple systems to support operational needs, often lending itself to limited knowledge and utilization

of the existing applications Finance

• Manual recording of Accounts Receivable (AR) costs from stand-alone systems to JDE

• Manual recording of PWC Fleet costs to JDE • Separate system from PWC - no visibility of consolidated costs • No ability for shared services with PWC • Reporting (Comprehensive Annual Financial Report, CAFR & Other) -

requires manual entries of PWC and other subsystems Human Resources

• The City’s Employee Master Record does not have details on performance reviews – only the score and date of next performance review.

• Currently no attachment of documents to employee records • Open enrollment for benefits is done under a service contract with the vendor providing software called “Univers/Impact.” Employees

enter their annual elections via a City provided terminal, on-line, or over an 800 toll-free phone number. Uploaded data must be carefully reviewed, as there are usually errors to be resolved

• Turnover reports and analysis is very difficult to develop JDE • Salary forecasts for annual budget process are prepared by HR from an Excel download from JDE. Various compensation scenarios – i.e.

cost of living and merits at different levels – require complex tables and formulas to forecast


• Currently looking at software solutions for performing pay and class studies in-house; ability to do salary comparisons, job grading/scoring, and for budget salary forecast. They now contract out pay and class plan updates

• Lack of training for JDE software users – new employees essentially learn on the job • No IT personnel assigned as on-going resource to support JDE applications – use JDE support primarily to resolve issues • Personnel files contain hard copies of the various employee, tax, and benefit documents – although they are scanned to laserfiche, they

are not organized in an employee file • HR staffing is an issue – majority of resources in HR (9 of 16 positions) are in organization development and safety. Ratio of City

employees to HR staff is very high compared to other organizations in NC • Job applications are received through NEOGOV. Notes on hiring process such as interviews and reasons for selection are entered by the

departments into NEOGOV. A personnel action form is generated from NEOGOV for the new-hire and then entered into JDE to set-up the employee master record

Payroll

• NEOGOV processes are manual and offer risk for error • Checks are also issued for termination pay to get employees to attend an exit interview • Employees may receive various types of incentive pay and departments are responsible to monitor these on each payroll run and notify

HR if no longer applicable • There are various errors on (write out what DBA stands for) DBA rollovers at year-end • Vacation balances rollover is manual and very time consuming • Family Medical Leave Act (FMLA) time is tracked in payroll on a spreadsheet, providing risk for error • Final pay calculations require manual tracking • Inefficient Direct deposit processing


Option 1: Separate Platforms (JDE and Oracle) With Refinement The assessment team has evaluated the existing solution and become familiar with solutions that the City of Fayetteville and PWC have on the horizon; there are two general approaches with regard to a blueprint for application solution architecture. The first option for a To-Be environment consists of the City using the current financial applications with the addition of Cityworks and Kronos to support respective functions and PWC’s full migration to the Oracle solution currently being implemented. All of the same issues exist for the City, with the exception of Kronos automating some of the Time tracking and HR functions. A general diagram of this solution is below:

Benefits and Barriers of Option 1 Benefits of Option 1 Lower integration cost for solutions

Less stress on the organization as the organization already knows

JDE, thus the enhancement engagement would require less change management efforts than moving to an Oracle solution

Overarching Barrier of Option 1

o Requires technical and functional application support with varying skill sets reducing the ability to cross train the service center employees


Option 2: City of Fayetteville and Fayetteville PWC Utilizing One Platform for Efficiencies

DavenportLawrence assessed the Fayetteville PWC Oracle configurations along with the City's current business functions in JDE, as well as other standalone systems, in order to evaluate the benefits and barriers of integrating both business units. We also addressed the City’s current challenges and suggested ways for Oracle to address these items. The firm met with City and Commission CFO’s, the City’s Financial, Human Resources and Payroll staff members, and Fayetteville PWC's Subject Matter Experts directly involved on the project. The following items were evaluated during our assessment:

• PWC Oracle Financial Configurations • PWC RICE List (Reports, Interfaces, Conversions, & Extensions) • PWC Functional spec for the WAM to Fixed Assets Interface • City's Challenges Log for Human Resources, Payroll, Budget and Finance • City's Stand Alone Accounts Receivable Systems • City's List of Required Reports • City's Financial Reporting Software

