The URL can be used to link to this page

Home My WebLink AboutStaff Report 1917City of Palo Alto (ID # 1917) Finance Committee Staff Report Report Type:Meeting Date: 7/19/2011 July 19, 2011 Page 1 of 4 (ID # 1917) Summary T itle: Refuse Fund Rate Recommendation Title: Recommendation for 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. As requested by the Finance Committee at its last meeting, in order to begin correcting the previously identified structural rate issues that lead to funding shortfalls and begin to address customer category inequities as required by Proposition 218, staff recommends a flat (fixed) residential rate increase of $4.62 per customer be adopted. In order to avoid a steep one-time increase, this recommendation also includes a short term loan from the Budget Stabilization Reserve in the amount of $1.25 million. 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. Executive Summary This report provides the Finance Committee with staff’s recommendations for rate increases to close the $3.7 million Refuse Fund operating deficit for FY 2012. At the Finance Committee’s direction, staff has added two other options for expressing a portion (or all) of the residential rate increase as a fixed amount for each residential customer, as opposed to a rate which varies depending on the size of the garbage can, as the current rates do. Background At the April 5, 2011 Finance Committee meeting, 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 2011 with recommendations for rate increases and additional expense reductions for FY 2012. The FY 2012 budget, 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 July 19, 2011 Page 2 of 4 (ID # 1917) due to the expiration of the FY 2011 rate increases that is scheduled to occur on September 30, 2011. Staff is proceeding with a detailed cost of service study that will likely result in a new rate structure beyond the interim adjustment recommendations being made in this Action Item. 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. At the July 5, 2011 Finance Committee meeting, staff was directed to prepare new options for refuse rate increases which would express a portion (or all) of the residential rate increase as a fixed cost, applicable to all residential users. The Finance Committee also directed staff to prepare a plan for eliminating the Recycling Center and retaining the Household Hazardous Waste Drop-off Area at the Wastewater Quality Treatment Plant. That detailed plan will take several months to produce. Therefore, staff used its cost saving estimate for the elimination of the Recycling Center during FY 2012 (six- months savings) in the refuse rate calculations. Staff then developed two options for refuse rate increases expressing some (or all) of the increase as a fixed amount for each residential customer. Those new options are summarized in the “Discussion” section below. Discussion At the July 5, 2011 Finance Committee meeting, staff recommended that a residential rate increase be adopted for FY 2012, 100% of which would vary by the size of the garbage can. This recommendation was in addition to retaining the FY 2011 6% rate increase that is scheduled to expire on September 30, 2011. Staff recommended that commercial rates have no increase for FY 2012 beyond retaining the FY 2011 9% rate increase. This approach would begin 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. Per direction, staff is now returning to the Finance Committee with additional options involving the use of fixed amounts for some (or all) of the increase for residential customers. Under these options, residential customers would continue to pay the current rate (which varies by can size), and an amount would be added to the current rate with an element of fixed cost. Two new options were calculated (50% and 100% fixed costs) and the fixed rate portion and percent increase to the existing variable rate are shown in Table 1 for each of these options. Table 1 also provides the new total fee July 19, 2011 Page 3 of 4 (ID # 1917) for each can size. Table 2 expresses the increases as percentages. Although Table 1 provides the combined variable and fixed rates, the variable and fixed rates would be shown separately on customer bills. The rate increases presented in Table 1 are in addition to retaining the 6% residential and 9% commercial rate increases that were adopted in FY 2011. Table 1:Options for fixed and variable residential rate increases and resulting residential rates. Option 1 Option 2 Option 3 FY11 Rates 100% variable 50% fixed, 50% variable 100% fixed Fixed Rate --$0.00 $2.31 $4.62 Variable Increase --13.4%6.7%0.0% Mini $15.90 $18.03 $19.27 $20.52 32 gallon $32.86 $37.26 $37.37 $37.48 64 gallon $67.84 $76.92 $74.69 $72.46 96 gallon $101.76 $115.38 $110.88 $106.38 Table 2: Percent increases over existing FY11 residential rates for fixed and variable residential rate increase options Option 1 Option 2 Option 3 100% variable 50% fixed, 50% variable 100% fixed Mini 13.4%21.2%29.0% 32 gallon 13.4%13.7%14.0% 64 gallon 13.4%10.1%6.8% 96 gallon 13.4%9.0%4.5% Staff recommends Option 3 (100% fixed cost), to address rate inequities at this time. Reduced expenses in FY 2013 because of the closure of the landfill allow the Refuse Fund to receive a $1.25 million loan from the Budget Stabilization Reserve in FY 2012 that will be repaid in FY 2013. The loan from the Budget Stabilization Reserve minimizes the rate increases for FY 2012. July 19, 2011 Page 4 of 4 (ID # 1917) Once the Cost of Service Study is completed this Fall, future rate increases (as needed) will be based on Cost of Service data. Regardless of which option Council chooses at this time, staff will return in approximately six months with fixed costs data based on the Study upon which to base future changes to the rate structure, as planned. Resource Impact The proposed rate increases (all 3 options) are estimated to erase the $3.7 million deficit and result in a balanced Budget for FY 2012 and FY 2013. The proposed rate increases include a loan of $1.25 million in FY 2012 from the General Fund Budget Stabilization Reserve (BSR) to be repaid in FY 2013. Interest on the loan would be paid based on the average yield on the City’s investment portfolio for the loan period. Timeline Recommendations from Finance Committee will be brought to the City Council on July 25, 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 Refuse Rate increase is consistent with current City Policies. Environmental Review The proposed actions do not constitute a project pursuant to CEQA. Prepared By:Brad Eggleston, Manager, Environmental Control Programs Department Head:J. Michael Sartor, Interim Director City Manager Approval: James Keene, City Manager