HomeMy WebLinkAboutStaff Report 1791City of Palo Alto (ID # 1791)
Finance Committee Staff Report
Report Type:Meeting Date: 7/5/2011
July 05, 2011 Page 1 of 6
(ID # 1791)
Summary T itle: Refuse Fund Rate Recommendation
Title: Recommendations for Expense Reductions and Rate Increases for the FY12
Refuse Fund Budget
From:City Manager
Lead Department: Public Works
Recommendation
Staff recommends that the Finance Committee recommend new Refuse Rates to
Council which would commence on October 1, 2011. Specifically, in order to begin
correcting the previously identified structural rate issues that lead to funding shortfalls,
staff recommends that a residential rate increase of 13.1% be adopted. In order to
avoid a steep one-time increase, this recommendation also involves a short term loan
from the Budget Stabilization Reserve or the Electric Fund. This recommended increase
is in addition to retaining the FY 2011 6% rate increase that is scheduled to expire on
September 30, 2011. To address Proposition 218 issues, staff recommends that
commercial rates have no increase for FY 2012 beyond retaining the FY 2011 9% rate
increase that is also scheduled to expire September 30, 2011. Staff also recommends
expense reductions for FY 2012 totaling $349,000.
Executive Summary
This report provides the Finance Committee with staff’s recommendations for expense
reductions and rate increases to close the $3.7 million Refuse Fund operating deficit for
FY 2012.
Background
At the Finance Committee meeting on April 5, 2011, staff provided an update on the
Refuse Fund Cost of Service Study and reviewed staff’s short and long term strategies
for bringing Refuse Fund revenues and expenses in alignment and for addressing
Proposition 218 issues with respect to the refuse rates. (A copy of the April 5 staff
report is attached as Attachment B.)
At the April 5, 2011 Finance Committee, staff was directed to propose an initial FY 2012
Refuse Fund budget for adoption by City Council that assumed expiration of the FY
2011 rate increases, and to return to Finance Committee in July with recommendations
for rate increases and additional expense reductions for FY 2012. The FY 2012 budget
July 05, 2011 Page 2 of 6
(ID # 1791)
adopted by City Council on June 20, 2011 contains an operating deficit of $3.7 million
for the Refuse Fund. Approximately $1.2 million of that deficit is due to the expiration
of the FY 2011 rate increases that is scheduled to occur on September 30, 2011. The
adopted FY 2012 Refuse Fund budget contains expense reductions included during the
budget development process. Staff has analyzed the additional areas for expense
reductions that were identified at the April 5, 2011 Finance Committee meeting, and
has prepared options and recommendations for both expense reductions and rate
increases.
Staff is proceeding with a detailed cost of service study that will likely result in a new
rate structure. The preliminary results of the study show that residential rates are not
covering their proportional expenses. Conversely, the commercial rates appear to be
exceeding expenses. While the cost of service study is not yet complete, the
recommendations in this report are based on the need to bring the residential rates up
to a fuller cost recovery level while attempting to correct the existing inequities between
residential and commercial sectors. The goal of this interim adjustment is to begin
implementing fuller cost recovery for residential immediately in order to avoid a larger
deficit problem going forward.
Discussion
In preparing recommendations for FY 2012 refuse rate increases, staff evaluated
expense reductions that are additional to those included in the FY 2012 adopted Refuse
Fund budget, and calculated a number of options for rate increases paired with the
expense reduction options.
Staff evaluated the following areas for additional expense reduction in FY 2012:
·Freeze the vacant Zero Waste Coordinator position for FY 2012;
·Reduce street sweeping expenses or charge to the General or Storm Water Fund
·Reduce Recycling Center costs;
·Defer Landfill gas flare replacement; and
·Reassess rent charged to the Utilities Department for use of the Los Altos
Treatment Plant site
Each of these areas is briefly discussed below.
Freeze Vacant Zero Waste Coordinator Position for FY 2012
Freezing the vacant Zero Waste Coordinator position for FY 2012 is expected to save
about $122,000. Although a number of projects identified in the Zero Waste
Operational Plan will continue to be deferred until this position is filled, Zero Waste
programs can continue at their current level of effort under the existing staffing. Staff
recommends that filling of this position be deferred for FY 2012.
July 05, 2011 Page 3 of 6
(ID # 1791)
Reduce Street Sweeping Expenses or Charge to Another Area
Staff began an evaluation of the expense reductions that may be obtained by
contracting out street sweeping operations and by reducing street sweeping frequencies
from weekly to biweekly or monthly. Further work is needed to complete this
evaluation. Due to the need for extensive public outreach before implementing any
reduction in street sweeping frequency, staff recommends that a public outreach
process, as well as additional analysis of the potential savings, be conducted in FY
2012. Staff also proposes to evaluate the potential allocation of street sweeping
expenses to areas other than the Refuse Fund, such as the General or Storm Water
Fund. Any changes to the street sweeping program would then be implemented in FY
2013. Staff would also present the impacts to the Funds picking up the cost since both
are experiencing fiscal challenges.
Reduce Recycling Center Costs
With the Palo Alto Landfill closing in 2011, the existing Recycling Center must be
relocated. Staff has identified three potential approaches for managing the Recycling
Center upon closure of the Landfill:
1.Eliminate the Recycling Center;
2.Build a new, smaller Recycling Center with limited hours; and
3.Build a large, enhanced Recycling Center to be open seven days per week.
The estimated expense impacts of the three options are detailed in slide 21, Attachment
A. Implementing Option 2 would significantly reduce the operating and capital costs for
the project, while preserving options for residents to drop off items that are not
included in the City’s single stream recycling program. Staff recommends that Option 2
(smaller Recycling Center with limited hours) be implemented. Implementing Option 2
is estimated to save $311,000 per year in operational costs and $600,000 in one-time
capital costs compared to Option 3, although the operational savings for FY 2012 will be
smaller because the existing Recycling Center is expected to be open through 2011.
