HomeMy WebLinkAboutStaff Report 246-08City of Palo Alto
TO:
ATTENTION:
FROM:CITY MANAGER DEPARTMENT: PUBLIC WORKS
DATE:
SUBJECT:
MAY 13, 2008 CMR:246:08
APPROVAL OF THE PALO ALTO SANITATION COMPANY
COMPENSATION IN THE AMOUNT OF $10,960,234 FOR FISCAL
YEAR 2008-09
RECOMMENDATION
Staff requests that the Finance Committee recommend that the Council approve compensation to
the ealo Alto Sanitation Company ~ASCO) in the amount of $10,950,234 for Fiscal Year 2008-
09 (FY 08-09). This recommendation, summarized below as Option 1, has been coordinated
with the City Attorney’s Office and the City Auditor’s Office.
BACKGROUND
The current waste hauling and recycling contract with PASCO requires an atmt~ review of
compensation due PASCO for the upcoming fiscal year. This review is to be conducted as part
of the Finance Committee’s annual review of the City budget for that fiscal year.
The contract provides that PASCO’s compensation in the upcoming year consists of forecasted
allowable costs (such as labor and equipment), forecasted pass-through costs (such as taxes and
regulatory fees), and profit. To calculate profit, the contract uses an "operating ratio"
methodology. Specifically, the agreed-on operating ratio ("OR") of 88% is applied to forecasted
allowable cost with the result representing the forecast amount of profit to be earned in the
upcoming year. (The "OR" is close to the reciprocal of a profit percentage, although the
calculation is slightly different. Thus, ira company’s OR is 88%, it earns about a 12% profit. A
90% OR equates to about a 10% profit, while an 86% OR is equivalent to a 14% profit.)
As a general proposition, the contract provides that the forecasted allowable costs for the
upcoming year are to be calculated by multiplying forecasted allowable costs for the current year
by specified percentages of the change in the CPI, with the sum of those increased costs, plus
profit, plus forecasted pass-through costs equaling the amount to be budgeted for PASCO
compensation in the upcoming year. PASCO also retains revenues ~om recyclable materials,
drop boxes, and disposition of vehicles as part of their compensation.
In most of the years since the contract began in 1999, PASCO’s compensation has been set
through the simple, CPI-based adjustment of current year’s Forecasted Allowable Costs amount.
However, the contract anticipated that, in some years, PASCO’s costs might increase (or
decrease) significantly in relation to the annual CPI change. In cases where this discrepancy in
costs is large enough so that PASCO profit would be expected to fall outside the 2% +/- target
CMR:246:08 Page 1 of 5
range above or below the 88% OR (i.e., above 90% or below 86%), the contract requires the
parties to perform a cooperative, good faith review of the Forecasted Allowable Costs to
determine if an adjustment from the CPI change is needed.
An adjustment in PASCO’s compensation was made by the City Council, at staff’s
recommendation, last year. In May 2007, the City Manager’s Report stated in part:
"Due to significant on-going cost increases incurred by PASCO,
staff recommends a prospective adjustment to PASCO’s
compensation for 2007-08 and going forward. These cost
increases are based on the results of operations as detailed in
PASCO’s 2005-06 audited financial statements and the notion that
the cost increases are continuing in nature." (Emphasis added.)
After a detailed review of PASCO’s financial records and meetings with PASCO representatives,
the staff recommended, and the Council approved, additional compensation in the amount of
$814,832 for FY 2007-08, attributed to specifically identified cost line items which had
increased sharply and were expected to continue. (CMR 245:07 is attached as Attachment A.)
DISCUSSION
As required by the contract, PASCO submitted its audited financial statements for FY 2006-07 in
September 2007 and its compensation adjustment application and review report (the
"Compensation Report") by December 30, 2007. The financial statements showed that PASCO
had fallen short of the target OR range during FY 2006-07 due to a continuation of the higher
costs it experienced in FY 2005-06 and which had led the City Council last May to increase the
allowable costs budgeted for PASCO compensation in FY 2007-08. (The financial statements
showed that PASCO’s OR in FY 2006-07 was 95% - meaning that its profit was approximately
5%.)
Therefore, the City engaged in a careful review of PASCO’s costs in FY 2006-07. At the City’s
request, PASCO also reported their costs for the first six months of the current year, FY 2007-08,
(Attachment B). Unlike the cost review conducted last year, however, staff found that the use of
the current year’s allowable costs as the baseline for setting Forecasted Allowable Costs for FY
2008-09 would not produce unfair results, precisely because of the City’s substantial increase in
PASCO’s compensation for the current year.
