In the fall of 2009 the Grand Rapids City Council directed the City Administrator to seek any and all ways to reduce duplication and increase efficiency in delivery of services in all departments and affiliated agencies. To this end the City Administrator requested information from the GRPUC for the purpose of analyzing the feasibility of consolidating service delivery of the two entities. This report analyzes the concept of reducing the duplication of services between the City of Grand Rapids and the Grand Rapids Public Utilities Commission (GRPUC). By reviewing the infrastructure staffing of the City of Grand Rapids/GRPUC compared to other cities of comparable size and service, reveals that the City of Grand Rapids/GRPUC has 57 FTE while the average of the comparables of 33.86. These figures do not include electrical workers for GRPUC or the comparable cities.

By merging the labor forces of the City and GRPUC and eliminating, through attrition over a five year time frame, seventeen FTE’s within the Administration, Finance, and Water/Wastewater departments the City and GRPUC will recognize an annual savings of approximately $700,700 in the first year of the agreement to $1,110,069 per year by the fifth year of the contract. If that savings were translated to a reduction of the City tax levy, this would result in a reduction of the City tax rate by just over 15.58%. This equates to an annual savings in property tax of $311.54 on a single family residence with an estimate taxable market value of $200,000.

By consolidating the employees into one organization the city can achieve synergies and economies of scale that will allow for the same amount of work to be done by fewer people. The consolidation of the employees into one organization will also produce synergies that cannot be quantified in advance. Work process and administrative tasks can be simplified and streamlined to allow for higher quality and more timely service delivery. These synergies are achieved through the cross utilization of employees and equipment. As with any service delivery organization there are ebbs and flows to the workload. By coordinating the efforts of the work crews the organizations resources can be directed at those work tasks that are the most critical at any given time. With the two sets of work crews operating independently these coordination efforts are cumbersome at best. The duplication of administration, human resources, and finance departments is unnecessary to continue delivering service at the same level. Duplication of this nature is also unnecessary to maintain the autonomy of the Commission in its oversight of the utility assets, rate structure, capital planning and the like. In other words the positive aspects of having an autonomous utility board can be maintained regardless of the management structure of the organization.

The GRPUC has a large number of employees who have already reached retirement eligibility or who will reach retirement eligibility in 2010. In order to execute the contracting of labor services between the GRPUC and the City and eliminate seventeen FTE’s it is recommended that City and GRPUC employees be offered an Early Retirement Incentive Package (ERIP) which provides $10,000 annually for medical expenses for five years. The cost of health care in retirement is a major deterrent for someone to retire. These dollars would be deposited into a post employment health savings account. The City offered this benefit in 2009 and found it to be successful with a reduction of six FTE’s generating a net savings of approximately $350,000 annually.

When the merging of labor forces moves forward, the City should consider restructuring where departments are located. It is recommended that Community Development and Engineering departments be relocated to the GRPUC/PW Facility which is located off-site from City Hall. This will provide contractors and home owners a “one-stop shop” concept where they can get their building, and storm water permits, along with establishing their utility accounts. The finance department should remain at City Hall and the GRPUC meetings should be in the City Hall Council Chambers to provide for the use of the Legistar agenda system, which has been found to be a labor saving tool. This would also allow for the conversion of all or part of the GRPUC/PW building conference room to be converted to office space if necessary.

There are two basic approaches to achieving the cross utilization objective and ultimately the cost savings. The first approach is a full merger of the employees. In this scenario all employees of the GRPUC would become employees of the city. This approach is desirable because it would facilitate a clear transition of the lines of authority. However this approach brings with it several legal issues that would have to be dealt with. The issue of unit clarification for the unions would have to be settled and the inherent difficulties in operating with two separate unions in the same departments. A second approach is that of a hybrid employee merger. If the AFSCME or the 49er Unions wished to oppose the merger beyond the legal lengths that the GRPUC or the City Council are willing to go, then this hybrid model could be utilized. The hybrid merger model would leave all of the AFSCME employees as employees of the GRPUC. The exempt employees of the GRPUC would become employees of the City. The GRPUC would then contract with the City to manage the departments. This approach assumes the two entities would agree to allow for cross utilization of equipment and employees. Additionally, the agreement should stipulate that the AFSCME employees of the GRPUC be in the City health care pool. The current costs per employee for the City are approximately $2,000 less per year for health insurance than the current cost per employee for the GRPUC.