Defer Landfill Gas Flare Replacement
Deferral of this $620,000 project would postpone the capital cost of constructing the
new flare, but would leave the existing, aging flare on Byxbee Park for a longer time.
Construction of the new flare will increase the amount of landfill gas that can be utilized
in the Regional Water Quality Control Plant’s incinerators, offsetting natural gas use and
providing additional revenue to the Refuse Fund. Staff recommends that the Landfill
gas flare project proceed.
Reassess Rent Charged to Utilities Department for Use of Los Altos Treatment Plant Site
Staff analyzed the additional revenue that could be generated by charging rent for the
Utilities Department’s use of the Los Altos Treatment Plant site at the same cost per
acre that the General Fund charges the Refuse Fund for Landfill rent (slide 23,
Attachment A). The increased rent above the $60,000 per year that is currently paid is
July 05, 2011 Page 4 of 6
(ID # 1791)
calculated as $71,154. The increased rent could also be applicable to rent paid by the
Utilities Department to the General Fund, as the Los Altos Treatment Plant site is jointly
owned by the General Fund and Refuse Fund.
Summary Recommendation on FY 2012 Additional Expense Reductions
Staff recommends that the Zero Waste Coordinator position be deferred, that a smaller
Recycling Center with limited hours be constructed, and that increased rent be assessed
for the Utilities Department’s use of the Los Altos Treatment Plant site. These changes
are estimated to save $349,000 in FY 2012 operating costs (slide 24, Attachment A).
Capital cost savings of about $600,000 also result from the smaller Recycling Center,
although this savings is not applicable to the FY 2012 Refuse Fund deficit.
Recommendation for FY 2012 Refuse Rate Increases
Staff has prepared multiple scenarios for FY 2012 refuse rate increases using two
primary options. In the first option (slides 27-28, Attachment A), the deficit in the
Refuse Fund adopted budget is reduced by the Expense Reductions described above,
and the remaining deficit is closed through rate increases. All of the rate increase
scenarios shown in slide 28 are in addition to retention of the FY 2011 rate increases
that are currently scheduled to expire on September 30, 2011. These are the rate
increases that customers would actually see on their refuse bill for October 2011. Per
guidance given to staff at the April 5, 2011 Finance Committee meeting, the potential
rate increases have been presented in the following ways:
·The rate increase is applied only to residential customers;
·The rate increase for commercial customers is modest and that for residential
customers is higher; and
·The rate increase for residential customers is 3% greater than that for
commercial customers.
Two Year Smoothing Proposal
The second option (slides 30-32, Attachment A) makes use of the significant decrease
in Refuse Fund expenses between FY 2012 and FY 2013 to propose a two-year
smoothing package that includes a loan to the Refuse Fund in FY 2012 to minimize rate
increases. Landfill rent expense decreases by $2.1 million in FY 2013, and landfill
operations expenses are expected to decrease by $1.1 million. The proposed loan
would be repaid in FY 2013, and further rate increases beyond the FY 2012 rate
increases would not be needed in FY 2013. The rate increases under this second option
are again presented in the ways described above with respect to allocating the increase
between residential and commercial customers.
Staff recommends that a residential rate increase of 13.1% be adopted for FY 2012,
and that a loan of $1.25 million be provided to the Refuse Fund by the Budget
Stabilization Reserve or the Electric Fund. This recommended rate increase is in
addition to retaining the FY 2011 6% rate increase that is scheduled to expire on
July 05, 2011 Page 5 of 6
(ID # 1791)
September 30, 2011. Staff recommends that commercial rates have no increase for FY
2012 beyond retaining the FY 2011 9% rate increase. The recommended residential
rate increase begins to address the inequities of the current rate structure between
residential and commercial sectors initially identified by the ongoing Cost of Service
Study without subjecting residential customers to a rate increase that is significantly
higher than other rate increases in the past.
The proposed rate increase results in the following rates for residential customers:
Service Type Current Monthly Rate
(FY 2011)
Proposed Monthly Rate
(FY 2012)
Mini-can $15.90 $17.98
32 gallon $32.86 $37.16
64 gallon $67.84 $76.73
96 gallon $101.76 $115.09
Resource Impact
The proposed expense reductions and rate increases are estimated to erase the $3.7
million deficit and result in a balanced Budget for FY 2012 and FY 2013. In proposing
the option of a loan to the Refuse Fund, there are several possible funds that could be
accessed.The Electric Fund has ample reserves (Distribution RSR of $9.6 million,
Supply RSR of $40.6 million, and Calaveras reserve of $50.3 million) and the General
Fund (GF) BSR has a balance of $27.0 million. Council policy is to keep the BSR at
between 15% and 20% of operating budget expenditures.The BSR is currently at
18.5% of expenditures.The difference between holding the BSR at 18.5% versus 15%
is equivalent to $5.1 million. While GF reserve funds are available, it is important to
note that if concessions from the public safety unions are not forthcoming to solve the
deficit in FY 2012, the City will either have to make further and difficult budget
reductions or rely partially on reserves.In addition, recent economic uncertainty
suggests that the GF Reserve should be held intact.A loan from the Electric Fund, if
the loan option is selected, is a viable alternative to a GF loan.The loan would be
disbursed in FY 2012 and repaid in FY2013.Interest on the loan would be paid based
on the average yield on the City’s investment portfolio for the loan period. In
discussing the possibility of a loan from the Calaveras Reserve, it should be noted that
potential uses of the Calaveras Reserve are usually reviewed by both the Utilities
Advisory Council and the Finance Committee. Due to the immediacy of this issue, the
possibility of a loan from the Calaveras Reserve has not been discussed with the Utilities
Advisory Commission.
Timeline
Recommendations from Finance Committee will be brought to the City Council in July
July 05, 2011 Page 6 of 6
(ID # 1791)
2011, following which Proposition 218 notifications will be sent to refuse customers.
