Town Council Work Session
Subject: Cary-Morrisville Utility Merger
September 27, 2005, 4:30 p.m.
120 Wilkinson Avenue, 2nd floor

Present: Mayor Ernie McAlister, Mayor Pro Tem Jack Smith, Council members Marla Dorrel, Jennifer Robinson, Julie Robison and Nels Roseland

Council Member Michael Joyce arrived late and his arrival is noted in the minutes.

Mayor McAlister called the work session to order at 4:40 p.m.

The purpose of the work session is to review the background information, goals, financial analysis and details of the Cary-Morrisville utility merger and merger agreement.

The Town’s consultant, Joe Stowe of CH2MHill, provided the overview and objectives of the work session. (A copy of CH2MHill’s PowerPoint Presentation is attached to and incorporated in these minutes as Exhibit A.)

Mr. Stowe stated that the seven municipalities in eastern part of Wake County have already merged or are considering merging with Raleigh—Garner, Rolesville and Wake Forest have already merged, Knightdale has approved the merger and is working out the specific details with Raleigh, and Wendell and Zebulon are currently involved in negotiating a contract with Raleigh for implementation of a merger. Mr. Stowe said that for the western part of Wake County Cary is designated as the predominate utility and the Town is currently involved in negotiations with Morrisville. He said that at some time in the future the other three municipalities in western Wake County could be considered.

Mr. Joyce arrived at this point in the meeting at 4:53 p.m.

Mrs. Robison asked if the merger was administrative or if it also involved investments required for infrastructure. Mr. Stowe replied that investments are required for infrastructure in order to get Morrisville services up to the standards of the Town of Cary , and all of those costs are taken into consideration when looking at the utility rates.

Mrs. Robison asked if the benefits and costs are covered in the financials. Mr. Stowe responded that all costs—infrastructure and implementation costs—will be borne by Morrisville customers; they will not be paid by existing Cary customers.

Mr. Stowe stated that while costs are estimated in the financial review, actual costs are laid out in the agreement and will determine the timing for adjustments in rates to pay for the merger. There agreement will address the actuals.

Mr. Joyce asked if merger related expenses were shared. Mr. Stowe said that all merger expenses will be paid for my Morrisville.

Mrs. Robinson asked how the development fees are set. Mr. Stowe replied that Cary will set the rate. He said that assuming the merger takes place, in April 2006 Cary becomes the operator of the utility and will set the rates, and the agreement addresses the setting of those rates. He stated that the Morrisville rates may never be less than Cary rates, although they may be the same.

Mrs. Robison asked about the differences in the current development fees. Jeff Adkins of CH2MHill said that Morrisville’s fees for a development are typically higher. With the merger, their processes will be brought in line with Cary ’s. Public Works and Utilities Director Kim Fisher added that there is a possibility that Morrisville’s fees could be less than they are now, but they will still be higher than Cary’s fees.

Mr. Stowe stated that Morrisville’s typical user combined water and wastewater bills are projected until 2022. With the merger, their rates will continue to be slightly higher than those of Cary rate payers. At the time the merger costs are paid for—projected to be within 15 years—then the two rates become the same and Morrisville will operate with Cary rates. However, if Morrisville continues to operate independently of Cary, their rates will continue to rise and be much higher.

Mrs. Robison asked about the costs for the merger and who will pay for it. Mr. Stowe responded that the costs would start as soon as the actual merger transfer date takes place. He said there are two critical dates: the effective date of the agreement, which is the date both municipalities approve and sign; then there is a period of time for due diligence when the Towns’ managers and staffs look at everything that needs to take place, ensuring that nothing has been overlooked. He said that Morrisville would pay for the costs.

Mrs. Robinson asked about the possibility of the merger costs not being paid off by the projected date. Mr. Stowe said it could happen and the details are very clearly spelled out in the agreement.

