CITY COUNCIL
REPORT 10B
DATE: DECEMBER 18, 2018
TO: MAYOR AND COUNCIL MEMBERS
FROM: TAMARA MILLER, DEVELOPEMENT SERVICES DIRECTOR/ CITY ENGINEER
SUBJECT: CONSIDERATION OF RATE REVIEW OF SOLID WASTE COLLECTION FEE AND DIRECT SURPLUS REVENUE TO RATE STABILIZATION FUND AND SOLID WASTE PROJECT FUND
RECOMMENDATION
It is recommended that the City Council adopt a resolution to:
1. Accept the collection fee rate review from Republic, and
2. Direct that the collection fee remain unchanged from 2018; and
3. Direct that surplus revenue be managed in accordance with Resolution 2013- 91, 25% into the Rate Stabilization Fund and 75% into the Solid Waste Project Fund (Fund 214).
BACKGROUND
Solid waste collection service in the City of Pinole is provided by Republic Services Inc. (Republic) under a collection franchise agreement managed by the City of Pinole. The rates for services have four components: collection fee, AB 939 fee, post collection fee, and solid waste project fee. The collection fee compensates Republic for hauling the waste. The AB 939 fee funds City activities related to recycling programs (Fund 213). The post collection fee funds West Contra Costa Integrated Waste Management Authority (WCCIWMA), also known as Recyclemore, and its efforts to sort and recycle materials to meet diversion goals under the Post Collection Agreement with Republic. Finally, the solid waste project fee funds City projects related to waste, which recently included the purchase of trash capture devices and a street sweeper.
Changes to the collection fee have been proposed by Republic to the City of Pinole, and changes to the post collection fee were adopted by WCCIWMA/Recyclemore at their November 8, 2018 Board meeting.
City Council Report December 18, 2018 2
Republic is allowed to increase the collection fee annually by the Consumer Price Index (CPI). A full rate review is required every five years. The purpose of the rate review is to assure that the annual CPI increases do not result in gross profits that are excessive and out of compliance with the franchise agreement. Under the franchise agreement, Republic Services is allowed to charge fees sufficient to generate a gross profit of 12%. Under the rate review process, if profit is found to be in excess of 12%, rates are adjusted downward, and if profit is found to below the 12%, rates are adjusted upward.
Republic has, as per the franchise agreement, performed a rate review and submitted it to the City for review. Upon review and comments, Republic has revised the rate review. The initial rate review application is attached (Attachment B). Republic advises that the financial data supports a minor decrease in the collection fee of about 3.6%.
The City of Hercules and the City of San Pablo have similar requirements within their franchise agreements. Republic has performed a rate review for these cities as well. Republic follows an established format for the Rate Review and, as per the format, determined that a downward adjustment is warranted for Pinole, but Hercules and San Pablo will see an increase. Because the financial data provided by Republic is grouped for the three agencies, the three cities joined together and brought in a consultant to review the submittals provided by Republic. The consultant advised that several changes to the review were warranted. These changes resulted in small changes in the rate review analysis. The consultant review document is attached (Attachment C).
WCCIWMA/Recyclemore is responsible for the post collection agreement with Republic. At their last meeting, WCCIMA approved an increase, of about 7.1%, in the post collection fee. The increase for residential customers is shown in the following table:
Service Size 2018 rates 2019 rates Increase 20 gallon can $5.08 per month $5.40 per month $0.32 35 gallon can $8.91 per month $9.47 per month $0.56 60/65 gallon can $16.57 per month $17.61 per month $1.04 95/100 gallon can $24.86 per month $26.42 per month $1.56
REVIEW & ANALYSIS
WCCIWMA/Recyclemore oversees the Post Collection Agreement. At the November 8th 2018, meeting the WCCIWMA Board discussed the post collection rate. The rate is being impacted by inflating costs and drastic changes in the recycling markets. These conditions are expected to continue into 2020 and beyond. The fee was
City Council Report December 18, 2018 3
adopted by the WCCIWMA Board and will be passed through to Pinole residents and businesses effective January 1, 2019.
For the City collection fee, although Republic shows that data supports a minor decrease in the collection fee, it is thought that this result was influenced by increased garbage collection arising out of the construction activities of several large projects in the area. This is possibly a onetime affect of local market conditions and is not likely to occur again.