PASCO disagreed with this conclusion, arguing that because its actual OR in FY 2006-07 (95%)
was well outside the target range (86% - 90%) because of higher than expected costs in that year,
the City should for that reason increase Forecasted Allowable Costs for FY 2008-09 above the
level actually expected to be incurred so that it could be "made whole" for FY 2006-07.
City staff conducted a careful review of PASCO’s submissions and held approximately four
meetings with PASCO representatives during January through March of this year. No agreement
was reached. Therefore, as required by the contract, staff is submitting its proposal for PASCO
compensation (summarized as Option 1, Attachment C), as well as PASCO’s request
(summarized as Option 2, Attachment D).
CMR:246:08 Page 2 of 5
OPTION 1: STAFF RECOMMENDATION ($10,960,234)
Staff calculated the FY 2008-09 compensation as follows:
1. Adjust the FY 2007-08 Forecasted Allowable Costs by a portion of the change in the CPI.
2. Determine the Profit by applying the 88% OR to the Forecasted Allowable Costs, as
adjustment.
3. Add Forecasted Pass-Through Costs.
STAFF CALCULATION
FY 2007-08 Forecasted Allowable Costs
CPI Adjustment (3.11% on allowable costs and 3.8 % on
corporate expenses)
FY 2008-09 Forecasted Allowable Costs
$9,240,745
+ 290,736
$ 9,531,481
Profit (88% OR)
Forecasted Pass-Through Costs
Total for FY 2008-09 Compensation
1,299,747
129,066
$10,960,294
OPTION 2: PASCO PROPOSAL ($12,048,749)
PASCO utilizes essentially the same methodology as the City, with one important difference. In
determining the Forecasted Allowable Expenses for FY 2008-09, PASCO also begins with the
Forecasted Allowable Expenses for FY 2007-08, but then includes an additional $950,474 which
it attributes to costs incurred in FY 2006-07 that were not budgeted for and which prevented it
from earning an adequate profit in that year.
PASCO CALCULATION
FY 2007-08 Forecasted Allowable Costs
Addition for Excess FY 2006-07 Costs
$ 9,240,745
+ 950,474
$10,191,219
CPI Adjustment (3.2% on a!lowable costs and adjusted
line items; 3.8 % on corporate expenses)
FY 2008-09 Forecasted Allowable Costs
Profit (88% OR)
Forecasted Pass-Through Costs
Total FY 2008-09 Compensation
298,155
$10,489,374
1,430,369
129,006
$12,048,749
Staff does not agree with PASCO’s approach for two reasons.
CMR:246:08 Page 3 of 5
First, it is not supported by the contract language which contemplates a process in which the
current allowable cost reimbursement level is carried forward from year to year with annual CPI
adjustments, unless doing so would prevent PASCO from earning a profit within the Target OR
Range. That outcome is to be avoided by a careful review of recent and current costs to see if
they should be increased (or decreased) in the upcoming year so that application of the 88% OR
to the adjusted costs can be expected to yield an OR in the coming year within the 86% - 90%
range. The contract does not guarantee PASCO that it will earn an OR within that range in every
year, with adjustments to a future year’s compensation being designed to compensate for a prior
year’s actual results. An historical excursion outside the OR target range serves as a trigger for a
detailed review of historical and current costs to determine if they need to be adjusted to get back
on track in the upcoming year, not to "true up" historical shortfalls or overages.
Second, the significant increase in this year’s compensation allowed by the Council last May was
not intended to "square the books" for the results of FY 2005-06. Instead, the results of FY
2005-06 were looked to, along with the best information available as to cost trends, to set the
costs for FY 2007-08 at a realistic level.
After a careful review of the costs PASCO incurred during FY 2006-07 and the costs it has
reported for the first six months of the current year, staff believes that adjusting the current
year’s allowable costs by the CPI and setting total compensation for next year at $10,960,234
will allow PASCO to earn a profit within the contract’s OR Target Range.
The contract provides that, if the City staff and PASCO present different recommendations to the
Council:
"The City Council shall consider staff’s proposal and alternatives
to staff’s recommendations, if different from collector’s [i.e.,
PASCO’s] request and shall approve such amount of compensation
as it reasonably deems appropriate, in a manner consistent with
this Agreement, based on adjustment information submitted to it."
