HomeMy WebLinkAbout1998-07-27 City Council (17)TO:
City of Palo Alto
City Manager’s Report
HONORABLE CITY COUNCIL
6
FROM:CITY MANAGER DEPARTMENT: PUBLIC WORKS
DATE:JULY 27, 1998 CMR:304:98
SUBJECT:APPROVAL OF AMENDMENT NO. 11 TO CONTRACT NO.
4688 WITH PALO ALTO SANITATION COMPANY FOR
REFUSE COLLECTION AND RECYCLING SERVICES
REPORT IN BRIEF
The current contract with Palo Alto Sanitation Company (PASCO) went into effect in 1987.
Annually, the City or PASCO on written notice to the other, may request a review and
renegotiation of items in the contract which would require an amendment. For FY 1998-99,
the City and PASCO agreed on several items for Amendment No. 11. (Attachment A); a 3.5
percent increase in PASCO’s profit target and cap, an increase of $500 in the minimum
dollar amount for assets to be included on their depreciation list, and a 3.2 percent increase
in the percentage to be paid to PASCO for total Refuse Fund customer sales. All
renegotiated items are included in a Letter of Understanding (LOU) (Attachment B)
Staff began drafting a new agreement with PASCO to update, improve, and clarify the
existing contract in February 1997 and hopes to have it completed no later than February
1999.
CMR:304:98 Page 1 of 5
BACKGROUND
The present contract with PASCO, which went into effect in 1987, provides for refuse
collection services,’ residential and commercial recycling, public receptacle emptying and
operation of the Recycling Center. The master contract between the City and PASCO
establishes the basis by which PASCO’s compensation will be determined. Annually, after
review of PASCO’s proposed budget, an amendment is used to establish the specific
compensation based on PASCO’s approved budget requirements.
This year’s review was conducted consistent with contractual provisions, historical
precedents, and the City Auditor’s 1995 audit recommendations. Staff from both the Public
Works and Administrative Services Departments reviewed PASCO’s proposed budget.
Through a series of meetings with PASCO, City staff has established FY 1998-99
compensation based on such review. Typically, PASCO’s finalized budget goes to Council
for approval in early June with the City budget. However, due to extended discussions over
several budgeted items, the fixed asset list, and Letter of Understanding (LOU), PASCO’s
budget did not get finalized by the City until July 6, 1998.
DISCUSSION
Negotiations for Amendment No. 11 to PASCO’s FY 1998-99 compensation included
discussions of PASCO’s profit, changes to the definition of fixed assets, and the percent of
revenue from billed services. All negotiated items are also included in the LOU, which is
the method used to incorporate into the PASCO contract new or changed items such as
payment amounts, percentage of revenue payment adjustments, or new programs. The FY
1998-99 programs included in the LOU are the extended interim mixed paper recycling
program, curbside phone book collection for single and multi-family residents, and colored
#2 plastic collection at the Recycling Center. The cost for these programs was included in
the FY 1998-99 PASCO budget. Due to the timing of final approval for PASCO’s budget,
the Refuse Fund budget did not provide funds for the additional programs; Staff will need
to come back to Council with the Mid-Year Report for an adjustment to cover the costs.
Profit
PASCO’s profit is determined by using a method called Return-on-Assets (ROA). The ROA
method determines the profit level based on the size of investment in company assets.
During the period from 1978 to FY 1997-98, PASCO’s pretax profits had been based on a
percentage ofundepreciated fixed assets, specifically, 5 percent ofundepreciated fixed assets
with a cap of 8 percent. Any profit exceeding 8 percent was divided equally with the City.
Up until 1996, PASCO received a dividend from its insurance carrier due to its worker’s
~compensation expenses being lower than the industry rate. This dividend amount has
averaged around $150,000 over the past five years, and has been a substantial part of
CMR:304:98 Page 2 of 5
PASCO’s income (2 percent oftota! profit). Due to a change in State law in 1997, PASCO
no longer receives the dividend from its carrier. In FY 1997-98, the City agreed to
compensate PASCO for the $150,000 loss. The $150,000 was paid as one lump sum and was
not included in the profit calculation.
