A three-city venture for wastewater utility services.

Editor's note: An article in the February 1996 issue of Government Finance Review detailed the privatization of a Miami Conservancy District (MCD) wastewater treatment facility in Franklin, Ohio. This article examines an alternative to privatization for another MCD facility; rather than selling the facility to a private firm, MCD transferred ownership to three cities. The three city managers involved were awarded the Ohio Government Finance Officers Association's 1996 Innovation in Public Finance Award.

When the Miami Conservancy District in Ohio decided to divest ownership of its North Regional wastewater treatment plant in 1991, the three affected cities proposed an innovative approach to ensuring reliable, reasonably priced, and environmentally sound treatment services for their citizens. Forming a partnership authorized by state law, the cities assumed joint ownership of the treatment plant.

A Transfer of Ownership

In 1991, MCD announced its plans to divest ownership of its wastewater treatment facilities so that it could focus on its primary mission of flood control. MCD's North Regional plant in Dayton, Ohio, had served the residents of Huber Heights (population 40,000), Vandalia (population 13,500), and Tipp City (population 7,500), as well as portions of Montgomery and Miami counties, since 1985. Previously, each city had its own wastewater treatment facility. When they were unable to finance upgrades required by secondary treatment standards, the cities asked MCD to construct a plant to serve the entire region. The North Regional facility was financed mostly by a grant from the U.S. Environmental Protection Agency, while the remaining funds were borrowed from the Ohio Water Development Authority. Once the 11.2 million gallon per day regional plant was completed, the Huber Heights and Tipp City plants were partially demolished, and the Vandalia sewage treatment plant was purchased and retrofitted to become a liquid sludge storage facility, an integral part of the regional plant.

Contemplating the divestiture of the North Regional facility, MCD engaged a private engineering firm to conduct an analysis to determine the best course of action. The firm suggested three options; the plant could be transferred to

* an existing public entity,

* a private company, or

* a regional sewer or sanitary district.

When MCD presented these options to Huber Heights, Vandalia, and Tipp City, extensive discussions led to a fourth option: the cities were interested in joint ownership of the plant.

A Joint-venture Agreement

An Ohio statute allows municipalities to enter into joint-venture agreements for the purposes of providing utility services. The three city managers met during a period of two years and, with assistance from attorneys and a financial consultant, drafted a joint-ownership agreement. The next step was to obtain the approval of MCD, the city councils, the Ohio Water Development Authority, and the Ohio Environmental Protection Agency (EPA).

After the cities presented the joint-venture agreement in late 1995, MCD petitioned the conservancy court judges to permit the transfer of ownership of the North Regional wastewater treatment facility to the three cities. The court unanimously approved the petition. In the meantime, the cities had a "due diligence" study completed by an independent engineering firm to assess the condition of the plant's resources and make recommendations as to which assets needed repair or replacement.

By mid-May 1996, the councils of Huber Heights, Vandalia, and Tipp City had passed ordinances approving the agreement, and the Ohio EPA had agreed to transfer the plant's wastewater discharge permit. A few weeks later, the Ohio Water Development Authority approved an agreement to assign the $12.5 million in outstanding debt on the facility to the three cities. Closing took place on June 11, 1996, and the Tri-Cities North Regional Wastewater Authority (TCA) was formed.

Exhibit 1 depicts TCA's organizational structure. TCA's one employee, the general manager, is responsible for overall management of the authority. This includes property and facility management, budgeting, and rate setting. The general manager works closely with the operations and maintenance staff to coordinate capital improvement projects and to obtain permits and licenses required by state and federal regulations.

Contracting Services

Most important, however, is the general manager's responsibility for contract oversight, as nearly all TCA services are performed under contract. Legal services operations and maintenance, and engineering and technical support are provided by private contractors. In drawing up the engineering firm's contract, TCA reserved the right to contract with other consultants for large-scale projects. The City of Vandalia provides TCA's financial services under a contractual agreement that expires December 31, 1998.

TCA's finance committee consists of the finance directors from each city, while the utility directors comprise the technical committee. These committees and the general manager advise the governing board of trustees, made up of the three city managers. Voting power on the board is based on flow to plant. Although Huber Heights contributes about 52 percent of the flow, its voting power is limited to 49.9 percent, and the balance is given to other cities on a pro rata basis. A majority vote is necessary to pass any action, and representation of at least 60 percent of the flow must be present for a meeting to have a quorum.

The selection and contracting of the engineering firm exemplifies how the organizational structure functions. In 1996, just after TCA's acquisition of the facility, the general manager requested general statements of qualifications from 13 engineering firms. After 11 responses were received, the general manager and technical committee together drafted a request for proposals (RFP). The board of trustees approved the RFP and asked that it be sent to five qualified firms.

The general manager and technical committee selected the qualified firms and developed evaluation criteria, interview questions, and score sheets they would use during the selection process. They reviewed the proposals and invited the three top firms to an interview. Based on the interview, reviewers scored the firms according to the established criteria, such as its reputation, time availability, approach to problem solving, and previous experience with the North Regional plant. The firm with the highest total score was awarded the contract.

The contract was finalized by the legal services firm, and the general manager monitors it and the engineering firm's performance. Meetings between the general manager and the technical and finance committees occur on a monthly basis. Recommendations from the committees are presented to the board of trustees for approval.

Money Matters

TCA's annual budget for FY1997 is $3.64 million, most of which covers operations and maintenance and the loan payments to the Ohio Water Development Authority [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. A 10-year payment schedule is being used to repay the $12.5 million in outstanding debt TCA shouldered when it assumed ownership of the North Regional plant. Payments of $633, 956 are made twice a year ($1.27 million annually). Budgeted capital improvements for 1997 include maintenance and improvements to TCA's buildings, land, machinery and equipment. At this time, no major capital improvement projects are planned; however, TCA is authorized to issue tax-exempt bonds for such projects.

The plant's operating costs are covered primarily by user charges. The City of Vandalia, as provider of financial services, is in charge of invoicing TCA's five customers monthly: the three cities, Miami County, and a private firm that operates the City of Huber Heights' nearby water treatment plant and discharges to the North Regional wastewater plant when it backwashes its filters. The cities bill homeowners and industrial and commercial customers for their wastewater usage quarterly. TCA's dedicated farm site (676 acres used for sludge disposal) is rented to a local farmer, contributing more than $47,000 to TCA's annual income. The remaining income comes from investments, sales of surplus equipment, and fees for septage hauling.

A Successful Venture

The Tri-Cities North Regional Wastewater Authority is an example of how jurisdictions can combine their resources and work together to provide services to citizens. Joint ownership enables the cities to establish their own rules for controlling the facility, issuing tax-exempt debt, and setting rates - activities that privatization would preclude. The arrangement allows cities to be sure that their citizens are paying a fair price for environmentally sound wastewater treatment.

CATHERINE A. HILL is general manager of the Tri-Cities North Regional Wastewater Authority, located in Dayton, Ohio. NANCY GLEASON is an associate editor of Government Finance Review.