Managing Support Services Cost is Not an After Thought but an Integral Best Practice in Clayton's Utility Financial Resilience

Abstract Description A few years ago, the Town of Clayton, NC began its intentional focus on building financial resilience in its water, sewer, and electric utilities by adopting financial planning and rate setting industry best practices. As part of its focus on continuous improvement, the Town has now proactively integrated Support Services Cost Allocation Plan (SSCAP) into its Enterprise Fund Financial Planning and Rate Setting practices. This presentation presents an overview of the Town's effective synthesis of analytical methodology, user-friendly tool, consistent process, and impact mitigation strategies in integrating its SSCAP into its annual budgeting and utility rate setting process. Abstract Utility leaders and decision makers, in large and small utilities, are increasingly understanding the importance of multi-year financial planning and rate setting in sustaining a utility's fiscal health. However, are utility managers and finance officers paying adequate attention to lesser-known components of a utility's costs, such as the costs of 'indirect support services' that is attributed to the utility, which can impact utility rate revenues. Are the utility's support services costs in reasonable alignment with the support services it actually receives? Are there organizational changes and/or other drivers that could impact support services costs that are allocated to the utilities? What are the implications of a substantive increase in support services costs and how can a utility proactively manage such fiscal stress? How often does and should a utility review its support services costs? These critical questions, if not addressed with rigor and timeliness, could cause untimely rate pressure, and throw an unexpected wrench in a utility's financial resilience. The Town of Clayton, NC decided to address this critical issue of management of support services costs, not as an after-thought but as an integral component of its overall enterprise fund budgeting, financial planning and rate setting best practices. In this presentation, we will highlight the intersection of the following five key aspects that the Town focused on as part of its continuous improvement process in managing support services costs: (i) Review of Organizational & System Drivers; (ii)Well-defined Cost-Allocation Methodology; (iii) Development of a User-Friendly SSCAP Tool; (iv) SSCAP Business Process; and (v) Impact Mitigation Strategies. The authors will also provide insights into the benefits realized from this effort and lessons learned that could be of benefit to other utilities. We'll present the key drivers in terms of organizational and utility system changes that had occurred including the sale of a regional wastewater pretreatment facility, addition of new positions, creation of a few new departments for functions that were previously under the Public Works department, and the construction of a new wastewater treatment facility. Given these changes, consistent with best practices, we initiated the SSCAP review and update to affirm the appropriate allocation of support services cost to the utilities. The presentation will briefly highlight the well-defined cost allocation methodology that we used to (i) delineate the cost centers and the associated support services costs, (ii) define the cost drivers and the allocation factors, and (iii) the methodical allocation of costs to the direct cost centers in accordance with legal statutes and industry guidelines. While cost allocation methodology and best practices provide a defensible approach to the development of a SSCAP, the Town also was keen on having a user-friendly Excel based SSCAP model. In the presentation, we will demonstrate some of the features of the SSCAP model including ease of navigation, centralized budget and activity volume data inputs, and the organization of cost driver data and cost allocation factors used to allocate support services costs to direct cost centers. The SSCAP model enables consistent is customized for the Town's organizational structure and specific policies and can easily be adapted for other public entities. We'll highlight how the collaborative process among the different departments and the consultant team helped define reasonable cost drivers, especially in the absence of some activity level reports or other data constraints. While the Town realized the benefit of enhancing the alignment between support services received and the associated support services costs, it also faced the impact of cost shifting to the utilities. We will discuss the strategies, such as draw down of reserves, the Town used to prudently manage the shifts in support services costs. One additional tangible benefit we have achieved is the effective integration of the SSCAP update process into our Town's overall annual budgeting, multi-year financial planning and rate setting practices and the associated timelines. Key takeaways we'll discuss include (i) the importance of having sufficient cash reserves to accommodate the support services cost increase that results from the SSCAP update so as to not significantly impact the utility rates; (ii) the collaborative engagement that is necessary from staff across multiple departments to develop a successful SSCAP; and (iii) the efficiency that can be gained by having a user friendly model that can be easily customized and updated to perform the necessary cost allocations and generate timely outputs for inclusion in the budgeting process. Performing periodic and timely reviews of support services costs can become a valuable best practice when utilities focus on synthesizing methodology, allocation model, business process and impact mitigation strategies.