Following City Council adoption in September 2011, the new rates will become effective
on October 1, 2011.
Policy Implications
The proposed expense reductions and Refuse Rate increases are consistent with current
City Policies.
Environmental Review
The proposed actions do not constitute a project pursuant to CEQA.
Attachments:
·A -Refuse Fund slides (PDF)
·B -Refuse Fund Staff Report 1577 -05Apr2011 (PDF)
Prepared By:Brad Eggleston, Manager, Environmental Control Programs
Department Head:J. Michael Sartor, Interim Director
City Manager Approval: James Keene, City Manager
1
Refuse Fund
Topics for July 5, 2011 Finance Committee Meeting
{Long Term Strategy
z Rate structure ideas for producing
sustainable revenue
{Short Term Strategy
z Refuse Fund status at FY11 close
z FY12 expense reductions
z FY12 rate recommendations
2
Long Term Strategy
{Establish rates that fully cover
expenses and establish necessary
expense reductions for FY12
{Complete forecasting model and
current cost of service analysis
{Prepare options for new
structural changes to rates
{Implement first of new structural
rate changes for FY13
Oct 2011
Nov 2011
Jan 2012
July 2012
3
Long Term Strategy (cont.)
{Achieve +$3 million operating reserve
{Achieve:
z All rate payer categories pay their
actual costs
z Full implementation of structural
rate changes
~ 3 Years
~ 3 – 5
Years
4
Ideas For New Rate Structure
{Goals
z Sustainable revenue
z Proposition 218 compliance
z Support zero waste goals
{Ideas
z Charge separately for garbage, recycling, yard trimmings
z Fixed rate to cover fixed costs
z Variable rate for other costs
z Eliminate imbalance between residential and commercial
sectors
z Eliminate/justify conservation pricing
z Include mandatory recycling
5
Matrix representation of current rate
structure
XVariable
Rate
Fixed Rate
Yard
TrimmingsRecyclingGarbage
6
Matrix representation example of
potential future rate structure
XVariable
Rate
XXXFixed Rate
Yard
TrimmingsRecyclingGarbage
7
Short Term Strategy
{Council adoption of FY12 budget
(including refuse fund deficit without
rate increase)
{Finalize FY12 plans (Finance Committee)
z Expense reductions
z October 2011 rate recommendations
{Council consideration of FY12 plans
{Notice rate increase
{Council adoption of October 2011 rates
{Implementation of October 2011 rates
{Continue to develop forecasting model
and ongoing Cost of Service analysis
June 2011
early July 2011
early July 2011
mid July 2011
September 2011
October 1, 2011
Ongoing
8
Refuse Fund FY 2010 Expense Actuals
(thousands of dollars)
$12,478, 39.7%
$2,364, 7.5%
$1,944, 6.2%
$175, 0.6%
$2,633, 8.4%
$4,289, 13.6%
$741, 2.4%
$187, 0.6%
$1,853, 5.9%
$1,061, 3.4%
$345, 1.1%
$834, 2.7%
$511, 1.6%
$2,019, 6.4%
GreenWaste Contract - 39.7%
SMaRT Station - 7.5%
Kirby Canyon Disposal Fee - 6.2%
Kirby Canyon Put-or-Pay - 0.6%
Landfill Operations - 8.4%
Landfill Rent - 13.6%
Interest on Landfill Rent - 2.4%
CIP - 0.6%
Allocated G&A, Transfers - 5.9%
Admin - 3.4%
Permitting/Enforcement - 1.1%
Zero Waste - 2.7%
HHW - 1.6%
Street Sweeping - 6.4%
9
Program Components to be Evaluated
During FY12
{GreenWaste collection frequency
{GreenWaste costs
{SMaRT Station cost structure
{Kirby Canyon fee structure (put‐or‐pay)
{Street sweeping
{Method of charging (rate structure)
{Public outreach
10
Expense Reductions and Revenue
Increases Implemented FY11
One‐time FY11590,648Refund from Vehicle Fund due to landfill
closure
On‐going until closure300,000Lifting of commercial refuse ban
On‐going350,000Landfill gas payment from RWQCP
On‐going250,000Landfill soil fee
One‐time FY11(300,000)Zero Waste – outreach modification
One‐time FY11(122,624)Freeze Zero Waste Coordinator position
One time or OngoingAmountExpense Reduction/Revenue Increase
11
Refuse Fund FY11 Ending Status
{Budget:
z Revenues = $33,697,864
z Expenses = $33,697,764
{Projected Actuals (based on actuals
through 5/31/11):
z Revenues = $31,488,000
z Expenses = $31,435,000
{Change in Net Assets = +$53,000
12
Expense Reductions Already in
Proposed FY12 Budget
Ongoing(159,397)Solid Waste Permitting/Enforcement
Ongoing(24,294)Hazardous Waste
One‐Time(262,743)Zero Waste Outreach
Ongoing(300,000)Fast‐fill Landfill
One‐Time(375,000)Defer/Eliminate CIP RF‐10003 Drying Beds,
Material Storage and Transfer Area
One time or OngoingAmountExpense Reduction
13
Possible Additional Expense
Reductions in FY12
One‐timeFreeze Zero Waste Coordinator position
One‐timeDefer landfill flare replacement
On‐goingLATP site –reassess rent charged to Utilities
Ongoing
One time
Recycling Center:
Operating Expense
CIP for Relocation
OngoingReduce street sweeping or charge to other areas
One time or OngoingExpense Reduction/Revenue Increase
14
Impacts of Freezing ZW Coordinator
{Projects that will be deferred/eliminated in FY12:
z Promotion of Green Business Program
z Zero Waste grant to support community/non‐profit efforts
for reuse and repair
z Assistance to Multi‐Unit Complexes (apartments) to expand
recycling and implement compostables collection
z Development of purchasing co‐op for compostable products
for businesses
z Development of tools/resources to support Zero Waste
practices for businesses (waste prevention, green purchasing,
etc.)
