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In the last post, I shared concerns about the budget forecast in the city’s rate proposal showing skyrocketing “operations” costs in both the water and wastewater departments – and the obvious diversion of some of the revenues from the proposed rate hike from infrastructure projects to cover these costs. 
That leads me to one of the questions posed in the first post that, if answered, could generate alternative reforms to prevent a rate hike.
Can we cut the operations (i.e. labor) side of the water and sewer budgets, and in doing so, free up monies for infrastructure (i.e. capital) projects? How much and how?
If we “cut” the operations budget by operating the system more efficiently, guess what? There’s more money available for the capital side of the budget. So the first set of reforms we should consider deal with “moving the money” from the operations side of the water and wastewater department budgets to the capital side.
The biggest way to do this is to reduce the size (and cost) of the workforce in the water and wastewater departments. How much can we save? Millions. Take a look at the attached breakdown of employees and labor costs for both departments. 
Take a look at some of the net “cost-per-employee” figures. Pretty outrageous. Most water and wastewater functions have an average “cost-per-employee” of well in excess of $80,000-$90,000. Certainly we should be reducing labor costs before hiking water and sewer rates. But how?
Reform 1: Delay the 4 percent Salary Increase for Water and Sewer Employees
Employees of the water and sewer departments are slated to receive a 4 percent across-the-board salary increase this year. That’s in addition to any individual step and merit increases that employees are given.
If our city leaders are serious about an infrastructure crisis in water and sewer, then declare it a crisis. Use this crisis to re-open negotiations with the labor unions to suspend this 4 percent hike if only in the water and wastewater departments. You can’t ask San Diego taxpayers to see a 35 percent hike in their water and sewer bills, unless you are willing to forgo a 4 percent hike in water and wastewater salaries. It is doubtful that unions will be receptive, which is why we could explore other reforms.
Suspending the 4 percent across-the-board pay hike in the water and wastewater departments would save $7.5 million per year, and support principal and interest on $125 million in bonds.
Reform 2: Cut the Number of Employees
Do we really need 1077.08 employees in the Wastewater Department, 914.06 for the Water Department, and 205.48 employees for the water and sewer capital project engineering division.
The FY 2007 budget provides scant detail for what these folks do, but the FY 2006 budgets contain some details. Take a look a the employee classification for each department contained in those old budgets for Wastewater and Water. See any positions to cut?
A 10 percent reduction in the workforce is not uncommon in the private sector – indeed a 10 percent reduction pales in comparison to other massive downsizings of 40-60 percent in some organizations facing a “crisis” like the water and wastewater departments face.
A mere 10 percent reduction in the water and wastewater departments would save $18.6 million per year, and support principal and interest on $310 million in bonds.
Reform 3: Implement Prop C-Managed Competitions
Maybe we shouldn’t be picking individual positions to cut from the outside. Perhaps we should let the water and wastewater employees themselves suggest where to cut.
Just a few weeks ago, voters overwhelmingly approved Proposition C to allow for “managed competitions” in the City of San Diego. Prop C requires city departments to streamline their operations through “business process re-engineering” and then checks those streamlining efforts using competitive bidding with outside providers. In some cases, outside bidders win and the function is outsourced using a “performance-based” contract. Regardless of who wins, experiences with managed competition in other cities (particularly in water and sewer functions) demonstrate 20-35 percent cost savings over the life of these contracts- primarily from the labor side of the budget.
The mayor asked for this important tool so he can reform city government. Many of us stepped forward to help the mayor pass Prop C. It is now time to use Prop C in the water and sewer departments to see if we can generate more operational efficiencies.
A 15 percent reduction in the water and wastewater departments through managed competition would save $28 million per year, and support principal and interest on $460 million in bonds.
Reform 4: Cut the Cost of Pension and Retiree Health Benefits
The city bureaucracy will obviously resist staff cuts – and most of the politicians at City Hall are loathe to the idea of cutting city staff. If they won’t streamline the workforce, can we perhaps reduce the cost-per-employee? There is a way: reforming the fringe benefits package given to water and wastewater employees.
Take another look at that labor chart above. It probably understates the true cost of labor – as it does not build in the Mayor’s proposed amortization of various pension and retiree health liabilities. By how much is unknown – the city’s rate hike case is suspiciously silent on the specific numbers behind Mayer-Hoffman’s findings.
However, I recently received a rough breakdown of the full costs of the average employee of the city’s wastewater department from an associate member of the PUAC committee. This PUAC member pushed the wastewater department for a) the average employee salary rate b) cost of pension contribution for “normal cost” c) cost of pension contribution for the UAAL (unfunded liability), d) cost of health care unfunded liability and e) other fringe benefits. I was pretty impressed by his analysis – and shocked by the implications. You may want to take a look at it yourself.
While these numbers are still rough and I have been waiting for a confirmation from the city for the past six weeks, they seem on first glance to be addressing the primary drivers of labor costs in the city. Here’s the summary of the calculations: the average employee at the wastewater department earns more than $55,000. But when you add all fringe benefit costs outlined above, the “cost” of the average employee shoots up to above $90,000-$95,000 per employee. If these calculations are accurate, the total fringe rate is over 6 percent of salary. In most organizations, a fringe rate of 30-35 percent is considered high. We could probably cut our fringe down to that level – if our city politicians had the willingness to do it.
Where could they start? You guessed it: a reformed pension plan. And be bold like County Supervisors Diann Jacobs and Pam Slater-Price by tackling retiree health reform. We have a pension crisis and an infrastructure crisis – more than enough justification for implementing a 401(k) plan in water and wastewater, and requiring those employees to cover their healthcare in retirement. Enact both of these reforms, and we can see a fringe rate comparable to the private sector for these two “under-funded” departments.
A 10 percent reduction in the total cost of the fringe benefits package in the water and wastewater departments would save over $13 million per year, and support principal and interest on $215 million in bonds.
You want to avoid water and sewer rate hikes? Let’s “move the money” from the labor side of the water and sewer budgets to the “capital” side.