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HomeMy WebLinkAboutStaff Report 301-10TO: HONORABLE CITY COUNCIL FINANCE COMMITTEE FROM: CITY MANAGER DEPARTMENT: PUBLIC WORKS DATE: JULY 6, 2010 CMR:301:10 REPORT TYPE: ACTION SUBJECT: Refuse Rate Analysis and Funding Strategies EXECUTIVE SUMMARY The Refuse Fund is facing a potential prospective shortfall in fund balance and mandated reserves by the end ofFY 2011 if corrective actions are not taken. That prospect is created by three factors: 1) a reduction in customer sales and resultant revenues associated with the economic downtown; 2) a largrr than anticipated success of the Zero Waste Program initiatives resulting in a shift of solid waste tonnages away from disposal services to commercial organics collection, and 3) an increase in programmatic and policy directed initiatives resulting in both . increased expenditures for capital improvements and revenue decreases associated with the ban on commercial material at the landfill. The City has a long history of providing comprehensive solid waste, recycling, and yard trimming services to the residents and businesses of Palo Alto. Over the last 20 years, community interests and Council policy, along with staff programmatic recommendations, have created and maintained a solid waste system that while effective, also maintains parallel and redundant services and facilities. In addition to the immediate causes, a convergence of factors has put pressure on the Refuse Fund resulting in a projected FY 2011 deficit of $6.3 including: CMR:301:10 • The provision of two parallel solid waste landfills -the City's own landfill and the Kirby Canyon landfill; • The "legacy costs" of the "put or pay" long term contract with the Kirby Canyon landfill; • The policy shift to zero waste servic.es while still incurring the longterm costs of the City Landfill and Kirby Canyon landfills; • The current rate structUre which incentivizes conservation and subsidizes recycling and yard trimmings services; Page 1 of 15 • The Refuse Fund's self-funding of capital programs, such as the recycling center relocation, SMaRT station upgrades, and early opening of the landfill phases IIA and lIB;· • An outdated and simplistic revenue model that does not have flexibility to account for tonnage fluctuations and other complexities; and • Declines in revenue from both the commercial sector and the Palo Alto landfill moratorium on commercial disposal. While staff is proceeding on a number of fronts to bring forward a Refuse Rate Restructuring Policy, these initiatives will not be complete until the end of 2010. The purpose of this report is to summarize the existing refuse fund programs, compare Palo Alto's program expenses to other cities, to summarize the steps staff is taking towards a rate restructuring policy and to provide a preview of the various fund balancing scenarios that staff is exploring. Most scenarios involve a combination of expense reductions and new revenue sources, including rate increases. Potential expense reductions total up to $2.6 million and new revenue sources total $3.9 million. Some of the scenarios also include the use of a short term loan from the Budget Stabilization Reserve (BSR) in the General Fund to bridge the remaining deficit over the next two to three years, in the range of $1.0 to $2.3 million. It is important to note that these scenarios are intended to address a short term deficit and that a more comprehensive solution will be recommended once the revenue model, data management tool and cost of service study are completed. This report is intended to provide the information on the context and alternatives for a focused discussion by the Finance Committee on July 6th regarding direction to staff on formulating a specific recommendation for resolving the potential shortfall in the Refuse Fund. Subsequent to the discussion and direction, staff will return to the Finance Committee on July 20th with a specific recommendation. BACKGROUND At the May 27, 2010 Finance Committee Meeting, staff provided an update of information originally presented on April 6, 2010 (CMR: 195:10) on the status of the Refuse Fund and the need for a rate increase. Staff proposed a rate increase to curb the effects of an emerging structural deficit within the Refuse Ftmd. On June 15, 2010, staff returned to Finance Committee (CMR: 281:10) with an update on the Refuse Fund, comparison of Palo Alto's refuse rates with those of other jurisdictions, further analysis of the impacts of Zero Waste services and the economy revenue, and proposed reductions in expenses in the Refuse Fund. DISCUSSION Summary of Palo Alto Solid Waste Program Elements and Impact on Expenses The City has a long history of providing comprehensive solid waste, recycling, and yard trimming services to the residents and businesses of Palo Alto. Many of these programs involve costs that have been fixed by previous long term contracts. Below is a summary of these servIces. Collection and Processing Services. Palo Alto contracts with a private hauler, currently