(Section 4.6.4)
RESOURCE IMPACT
There are sufficient funds in the Refuse Fund FY 2008-09 Proposed Budget to accommodate
either Option 1 or Option 2. If the Council selects Option 1, the ending balance of the Rate
Stabilization Reserve 0~SR) as of June 30, 2009 is projected to be approximately $2.0 million.
With Option 2, the projected RSR ending balance would be approximately $1.0 million. Under
either option, the projected RSR ending balance falls below the minimum guideline range of
$2.7 million. However, staff believes that the projected RSR under either option will be
sufficient to meet its near-term needs and will continue to evaluate the RSR on an on-going
basis.
ENVIRONMENTAL REVIEW
This report is not a project under the California Environmental Quality Act (CEQA) and an
environmental review is not necessary.
CMR:246:08 Page 4 of 5
ATTACHMENTS
Attachment A:CMR:245:07
Attachment B:PASCO’s Six Month Financial Analysis
Attachment C:Option 1 - Staff Recommendation
Attachment D:Option 2 - PASCO Proposal
PREPARED BY:
RUSS REISERER, Solid Waste Manager
PAULA BORGES FUJIMOTO,Executive Assistant
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
GLENN S. ROBERTS
EVErEMSLIE
CMR:246:08 Page 5 of 5
ATTACHMENT A
TO:
ATTN:
FROM:
City of Palo Alto
City Manager’s Report
FINANCE ........................................COMMITTEE V-~ BUDGET
HONORABLE CITY COUNCIL,, ’07-’09
CITY MANAGER DEPARTMENT: PUBLIC WORKS
DATE:MAY 15, 2007 CMR:245:07
SUBJECT:APPROVAL OF ADDITIONAL COMPENSATION TO THE PALO ALTO
SANITATION COMPANY IN THE AMOUNT OF $814,832 FOR COST
INCREASES PERTAINING TO SERVICES IN 2007-08
RECOMMENDATION
Staff requests that the Finance Committee recommend that the Council approve additional
compensation of $814,832 to Palo Alto Sanitation Company (PASCO) for cost increases
pertaining to services in 2007-08 and authorize the City Manager to execute a contract
amendment for the additional compensation and services for 2007-08. This recommendation has
also been discussed with the City Attorney’s Office and the City Auditor’s Office in order to
ensure compliance with the PASCO contract and the recent PASCO contract audit.
BACKGROUND
The current refuse and recycling contract with PASCO allows staff to perform a good-faith
review of PASCO’s compensation and recommend adjustments when PASCO goes outside the
target operating ratio range set in the contract. Due to significant ongoing cost increases incurred
by PASCO, staff recommends a prospective adjustment to PASCO’s compensation for 2007-08
and going forward. These cost increases are based on the results of operations as detailed in
PASCO’s 2005-06 audited financial statements and the notion that the cost increases are
continuing in nature.
DISCUSSION
PASCO has experienced considerable cost increases in its operations. Upon review of PASCO’s
financial statements and meeting with PASCO representatives, staff recommends an additional
adjustment to PASCO’s compensation of $814,832, which is based on the following cost
increases:
Operating Expenses
c~Disposal to landfall- $5,000
o Construction and demolition processing fees- $40,000
o Labor- wages (including merit increases)- $210,000
o Labor- supplemental (sick pay, bonuses, and overtime)- $45,000
o Labor- benefits (insurance, vacation, 401K, medical)- $80,000
~Labor- payroll taxes- $10,000
~Fuel costs (increased fuel costs and increased consumption due to C&D routes
and redirection of debris boxes to SMART Station)- $300,000
CMR:245:07 Page 1 of 2
o operating costs for trucks (including parts and exhaust system filters for
equipment)- $10,000
o Truck repairs (transmission, tires, lubes, third-party services)- $30,000
o Safety program expense (protective equipment, monthly safety meetings, safety
incentives)- $5,000
General and Administrative Expenses
o Wages and benefits- $34,832
o General liability insurance (including insurance premium increases for vehicles
and equipment)- $40,000
o Travel to required training courses due to increased regulation requirements-
$5,000
RESOURCE IMPACT
If the Finance Committee recommends that Council approve this additiona! compensation of
$814,832 to PASCO in 2007-08, this adjustment will appear as an amendment to the City
Manager’s 2007-09 Proposed Budget in Exhibit B of 2007-09 Budget Adoption CMR.