z Involvement in local and regional efforts to promote
producer responsibility and develop retail take‐back systems
15
Street Sweeping:
Current Level of Service and Costs
{Residential: weekly sweeping
{Commercial:
z Downtown and California Avenue business
districts: 3 times per week sweeping
z Other: weekly sweeping
{Other services: parking lots, bike paths,
medians, leaf pickup and transport,
complaints, downtown street maintenance
assistants
{Total annual cost: $2 million
z Costs of $220,000 recovered from parking districts
16
Street Sweeping Funding
{Total budget = $2 million
z Refuse Fund = $1.78 million
z Parking districts = $0.22 million
{Funding could also be provided by
General Fund and/or Stormwater
Fund
17
Street Sweeping Expense Reduction
Options
Monthly residential and commercial sweeping;
Maintain current business district sweeping
3*
Biweekly residential and commercial sweeping;
Maintain current business district sweeping
2*
Contract out current residential, commercial, and
business districts sweeping
1
DescriptionOption
* Hire contractor to increase frequency to weekly during leaf season:
November, December, and January
18
Street Sweeping
{Staff recommendation:
z Further analysis of potential savings
and other funding sources
z Substantial public outreach on
potential changes to street sweeping
services in FY12
z Implement any service level or
funding changes in FY13
19
Recycling Center:
Current Level of Service and Costs
{Open 9am‐5pm daily (except three holidays)
{Materials collected: single stream recyclables, rigid
plastics, scrap metal, reusable items, media,
electronics, universal wastes, cooking oil, appliances
(fee), mattresses (fee)
{Annual Operating Costs (FY12):
z GreenWaste contract: $226,000
z Greenwaste bin hauling :$161,000
z Total: $387,000
{One‐time CIP project to relocate and enhance
Recycling Center, and to improve Household
Hazardous Waste facility, in FY12: $1,100,000
20
Recycling Center:
Tonnages Collected vs. Curbside
1,0461,0161,3982,010Recycling Center
Recyclable
Materials (tons)
6.2%6.3%9.7%13.0%Recycling Center
as Percent of
Total
13,472
FY08
13,052
FY09
15,190
FY10
15,851Curbside
Recyclable
Materials (tons)
FY11*
*projected
21
Recycling Center Expense Reduction
Options
No savings
(current cash balance
does not allow)
Build large, enhanced Recycling Center
as planned, to be open seven days per
week for nine hours
3
$311,000 (annual
operational)
$600,000
(one‐time CIP)
Build new, smaller Recycling Center, with
limited hours (two days per week for
four hours)
2
$387,000 (annual
operational)
$1,100,000
(one‐time CIP)
Fully eliminate Recycling Center (rely on
curbside single stream and annual
cleanup day services)
1
Estimated SavingsDescriptionOption
Staff Recommendation: Option 2
22
Flare Relocation Project
{Eliminates existing flare on Byxbee Park
{Builds new flare on RWQCP site
{Will allow greater use of landfill gas in
RWQCP incinerators
z Source of revenue to Refuse Fund
{Potential to defer spending $620,000
capital cost in FY12
{Staff recommendation: Complete flare
relocation in FY12 as planned
23
Los Altos Treatment Plant Site Rent
{2.6 acres of LATP site used by Utilities
Department
z One‐half owned by Refuse Fund, one‐half owned
by General Fund
{Landfill annual rent per acre: $100,888
z Per Council adopted landfill rent schedule
{Current rent paid by Utilities to Refuse Fund:
$60,000
{Proposed additional rent from Utilities to
Refuse Fund:
(1.3 acres X $100,888) ‐$60,000 = $71,154
24
Combined Expense Reduction
Options: Savings for FY12
$349,000Defer ZW Coordinator; Build smaller
Recycling Center; No street sweeping
changes in FY12; Additional LATP
rent
Moderate
$194,000Defer ZW Coordinator; Build full
Recycling Center; No street sweeping
changes in FY12; Additional LATP
rent
Minimal
25
Initial Cost of Service Analysis (FY11)
Residential/Commercial/Industrial
Conclusion: Structural changes should not be
implemented in one year, but over a number of years.