Green Waste of Palo Alto, to provide 'exclusive services for solid waste, recyclable materials, CMR:301:10 Page 2 of15 organic materials, and yard trimmings collection and processing for residential and commercial customers. The contract is in force until 2017, with the option to extend the contract to 2021 to coincide with the SMaRT Station agreement. Key elements of the Zero Waste Operational Plan were included in the contract with GreenWaste, including providing commercial compostables (food scraps) collection service, expanding commercial recycling services, increasing construction and demolition debris (C&D) recycling, and expanding the list of acceptable recyclable materials. Palo Alto Landfill and Composting Operations. The Palo Alto landfill is located on 137 acres and has been in operation since the 1930s. City staff operates the facility and it is over 98 percent full. Until March 2009, the landfill accepted solid waste from residential and commercial customers, but currently only accepts residential self haul garbage. The compo sting operation, also run by City staff, began in 1977 and primarily takes residential yard trimmings collected by the hauler and commercial self-haul customers. A recycling center, in operation since 1972, for use by Palo Alto residents, is also situated at the landfill and is operated by GreenWaste of Palo Alto staff. SMaRT Station. The Sunnyvale Materials Recovery and Transfer (SMaRT) Station began operation in October 1993 on a 10 acre site in northern Sunnyvale, at the city's closed landfill. It was built by the City of Sunnyvale, in partnership with Mountain View and Palo Alto. The facility has five purposes: receive and recover recyclable materials from garbage collected by the three cities, transfer the unrecycled portion of the garbage to Kirby Canyon Landfill for disposal, receive, process, and ship to compo sting facilities the yard trimmings collected by the cities, receive, sort and market curbside recyclables, and provide a recycling center where residents can drop off recyclable materials and receive cash for bottles and cans covered by California's 'Bottle Bill' system. The city is committed to this partnership; via a MOU signed in 1991, until 2021. The Kirby Canyon Landfill, a private landfill in south San Jose owned by Waste Management, agreement, also in effect until 2021, requires the City to deliver specific annual tonnages of solid waste. If the CitY does not meet the tonnage requirement, there is still a requirement to pay Waste Management for each ton that falls short of the annual tonnage commitment. Household Hazardous Waste. The City provides HHW services to the residents and small businesses of Palo Alto. Palo Alto is the only city in Santa Clara County not to participate in the County's HHW program .. The City's program continues to be cost effective and to have a much higher rate of participation than the County program. Landfill Rent. In 2007, Council established a comprehensive policy on landfill rent (CMR 104:07). As part of that policy, Council directed the Refuse Fund to begin paying rent to the General Fund on the closed, undeveloped areas of the landfill in addition to the active portions and that the landfill payments be amortized over time to avoid significant rate impacts. Under the rate smoothing schedule adopted by Council the Refuse Fund makes annual rental payments in the amount of $4,288,747 through FY 2012 to the General Fund for use of approximately 100 acres. In FY 2013, after the landfill is projected to close, the annual payments go down to $2,094,331 through FY 2020 with a fmal payment of$881,851 in FY 2020. CMR:301:10 Page 3 of 15 A large percentage of expenses covered by the Refuse Fund are built into long term contracts. One is the contract with GreenWaste of Palo Alto for collection and processing (38.8% of total expenses), and with the SMaRT Station (and with Kirby Canyon Landfill) for transfer and disposal of solid waste (14.5%). These three commitments will remain relatively fixed, with specific growth measures built in, until 2021. Meanwhile, since the City signed the MOU with the SMaRT Station partners in 1991, Palo Alto has made policy and operational decisions that continued to support the ongoing operations at the Palo Alto landfill and composting facility. These contractual versus city-provided services have created a redundancy in Palo Alto's system . that have added to the overall cost of the total program. Additionally, while the City has a long history of aggressive recycling, in 2007, the City adopted the Zero Waste Operational Plan which set goals for 73% diversion by 2012 and virtually zero waste going to landfills by 2021. This is clearly the future for Palo Alto, however, the intended elimination of material previously destined to go to a landfill, coupled with a put or pay requirement at a landfill creates a budgeting challenge. In evaluating the overall solid waste system, the City needs to analyze all of it policy decisions, goals, and contractual obligations to determine ways to