Through our evaluations, it was discovered that some customizations/extensions were required by PWC’s business needs to implement Oracle. Based on information the assessment team has been provided to date, there is nothing that would preclude the ability of the City to integrate with the Oracle solutions. The preferred path for the City and the Commission, in order to achieve full benefit of functional alignment, is to utilize a single platform. A shared Oracle instance will provide the ability of both organizations to leverage staff in consolidating transactional responsibilities, utilize existing workflows to optimize processes between departments, the ability to focus on a smaller set of technologies while honing knowledge and support needs, and the ability to effectively create appropriate operational reports to manage the organizations effectively. Without the ability to share resources (people, processes, and technology), the shared Support Services design will not fully achieve the benefits of a combined solution. The following represents the designed ability to establish a shared organization utilizing the Oracle solution as a single platform:


The organizational architecture depicts both organizations (CoF & FPWC) as they would be configured on the same Oracle instance. Both groups enter labor & non-labor transactions at the cost center level, which is shown beneath the departments. This picture does not include every cost center because of space issues only.

Departments & Divisions represent the reporting level groups only


As Is - To Be Summary for Financials Integration The Oracle Financials suite includes the General Ledger, Purchasing, Accounts Payable, iExpense, Fixed Assets, Accounts Receivable, Cash Management, Project Accounting & Grants. Each of these are unique with flexible setups, yet integrate seamlessly without customization.

Benefits and Barriers to Option 2: Benefits Single instance can support multiple organizations Single point of maintenance Ability to support multiple Charts of Accounts by organization Ability to support multiple Legal Entities/Tax IDs and Bank

Accounts Ability to support responsibilities that can transact in one, or

all, organizations Ability to secure data by responsibilities at the user level Supports a Shared Service business, allowing users to

transact, by organization, based on security level Ability to support business growth Ability to consolidate financial reports by the use of

consolidated ledger Barriers

• It would be suggested that PWC be fully functional before adding additional organizations • Additional Patch Testing because of multiple charts of accounts, legal entities, etc. • Introduction of Automatic Testing Tool (Mercury); additional cost for implementation & training • More information needed on PWC customizations and their possible impact on the City’s integration


Integration Risk Assessment Based on the information made available regarding the Oracle implementation by Fayetteville PWC, DavenportLawrence suggests that having the City join the Fayetteville PWC instance poses a medium risk to the City due primarily to the functions of Financials and Reporting. Financials:

• This is graded as medium risk due to lack of comprehensive understanding PWC’s RICE list (Reports, Interfaces, Conversions, & Extensions), especially their conversions and instances. Although the Commission did provide a RICE list, more detail and analysis is needed to understand the conversions and their impact on the financials.

• The City may have to do a modified customization to fit into Fayetteville PWC’s conversion(s) Reporting:

• Fayetteville PWC said they’re using OBIEE, although unsure of whether this will be the product they stay with for reporting, as it is a new, expensive product

• Due to the uncertainty of PWC’s reporting tool, this is rated as a medium risk to the City • Alternative reporting product recommended to the Commission and the City is Discoverer, which is affordable and user friendly. It is

almost free with licensing, and while a developer is needed for set-up, users can be trained to develop their own reports • City of Fayetteville said they need 456 different reports, yet we are unsure of finality of this • Benefit is that Fayetteville PWC will be live and functioning before the City can start implementation, which provides the ability for the

City to participate in preliminary training. All customizations and reports will be up and running. Before the City joins the instance, we recommend Fayetteville PWC demo and/or train their own instance in a test environment, to the City, allowing them to see the functioning. City will have qualified users on a stable instance to learn about the exact Oracle system they will eventually be using.

Assumptions:

• Limited information regarding details of PWC customizations limits the assessment team’s ability to assess the impact on the City integration. It will be required to have additional details prior to executing any migrations.

• Changes in the system will impact both organizations. Therefore, it would be suggested that a change board be established within the Internal Service Organization to evaluate impact of requested modifications and patches to mitigate this risk.

• Initial integration of COF into PWC’s environment will be dependent on the business and design decisions during the PWC implementation.

• Based on the PWC design, gain assurance that Key Flexfields throughout the Oracle application will support PWC and COF without modification

• PWC and COF will need to coordinate, through a Change Control board; any custom extensions or patching to ensure changes will not negatively impact the other organization.