+28%$2,350,122$1,830,109Industrial
‐42%$12,095,108$20,674,689Commercial
+79%$17,731,979$9,924,711Residential
Estimated Rate
Change Required
for Parity
Estimated
Expense
Estimated
Revenue
Line of
Business
26
Two Overall Rate Increase Options
1.Reduce expenses, close remaining
deficit with rate increases
2.Reduce expenses, FY12 to FY13
loan from Budget Stabilization
Reserve (BSR) or Electric Fund,
close remaining deficit with rate
increases
27
Budget Deficit to be Closed Through Proposed
Refuse Rate Increases (Option 1)
{Adopted FY12 Budget: $3.7 million deficit
(includes expiration of FY11 rate increases
on 9/30/11)
{Deficit to be closed through FY12 rate
increases:
z With minimal expense reduction: $3.52 million
z With moderate expense reduction: $3.36 million
28
Rate Increases to Balance Expenses with
Revenues in FY12 (without loan)
12.9%, 9.9%23.4%, 5.7%37.9%, 0%
Moderate
Expense
Reduction
13.7%, 10.7%24.8%, 6.4%40.9%, 0%Minimal Expense
Reduction
Residential 3%
Greater Than
Commercial
High Residential
and Modest
Commercial
All Residential
Increases shown as additional increase over FY11 rate increases
29
Refuse Fund FY 2010 Expense Actuals
(thousands of dollars)
Landfill costs are about 25 percent
$12,478, 39.7%
$2,364, 7.5%
$1,944, 6.2%
$175, 0.6%
$187, 0.6%
$1,853, 5.9%
$1,061, 3.4%
$345, 1.1%
$834, 2.7%
$511, 1.6%
$2,019, 6.4%
$7,663, 24.4%
GreenWaste Contract - 39.7%
SMaRT Station - 7.5%
Kirby Canyon Disposal Fee - 6.2%
Kirby Canyon Put-or-Pay - 0.6%
Landfill Costs - 24.4%
CIP - 0.6%
Allocated G&A, Transfers - 5.9%
Admin - 3.4%
Permitting/Enforcement - 1.1%
Zero Waste - 2.7%
HHW - 1.6%
Street Sweeping - 6.4%
30
Option 2: Include Loan From Budget
Stabilization Reserve or Electric Fund
{FY12 expenses are higher than FY13 expenses
due to landfill rent and operations costs
z FY12 landfill rent = $4.29 million
z FY13 landfill rent = $2.09 million
z FY12 landfill operations = $2.24 million
z FY13 landfill operations = $1.13 million
{Loan of $1.25 million in FY12 can be repaid in
FY13 to minimize FY12 rate increase (with no
rate increase in FY13)
31
Budget Deficit to be Closed Through Proposed
Refuse Rate Increases With Loan of $1.25 million
(Option 2)
{Adopted FY12 Budget: $3.7 million deficit
(includes expiration of FY11 rate increases
on 9/30/11)
{Deficit to be closed through FY12 rate
increases:
z With minimal expense reduction: $2.27 million
z With moderate expense reduction: $2.11 million
32
Rate Increases to Balance Expenses with
Revenues in FY12 (with loan)
5.9%, 2.9%12.5%, 0.2%13.1%, 0%
Moderate
Expense
Reduction
6.7%, 3.7%13.8%, 0.9%16.2%, 0%Minimal Expense
Reduction
Residential 3%
Greater Than
Commercial
High Residential
and Modest
Commercial
All Residential
Increases shown as additional increase over FY11 rate increases
33
Recommended FY12 Residential Refuse Rates : 13.1%
increase with $1.25 million loan
(37.9% increase without loan shown for comparison)
$115.09
$76.73
$37.16
$17.98
FY12 Rate with
loan
(13.1% increase)
$140.33
$93.55
$45.31
$21.93
FY12 Rate
without loan
(37.9 % increase)
$32.86
32 gallon
(1 can)
$101.76
96 gallon
(3 cans)
$67.84
64 gallon
(2 cans)
$15.90
Minican
FY11 RateService Level
34
Comparison of Residential Rates
Santa Clara & San Mateo Counties
Low
$17.45
Low
$10.30
High
$44.01
High
$32.59
Average
$25.93
Average
$17.51
Palo Alto
FY11
$32.86
Palo Alto
FY11
$15.90
Palo Alto FY12
Proposed
$37.16
Palo Alto FY12
Proposed
$17.98
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
20 Gallon 32 Gallon
Mo
n
t
h
l
y
C
h
a
r
g
e
35
Community Outreach Plans
{Phase 1: Educate community about October
2011 rate increases
z June – October 2011
{Phase 2: Share results of cost of service study
and potential new rate structures; Gather
community input on options
z November 2011 – February 2012
{Phase 3: Educate community on new rate
structure
z April 2012 – July 2012, ongoing
36
Long Term Strategy (Recap)
{Establish rates that fully cover
expenses and establish necessary
expense reductions for FY12
{Complete forecasting model and
current cost of service analysis
{Prepare options for new
structural changes to rates
{Implement first of new structural
rate changes for FY13
Oct 2011
Nov 2011
Jan 2012
July 2012
37
Long Term Strategy (Recap)
{Achieve +$3 million operating reserve
{Achieve:
z All rate payer categories pay their
actual costs
z Full implementation of structural
rate changes
~ 3 Years
~ 3 – 5
Years
38
Short Term Strategy (Recap)
{Council adoption of FY12 budget
(including refuse fund deficit without
rate increase)
{Finalize FY12 plans (Finance Committee)
z Expense reductions
z October 2011 rate recommendations
{Council consideration of FY12 plans
{Notice rate increase
{Council adoption of October 2011 rates
{Implementation of October 2011 rates
{Continue to develop forecasting model
and ongoing Cost of Service analysis
June 2011
early July 2011
early July 2011
mid July 2011
September 2011
October 1, 2011
Ongoing
39
Additional Slides
40
Rate Increases to Balance Expenses with
Revenues in FY12 (without loan)
18.9%, 18.9%29.4%, 14.7%43.9%, 9.0%
Moderate
Expense
Reduction
19.7%, 19.7%30.8%, 15.4%46.9%, 9.0%Minimal Expense
Reduction
Residential =
Commercial
2/3 Residential,
1/3 Commercial
9% Commercial,
Balance
Residential
Increases shown as total increase after FY11 rate increase expiration occurs
41
Rate Increases to Balance Expenses with
Revenues in FY12 (with loan)
11.9%, 11.9%18.5%, 9.2%19.1%, 9.0%
Moderate
Expense
Reduction
12.7%, 12.7%19.8%, 9.9%22.2%, 9.0%Minimal Expense
Reduction
Residential =
Commercial
2/3 Residential,
1/3 Commercial
9% Commercial,
Balance
Residential
Increases shown as total increase after FY11 rate increase expiration occurs
42
Option 3: Include Loan and
Realignment of Minican Rate
{Increases minican rate by 64% before calculated rate
increases are applied to all service levels, including
minican
{Generates $425,000 in FY12 revenue (prior to
application of calculated rate increase)