make the system as effective and efficient as possible. Comparison With Other Cities On June 15, 2010, (CMR: 281:10) staff provided a comparison of Palo Alto's major expense categories with other Santa Clara County cities. Staff is providing additional information on the details of what expenses are included in these categories, as available from Sunnyvale, Santa Clara, and San Jose. Due to time constraints, Mountain View was not able to provide additional information on their expenses. If an expense category has no entry, it does not necessarily mean the city has no expenses associated with it, but that expense may be captured elsewhere and the city does not track the expense separately. CMR:301:10 Comparison of Expenses, by City FY 2011 Mountain Palo Alto View Santa Clara San Jose Page 4 of 15 Solid waste/recycling collection services (hauler). For Palo Alto, this expense category exclusively covers the city's expense obligations for the contract with GreenWaste of Palo Alto to provide services for residential, multi-family, debris box and commercial customers. The same is true for Sunnyvale. For San Jose, this expense category covers collection and processing services for residential and multi-family services. Santa Clara includes their contract with the hauler (which includes collection, processing and disposal), clean up and recycling services provided by City staff, and overhead. Landfill operations/maintenance. Palo Alto's landfill and compo sting operation is included in this category. For San Jose, the city included payments under a long term contract for residential and City generated garbage disposed of at a private facility. This expense is analogous to a portion of Palo Alto's SMaRT Station category. Neither Sunnyvale nor Santa Clara operate a landfill. Their disposal costs are included elsewhere. (Sunnyvale -SMaRT Station; Santa Clara -hauler) Capital Projects. Santa Clara's CIP projects, about $550,000 per year, are associated with their closed landfill. The General Fund subsidizes these post-closure projects. Street Sweeping. Palo Alto's Refuse Fund solely funds street sweeping operations, weekly residential and commercial service, provided by City staff. Santa Clara provides· weekly residential and biweekly commercial service by city crews. It is solely funded by the Refuse fund and totals approximately $650,000 per year. Sunnyvale is increasing from monthly to biweekly service in FY 2010-2011. The service is provided by city staff and is funded equally between Solid Waste and Waste Water funds. In San Jose, street sweeping in conducted once per month and the residential services are provided by a contractor. The Storm Water fund pays for 50% of the services, totalling about $2 million. City Operations. This is not an expense category used by Palo Alto, or Santa Clara. For Sunnyvale, this category includes all city solid waste staff, the Solid Waste fund's portion of street sweeping payments, closed landfill maintenance, and payments to the County for HHW serVices. San Jose included their recycling and zero waste programs in this category. SMaRT Station. For the SMaRT partners, Palo Alto, Mountain View, and Sunnyvale, this category covers the proportionate expenses for the operating contract for the facility, fmancing payments, and Kirby Canyon landfill disposal payments. Admin/Overhead. For Palo Alto, this includes all of the allocated costs to cover City General Fund services and solid waste staff salary and benefits. Santa Clara included these costs under Hauler. For Sunnyvale, this includes only the General Fund services (Attorney, FinancelPurchasing, IT etc.). The same is true for San Jose. Debt Service. This is a category for only Sunnyvale. Included in this expense is debt service payments for Sunnyvale's portion of the SMaRT Station and repayment of an inter-fund loan from the General Fund for landfill closure in the 1990s. CMR:30I:IO Page 5 of 15 Land Rent. For Palo Alto, this is payment to the General Fund for the use of land on which the landfill and composting operations reside. Sunnyvale also pays their General Fund for use of the closed landfill and SMaRT Station. HHW. Palo Alto runs its own household hazardous waste program. The other four cities participate in the County's program and pay the County for those services. Every other city except Santa Clara included those costs in other categories. Other. For Palo Alto, this category primarily includes the zero waste outreach and education programs. Santa Clara includes nuisance abatement in this category. San Jose used this expense category to capture miscellaneous expenses and outreach costs. Permitting and Enforcement. The expense category covers the costs of contractor and consultant services to monitor the landfill and compo sting operations. Analysis of Revenue Projections and Rate Setting For at least the last seven years, the Refuse Fund has seen the impact of the Law of Demand and the Substitution Effect on its actual versus projected revenue, during the years when a rate increase was implemented. Briefly, the