Final Report - Text Only (No Appendix)

Fairhope Governmental Structure Committee
Final Report
October 8, 2007















Charles Zunk, Chairman
Dennis Frodsham
Harvey Joanning
Ed Lawrence
Ron Muschel
Rod Platt


Background and Summary

The Fairhope Governmental Structure Committee was created to research, analyze, and recommend improvements, if any, upon the topics of:
· Structure between the Utility Departments and City government operations
· Oversight of Utility Departments
· Management structure of City government operations
· Lines of authority
· Reporting and information flow between City government operations and Council
· Strategic (long-term) planning process

In order to accomplish this task, interviews were conducted with the mayor and all city council members; most of the city staff department heads including all three of the city utilities; knowledgeable professionals familiar with Fairhope or municipal government to include a municipal investment banker, two CPA’s, three developers, two utility marketing experts, a utilities environmental consultant, and approximately a dozen local business leaders and concerned citizens.

Other cities and other city utilities were researched via their websites and/or by telephone, approximately thirty in all. Members of the committee also interviewed the staff, and consulted the websites, of several relevant organizations and associations including American Public Power Association, Alabama Municipal Electric Authority, League of Municipalities, and Electric Cities of Alabama.

Committee members reviewed Recommended Best Practices published by the Government Finance Officers Association, and studied in detail their publications on Strategic Planning, Long Term Financial Planning, Performance Management, Use of Web Sites, Use of Trend Data and Use of Comparative Data for Financial Analysis. Alabama Codes and selected Fairhope ordinances were also reviewed.

The Fairhope Governmental Structure Committee conducted six meetings at the Nix Center to present its findings, deliberate its conclusions, and make its recommendations to be included in this report. Two of the six meetings included a Public Hearing, in which all members of the public had an opportunity to speak to the issues being considered by the committee. At all six meetings members of the public were given an additional opportunity at the end of the meeting to make additional comments or ask questions of the committee members.

The findings of the research, conclusions from the findings, and recommendations based on the conclusions are presented in this report. For ease of discussion the report is grouped into five topical sections: financial reporting, strategic planning, personal communications, viability of marketing Fairhope Utility Services outside the city limits, and oversight/management of the utilities. However, these topics are very intertwined and there will be frequent references in one section of the report to another.

But first, here is a summary of our key recommendations…
Charting a Course for the Future – Summary of Key Recommendations


A. Develop summarized, easy to read financial reports emphasizing graphs, trends, and Key Performance Indicators instead of traditional line-by-line detail.

B. Develop a 36-48 month projection of Revenues, Expenses, Capital Requirements and Priorities, and Sources/Uses of Cash.

C. Initiate a Strategic Planning Process, using a consultant if necessary to get started. Follow Government Finance Officers Association (GFOA) “Best Practice Guidelines.

D. Initiate all large requests for capital through the Strategic Planning Process, and defer all large requests until a 36-month financial projection is done.

E. The provision in the city code that requires the Mayor to serve as Superintendent of Utilities should be repealed, and the positions of mayor and utility superintendent be separated, effective immediately following the municipal election of August, 2012. However, we further recommend that this ordinance to separate the positions of mayor and utility superintendent not be enacted until after the municipal election of August, 2008 to allow ample time for orderly transition planning, professional compensation and benefits analysis, public comment, and the opportunity for citizens and elected officials to discuss this issue during an election cycle.