It is recommend, that the City accept the rate review submitted by Republic. With the post collection fee increase, and the recommended maintenance of the 2018 collection fee, the impact to the overall garbage rate is a small increase as shown in the following table:
Monthly Percentage Service 2019 2018 increase increase 20 gallon $ 29.99 $ 29.67 $ 0.32 1.08% 35 gallon $ 35.74 $ 35.18 $ 0.56 1.59% 65 gallon $ 63.63 $ 62.59 $ 1.04 1.66% 95 gallon $ 92.10 $ 90.54 $ 1.56 1.72%
This recommendation follows in line with prior Council direction in 2013 to level rates. If the City adopts the fees as proposed by Republic they will go down in 2019 only to go up in 2020.
Passing through the Post Collection fee increase at this time helps keep the consumer engaged with the overall issues related to waste diversion. We rely upon the efforts of residential and business waste generators to divert recyclables from the waste to meet regulatory requirements. Further, it helps to understand that there is a cost associated with diversion programs. The recyclables do not have adequate market value to pay for the diversion programs. With global recyclable market issues, we expect costs for diversion programs to rise sharply in future years.
FISCAL IMPACT
The recommended action of holding the collection fee level with the same rate for 2019 will result in surplus revenue. The estimated amount of surplus revenue for the 2019 calendar year is $64,790.64. In 2020, this surplus revenue is expected to decrease and possible be fully consumed by an allowable CPI increase or by a necessary increase to the Post Collection Agreement as a result of recycling market impacts.
City Council Report December 18, 2018 4
ATTACHMENTS
ATTACHMENT A: Resolution ATTACHMENT B: Resolution 2013-91 ATTACHMENT C: Republic Rate Review Request ATTACHMENT D: R3 Rate Review
ATTACHMENT A
RESOLUTION NO. 2018-___
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PINOLE, COUNTY OF CONTRA COSTA, STATE OF CALIFORNIA, ACCEPTING THE COLLECTION FEE RATE REVIEW, DIRECTING THE FEE TO REMAIN UNCHANGED, AND DIRECTING THE SURPLUS REVENUE BE MANAGED IN ACCORDANCE WITH RESOLUTION 2013-91
WHEREAS, solid waste collection service in the City of Pinole is provided by Republic Services Inc. (Republic) under a collection franchise agreement the City of Pinole; and
WHEREAS, Republic is required to perform a rate review every 5 years; and
WHEREAS, Republic submitted the 2019 Rate Review for our review; and
WHEREAS, together with the cities of Hercules and San Pablo, R3 Consulting was tapped to take three rate reviews in aggregate and perform a detailed review the material; and
WHEREAS, R3 Consulting was helpful in improving the outcome of the rate review process; and
WHEREAS, Republic revised the rate review application which shows a small decrease; and
WHEREAS, the City of Pinole has within Resolution 2013-91 directed staff to stabilize rates wherever possible and to set aside surplus revenue within a rate stabilization fund and a solid waste project fund; and
WHEREAS, maintaining the same rates from the prior year for the collection fee provides a stabilized rate structure as we anticipate collection rates will increase next year.
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of Pinole does hereby:
Section 1. Accept the collection fee rate review from Republic; and
Section 2. Direct that the collection fee remain unchanged from 2018; and
Section 3. Direct that surplus revenue be managed in accordance with Resolution 2013-91, 25% into the Rate Stabilization Fund and 75% into the Solid Waste Project Fund (Fund 214).
PASSED AND ADOPTED at a regular meeting of the Pinole City Council held on the 18th day of December 2018 by the following vote:
AYES: COUNCILMEMBERS:
NOES: COUNCILMEMBERS:
ABSENT: COUNCILMEMBERS:
ABSTAIN: COUNCILMEMBERS:
I, hereby certify that the foregoing resolution was regularly introduced, passed, and adopted on this 18th day of December 2018.