In FY 1998-99, the pre-tax profit return on undepreciated fixed assets was negotiated to be
targeted at 8.5 percent with a cap of 11.5 percent, .and any pretax profit exceeding 11.5
percent will belong to the City. Staff determined that this increased percentage would:
1)
2)
Compensate PASCO by the amount lost from the previous insurance dividend
(approximately 2 percent of PASCO’s profit or $150,000 annually), and
Compensate PASCO at a rate closer to the "industry standard." The 1996
Refuse Fund Cost-of-Service Study (COS) compared the profit percentages
of 11 cities in Santa Clara County, including Palo Alto. Since none of the
other cities use the ROA calculation, the study was adjusted to reflect the
inclusion or exclusion of specific expense items to allow for direct
comparison. Given this adjustment, the profit amounts of other cities ranged
from 8.6 percent to 15.1 percent with 11 percent as the average.
The COS determined ~that, over the past six years, PASCO’s profit has been
highly variable. However, the average was 8.9 percent (adjusted to compare
with other profit formulas used in the study area). This is near the low end
of the range of profit calculations for other Bay Area refuse and recycling
companies. PASCO has agreed to the profit target of 815 percent with the 11.5
percent cap as the basis for starting negotiations on the new agreement.
Definition of Fixed Assets
PASCO submits its fixed asset and depreciation list annually during the budget process. This
year, staff evaluated PASCO’s fixed asset and depreciation list and met with PASCO to
discuss the methodology for including items on the list. The list includes all assets that are
currently in use, the purchase price of the assets, and the five-year depreciation schedule.
Currently, PASCO adds everything above $500 and groups several items below $500 and
includes them on the list. All of these items have been considered allowable expenses and
included in the calculation for compensation in the past.
However, staff felt the minimum amount for assets being included on the list should be
$1000, and only items the City has approved as part of PASCO’s new capital assets should
be added to the list. This methodology will ensure that PASCO does not receive higher than
CMR:304:98 Page 3 of 5
appropriate profits, and will also make it easier for City staff to analyze the list and confirm
that all items are justified for efficient PASCO operations.
Staff also verified with PASCO that all items on the asset list have been regularly inventoried
by PASCO’s Certified Public Accountant, and disposed of within 30 days after replacement
items have been received and tested.
Percent of Revenue from Billed Services
As e~tablished in the 1987 PASCO contract, PASCO compensation is based upon a
percentage of the refuse service revenue that customers pay to the City. The percentage to
be paid to PASCO in FY 1998-99 will increase from 30.43 percent to 33.52 percent of the
total Refuse Fund customer sales revenues.
RESOURCE IMPACT
There are several resource impacts to the City resulting from the changes:
1)There is a 3.5 percent increase in PASCO’s profit target from what it currently
receives (the current target is 5 percent, the proposed is 8.5 percent). Of that
increase, 2 percent is compensation for the loss of the $150;000 insurance
dividend (as mentioned previously). This will not be an additional resource
impact to the City because last year, it was included as a budget item with the
assumption PASCO would continue to be compensated for the loss each year.
The other 1.5 percent increase is to bring PASCO closer to industry standard
and will have a resource impact. The City will pay PASCO approximately
$120,000 in additional profit (1.5 percent increase in PASCO’s profit target,
multiplied by 8 million dollars in PASCO assets equals $i20,000).
2)Staff estimated PASCO’s budget to be $7,380,000 for the City’s draft budget
document.. PASCO’s finalized budget came in at $7,471,000 so an adjustment
of $91,000 will be needed at mid-year. Staff will return to Council with the
Mid-Year Report to ask for the additional funds.
POLICY IMPLICATIONS
This report does not represent any change to existing City policies.
ENVIRONMENTAL ASSESSMENT
The amendment to Contract No. 4688 for compensation purpose is not a project under the
California Environmental Quality Act.
CMR:304:98 Page 4 of 5
ATTACHMENT
Attachment A:
Attachment B:
Amendment No. 11
Letter of Understanding
PREPARED BY: Karen Gissibl, Executive Assistant, Operations Division
GLENN S. ROBERTS
Director of Public Works
CITY MANAGER APPROVAL:~~, ~
E’~LY’HA~SON
Assistant City Manager
CMR:304:98 Page 5 of 5
A I 1 AUttNI~ 1 A
AMENDMENT NO. ELEVEN TO CONTRACT NO. 4688
BETWEEN THE CITY OF PALO ALTO AND
PTtLO ALTO SANITATION COMPThNY FOR COLLECTION
AND TRANSPORTATION OF REFUSE PRODUCED
AIqD ACCOMULATED IN THE CITY
FISCAL YEAR 1998-1999
This Amendment No. ii to Contract No. 4688 is entered
into , 1998, by and between the CITY OF PALO ALTO, a
chartered city and a municipal corporation of the State of
California ("CITY"), and PALO ALTO SANITATION COMPANY, a
corporation duly organized and existing under the laws of the State
of California ("CONTRACTOR").