{Begins to address Proposition 218 level of service
issues
$26.01$24.53$20.97Realigned Rate
$15.90$15.00$20.97Actual Rate
FY11FY10FY09
43
Rate Increases to Balance Expenses with
Revenues in FY12 with Loan and Minican Rate
Realignment
11.6%, 11.6%18.0%, 9.0%18.0%, 9.0%
Moderate
Expense
Reduction
12.5%, 12.5%19.3%, 9.7%20.8%, 9.0%Minimal Expense
Reduction
Residential =
Commercial
2/3 Residential,
1/3 Commercial
9% Commercial,
Balance
Residential
Increases shown as total increase after FY11 rate increase expiration occurs
44
Rate Increases to Balance Expenses with
Revenues in FY12 with Loan and Minican Rate
Realignment
5.6%, 2.6%12.0%, 0.0%12.0%, 0%
Moderate
Expense
Reduction
6.5%, 3.5%13.3%, 0.7%14.8%, 0%Minimal Expense
Reduction
Residential 3%
Greater Than
Commercial
High Residential
and Modest
Commercial
All Residential
Increases shown as additional increase over FY11 rate increases
45
Palo Alto Residential Refuse Rate
History: 1980 through present
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
7/1/1980 7/1/1985 7/1/1990 7/1/1995 7/1/2000 7/1/2005 7/1/2010
Year
Ra
t
e
Mini
32 gallon
64 gallon
96 gallon
46
Example of rates for customer
switching to Mini‐can in 2009
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
7/1/2009 8/1/2009 10/1/2010 10/1/2011
FY10 32-
gallon rate
switch to
Mini-can
FY11
Mini-can
rate
FY12
Mini-can
rate
47
Residential Rate Comparison
17% ‐Feb 201119.0810.32Burlingame
23.3% ‐Apr 201117.4510.92San Mateo
29.5% ‐Feb 201117.7811.11Foster City
18% ‐Jan 201124.7310.30Redwood City
Proposed rates39% ‐TBD38.4624.02Atherton
25% ‐Apr 201133.2820.80Hillsborough
5% ‐201018.0012.65Santa Clara
Includes $4 for yard trimmings cart4.5% ‐Jul 200831.5029.90San Jose
7.5% ‐Jul 201028.70n/aSunnyvale
2.6% ‐Jul 201034.6524.84Los Altos Hills
Rates for backyard service increased Oct 201116.5% ‐Jul 200828.1126.11Los Altos
8% ‐Jul 201018.9512.95Mountain View
7% ‐Apr 201121.6712.95Menlo Park
6% ‐Oct 201132.8615.90Palo Alto
CommentsLast Increase32 gal20 galJurisdiction
Current Rates
48
Kirby Canyon Landfill Disposal Costs:
Constant Tonnage
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
An
n
u
a
l
C
o
s
t
(
$
)
Put or Pay Costs
Disposal Costs
ProjectedActual
Assumptions: Constant Palo Alto tonnage delivered, tip fee increase of 3% per
annum, 25% SMaRT Station diversion
49
Kirby Canyon Landfill Disposal Costs:
5% Annual Decrease in Tonnage
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
An
n
u
a
l
C
o
s
t
(
$
)
Put or Pay Costs
Disposal Costs
ProjectedActual
Assumptions: Palo Alto tonnage reduced by 5% annually, tip fee increase of 3%
per annum, 25% SMaRT Station diversion
City of Palo Alto (ID # 1577)
Finance Committee Staff Report
Report Type:Meeting Date: 4/5/2011
April 05, 2011 Page 1 of 3
(ID # 1577)
Summary T itle: Refuse Fund Cost of Service Study Initial F indings
Title: Discussion of Initial F indings of Refuse Fund Cost of Service Study
From:City Manager
Lead Department: Public Works
Executive Summary
This is an update Report to the Finance Committee concerning the Refuse Fund Cost of
Service Study and Staff’s Long and Short Term Strategies for addressing declining
revenues and associated challenges.
Background
In recent years three problems have occurred with respect to the Refuse Fund. First,
expenses have exceeded revenues in certain years. Second, the fund’s Rate
Stabilization Reserve has become negative. Third, certain users have not been paying
for their actual cost of service. The causes of these problems are the following:
·a reduction in the amount of waste has led to decreasing revenues
·financial incentives to reduce waste are built into the Refuse rates (Zero
Waste Program)
·the city is still operating a landfill at a loss (until mid-late 2011) while also
paying for Smart station privileges
·landfill closure cost estimate has risen (increasing the City’s liability)
To deal with these causes the City has taken a number of steps in FY 2011. First,
expenses were cut (see slide 14, Attachment A). Second, a “fast-fill” approach was
initiated at the Landfill, so that it could be closed as soon as possible (mid-late 2011).
Third, a one-year rate increase of 6% (residential) and 9% (commercial) was
implemented on October 1, 2010. Fourth, a Cost of Service Study was initiated to
develop a sustainable structure for refuse rates that would achieve parity among all rate
payers.
To date in FY 2011, expenses are below revenues despite the fact that the structural
problems in the rate structure still exist. The Cost of Service Study has resulted in
valuable information which will be discussed later in this staff report. However, the
financial model creation and execution which was to be part of the Study, has proved to
be much more difficult to develop than anticipated.
April 05, 2011 Page 2 of 3
(ID # 1577)
Discussion
The Cost of Service Study has not been completed for two fundamental reasons. First,
due to the complexity of the billing system the model predictions do not yet agree with
past data nor other methods of predicting revenues and expenses. Substantially more
work on the modeling is required before it can be relied on to make policy decisions.
Second, the model is too coarse to fully address the issue of parity among ratepayers.
Hauling costs, for example must be more finely divided to determine the appropriate
cost allocation between large and small customers. In addition, the impending closure
of the Landfill, as well as other potential expense reductions for FY 2012, will impact
the allocation of costs between customers. Therefore staff is requesting more funding
from Council, as part of a separate staff report which is being prepared.
While the Cost of Service Study cannot yet be used to recommend structural changes to
rates, the results to date can be used for certain purposes. The results to date allow us
to compare broad categories of rate payers (residential, commercial and industrial).