Infrastructure A high level analysis of needs and existing state of infrastructure was conducted as a component of the Support Services design. This assessment is consistent with prior analysis performed by DavenportLawrence for IT environments as infrastructure solutions are, for the most part, a commodity service with predictable benefits and cost savings given economies of scale. Areas of leveraged alignment include infrastructure support and desktop support processes, IT network management personnel, and capital resources. During our evaluation both organizations articulated that shared infrastructure would be an effective alignment opportunity and would be deemed a high value as a foundational function in advance of the integration of Oracle by the City. Our team’s assessment yielded the following summary conclusions with regard to the two organizations: City of Fayetteville

• Varies in technologies, closely aligned to the Commission’s enterprise framework • No clear vision on the City’s future state infrastructure design • Resource constrained thereby often causing reactionary decision making • Inability to collaborate on potential synergies with Fayetteville PWC

Fayetteville PWC

• Varies in technologies, closely aligned to City enterprise framework • Extensive inventory of technologies and resources but without any business model to disperse to other organizations • Fairly consistent turn-over challenges in the IT organization • The few technologies shared with the City have reached useful life, are being upgraded, and does not leverage economies of scale • Extensive Fiber & Disaster Recovery platforms without a central management to oversee and direct operations and future strategy for

use of the platform Recommendations: It is our recommendation that a comprehensive infrastructure consolidation assessment and plan be executed with the result being a clear “Short Time To Market” (implementation) approach. The goal should be to target short-term consolidation of resources where applicable (for example; Email, Disaster Recovery, etc.) that will yield quantifiable cost savings and increased service levels. The IT strategy should take into account organization priorities of reduction in overall costs, reduction in "IT" risks, increasing service level of support and a high level of reliability within the shared technical infrastructures. With a centralized technology and program management platform the organizations would benefit from:


Cost reduction between the organization through consolidation of duplicative hardware, people and processes Ability to consider appropriate cloud strategy, including business and IT operational and technical impacts Improved “time to market” for the City and FPWC technology customers with effective infrastructure products Leveraging best of breed Infrastructure support to increase agility, scalability and elasticity with all technology decision-making. Reduction in risk with effective off-site disaster recovery Ability to move from a capital intensive environment (CAPEX) to an operational environment (OPEX) that is predictable in cost and

supports continuous IT improvement Ability to set clear Internal Service Standards that drive high performance and reliability standards for external customers “Users” of IT

Solutions for the City and FPWC Ability to better adjust to short term capacity demands without intensive capital investment through third party of shared resource

leverage

Summary It is our belief that to best leverage technology resources and offer leading edge solutions to support organizations; IT organizations must take advantage of opportunities like cloud computing, unified communications, mobility, and virtual desktops. The shared organization should have a clear focus on meeting on-going expectation through clear and consistent service level standards while engaging proactively with the business users to deliver high quality solutions. It is our belief this value can be maximized by consolidating resources and considering the best overall strategy to deliver a proper Infrastructure foundation.

Assess/Develop Service Strategy Service Design Service Transition Service Operation

Creation

Continuous Service Improvement

Through Invocation Communication


Implementation Plan The implementation plan for a successful alignment of functions that are either duplicative (resulting in elimination of unnecessary costs) or are targets for economies of scale (lowering costs of internal services by expanding fixed costs over more functions) establishes the mechanisms for developing a cooperative, continual improvement culture for the City of Fayetteville. The pathway of effective implementation involves a complex “network” of initiatives that support the organizational change management system. Categorically, these initiatives are housed in five key areas of progression:

The implementation strategy requires dedicated resources at each phase of the process, representing the interests of both the City of Fayetteville and Fayetteville PWC. The preferred path for functional alignment ultimately has to be a plan that is supported, both conceptually and practically, by those responsible for execution and for oversight. The Support Services group and the associated organizational relationships must develop clear levels of service and responsibilities so that appropriate management and progression of the combined solution is measured for effectiveness, benefit, and sustainability. DavenportLawrence has developed a prioritization of action list that takes into consideration the City’s financial, resource, political, and historical capacities to invoke a comprehensive change within for the City of Fayetteville. Municipal operations do not work independently. Therefore, opportunities for consolidation and shared service arrangements beyond just the Finance, Customer Service, and Public Works Departments have been included in the list of recommended actions.


Initiatives Plan (Suggested Implementation by Priority)


THE CITIZEN AND THE CUSTOMER…AND THE OBLIGATION TO SERVE…

Documents

Study Results and Recommendations Unveiled for Alignment of City and Fayetteville PWC Services