It must be emphasized that under either scenario the GRPUC will remain intact with the same statutory responsibilities and authority that it currently has. Additionally, all assets of the GRPUC will remain assets of the GRPUC. The only change that will likely occur is that the equipment will be leased to the city for use under both scenarios described above. This is necessary to relieve the GRPUC of liability if there were ever a legal claim against the City concerning the use of GRPUC equipment by City employees or GRPUC employees working under the direction of City employees. The added benefit of this arrangement to the GRPUC is that it acts as a failsafe if either the City or GRPUC would want to exercise their right to terminate the contract. Service provision could continue to be provided without a large capital outlay by the GRPUC.

Ultimately, both entities need to change the way public services are delivered to their owners. This will require right sizing and the altering of duties and responsibilities of the existing employee base. The focus of both the GRPUC and City needs to be on reducing the cost of government to the owners of the utility which is the residents along with the other property tax payers in the community. To that end it is recommended that all savings identified at the beginning of the agreement be translated to tax rate or utility rate decreases or combination of both.

COMPARABLE CITIES

To begin the process of analysis of a potential merger of the operations of the City and the GRPUC we must look at how the service delivery in Grand Rapids compares to that of cities of like size and service levels in Minnesota. Eight cities were selected based on population and types of service delivered. These cities were then contacted with a request for data on number of personnel performing services in the areas of administration, finance/HR, right-of-way (ROW) Because electrical utility service is not provided by many municipalities the employees associated with the electric distribution services were excluded from this analysis.
The results of this research are shown in Table 1. We combined the employees of the City and the GRPUC in each department listed above and compared that data to the number of employees providing the same services in the Comparable Cities. As you can see the number of employees providing these services in Grand Rapids is significantly higher than the comparables. This is due in the most part to the duplication of administration and support staff in Grand Rapids. By creating two separate operations the number of employees necessary to provide service is increased.

Table 1 GRPUC/City and Comparable Cities Comparison Data









Figure 1: Finance Department Employee Number Comparison

In Figure 1 the duplication in Grand Rapids is clearly demonstrated. For this comparison the finance departments include the general accounting staff for the municipal operations and the utility operations. It also includes the personnel involved in the utility billing processes. This comparison deals only with the differences in personnel. There is a myriad of peripheral costs associated with having two separate departments. The most obvious is the cost of maintaining two separate accounting software systems.

Figure 2: Admin/HR Employee Number Comparison

In Figure 2 the differences in personnel levels in the administration and human resource functions is shown. Again, Grand Rapids is significantly higher than the comparable cities. This is a clear indication of the effects of unnecessary duplication in our service delivery.

Figure 3: ROW Employee Number Comparison

Figure 3 demonstrates the differences between Grand Rapids and the comparable cities when it comes to the level of personnel in the right-of-way (ROW) crews. The ROW crews are those front line personnel that work in the areas of fleet maintenance, road, maintenance, water, water treatment, sewer, and wastewater treatment. How these tasks are distributed between departments and how the work is assign to the work crews will vary from city to city. The point is this; there is no one best way to accomplish these tasks. But according to our data the same level of service can be delivered with fewer people. Recall that these data do not include the electrical department crews for GRPUC or the comparable cities.

Another interesting thing to note is the magnitude of the difference in the number of ROW employees in Grand Rapids and the comparable cities. It is clear from the data that the magnitude of the difference is greater in the Admin/HR and Finance departments. This is a clear indication of the unnecessary duplication of service in Grand Rapids is concentrated in these departments rather than the front line ROW crews. This is intuitive because there is a basic level of support needed to provide service to one customer. As the number of customers increases the level of support necessary does not grow proportionally. In other words it takes a similar number of support personnel, i.e. finance, admin and human resources, to supply service to one customer as it does to 100 customers and so on. With the advances in computer technology this is increasingly true.

Figure 4: Total Employee Number Comparison

If we examine the total number of employees in Grand Rapids and compare it to the total number of employees in the comparable cities we see that Grand Rapids is significantly higher than the majority of comparable cities. The City of Hibbing falls in at a close second; however we must note two important facts about Hibbing that explains this. Hibbing is one of the comparable cities that do have a separate PUC. Additionally, Hibbing has a significantly higher number of utility customer, road miles and population. Another city of note is Fairmont. Fairmont also has a separate public utility not unlike Grand Rapids. They also have a greater number of utility customers than Grand Rapids .