RECITALS.:
WHEREAS, Contract No. 4688 was previously entered into
between CITY and CONTRACTOR, under which CONTRACTOR provides
certain specified services for the collection and transportation of
refuse produced or accumulated ~n CITY; and
WHEREAS, the parties desire to modify said contract as
set forth below;
NOW, THEREFORE, in consideration of their mutual
covenants, the parties hereto agree that Contract No. 4688 shall be
amended as follows:
SECTIQN I. Section 9 is amended to read as follows:
"9. COMPENSAT I ON.
As full and complete compensation for the services
to be provided by. CONTRACTOR hereunder, CITY shall pay
CONTRACTOR as follows:
Effective the first billing cycle of July, 1998,
with respect to the revenue derived each calendar month
from CITY refuse service rates described in Section 8
above, CITY shall compute and pay to CONTRACTOR, on or
before the tenth of the following month, an amount equal
to thirty three and sixty-three hundredths percent
(33.63%) of revenue billed under refuse rate schedules,
less any liquidated damages assessed under Section
5(c) (3) of the refuse collection specifications. With
respect to the revenue derived each calendar month from
the CITY collection bin rental described in Section 8
above, CITY shall compute and pay CONTRACTOR on or before
the tenth of the following month an amount equal to
ninety-five percent (95%) of revenue billed under refuse
rate schedules for such collection bins. CONTRACTOR
shall credit CITY with six percent (6%) of gross revenues
of CONTRACTOR, derived from activities associated with
or arising from this contract, but which are not
performed within the scope of this contract (such as but
not limited to portions of the cleaning operation). CITY
9g0714 sya 0071467
1
is authorized to deduct such credit from the payments due
CONTRACTOR in the next succeeding year. Accounts and
records from the activities shall be made available to
CITY concurrently with the Annual Financial Statements
supplied pursuant to Section 7 above. From the above
payment amounts, CITY may deduct liquidated damages
assessed CONTKACTOR under Section 34 of this contract.
Annually, on or before December 31, CITY or
CONTRACTOR on written notice to the other may request a
review and renegotiation of the percentage of revenue
payment. Any renegotiated payment amounts, any
percentage.of revenue payment, adjustments or any other
renegotiated items shall be included in a letter of
understanding which shall include the formula of
calculations used to determine percentage of payments,
and will not become effective until July 1 the following
year."
SECTION 2. Except as herein modified, all other
provisions of, includigg the exhibits and amendments to, Contract
No. 4688 shall remain in full force and effect.
SECTION 3. The Council of the City of Palo Alto finds
that this amendment to Contract No. 4688 does not constitute a
project under the California Environmental Quality Act and,
.therefore, no environmental assessment is necessary.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment the date first above written.
ATTEST CITY OF PALO ALTO
City Clerk
APPROVED AS TO FORM:
Mayor
PALO ALTO SANITATION COMPANY
Senior Asst. City Attorney
APPROVED:
Its:
Assistant City Manager
Director of Public Works
Acting Director of
Administrative Services
Purchasing/Insurance Review
980714 syn 0071467
2
CERTIFICATE OF ACKNOWLEDGMENT
(Civil Code ~ 1189)
STATE OF
.COUNTY OF
)))
On __me, the undersignednotary publid~in and-q/6r s-aidbef°re a
County, personally appeared
personally known to me (or proved to me on the bas~s ofsatisfactory evidence) to be the person(s) whose name(s), is/are
subscribed to the within instrument, and,acknowledged to me thathe/she/they executed the same in hls/her/thelr authorized
capacity(ies), and that by his/her/their signature(s) on ~he
instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
980714 syn 0071467’
July 9, 1998
ATTACHMENT B
City of Palo Alto
Public Works Department
Divisions
Administration
415.329.2373
415.329.2299 Fax
Engineering
415.329.2151
415. 329. 2299 Fax
Environmental
Compli,’mce
415.329. 2598
415.494.3531 Fax
Equipment
Management
415.4%.6922
415.496.6958 Fax
Fadlities
Management
415.4%.6900
415.496. 6958 Fax
Operations
415.496.6974
415.852.9289 Fax
Regional Water
QualityControl
415.329.2598
415.494.3531 Fax
Paul Madsen Jr.