Law of Demand states if the price of a good or service increases, the quantity demanded will decline. The Substitution Effect is the change in the quantity of a good or service as the consumer substitutes a good that has been relatively cheaper in the place of one that has become more expensive. Whenever conservation pricing, rate structures designed to encourage the customer to consume less or reduce service levels, are enacted, a service provider should expect that many customers will be motivated by the increased prices to migrate to less service in order to save money. So any revenue projections calculated on the old level of service will not meet the reality of the revenue generated with the new, downsized levels of service. This can be seen in the revenue trends in the Refuse Fund over the last several years. Of the last five years in which the City enacted a rate increase, only one of them obtained the projected rate increase, though not the budgeted amount (FY 2008). The following table showing curbside revenue, which is the revenue category from which the City generates the majority of our revenue, demonstrates the trend. ur Sl e C b'd P r02ram rO.1ec e v. c ua evenue P . td At lR FY Budgeted Budgeted Actual Revenue Actual One Variance Rate Change Revenue Year Change from Budget 2004 0% $18,673,951 $18,515,575 0% ($158,375) 2005 10% $20,541,346 $19,539,324 5.5% ($1,002,021) 2006 8% $22,184,654 $20,703,662 6% ($1,480,991 ) 2007 0% $22,184,654 $20,767,521 0.3% ($1,417,132) 2008 13% $25,068,660 $23,545,925 13.4% ($1,522,734) 2009 10% $27,575,660 $25,171,597 6.9% ($2,404,062) 2010 17% $32,416,927 $25,773,936 2.4% ($6,642,991 ) For FY 2010, price demand elasticity was coupled with the implementation of new zero waste services, primarily commercial compostable (food scraps) collection services. Two thirds of this CMR:301:1O Page 6 of15 year's 37% decrease in tonnages can be attributed to this new program. Staff explained the impact briefly on June 15, 2010 (CMR: 281:10). The remaining decrease in tonnage has been associated with the economic downturn. Our neighboring cities have experience decreases in tonnages over the last two years ranging from a low of 1.1 % in Sunnyvale to a high of 32% in Mountain View, with an average decrease of 14.4%. None of these cities changed their collection programs as Palo Alto did, and have stated to staff that they attribute the decreases in tonnage, and subsequent revenue, on the economic climate of the last two years. Additionally, industry reports in journals such as MSW Management (e.g. May 2010) site tonnages at landfills across the country are down 15-20% and tie this trend to reduced production and sale of goods and the collapse of the construction industry. Overall, the modeling of revenue generation for FY 2010 did not account for the shift in tonnages and subsequent service levels with the implementation of the commercial compostable collection service. The change in rates was calculated using the old rate/tonnage structure. The revenue forecast did not consider that an estimated 25% of solid waste tonnage was expected to 'migrate to commercial organics service, which is offered at a discount. Nor did it consider the potential for downward migration of service levels for the remaining commercial solid waste tonnages. Additionally, as shown in the above table, for the last seven years, the Refuse Fund actual revenue has not met budgeted expectations, and the Rate Stabilization Reserve has been used to help mitigate these shortfalls. The forecast model used for the Refuse Fund has many limitations, which led to the inability to reasonably predict more complex impacts on projected revenues. It is a simple spreadsheet that calculates increases in revenue only at the total revenue level. There is little ability to project revenue increases at either the line of business, or better yet, at individual service levels. To rectify this, over the past fall and spring, staff has worked with a consultant to design a more sophisticated source and use model. The forecasting model is just being finalized and will be used for all future projections. The model will allow staff to analyze separately the potential impacts to financial, operational, and tonnage calculations from changes made to the program, project customer migration levels, and incorporate economic growth factors, among other elements. While no model is perfect, this new tool should provide improved projections for future fiscal years. Staffhas also engaged in developing comprehensive data management and monitoring practices. This includes the development of a data management tool electronically linking various monthly reports received on actual tonnages, revenue, and customer trends. Staff should have this system completed by fall 2010. Staff anticipates this system to increase the ability to track trends in a more efficient and comprehensive manner. As meqtioned before, Public Works is preparing to conduct a cost of service study for the solid waste system and Refuse Fund. The RFP has been