F. The City Council should retain its financial control and oversight responsibilities for the city utilities. Because of the unique nature of the utilities as major profit-generating businesses and the significant contribution the utilities profit makes to the governmental funds, the Council should increase the amount of time it allocates to this function.
Financial Reporting

Financial Reporting – Findings

Fairhope financial reporting is performed monthly, quarterly and annually. A report package is usually available for the City Mayor by the 10th of the month for the previous month. Council members packages are available by the third Thursday of the month, which is five days prior to the council meeting on the 4th Monday of the month. Numerous Reports (Revenues and Expenses) are presented in Summary as well as Detail by major fund type. Comparisons are made to same month last FY and YTD as well as budget. In addition, a Summary Cash Balance Comparison for all major funds compares current month to prior month as well as prior year. Available Cash by operating accounts and Accounts Payable by fund type is also presented. A monthly detail of all payments to Vendors is provided. A quarterly Utility Sales Report is provided. Besides the above listed reports the Revenue and Expense Summary by fund comparing the current month to the previous two fiscal year (s) same month as well as year to date comparisons are available.

The reader of the monthly, quarterly, and annual reports should have some knowledge of municipal accounting (cash as well as accrual accounting) in order to comprehend the reports. Easy to understand graphs and summaries are not routinely used. Key Performance Indicators that track specific goals are not routinely used.

Annual Budget preparation usually begins 120 days prior to the Fiscal Year End, with the Mayor meeting with Department heads. During this process the final Budget Adjustment inputs for the current year are also discussed. Major Budget Assumptions are gathered and assembled. The Capital Budget (multiyear) is also assembled at about the same time with input from each department. Departments reporting under the general fund show their capital items expensed in the Revenue and Expense for the upcoming fiscal year while the Utility Departments and Golf Course show these items as assets amortized over their estimated life. Included in the budget package is an organization chart listing department heads but it shows no indication of Full Time Equivalents (FTE’S) for each department.

Budget reviews (Actual vs. current budget) are performed periodically throughout the year. During the budget year, projections are prepared for the Mayor and City Council from time to time comparing Actual to Budget and projecting for the full year. Projections are based on current year trends, prior year actual, input from department heads and estimates of revenues from city officials. A final budget adjustment is made usually sixty days prior to Fiscal year End.

Annual Audited Report – The audit firm completes its tests and analysis and publishes the annual audit report usually within 120 days of the fiscal year end. The City of Fairhope has earned an unqualified opinion for the past four years. Included in the Annual Report are Management’s Discussion and Analysis and an organization chart, however no indication of the staffing level for each department is presented.

Standard and Poor’s latest rating for Fairhope Bonds issued 6/01/2007 ($7.6Mil) is A+ Stable, which is consistent with the rating in 2002 and 1999.

The General Ledger and supporting software modules were custom built by a local vendor, which is described as a one-man shop. The system is 8+ years old and has been updated with enhancements. The system is considered reliable. Query reports are available. The employment of Microsoft Excel and ACCESS to create ad-hoc analytical reports is available, but not widely used.

The City’s web site doesn’t at this time include monthly, or quarterly financial reports, the audited annual report, the annual budget of revenues and expenses, the capital plan or a strategic plan. (Note: the audited annual report is available in the public library.)

Financial Reporting – Conclusions

The Financial Reports are timely, accurate, numerous and in great detail. Although the reader has bountiful reports, they can be difficult to read and comprehend for someone not familiar with governmental accounting and not using the reports on a daily basis to make management decisions. LACK OF EMPHASIS ON USEFUL SUMMARIES, TREND ANALYSIS, AND KEY PERFORMANCE INDICATORS MAKE IT DIFFICULT FOR THE MAYOR AND CITY COUNCIL TO EFFICIENTLY EXECUTE THEIR RESPECTIVE RESPONSIBILITES FOR POLICY MAKING AND FIDUCIARY OVERSIGHT.

The City remains financially sound as indicated by the unqualified audit opinion and A+ rating from Standard and Poor’s. (Review graphs 1 through 8) However, significant increases in capital spending over the last two years has strained the cash position and available reserves. If this trend should continue then additional sources of revenues should be identified as a first step in developing a long-term financial/strategic plan. (Review graph 9)

City Council members as a group are not actively participating in the planning process for the annual budgets, i.e. a formal /informal approval of key assumptions used in building the budget. Council members do review and approve the finished product

The MIS software and the reports it generates were designed in conformity with Governmental Accounting Standards Board (GASB) standards. The system and its reports are more internally focused and were not originally designed for ease of comprehension by city council and or the public. The MIS software used to support reporting and analysis is not as robust as may be required in the future. Current MIS resources are inadequate to create changes and improvements at a reasonable rate.