Mrs. Robison asked about other potential mergers in western Wake County. Mr. Stowe said it would depend on the desire of Apex, Holly Springs and Fuquay Varina. He said that the Morrisville merger is a stand alone. If one of the other towns wanted to merge into the Cary system at some time in the future the same principles would apply as for the Morrisville merger—costs would be looked at and rates compared and appropriate adjustments made. The only linkage between a merger with the different municipalities is the requirement of a joint utility advisory board which is addressed in the agreement.

Mr. Roseland asked if provisions are made for disagreements and resolution of those disagreements. Mr. Stowe responded that the principle for resolution of any dispute in the agreement is that it would get resolved at the lowest level in the organizational structure between the two towns and, if not resolved at that level, would move up to the town managers, and then the governing boards. He said that a dispute could possibly end up in the courts.

Ms. Dorrel asked about the initial costs of financing. Mr. Stowe said they are financed by the operating utility. He said that once the merger is completed then Cary owns the utilities and decisions on timing are made based on the availability of funds. He said that any of costs are borne by Morrisville but administered by Cary.

Mr. Joyce asked who pays the up front costs. Mr. Stowe said that some of the money is transferred as fund balances from Morrisville, and that improvement will be scheduled based on the availability of funds. Mr. Stowe said that Cary would be responsible for the administration but the cost for borrowing the money is paid for by Morrisville. Mayor McAlister added that the Town would borrow the money on behalf of the utility, but that Morrisville would be responsible for payment of the loan.

Ms. Dorrel asked if the merger creates additional debt for Cary. Ms. Mills responded yes; she said it creates additional debt for the system.

Mr. Fisher said that staff is working on an implementation budget to take place this fiscal year. He said they looking at $800,000 to $900,000 to hire people and get the system in place by April 1st. That money would pay for the operating and maintenance costs through June 30, including staff and equipment. He said it would become a budget item after July 1st. Mr. Fisher said that during that time Morrisville is paying a higher rate than Cary and the Town is collecting money in excess of its operating costs. The capital collected over the first year is used to finance capital projects in the second year.

Mr. Roseland asked about the total transition costs for merging. Mr. Fisher responded that the total cost to merge the systems over 15 years is about $30 million and it will be paid through the rates of Morrisville customers.

Mrs. Robison asked about operating expenses for the system. Mr. Fisher said that the base part of the rate pays for the operating system and it is figured into the costs. He said that capital reserve money pays off the longer term costs. Ms. Mills added that if the merger it happens on April 1st Morrisville customers would be paying at the retail rate, whereas the Town is currently collecting from them at a wholesale rate.

Mrs. Robison asked if $800, 000 to $900,000 for FY06 is immediately recovered. Mr. Fisher said it is covered in arrears.

Mrs. Robison asked if money needs to be appropriated in this fiscal year. Mr. Fisher said yes in the form of an amendment to the budget to accommodate the change in the operation of the utility fund. He said that council will receive a staff report covering the financials.

Ms. Dorrel asked if the system will incur debt. Ms. Mills responded yes. Mr. Fisher said that it is part of the merger recovery cost. Mr. Stowe added that bringing the system up to standards will not happen immediately after the merger, it will be done over time.

Mr. Stowe said that the merger cost recovery period is the time when the rate and fee differential pays for merger. He said that there are existing agreements between Morrisville and some of its customers that need to be addressed. He said the most prominent ordinance is the pretreatment or wastewater ordinances that would give right and authority to the Town to carry out inspections and enforcement in Morrisville. Mr. Fisher said Morrisville’s industries are similar to Cary’s and over the years the towns have worked together to development a treatment ordinance similar to Cary’s.

Mr. Roseland asked about the strain on the water pressure by adding customers to the system and any possible decrease in the amount of potable water. Mr. Fisher said that Morrisville is already on the Town’s system and that it does not affect amount of potable water.