This comparison (slide 9, Attachment A) demonstrates that an estimated 79 % increase
in residential rates would be needed to immediately achieve full parity among these
categories of rate payers. Staff concludes that such a change cannot be made in the
near term and that a Long Term Strategy (slides 5 and 6, Attachment A) will be needed
to correct the causes of all of the problems identified above.
Since it will take a number of years to fully address all of the issues, staff has also
prepared a Short Term Strategy to address the most immediate problem for FY 2012.
The most immediate problem is to insure that expenses do not exceed revenues. By
making adjustments to the model, staff was able to use it for the limited purpose of
predicting income and impacts on reserves (slides 10 and 11, Attachment A). Staff will
now work further on the model, consider additional expense reductions, finalize the FY
2012 projections, and return to the Finance Committee in early July with a package of
recommendations. Those recommendations will include both expense reductions and
potential rate increases. Preliminary model runs (slides 10 and 11, Attachment A) allow
staff to conclude that the temporary 6% (residential) and 9% (commercial) rate
increases must be recommended for retention, with a modest increase above that. The
exact amount to be recommended will be determined prior to staff’s return to Finance
Committee in early July. Staff will use neighboring city benchmark rate increases (slide
22, Attachment A) to help guide its recommendations.
Resource Impact
This project is being coordinated with the Administrative Services Department.
Implementation of the results of the Cost of Service Study could have major impacts on
the Refuse Fund. Those impacts are expected to begin in FY 2013. Staff
recommendations for rate increases for FY 2012 will be brought to the Finance
Committee in July 2011 and will impact refuse customer rates beginning in October
2011.
April 05, 2011 Page 3 of 3
(ID # 1577)
Attachments:
·Attachment A: Finance Committee -Refuse Fund 4-5-11 (PDF)
Prepared By:Philip L. Bobel, Manager, Environmental Compliance
Department Head:J. Michael Sartor, Interim Director
City Manager Approval: James Keene, City Manager
2
Refuse Fund Problems and Causes
Problems
¡Revenue less than Expenses
¡Rate Stabilization Reserve Negative
¡Users not paying actual costs
Causes
¡Waste amount falling
¡Revenue falling
¡Conservation pricing
¡Landfill closure estimate increased
¡Operating a landfill (parallel program)
3
Goals and Terminology
¡“Positive Income”: Revenues exceeding expenses
¡“Change in Net Assets”: Revenues minus expenses
¡“Rate Stabilization Reserve (RSR)”: Goal = $3 million
(currently -$5 million)
¡“Operating Reserve”: RSR + Post closure liability, Goal =
+$3 million (currently zero)
¡“Change to Rate Structure”: Structure for sustainable
revenue (currently charging only for waste and eliminating
waste)
¡“Parity Among Rate Payer Categories”: Everyone pays their
true cost of service (Prop 218)
4
Cost of Service Priorities
1.Achieve parity among rate payer categories (top priority)
o Commercial customer segment
subsidizing residential customer segment
2.Address conservation pricing for refuse
o Rates should align with actual cost for
servicing each can size
3.Begin charging for recycling, yard waste service
5
Long Term Strategy
for Problem Resolution
¡Establish “Positive Income”rates
and necessary expense
reductions for FY12
¡Complete forecasting model and
current cost of service analysis
¡Prepare options for new
structural changes to rates
¡Implement first of new structural
rate changes for FY13
Oct 2011
Nov 2011
Jan 2012
July 2012
6
Long Term Strategy
for Problem Resolution (cont.)
¡Achieve +$3 million operating reserve
¡Achieve:
l Full parity among rate payer
categories
l + $3 million Rate Stabilization
Reserve
l Full implementation of structural
rate changes
l New, sustainable basis for income
~ 3 Years
~ 5 –10
Years
7
Short Term Strategy
¡Continue to develop forecasting model and ongoing Cost of Service study
¡Council adoption of FY12 budget (including likely refuse fund deficit)
¡Finalize FY12 plans (Finance Committee)
l Expense reductions
l October 2011 rate recommendations
¡Council consideration of FY12 plans
¡Notice rate increase
¡Council adoption of October 2011 rates
¡Implementation of October 2011 rates
Ongoing
June 2011
early July 2011
early July 2011
mid July 2011
September 2011
October 1, 2011
8
Cost of Service Study Status
¡Existing financial forecasting model incorporated into rate model
¡Incorporated each individual ratepayer and service level to generate revenue projections
¡Allocated all revenues and expenses to lines of business (residential, commercial, industrial)
¡Model configured to run 10-year scenarios including Operating Reserve and Rate Stabilization Reserve
¡Scenarios include year by year analysis of lines of business expenses relative to revenues
9
Initial Cost of Service Analysis (FY11)
Residential/Commercial/Industrial
Conclusion: Structural changes should not be
implemented in one year, but over a number of years.