Combining this additional compensation with the amount of $9,248,298 already included in the
2007-08 proposed budget would yield a total compensation amount of $10,063,130 for 2007-08.
The recently proposed thirteen percent increase to the refuse rates are estimated to net an
additional $2.9 million to the Refuse Fund annually (CMR:208:07, April 17, 2007) starting in
2007-08. This thirteen percent proposed rate increase would cover this additional expense.
ENVIRONMENTAL I1ViPACT
This report is not a project under the California Environmental Quality Act (CEQA) and an
environmental review is not necessary.
PREPARED BY:
DEPARTMENT HEAD:
)TO
GLENN S. ROBERTS
Director of Public Works
Director of Admini,,Services
CITY MANAGER APPROVAL:
ON
Assistant City Manager
CMR:245:07 Page 2 of 2
Attachment B - PASCO’s Six Month Financial Analysis
PALO ALTO SANITATION CO.
Six-Month Financial Analysis
From 07/01/2007 To 12/3112007
Disposal to Landfill
Sub Contractor Cost
C&D Program Processing Fee
Labor - Wages
Labor - Supplemental
Labor - Benefits
Labor - Payroll Taxes
Trucks - Fuel & Environment
Trucks - Operating
Trucks - Repairs
Trucks -Depreciation (7 yrs life)
Containers - Repair & Maintenance
Containers - Depreciation
Operations - Support - Depreciation
Safety Program Expense
Total Operating Expenses
Six Months
Budget 07-08 Projected 07-08 Variance Actual
7,221 0 (7,221)0
10,160 10,160 5,080
254, 971 247,725 (7,245)123,863
3,129,874 2,938,655 (191,219)1,469,328
852,016 1,005,818 153,802 502,909
1,061,004 749,772 (311,233)374,886
345,526 281,805 (63,721)140,902
532,447 552,226 19,779 276,113
151,822 181,387 29,565 90,693
350,718 366,257 15,539 183,128
603,347 645,454 42,107 322,727
76,615 14,525 (62,090)7,263
59,213 58,859 (353)29,430
35,279 35,653 374 17,826
70,304 34,208 (36,096)17,104
7,530,357 7,122,504 (407,853)3,561,252
Wages & Benefits
Advertising
Bad Debt
Dues & Subscriptions
Insurance - Group
Insurance - General Liability
Maintenance - Buildings
Miscellaneous
Office Supplies
Publications/Educational Manuals
Professional Expense
Postage
Rental - Equipment & Facili~es
Rental - City
Taxes & Licenses
Taxes - Payroll
Telephone
Travel
Uniforms
Utilities
Depreciation - Office Equipment
Depreciation - Leasehold Improvements
Division, Area, Corporate Expenses
Total General & Administrative Expenses
500,477 396,616 (103,861)198,308
7,426 9,931 2,505 4,966
5,149 11,953 6,804 5,976
2,236 258 (1,978)129
65,740 59,679 (6,061)29,839
63,941 72,792 8,851 36,396
16,825 11,701 (5,124)5,851
19,262 (8,703)(27,965)(4,352)
19,228 33,570 14,342 16,785
715 2,919 2,204 1,460
44,276 88,959 44,683 44,480
8,445 1,476 (6,969)738
30,557 20,919 (9,639)10,459
123,216 126,126 2,910 63,053
142,947 125,283 (17,663)62,642
31,856 25,367 (6,489)12,683
45,900 40,125 (5,775)20,062
13,621 7,113 (6,507)3,557
33,540 21,671 (11,870)10,835
105,513 60,564 (44,928)30,292
6,836 0 (6,836)0
14,077 2,292 (11,785)1,146
408,606 408,612 6 204,306
1,710,388 1,519,243 (191,145)759,522
Total Allowable Costs
Operations - Interest
Sale (Gain) on Assets
Total Pass-through Costs
9,240,744 8,641,747 (598,998)4,320,873
0
141,050 159,381 18,331 79,691
0 1,383 1,383 692
141,050 160,764 19,715 80,382
Total Costs 9,381,794 8,802,511 (579,283)4,401,256
Total Collection Revenue
Total Recycling Revenue
Shared Revenue to COPA
10,232,705 10,579,416 346,711 5,289,708
1,211,034 890,165 (320,868)445,083
(801,843)(933,487)(131,645)(466,744)
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