______Patricia Athenour, MMC Interim City Clerk
ATTACHMENT B
ATTACHMENT C
ATTACHMENT D www.r3cgi.com
1512 Eureka Road, Suite 220, Roseville, CA 95661 2600 Tenth Street, Suite 424, Berkeley, CA 94710 Tel: 916-782-7821 | Fax: 916-782-7824 Tel: 510-647-9674
627 S. Highland Avenue, Suite 300, Los Angeles, CA 90036 Tel: 323-559-7470
November 6, 2018
Ms. Karineh Samkian Environmental Program Analyst Public Works Department, City of San Pablo 13831 San Pablo Avenue, Building 3 San Pablo, CA 94806
Subject: Final Report on Review of Richmond Sanitary Services’ 2019 Rate Applications for San Pablo, Pinole and Hercules Dear Ms. Samkian: R3 Consulting Group, Inc. (R3) was engaged by the City of San Pablo (City) on behalf of the City and the cities of Pinole and Hercules (collectively referred to as the “Jurisdictions”) to review Richmond Sanitary Service’s (RSS’s), rate adjustment applications (Rate Applications) to each of the Jurisdictions for 2019 Base Year Rate Change (effective January 1, 2019). This letter report presents the results of our review. Background RSS has an exclusive franchise agreement (Agreement) with each of the Jurisdictions for the collection of solid waste, recyclables and organics. Under the terms of the Agreements, the year 2019 shall be a “Base Year” for rate review and adjustments. RSS may initiate a Base Year request to adjust the rates authorized under the Agreements by providing written notice no later than 180 days prior to the January anniversary date for the adjustment of rates. Notice must therefore, be given by July 1, 2018 for adjustment to the maximum permitted Base Year rates for calendar year 2019. RSS’s Rate Applications to each of the Jurisdictions are dated June 28, 2018, with modified Rate Applications dated July 5, 2018 reflecting “some minor adjustments in projected labor costs”. The Agreements provide that “The Contractor’s Rate Application shall be supported by sufficient financial operational information as determined by the City.” Rate Adjustment Requests & Recommendations RSS’s requested 2019 rate adjustments are as follows: Pinole - 2.49% Hercules + 6.35% San Pablo + 5.78% Based on our review, we recommend the following 2019 rate adjustments, which have been reduced from RSS’s original rate applications: Pinole - 3.67% Hercules + 5.34% San Pablo + 4.36% Ms. Karineh Samkian Final Report on Review of Richmond Sanitary Services’ 2019 Rate Applications November 6, 2018 Page 2 of 4
It should be noted that rates in Pinole are proposed to decrease while rates in Hercules and San Pablo are proposed to increase. This is due to the fact that Pinole has seen greater growth in its commercial sector compared to San Pablo and Hercules and that this growth has driven an increase in rate revenues as compared to allocated RSS expenses. As a component of this review, R3 reviewed and confirmed the basis and mathematical accuracy of those allocations. The above preliminary adjustments are based on handling the following items as noted below: . An operating ratio (used to calculate profit) of 88%; . Limiting bonus pay expenses at the average of the last three years expenses (escalated for 2019 and consistent with prior methodology); . Disallowing lobbying expenses; . Correcting 2019 revenue projections at current rates; and . Correction franchise fee calculations.
R3 has briefed RSS regarding the basis and calculations for these adjustments, and RSS has confirmed their acceptance of these adjustments as presented in this report. Review Methodology The Agreements do not specify a methodology for adjusting Base Year rates, including how to handle a number of relevant items including: . The level of profit; . Expenses not subject to profit (i.e., pass-through expenses that are allowable but not subject to profit. Pass-through expenses may include solid waste disposal and recyclable material processing costs, franchise and other fees and other certain expenses); and . Non-allowable expenses (e.g., fines and penalties, charitable or political donations, income taxes, employee free services, etc.). The lack of a clear methodology for preparing the Base Year Rate Application was first noted during Hercules 2007 Base Year Rate review process. For purposes of structuring its Rate Application, RSS used rate application forms from Contra Costa County’s Rate Adjustment Guidelines (Guidelines) for its 2019 Rate Applications, as well as its 2007 and 2012 Rate Applications to the City of Hercules. In conducting this review R3 applied methodologies consistent with past practice, as proposed to the Jurisdictions and RSS at the outset of the review. Profit Level The Agreements do not specify a target profit level (operating ratio) for RSS, although the City of Hercules increased RSS’s profit from a 90 percent operating ratio (11.1% profit) to an 88 percent operating ratio (13.6% profit) in 2007 at RSS’s request. RSS based that request “on its ability to control costs by meeting internal productivity goals which have resulted in labor costs escalating at a lesser rate than the union contract increases.” RSS set its profit level to an 88% operating ratio in each of its Rate Applications to each of the Jurisdictions. RSS reported that 88% operating ratios were accepted by each jurisdiction. For purposes of this review R3 applied the 88% operating ratio to calculate RSS’s profit for each of the Jurisdictions. Ms. Karineh Samkian Final Report on Review of Richmond Sanitary Services’ 2019 Rate Applications November 6, 2018 Page 3 of 4