By comparing the ratio of employees to the number of service units we can glean additional information about the level of duplication in Grand Rapids. Table 2 shows the comparison of various service unit ratios of Grand Rapids and the comparable cities. A significant difference can be seen between the number of employees per service unit in Grand Rapids and the comparable cities. This is further evidence that the duplication in Grand Rapids is unnecessary.

Table 2: GRPUC/City vs. Average Comparable Employee Ratio Comparison

Figure 5: Employee per Park Acreage Ratio Comparison

The employee to park acre ratio is telling. Grand Rapids has more than twice the average number of employees per park acre. A couple of things need to be noted here. First, the park acreage data from Hibbing was omitted from the comparison because the total park acreage was in the thousands. This included some acreage that was not maintained as “parks” thus did not require personnel. The second thing to note is that we did include “park maintenance” personnel in this comparison. Some cities, like Grand Rapids, use public works personnel to maintain the parks. Other cities have separate park maintenance personnel. The numbers were adjusted to include parks maintenance personnel.

Figure 6: Employees per Utility Customer Ratio Comparison

The ratio of employees to customers is a key indicator of where Grand Rapids stands relative to the comparable cities. As shown in Figure 6, Grand Rapids has nearly three times the average number of employees per customer. This is a glaring red flag that tells us we need to reconsider how we deliver service in Grand Rapids.

The next factor we need to consider is the variance in the workload in each community. Cities are all different in size and geographic distribution. This means that to deliver the same service in one community may take more miles of water mains, sewers, streets, and the like. To compare the ratios of the average employees per mile of water mains, sewer, storm sewer, and road miles is compared to Grand Rapids.

Figure 7, Figure 8, Figure 9 and Figure 10 show the comparison of the average employees per water main, sanitary sewer, storm sewer, and road miles; with Grand Rapids. The ratios are significantly higher in Grand Rapids than in the comparable cities.

Figure 7: Employees per Water Main Mile Ratio Comparison

Figure 8: Employees per Storm Sewer Mile Ratio Comparison

Figure 9: Employees per Sanitary Sewer Mile Ratio Comparison

Figure 10: Employees per Road Mile Ratio Comparison

Figure 11 Employees per Capita Ratio Comparison

The story is the same when we look at the ratio of employee per capita. Grand Rapids has twice as many employees per capita performing delivering the same level of service as the comparable cities. Regardless of how we examine the differences between Grand Rapids and comparable cities, Grand Rapids has more employees than necessary to deliver this level of service. As noted above this excess employee number is due to the unnecessary duplication of service at the GRPUC and the City.

The cost savings listed in Table 3 are indicate how much lower the total cost would be due to the merger as compared to the 2010 expenditure level. It is demonstrated graphically in Figure 12. When the natural cost increases are brought into the equation the total savings would be much more significant.

Table 4 lists the annual savings relative to the total costs of the GRPUC with average increases factored in. These costs savings assume that each employee that is eligible to retire will accept the ERIP. It is assumed that health insurance costs will grow at a rate of 10% per year and that wages will increase at a rate of 2% per year. The current collective bargaining agreement (CBA) between the GRPUC and the AFSCME union contains a 2% increase for each year of the three year agreement. The city changed to a high deductable HSA health care plan in 2008. In 2009 the health care premiums for the city increased by 9% and in 2010 they decreased by 20%. It is likely that the increases will be below 10%. If the future CBA with the AFSCME union contains increases greater than 2%, say 3%, the savings will be impacted, but only marginally. The true reduction in cost is derived from the reduced number of personnel.

Table 3 Total Cost Savings Relative to GRPUC 2010 Costs

Figure 13 Cost Savings Over Time Relative to GRPUC Average Increased Costs

Table 4: Total Annual Savings Relative to GRPUC Average Increased Costs

Figure 13 Cost Savings Over Time Relative to GRPUC Average Increased Costs

Impacts of Potential Savings
The impacts to the tax and utility rate payers as a result of merging the GRPU into the City are substantial. We can assume at this point that an appropriate share of the savings will be split between a tax reduction and utility rate reductions. This arrangement will be negotiated between the GRPUC and the City when crafting the final contract. However, identifying a reduction in utility rates would be very labor intensive and is not included in this report. Logically the average savings per household would be the same regardless of structure of the reduction, therefore, for the sake of simplicity in our discussion it is assumed that one hundred percent of the savings will be translated into a City tax levy reduction. For a baseline the following table identifies the payable 2010 Tax Capacity, Certified Levy, and tax rate without the reduction in savings for the City of Grand Rapids.