released, proposals have been received, and staff anticipates awarding a contract by early August. This study will produce both a cost of service model to calculate future allocation of expenses to use in rate setting, and a new proposed rate structure for the Refuse Fund. One of the anticipated results of the cost of service study is a rate structure that no longer relies solely on rates based on garbage service levels. In a system such as Palo Alto's where total solid waste tonnages are decreasing, a more comprehensive rate structure is necessary to improve revenue projections and stabilization. Staff anticipates bringing CMR:301:10 Page 7 of15 a new rate structure to Council as part of the FY 2012 budget process. At that time, staff will also bring forward a Refuse Rate Restructuring Policy, to provide a consistent method, based on cost of service, for setting rates for solid waste services. Potential Sources of Revenue and Expense Reductions to Address Shortfall Staff approached the development of options to close the $6.3 million gap in revenue for FY 2011 with the goal both to preserve the cash needed for landfill closure and to realign revenue to expenses over a three year period. This approach relies on a combination of expense reductions and revenue increases, coupled with a short term guarantee of revenue to cover any gaps until the fund is completely cost recovery by FY 2013. While the lists below offer many options and opportunities to regain cost recovery, several of them would require Council action to implement, or are mutually exclusive. For example, lifting the commercial ban at the landfill will increase revenue, but that action runs counter to Council direction and allows the landfill to be filled sooner. Potential Expense Reductions Expense reductions are comprised of a combination of one-time and permanent, structural changes to the budget. The primary goal of the structural changes is to reduce the impact of any parallel services currently provided by both Palo Alto facilities and contractual services provided through the SMaRT Station and GreenWaste of Palo Alto (as described above). The following table summarizes the potential expense reductions for FY 2011 and beyond. Expense Reductions Amount One..,time or On~oin~ Landfill-reduce operations to 5x per week $250,000 Ongoing (until closure) Street Sweeping -change to biweekly service for $250,000 Ongoing residential Compost Facility -Closure $150,000 Ongoing Recycling Center -Closure $300,000 Ongoing Zero Waste -Outreach modification $200,000 Ongoing Salary Savings -Zero Waste Coordinator position 2011 $100,000 One time FY 2011 crp -defer 2 proj ects to 2012 $1,350,000 One time FY 2011 TOTAL $2,600,000 A brief description of all of the potential expense reductions is listed below. • Landfill. Staff has analyzed the potential to reduce days the Palo Alto landfill is open and recommends reducing operations to five days per week. Currently the Palo Alto landfill is open for business seven days per week. With minimum impact to customers, staff proposes closing the landfill 011 its two slowest days, with the net decrease in expenses of $250,000 per year. This savings comes primarily from the elimination of two positions at the landfill, and subsequent allocated costs. Modifications to the existing operating permit with the State will have to be made. • Street Sweeping. The proposal would reduce street sweeping in the residential areas of the City from every week to biweekly. Sweeping in the commercial districts would remain weekly. The net savings to the City is estimated to be $250,000 per year. This CMR:301 :10 Page 8 of 15 savings comes primarily from the elimination of two positions and the need for one piece of equipment. Modifications to the current street sweeping frequency may have impacts on stormwater quality and localized flooding potential in certain areas of the City . . ~ LATP Rent -ongoing payment from Utilities $60,000 Ongoing Landfill gas payment -from RWQCP $350,000 Ongoing Landfill -increas~ gate fees $230,000 Ongoing (until closure) Landfill -lift commercial ban $500,000 Ongoing (until closure) Landfill -implement fee for soil $250,000 One time FY 2011 LATP Rent -back payment from Utilities $480,000 One time FY 2011 Rate Adjustment for 2011 -Residential-6% $400,000 Rate Adjustment for 2011-Commercial-9% $1,700,000 TOTAL $3,970,000 A brief description of each revenue source is below. • LATP Rent. The City purchased the site and it is owned jointly in equal shares by the General and Refuse Funds. Public Works, through the Refuse Fund, purchased 50 percent of the total acreage at the former LATP site. The Utilities Department has been using the site since FY 2005 for electric and gas fund project staging and paying a fix rent of $120,000 per year. Since the property is owned in equal shares the rent proceeds are split evenly between the General and Refuse Fund. However, rent was paid for only two of those years, 2005 and 2007. Moving forward, Utilities will be paying the Refuse Fund $60,000 per year for rent