Financial Reporting – Recommendations

Develop summarized, easy to read financial reports emphasizing graphs, trends, and Key Performance Indicators (see examples attached plus graphs 1-10) instead of traditional line-by-line detail.

Develop a 36-48 month projection of Revenues, Expenses, Capital Requirements and Priorities, and Sources/Uses of Cash. These projections will assist Council and Mayor in decisions regarding adding or reducing debt; adding revenue and/or reducing expenses; and assessing the amount of funds available for capital projects.

Encourage Council participation earlier in the Budgeting Process, in particular by review and approval of assumptions used to build the budget.

Publish Strategic Plan, Annual Report, Annual Budget of Revenues and Expenses, Capital Budget, and Quarterly budget review on the City web site.

Add additional IT resources for software support and enhanced financial reporting.
Strategic Planning

Strategic Planning – Findings

The City does not have a Strategic Plan, commonly understood to be a five-year look forward including financial projections. However, each utility department has a long- term plan, focused primarily on capital projects and system betterments.

Based upon interviews with financial/accounting professionals, the largest financial threat to the City is a series of well intentioned but capital-intensive infrastructure improvements approved individually without respect for the long-term impact on the City’s financial structure.

Although each city official seems to have in mind long-term strategic or financial goals, none of these goals are communicated in writing to other officials.

A review of small cities around the country finds many similar to Fairhope, with little formal long-range planning. But a growing number of progressive cities have strategic plans that include vibrant community involvement components. The planning models vary widely.

Strategic Planning – Conclusions

LACK OF A FIVE YEAR STRATEGIC AND FINANCIAL PLAN IS THE LARGEST RISK FACTOR AFFECTING THE FUTURE FINANCIAL INTEGRITY OF THE CITY OF FAIRHOPE AND ITS UTILITIES.

Communications difficulties between the mayor and council have been frequently connected with financial issues, often extending beyond the current budget cycle, and often related to status of available of cash.

The annual budgeting process and the strategic planning process should be linked. The annual budget each year should be the implementation of the first year of the current five-year strategic plan, after which the strategic plan should be updated for one additional year.

The three most relevant practices of the GFOA to the situation in Fairhope are:
· Recommended Budget Practices of the National Advisory Council on State and Local Budgeting (NACSLB)(1998). Key characteristics of the budget process include incorporating a long-term perspective and establishing linkages to broad organizational goals.
· Recommended Practice: Budgeting for Results and Outcomes (2007). Four essential provisions of effective budgeting are (1) set broad goals to guide decisions, (2) develop strategies and financial policies, (3) design a budget supportive of strategies and goals and (4) focus on the necessity of continually evaluating a government’s success at achieving the goals that it has set for itself (i.e., performance).
· Recommended Budget Practice on the Establishment of Strategic Plans (2005). GFOA recommends that all governmental entities use some form of strategic planning to provide a long term perspective for service delivery and budgeting, thus establishing logical links between authorized spending and broad organizational goals. They identify thirteen key steps common to all strategic planning processes.

Strategic Planning – Recommendations

Initiate a Strategic Planning Process, using a consultant if necessary to get started. Follow Government Finance Officers Association (GFOA) “Best Practice Guidelines. A key element of the GFOA “Recommended Practices” is the necessary interrelationship between budgeting and long-term financial and strategic planning.

Initiate all large requests for capital through the Strategic Planning Process, and defer all large requests until a 36-month financial projection is done.