Table 5: 2010 Grand Rapids Tax Rate

The tax rate utilized in calculating property taxes, payable in 2010 was 64.970%. As an example, a person who owns a home with a taxable market value of $200,000 would pay ($200,000*0.01*0.6497) or $1,299.40 for the city portion of their property tax.
Reducing the certified levy by $700,000 would result in a reduction of the tax rate to 55.148% as identified in Table 6. That same person who owns the $200,000 home would see a city tax of ($200,000*.01*0.55148) or $1,102.96. This is a savings of $196.44 annually.

Table 6: Potential Tax Rate with $700k Savings

By year five of the agreement the total savings, net of retirement payouts and pay equity adjustments, will grow to approximately $1,110,069. When this reduction is applied to the same tax rate calculation as the Year 1 savings, all else being equal, the tax rate drops to 49.393%. (See Table 7) This generates a tax on the same $200,000 home of $987.86 a savings of $311.54. By looking at the trend of the City tax rate over the last ten years it is clear that the probability is high that the tax rate will be on a natural decline regardless of the merger. The savings calculated here represent the differential between what the tax rate would be under the current structure vs. what to could be under a merged structure. As stated earlier we use the tax rate in this demonstration to make the calculations of potential tax burden reduction less cumbersome. The actual structure of tax rate/utility rate reduction would be a matter of negotiation between the GRPUC and the city.

Table 7 Potential Tax Rate with $1,110,069 Savings

Organizational Structure
To achieve these savings there it would not be necessary to make significant changes to the City organizational structure. The city currently has the management capacity to handle the expanded operational scope. The GRPUC management staff would be folded into our current management structure. Department heads managing utility functions and support functions such as HR and Finance in the merger scenario would be responsible to the GRPUC for those operational components, with ultimate oversight responsibility ending with the City Administrator.

Figure 14: General Organization Structure Post Merger

To get an idea of what a combined workforce structure would look like, the general concept is presented in Figure 14. The GRPUC as an entity would remain intact. It would maintain ownership of all assets currently owned by the GRPUC and would make final decisions on the capital investment upon those assets. All equipment would remain under GRPUC ownership, but would be leased to the city in some fashion to eliminate liability exposure for the GRPUC. The Public Works Director and the City Engineer would answer to the GRPUC for all utility functions.

The oversight of the utility operations would be divided as outlined in Figure 14.
Some logistical issues that can be dealt with along a simultaneous timeline as the legal issues are computer software merger, office space issues and office location issues. It would be logical to have a one stop shop for all permitting, utility hookup, and the like. Therefore under either merger scenario the Community Development and Engineering departments of the City would move to the PW/PUC building. Additionally, the finance and human resource personnel would move to City Hall. Bill payment and process could still be at the PW/PUC building but some combination of personnel in City Hall and the PW/PUC building would be designed by the Finance Director and the City Administrator. It is assumed that this would be done to the satisfaction of the GRPUC.

Additionally, the accounting and billing software, including work order and purchase order systems would need to be merged. This is a major undertaking but should not be an obstacle to achieving the cost savings. There are significant sunk costs associated with these systems but not enough to justify higher operational costs. Dual accounting systems would need to be run for at least six months to guarantee that the system merger is complete.

In summary, the City and the GRPUC can achieve an annual expenditure reduction of just over $1,100,000 by the fifth year of merged workforce agreement. I recommend that the City move forward with a formal proposal to the GRPUC without delay. A goal of completion of the merger by January 1, 2011 is not unreasonable. The cost reductions associated with a merger of the employees of the City and the GRPUC are too large to ignore. The timing is ideal due to the large number of employees eligible to retire during the proposed five year timeframe, allowing the cost savings to be recognized without reduction in force measures. The current management structure within the city can absorb the increase scope of service relatively easily and economic impact of the reduced tax burden could not come at a better time for the City of Grand Rapids.