of the site. Staffwill charge the electric and gas funds $360,000 in FY 2010 to catch up for the last three years and $120,000 will be paid in 2011. The total of $480,000 is proposed to be paid to the Refuse Fund with $240,000 being a short-term loan from the General Fund. • Landfill Gas Payment. Currently the RWQCP uses 125 million cubic feet of gas generated by the landfill to generate energy, primarily for the incinerators. Based on current Utilities rates for natural gas, the energy is worth $350,000 in revenue, were the plant to pay the Refuse Fund. • Landfill Gate Fee. By increasing the gate fees for all materials, even with maintaining the commercial ban, the landfill will generate an additional $230,000 per year, while it remains open. The increase in rates does require modifying the Municipal Fee Schedule. • Landfill Ban. If the ban accepting commercial solid waste were lifted, the landfill would generate approximately an additional $500,000 per year while it remains open. Ending the ban would require Council action and hastens the closure of the landfill. As noted above, deferring the CIP expenses could not occur if the landfill ban is lifted. • Landfill -Soil. The landfill will begin implementing a fee for soil accepted by the facility. The soil is needed to address maintenance of contours, to fill in areas, and to cover the area as part of closure. An additional $250,000 in revenue will be generated by instituting the fee for FY 2010-2011 to take in enough soil for closure. CMR:301:10 Page90f15 • Rate· Adjustment -Residential. The residential sector services are not at cost recovery. More detailed analysis will take place as part of the Cost of Service Study, but a moderate increase to begin aligning revenues with costs is warranted, and will help close the budget deficit. A 6% increase for residential customers for FY 2011 is proposed to generate $400,000 in revenue. For the 32 gallon customer, the increase is $ per month, from $31.00 to $. (More detail is provided below as part of the recommended scenario to return the Refuse Fund to cost recovery). • Rate Adjustment -Commercial. While the majority of the revenue shortfall for FY 2010 occurred in the commercial lines of business, they are closer to cost recovery. Staff is recommending a 9% increase for commercial customers to generate an additional $1,700,000 per year. (More detail is provided below as part of the recommended scenario to return the Refuse Fund to cost recovery). Reserve Levels and use of BSR Guarantee Staff examined using Refuse Fund reserves to fund the short term projected deficit, but given State restrictions on refuse reserves this option is problematic. The State requires all landfill operators to fund several reserves, including: a Landfill Closure Reserve and a Corrective Action Reserve. These reserves are required to ensure the State that the City has adequate funding to properly cap and close the landfill and properly remediate in the event of an accidental emission. For. FY 2011 the Closure Reserve must be funded at $6.1 million and the Corrective Action Reserve must be funded at $650,000. As the landfill is nearing closure these reserves are almost at the 100% level. Given this restriction, staff is instead recommending that the General Fund Budget Stabilization Reserve be used to guarantee the projected shortfall in the scenarios described below. General Fund Loan The City is required by the State of California to maintain sufficient funds for the future closure of the landfill. The amount is estimated to be $6.1 million. For FY 2010 the Refuse Fund will have sufficient funds to cover the State funding requirements. Based on current projections, without further adjustments the Fund would fall below the State required funding level. As a result of the significant drop-off in revenues, staff is recommending that any shortage after expenditure reductions and rate increase be covered by the General Fund. Staff estimates the loan requirement to be from $1.5 to $2.5 million depending on the approved funding option. The General Fund reserve (BSR) has a current balance of $23.9 million or 17.2 percent of the 2011 Adopted Budget expenditures. A loan of $2.5 million would reduce the reserve to $21.4 million or 15.35 percent. The Council approved reserve minimum is 15 percent, so this amount would leave little room for unanticipated needs during FY 2011 unless the Council revises the reserve policy. Scenarios Staff developed several scenarios using the above list of possible ~lements. The rate increase estimates included in the scenarios for FY 2012 and 2013 are subject to the results of the Cost of Service study to be completed in the fall of 2010. Rate scenarios also include estimates (or any downward migration in service levels. CMR:301:10 Page 10 of 15 Scenario 1 -Commercial Ban Remains: This scenario assumes that the ban on commercial material at the Palo Alto landfill remains in place. Given current projections, the landfill would not close until sometime in late 2013 or early 2014 because the ban has extended the life of the landfill. In summary, for FY 2011, if all of the proposed revenue elements listed above are adopted (except for increased landfill revenue from lifting the ban = $500,000) and all of the expense reductions listed above are adopted, the Refuse Fund would essentially eliminate its shortfall. s cenano : . 