President
Palo Alto Sanitation Company
2000 Geng Road
Palo Alto,, CA 94303
Dear Paul:
The following are items agreed to in the negotiations for the refuse collection, recycling and receptacle
contract for Fiscal Year (FY) 1998/99 and are retroactive to July 1, 1998. The new or changed items
supersede all prior Letters of Understanding concerning these specific items:
PASCO Pre-Tax Profit Rate and Cap
In an effort to compensate PASCO for the dividend they no longer receive from their insurance
company for their excellent safety record and to bring the profit rate closer to industry standar~l, the
PASCO profit rate for FY 1998-99 will be targeted at 8,5% and the cap will be at 11.5%. Any
amount exceeding I 1.5% will belong to the City. If PASCO’s pre-tax profit (adjusted for
unallowable expenses) exceeds 11.5 percent in 1998-99, PASCO will refund the City’s share of
excess profit within 30 days of issuance of its annual financial report. Pre-tax profit will be based
on undepreciated fixed assets. This compensation agreement is for one year (FY 1998/99).
PASCO Revenue Percentage
The percent PASCO will receive for billed revenue for FY 1998/99 will 33.63% and for billed
bin rental 95 %.
Gas/Fuel Expenses
In the event the City requires PASCO to transport solid waste (who’s costs have not been
budgeted) to the SMART Station, the City will reimburse PASCO for the total costs.
Phone books Recycling
Due to agreements with the paper broker, phone books can now be collected with newspapers at
the curb for all residents who have curbside recycling service. The estinmted cost will be
approximately $1,000 and has been included in the FY 1998/99 PASC0 budget.
Colored #2 Plastic at Recycling Center
PASCO will begin collection of colored #2 plastic at the Recycling Center along with the other
types of plastic.’ The estimate for labor and processing is $11,500/year and has been included in
the FY 1998/99 PASCO budget.
Labeling Wheeled Carts
All labels on the tops of wheeled carts for recycling will be covered and replaced with new labels.
The estimate for placing all labels is $3,000 and has been included in the FY 1998/99 PASCO
budget.
Mixed Paper Drop-off Program
On September 1, 1997, a mixed paper drop-off program began at the. direction of City Council.
The program was reviewed by the Finance Committee on May 19, 1998 to determine if it should
be continued. City. staff recommended that the interim program be continued until June 1999 and
the Finance Committee approved the recommendation~ The estimate for the continuation of the
program is $40,080 and has been included in the FY 1998199 PASCO budget.
Review of Depreciation Schedule
City staff and PASCO met to discuss the fLxed asset list and depreciation schedule and agreed on
the following:
P.O. Box 10250
Palo Alto, CA 94303
I) An audited sample of all asset categories must be conducted by PASCO’s Certified
Public Accountant as part of their annual audit.
2) Any assets replaced by new purchases that have passed an initial testing period
and have been accepted by PASCO shall be removed from the asset list within 30 days
(it is understo~xl that the testing period may be 90-120 days from receipt of the newly
purchased item or if parallel testing is needed, until it is complete).
3) Only assets over $1,000 (other than those cl~ssified as "vehicles" or "boxes/bins/carts")
will be used to determine PASCO’s annual compensation.
4) The change in item 3 above, requested by the City, requires PASCO to separately
track their assets due to IRS tax rules. This change also causes a reduction in the
undepreciated asset total upon which PASCO’s targeted profit is based. The cost for this
chm~ge in method is $2,561 and is included in the budget.
Reopeners in Contract
The City will list reopeners in Amendment No. 11 for: ,
¯Service level and policy changes;
¯program ~klitions that require equipment, personnel changes or other impacts on PASCO
Sincerely,.
Michael Jackson
Deputy Director
Manager
Date
cc~"June Fleming
Emily Harrison
Glenn Roberts
Carl Yeats
Virginia Harrington
Lalo Perez
Karen Gissibl
Rich Buchner, PASCO