Non-Allowable Costs As noted above, the Agreements do not address non-allowable costs, although doing so is common industry practice. As an example, Contra Costa County’s Rate Setting Manual specifies that the following costs are not allowed for rate setting, and as a result will not be passed on to the ratepayers: . Amortization of franchise purchases;
. Charitable and political contributions;
. Fines and penalties;
. Income taxes;
. Interest expenses; and
. Other costs on a case-by-case basis. As part of the 2012 Base Year rate review for the City of Hercules, R3 identified the certain expenses allocated to the City that we recommended be disallowed based on common industry practice, including fines and penalties, charitable contributions, lobbyist fees, property damage and other expenses. In 2013 the Hercules City Council ultimately adopted rates that included adjustments for fines and penalties, lobbyist fees, and other expenses. For this review, RSS reported that it did not make adjustments to its 2017 reported expenses, or its 2018 or 2019 projected expenses to account for non-allowable costs. For the purposes of the review of the 2019 Rate applications, R3 applied past practice with respect to non-allowable costs for the Jurisdictions, resulting in disallowance of fines/other penalties, lobbyist fees, and limations on staff bonuses. Revenue Adjustments RSS calculated its residential revenues by multiplying the number of current customers at each service level (i.e., cart size) by the associated monthly rates. While this provides a good projection of residential monthly base rate revenues it does not account for residential revenues associated with extra services, fees or other residential revenue not accounted for in the monthly base rate revenue. We requested that RSS provide an accounting of residential revenue associated with special services, extra services, and/or charges or fees not included in the monthly base rate revenue, and applied those revenues to the revenue calculations in the rate application. Franchise Fee Adjustments R3 reviewed RSS’s calculations of franchise fees in the rate applications, and made adjustments consistent with the descriptions for franchise fees (and other Jurisdiction payments) as noted below. City of Pinole The 2nd Amendment; Section 7 (Franchise Fee) states that franchise fees shall be calculated as follows: “For calendar year 2012 and thereafter an amount of 10% of gross revenues.” Gross Revenues are defined within the Amendment as: “all actual monies remitted to RSS by customers excluding any pass-through fees such as the IRRF Fee and AB 939 Fee as determined in accordance with Generally Accepted Accounting Principles.” Pinole’s franchise fees exclude light industrial rate revenue, and also include a $6,000 annual “blight” payment.
Ms. Karineh Samkian Final Report on Review of Richmond Sanitary Services’ 2019 Rate Applications November 6, 2018 Page 4 of 4
City of San Pablo The 2013 Amendment; Section 5 states that franchise fees shall be calculated as follows: “…in an amount equal to the percent (10%) of gross revenues.” The Amendment also specifies that “For purposes of calculating gross revenues, Contractor shall not deduct the amount of franchise fee payments or any other business expense.” San Pablo’s franchise fees further include $35,000 for a voucher program and annual “blight” payments. City of Hercules In 2013 the City of Hercules set its franchise fee in the amount of 10% on gross revenues not including light industrial rate revenues. We calculated 2019 franchise fees for the Jurisdictions according to the methods reported above, which resulted in slight reduction to the proposed rate adjustments. Limitations The level of review conducted for this engagement was limited in accordance with the available project budget, and per our proposal to the Jurisdictions to conduct this review. Of note is that this review was conducted simultaneously for all three Jurisdictions and included a general application of prior practice to all Jurisdictions. Because of the limited nature of this review, prior differences in approach by Jurisdiction were not continued, and RSS’s rate applications to each Jurisdiction were treated identically. Overall, our review focused on ensuring that the Rate Applications were consistent with general past practice, that they were mathematically accurate, and that adjustments were made that were consistent with the City of Hercules’ 2012 Base Year Rate review. While we conducted a variance analysis and requested that RSS provide an explanation of significant variances, we did not conduct a more detailed review, or make adjustments to RSS’s 2018 and 2019 expense projections, except as otherwise noted above.
* * * * * * * We appreciate the opportunity to be of service to the City and the Jurisdicitons. Should you have any questions regarding this submittal, please contact me by phone at (510) 292-0853 or by email at [email protected]. Sincerely, R3 CONSULTING GROUP
Garth Schultz | Principal