1 S ummaryo fR evenue an dE xpense I t FY 2011 mpac s, Ongoing One time Total Additional. Revenue $2,740,000 $730,000 $3,470,000 Expense Reductions $1,150,000 $1,450,000 $2,600,000 TOTAL $6,070,000 Remainder needed $300,000 The following table demonstrates how the ongoing, structural changes in expenses, coupled with some potential rate increases (or rate re-structuring depending on the results of the Cost of Service Study) in the table above will work together to move the Refuse Fund to cost recovery, and a positive ending balance to begin to rebuild the Rate Stabilization Reserve. Fiscal Year 2011 2012 2013 Residential Rate Adjustment 6% 6% 0% Commercial Rate Adjustment 9% 9% 0% Revenues 33,349,934 34,959,572 34,329,572 Expenses 33,544,722 34,842,640 31,040,099 Change in Net Assets (Remainder Needed) (194,788) 116,931 3,289,472 Scenario 2 -Commercial Ban Lifted: This scenario shows the impact of Council lifting the ban on commercial solid waste from being accepted at the Palo Alto landfill. Closure of the landfill is estimated to be in late 2012 if the ban is lifted. If that is the case, increased revenue at the landfill can be collected, but all CIP projects for the landfill would need to be completed in FY 2011 in preparation for closure, which adds $1,350,000 of expenses back to the budget. All other proposed expense reductions and all revenue estimates in the tables from the previous section are included in this scenario. S cenano : . 2 S ummaryo fR evenue an dE xpense mpac s, I t FY2011 Ongoing One time Total New Revenue $3,240,000 $730,000 $3,970,000 Expense Reductions $1,150,000 $100,000 $1,250,000 TOTAL $5,220,000 Remainder needed $1,100,000 In this scenario, a larger negative balance and guarantee of funds are needed to ensure the Refuse Fund is whole in FY 2011. However, because the ongoing operational expenses of the landfill begin to be reduced significantly in FY 2012, the Refuse Fund is projected to be positive by the end of the fiscal year. CMR:301:10 Page 11 of 15 Fiscal Year 2011 2012 2013 Residential Rate Adjustment 6% 6% 0% Commercial Rate Adjustment 9% 9% 0% Revenues 33,849,934 35,209,572 33,599,572 Expenses 34,894,722 33,492,640 30,640,099 Change in Net Assets (Remainder Needed) (1,044,788) 1,716,931 2,959,472 Scenario 3 -Close the landfill in FY 2011: This scenario explores the impact to the Refuse Fund if Council directed staff to close the landfill, and compo sting operation, immediately in FY 2011. This scenario assumes that while the final closure of the landfill would begin in FY 2011, it may not be completed until FY 2013 due to the necessary operational activities involved in shutting doWIi a landfill. But the expenses presented address the multi-year nature of the closure, and are decreased over several years. Ongoing revenue includes the 6% increase for residential customers and 9% increase for commercial customers, RWQCP payment for landfill gas, and rent payment from Utilities. One time revenue includes the back payment from Utilities and revenue from charging for soil at the landfill. Ongoing expense reductions are comprised of $1,500,000 from beginning the landfill closure in FY 2011, the Recycling Center closure, and reduction in the Zero Waste outreach program. One time expense reduction is the salary savings from the Zero Waste program position vacancy. cenarlO . ummaryo evenue an xpense mpac s, . S . 3 S fR dE I t FY2011 Ongoing Onetime Total New Revenue $2,510,000 $730,000 $3,240,000 Expense Reductions $2,000,000 $100,000 $2,100,000 TOTAL $5,340,000 Remainder needed $1,000,000 As in Scenario 2, FY 2011 requires a slightly larger guarantee of a loan to balance revenue and expenses, but by the end of the $econd year, the Refuse Fund is at cost recovery. Additionally, this scenario keeps the street sweeping program at the weekly service level for residential and commercial areas. Fiscal Year 2011 2012 2013 Residential Rate Adjustment 6% 6% 0% Commercial Rate Adjustment 9% 9% 0% Revenues 33,310,534 33,540,126 33,570,126 Expenses 34,397,117 32,573,515 30,564,191 Change in Net Assets (Guarantee Needed to (1,086,583)) 966,611 3,005,934 Cover) Scenario 4 -Maintain All Council Directed Services/Policies: This scenario explores which of the proposed revenue sources and expense reductions could be applied to reducing the FY 2011 CMR:301:10 Page 12 of15 deficit, while honoring all services and policies incorporated into the solid waste program, as directed by Council. With regards to new revenue sources, all of the proposed recommendations could be implemented except for the increased revenue at the landfill from commercial customers due to the ban on commercial material. So of the $3.9 million in new revenue sources, staff could implement $3.4 million of the total in FY 2011. In reviewing expense reductions, all of the proposed changes to programs and services are tied to Council prior direction, except for the proposed change in number of days the landfill will be open and switching to biweekly sweeping for residential streets. These include maintaining the compo sting operation, keeping a recycling center in Palo Alto, adoption of the Zero Waste Operation Plan, the associated CIP projects with the recycling center and the ZWOP, and preparing landfill Phase II a&b before the closing of the landfill begins. S . 