Implementation of a strategic planning process can be done in phases, done in small pieces that individually will not overwhelm city staff and elected officials. Even at that, a consultant will likely be required for at least the first few cycles to assist with development of the process and plan.
Communication Difficulties within Fairhope City Government

Communication Difficulties – Findings

Interviews with city leaders indicated that communication among some of these individuals is strained. A lack of trust leading to limited informal conversations was also described although most individuals interviewed recognized the importance of face-to-face one-on-one communication. Within this general context, communication between some city council members and department heads has become inhibited.

Communication Difficulties – Conclusions

More communication among elected leaders on a one on one basis will facilitate information flow.

Communication Difficulties – Recommendation

Information flow needs to be improved. It would be beneficial if City Council members and the Mayor initiate conversations about the City’s business rather than wait for the other person to make first contact. Discussions of current issues pertinent to city governance can provide a context for improved communication.



Oversight/Management of Utilities

Oversight/Management of Utilities – Findings

The Utility Departments are comprised of 63 personnel including managers, department heads and the Mayor in his position of Utilities Superintendent. This is approximately 28% of Fairhope’s total full time employees. Most utility department employees are professionals who earn numerous job specific certifications in order to perform their jobs. Two of the three department heads as well as some senior supervisors are nearing or at retirement age.

Relevant financial data from the FY2006 audited statements include:
· Utilities net assets are approximately 27% of Fairhope primary government assets
· Utilities revenues are approximately 63% of Fairhope total revenues
· Fairhope Utilities Earnings Before Interest, Taxes, Depreciation/Amortization (EBITDA) of $8.1 million covers its principal and interest payments by 5.3 times; and, it covers the total Fairhope government principal and interest by 1.8 times

Unofficial estimates indicate Fairhope’s population is 16,164 as of July 2006, a 29% increase over the 2000 census.

The Utility department (as well as all the other city departments) maintains a reputation for quick response and professionalism as demonstrated by Hurricane Ivan and Katrina and recent news articles.

Having the Mayor also serve as superintendent of Utilities has worked successfully for Fairhope over the years. Some of the advantages are: promotes a flat organization, which minimizes management layers and costs of salaries and benefits; and, facilitates unity of effort in response to catastrophic events.

However over time as towns grow into cities and their population grows, the dual position of Mayor/Superintendent of Utilities evolves in most situations into two separate positions. Recent examples reported in the Mobile Press Register mentioned Bay Minette following Daphne's lead. Most cities with publicly owned utilities have a Utilities Board to oversee the operations of the utility department(s). In some cases the Utilities Board is the City Council, in some cases it is a separate Board appointed by the City Council or by the Mayor (or by both), and in a few cases the Utilities Board is elected. In some cases the Utilities Board is entirely independent and separate from municipal government. According to the American Public Power Association, about 43% of the Utility Boards in cities the size of Fairhope consisted of the City Council, and 57% of the Utility Boards were separate entities, either appointed by the City Council or Mayor (or both), or in some cases elected.



Current System of Utilities Governance:
· Each utility is operated as a department of City government, with its own department head.
· The Fairhope Municipal Code requires that the Mayor of Fairhope, in addition to his or her duties as Mayor, also serve as the Superintendent of Utilities. According to the organizational chart for Fairhope, the Utilities Superintendent reports directly to the Mayor.
· There is no mention of a “Utilities Board” in the Fairhope Municipal Code. The City Council, however, does have control over the property owned by the City (including the three utility departments), and therefore the City Council is responsible for financial oversight including approval of spending proposals and payment of bills.

Oversight/Management of Utilities – Conclusions

The Utility operations are well managed, with professional employees as evidenced by their performance before, during, and after Hurricane Ivan and Katrina.

The Utility operations are the key component in Fairhope’s revenue stream and remain an essential cash flow generator to support city operations.