+28%$2,350,122$1,830,109Industrial
-42%$12,095,108$20,674,689Commercial
+79%$17,731,979$9,924,711Residential
Estimated Rate
Change Required
for Parity
Estimated
Expense
Estimated
Revenue
Line of
Business
10
-3,360-2,185-1,806-1,927111Operating Reserve
-7,980-6,976-6,769-7,060-5,022RSR
-1,175-378291-2,038-86Change in Net Assets
29,87029,07328,40431,78332,515Expenses
28,69528,69528,69529,74532,430RevenuesScenario 1:
Retain FY11 rate
increases
FY15FY14FY13FY12FY11
Cost of Service Forecasting Model
Goals: Income and Reserves
¡All figures in thousands of dollars
¡Income goal: positive Change in Net Assets
¡Rate Stabilization Reserve (RSR) goal: + $3 million (longer term)
¡Operating Reserve goal: + $3 million (shorter term)
11
1,0451,046250-1,045111Operating Reserve
-3,575-3,745-4,712-6,178-5,022RSR
-17961,466-1,156-86Change in Net AssetsScenario 4: Further 5%
rate increase
4,4173,000786-1,927111Operating Reserve
-203-1,791-4,176-7,060-5,022RSR
1,4172,2142,884-2,038-86Change in Net AssetsScenario 3: Further rate
increase of 11.0% in FY13
to reach Operating Reserve
balance of $3 million in
FY14
3,7093,0001,493-513111Operating Reserve
-911-1,792-3,470-5,646-5,022RSR
7101,5072,176-624-86Change in Net AssetsScenario 2: Further rate
increase of 8.0% to reach
Operating reserve balance
of $3 million in FY14
-3,360-2,185-1,806-1,927111Operating Reserve
-7,980-6,975-6,769-7,060-5,022RSR
-1,175-378291-2,038-86Change in Net AssetsScenario 1: Retain
FY11 rate increases
FY15FY14FY13FY12FY11
Cost of Service Forecasting Model
Goals: Income and Reserves (cont)
12
Next Steps
¡Evaluate Additional FY12 Expense
Reductions
¡Set FY12 Refuse Rates
¡Continue Developing Forecasting
Model
13
Breakdown of Refuse Fund Expenses
¡39% -Collection Costs -GW contract
¡14.5% -Transfer Station/Disposal Costs
l SMaRT Station
l Kirby Canyon
¡46.5% -Other Operational Expenses/Costs
l Landfill rent: 11.9%
l Palo Alto landfill operations: 9.8%
l Admin/allocated charges: 8.4%
l Street sweeping: 5.6%
l Capital projects: 4.5%
l Zero Waste programs: 3%
l HHW: 1.8%
l Permitting/enforcement: 1.5%
14
Expense Reductions and Revenue
Increases Implemented FY11
One-time FY11590,648Refund from Vehicle Fund due to landfill
closure
On-going until closure300,000Lifting of commercial refuse ban
On-going350,000Landfill gas payment from RWQCP
On-going250,000Landfill soil fee
One-time FY11(300,000)Zero Waste –outreach modification
One-time FY11(122,624)Freeze Zero Waste Coordinator position
One time or OngoingAmountExpense Reduction/Revenue Increase
15
Refuse Fund FY11 Outlook
¡Projected $0.75 million revenues over
expenses for year
¡Monthly tracking and meetings with ASD staff
92.3%
94.5%
Percent of
Budget
$31,178$33,799Expenses
$31,926$33,799Revenues
Projected Actuals
for FY11
Budget
Figures in thousands of dollars
16
Expense Reductions Already in
Proposed FY12 Budget
Ongoing(159,397)Solid Waste Permitting/Enforcement
Ongoing(24,294)Hazardous Waste
One-Time(262,743)Zero Waste Outreach
Ongoing(300,000)Fast-fill Landfill
One-Time(375,000)Defer/Eliminate CIP RF-10003 Drying Beds,
Material Storage and Transfer Area
One time or OngoingAmountExpense Reduction
17
Possible Additional Expense
Reductions in FY12
One-time(122,624)Freeze Zero Waste Coordinator position
One-time(500,000)Defer landfill flare replacement
On-goingUnknown; current
rent is 60,000/year
LATP site –reassess rent charged to
Utilities
Ongoing
One time
(200,000 -300,000)
(500,000 -1,000,000)
Recycling Center:
Operating Expense
CIP for Relocation
Ongoing(100,000 -250,000)Reduce street sweeping –residential
One time or OngoingRangeExpense Reduction/Revenue Increase
18
Next Steps for Forecasting Model and
Cost of Service Study
¡Augment consultant contract to allow
completion of current study ($48,000)
¡Improve model’s link to SAP/Customer Care
and Service (CCS) data
¡Complete reconciliation to actual revenues
¡Develop level of service (can size) analysis
within model
¡Develop reserve funding scenarios and rate
implementation strategies
19
Long Term Strategy
for Problem Resolution
¡Establish “Positive Income”rates
and necessary expense
reductions for FY12
¡Complete forecasting model and
current cost of service analysis
¡Prepare options for new
structural changes to rates
¡Implement first of new structural
rate changes for FY13
Oct 2011
Nov 2011
Jan 2012
July 2012
20
Long Term Strategy
for Problem Resolution (cont.)
¡Achieve +$3 million operating reserve
¡Achieve:
l Full parity among rate payer
categories
l + $3 million Rate Stabilization
Reserve
l Full implementation of structural
rate changes
l New, sustainable basis for income
~ 3 Years
~ 5 –10
Years
21
Short Term Strategy
¡Continue to develop forecasting model and ongoing Cost of Service study
¡Council adoption of FY12 budget (including likely refuse fund deficit)
¡Finalize FY12 plans (Finance Committee)
l Expense reductions
l October 2011 rate recommendations
¡Council consideration of FY12 plans
¡Notice rate increase
¡Council adoption of October 2011 rates
¡Implementation of October 2011 rates
Ongoing
June 2011
early July 2011
early July 2011
mid July 2011
September 2011
October 1, 2011
22
Residential Rate Comparison
17% -Feb 201119.0810.32Burlingame
23.3% -Apr 201117.4510.92San Mateo
29.5% -Feb 201117.7811.11Foster City
18% -Jan 201124.7310.30Redwood City
Proposed rates39% -TBD38.4624.02Atherton
25% -Apr 201133.2820.80Hillsborough
5% -201018.0012.65Santa Clara
Includes $4 for yard trimmings cart4.5% -Jul 200831.5029.90San Jose
7.5% -Jul 201028.70n/aSunnyvale
2.6% -Jul 201034.6524.84Los Altos Hills
Rates for backyard service increased Oct 201116.5% -Jul 200828.1126.11Los Altos
8% -Jul 201018.9512.95Mountain View
7% -Apr 201121.6712.95Menlo Park
6% -Oct 201132.8615.90Palo Alto
CommentsLast Increase32 gal20 galJurisdiction
Current Rates
23
Landfill Fast Fill in Action