Mayor McAlister asked how many Morrisville employees are affected by the merger. Mr. Stowe responded that there are about eight employees. Mr. Fisher said that staff has met with the Morrisville employees and they are very qualified. The employees will be transferred and treated like any other employee in system. He said that they will have a probationary period and staff will work with them to ensure their success and they will be reviewed after six months.

Mayor McAlister asked about the effect of financing on Cary’s bond rating. Ms. Mills said the bond rating agencies would take into account the fact that the system is growing. She said that it would not have a negative impact on the Town’s rating.

Mr. Joyce asked about identifying the costs for the merger. Mr. Fisher said that staff can have information for council before the November 10th council meeting.

Mr. Joyce asked about the accuracy of the fiscal impact information that will be provided to council in November. Mr. Coleman said that the accuracy will not be to the penny, but that staff can provide council with details at that time and then provide progress schedules between through April.

Mr. Fisher said that during the due diligence period a budget is established and procedures are worked out with Morrisville on how to make the merger and how their engineering and planning departments will interface on development, maintenance and operations issues. He said that information will then be put into a standard procedure. In addition, the due diligence period will provide an opportunity for the two town managers to back out of the deal.

Mr. Joyce asked about liability insurance. Mr. Fisher said it is included. He said has an idea of Morrisville’s standards for sewer and water.

Mr. Fisher said that the merger agreement does not address the Western Wake partnership; there is a stipulation that the merger agreement supercedes any previous agreements and Morrisville will still be a sitting member on that partnership.

Mr. Coleman said that staff can provide specific details of the financial plan and provide council with updates. He said that there are two basic principals involved in the merger: one is that it is a long-term benefit to Cary from the standpoint of an economy scale, improving the ease of the utility system, and the logistics of developing and maintaining infrastructure; the other is that Cary rate payers are not in any way subsidizing Morrisville rate payers. He said that staff is engaging every effort in guaranteeing that those goals are met.

Mr. Fisher said that everything will run through utility fund, staff will set up a tracking system to annually summarize actual expenses and costs incurred from the merger, total and net revenues recovered, any borrowing for the system, and its progress each year.

Mayor McAlister asked about any consideration in the event that the merger does not happen. Mr. Fisher responded that the capacity need for Morrisville to grow and the operation of their utility system are taken into account.

Mrs. Robison asked how the Town is saving money by merging utilities. Mr. Fisher said that after the merger costs are recovered and the Town’s customer base is up to about 45,000, it will benefit Cary and Morrisville because of the economy scale.

Mrs. Robison asked about the potential savings. Mr. Fisher said it is hard to forecast rates out 15-20 years because of the amount of speculation.

Mayor McAlister asked on whose balance sheets the debt resides. Mrs. Mills responded that the Town would increase debt in that the Cary system would incur $15 million in the first phase, but costs will be recovered from those customers. The Town will have more assets and more customers to recover costs. She said that $110 million was approved in bond referendum and provides authority for Cary to borrow what it needs for the Western Wake facility. She said that revenue funds would be used if the Town needs to borrow beyond that amount.

Mayor McAlister asked Morrisville would vote on the merger. Mr. Fisher said that Morrisville has called a special meeting for consideration of the merger agreement on Tuesday October 18th, outside of their regular meeting. He said that Cary staff will take the agreement to the Operations Committee on November 2nd, and it will then go to the full council on November 10th.

Mayor McAlister stated that it was brought to his attention that it may be an issue for Morrisville to consider the merger before the election. He asked what happens if it is delayed. Mr. Fisher responded that the whole schedule will be effected, it will impact the budget, and the transfer date would no longer be April 1st. Mr. Fisher said that everything would bet adjusted forward.

Mayor McAlister commended staff on their work and said that council needs to be cognizant of the concerns in Morrisville and the perception that Cary is taking over something that belongs to Morrisville. He said that they need to be prepared to answer questions and not fuel that perception. Ms. Moran said that Cary staff has worked with Morrisville on public information.

The meeting adjourned at 6:02 p.m.