Within the next several years the positions of Mayor and Utility Superintendent must be separated because of the ever-increasing time demands on both positions associated with the following factors:
· Implementing and annually updating a strategic plan
· Implementing and annually updating long range financial projections
· Implementing a marketing strategy for the gas and water/sewer utilities, and implementing a appropriate expansion plan for services
· Creating a transition management plan within the various utilities because of the large number of key employees approaching retirement age
· Managing an increasing complexity of issues driven by rapid growth in and near the city
· Contingency planning for catastrophic events
· Increased assessment of capital projects balanced against the amount of funds available to the City

Oversight/Management of Utilities – Recommendations

The provision in the city code that requires the Mayor to serve as Superintendent of Utilities should be repealed, and the positions of mayor and utility superintendent be separated, effective immediately following the municipal election of August, 2012. However, we further recommend that this ordinance to separate the positions of mayor and utility superintendent not be enacted until after the municipal election of August, 2008 to allow ample time for orderly transition planning, professional compensation and benefits analysis, public comment, and the opportunity for citizens and elected officials to discuss this issue during an election cycle.

The City Council should retain its financial control and oversight responsibilities for the city utilities. Because of the unique nature of the utilities as major profit-generating businesses and the significant contribution the utilities profit makes to the governmental funds, the Council should increase the amount of time it allocates to this function.

A professional compensation analysis of the positions of mayor and of utility superintendent (renamed Utilities General Manager) should be commissioned.

At least one year prior to the separation date of August, 2012, the new Utilities General Manager should be recruited and hired, to allow for an orderly transition of institutional knowledge. As with all other city employees, the Utilities General Manager will report to the mayor, as required by Alabama law.

Marketing of Fairhope Utility Services Outside the City Limits

Marketing of Utilities – Findings

Profits generated by the Fairhope utilities provide a significant contribution to the City’s operating budget, and the utilities have a reputation for high service levels. The service area of the electrical utility is limited by Alabama Statute, but territorial growth potential exists for the gas and water/sewer utilities.

Within the potential territorial growth areas there is at least one competitor for each of gas and water/sewer utilities capable of providing services. In both cases, these are non-municipal enterprises, with an aggressive mindset in their approach to marketing their services. Examples of this marketing aggressiveness include a great sense of urgency in responding to developer needs, proactive expansion of delivery infrastructure, and willingness to provide incentives to developers and potential customers to tie in.

Marketing of Utilities – Conclusions

With the explosive growth of large blocks of residential units in Baldwin County, the opportunity exists to expand market penetration of City-owned gas and water/sewer services to large numbers of end users with limited infrastructure expansion. To be competitive in this environment, the City utilities must adopt a market driven model that will allow them to competitively meet these needs for services with strategies comparable to those of the non-municipal competitors. Unless the City is willing to embrace this philosophy it should not put its capital “at risk” attempting to expand into new territories.

As long as the City relies on profits from utilities as a major source of operating funds, then utility system expansion should be considered as a way to keep pace with the increasing cost of city governmental services. However, expansion of the gas and water/sewer utilities outside their current boundaries to compete in an open marketplace is a complex decision. Analysis of the capital cost of system expansion, human resource needs, anticipated revenues, long term service requirements and costs, and risks of not achieving projected revenue goals must be made before proceeding to the planning and strategy phase.

Marketing of Utilities – Recommendation

The decision to expand the utility services into new markets, without first initiating a marketing analysis and a strategic planning process does not set the stage for a favorable outcome. No expansion should be considered until these are completed, and until sufficient marketing expertise is acquired.
Index Of Attachments

I. Selected Sections of Alabama Code
II. Newspaper Editorial about increases in Pension Costs
III. Selected “Best Practices” of the Government Finance Officers Association (GFOA)
IV. Article about Data Visualization
V. Article about Key Performance Indicators
VI. Examples of Graphs and KPI’s for Fairhope
VII. Article about Dashboard Reporting
VIII. Examples of Dashboards
IX. Survey of Utilities (by Ed Lawrence)
X. American Public Power Association (APPA) 2005 Governance Survey
XI. Newspaper Article about Utility Governance in nearby cities
XII. Articles about Fairhope Public Utilities