4 S fR dE I t FY 2011 cenano . ummaryo evenue an xpense mpac s, . Ongoing Onetime Total New Revenue $2,740,000 $730,000 $3,470,000 Expense Reductions $500,000 $0 $500,000 TOTAL $3,970,000 Remainder needed $2,300,000 This scenario would require a substantial loan, ~$2.3 million, from another fund to make the Refuse Fund whole in FY 2011, as most of the identified expense reductions would not be enacted. Fiscal Year 2011 2012 2013 Residential Rate Adjustment 6% 6% 0% Commercial Rate Adjustment 9% 9% 0% Revenues 33,349,934 34,709,572 34,329,572 Expenses 35,394,722 33,996,640 31,554,179 Change in Net Assets (Remainder Needed) (2,044,788) 712,931 2,775,392 Scenario 5 -Balance the Shortfall in FY 2011 through Rate Increase Only: While not recommended, Scenario 5 demonstrates what rate increase would be needed in FY 2011, coupled with implementing all of the proposed new revenue sources listed in the previous section (except lifting the landfill ban. This scenario maintains all existing expenses, including weekly street sweeping, and returns the Refuse Fund to a positive balance in one year, FY 2011, with no loan from another fund. The scenario does include an estimate of service level migration into the revenue projection, and projects a 25% rate increase for all customers. CMR:301:1O Page 13 of 15 cenano . ummaryo evenue an xpense mpacts, . S . 5 S fR dE I FY2011 Fiscal Year 2011 2012 2013 Residential Rate Adjustment 25% 0% 0% Commercial Rate Adjustment 25% 0% 0% Revenues 36,139,872 35,107,872 34,727,872 Expenses 36,094,722 34,646,640 32,204,179 Change in Net Assets (Guarantee Needed to 45,150 461,231 2,523,692 Cover) NEXT STEPS Staff will return to the Finance Committee on July 20th with a specific recommendation for the Finance Committee's approval, including revenue and expenditure changes and rate changes. Most scenarios involve a proposed rate increase. The recommended refuse rate increase is subj ect to the notice and protest hearing procedures of Proposition 218. In the event that a refuse rate increase is approved, the City will conduct the refuse rate increase procedures in accordance with those requirements. Pursuant to Proposition 218, the City must provide written notice of any new or increased refuse utility fee to those subject to the proposed fee. A public hearing on the new or increased fee must be held not less than 45 days after mailing the written notice. If written protests against the proposed fee are presented by a majority of those subject to the fee, the City may not impose the fee. On a longer term basis, City staff will be recommending a Refuse Rate Restructuring Policy. The policy and a proposed new rate structure will be brought to Council as part of the budget process for FY 2012. Additionally, staff will be updating the Refuse Fund Reserve Policy. While there is clear direction on the amount of funding for closure of the landfill, there needs to be a review of the level of reserves the Fund should carry for operations. The majority of other funds carry reserves tied to a percentage of revenues in the fund to help smooth rates and have funds available for unanticipated needs. The current minimunl and maximum reserve levels are 10 and 20 percent respectively and the recommendations above do not address funding the reserves to these levels. RESOURCE IMPACT The Refuse Fund has a $7.8 million cash balance as of July 1, 2010, but this is before closing entries are made and the financial audit for the fiscal year is yet to begin. The Fund will have sufficient funds to cover the State required $6.1 million in FY 2010. The impacts to the Refuse Fund reserve levels depend on the scenario approved, but as currently presented the scenarios only ensure adequate State required reserves and would not fully fund a Refuse Fund operational fund. POLICY IMPLICATIONS Proposed changes in the use of solid waste facilities or implementation of zero waste programs may require revisions to the Baylands Master Plan, the Zero Waste Operational Plan, and municipal code. CMR:301:1O Page 14 of 15 ENVIRONMENTAL REVIEW ; An increase in rates to meet financial reserve needs and operating expenses is not subject to California Environmental Quality Act (CEQA), pursuant to California Public Resources Code section 21080(b)(8) and Title 14 of the California Code of Regulations section 1S273(a)(1) and (3). ATTACHMENTS None. PREPARED BY: DEPARTMENT HEAD: CITY MANAGER APPROVAL: CMR:301:10 GLENN ROBERTS Director of Public Works Page 15 of 15