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HomeMy WebLinkAboutStaff Report 373-06City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL ATTENTION:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: OCTOBER 17, 2006 CMR:373:06 RECOMMENDATION REGARDING RENT CHARGED BY THE GENERAL FUND TO THE REFUSE FUND ON UNOPENED PORTIONS OF LANDFILL RECOMMENDATIONS Staff recommends that the Finance Committee recommend that Council establish a policy on rent charged by the General Fund to the Refuse Fund on closed portions of the landfill whereby the Refuse Fund should pay rent at less than full market value in coiasideration of the fact that the landfill area cannot be readily converted to the land’s highest and best use. BACKGROUND In the City Auditor’s review of the Envirortmental Services Center proposal, the City Auditor recommended that staff should determine whether the Refuse Fund should be responsible for paying rent on the closed, undeveloped areas of the landfill. The Finance Committee reviewed staff’s original recommendations on December 6, 2005 (CMR:441:05), and recommended that Council adopt a policy whereby the Refuse Fund pay rent on closed portions of the landfill that had not yet been developed into parkland. Staff was also directed to return with a proposed payment plan to recover unpaid rent for past periods and to provide funding for post-closure park development. Staff was also directed to examine the legal issues relating to the recovery of rent in past periods and to review the appraised value of the landfill area. This report provides a proposed rental amount and payment plan. DISCUSSION The City retained an independent appraiser to appraise the land, and that appraisal determined that the highest and best use of the land was Industrial- Research & Development. After review of the appraised value, staff considered the possibility that the landfill area cannot be readily developed into usable space in keeping with its highest and best use designation as Industrial- Research & Development. Accordingly; staff has referred this matter back to the Finance Committee to review this new consideration before submitting a proposed payment plan to the full City Council. The proposed payment plan sets the rent at less than full market value (see Attachment A). The plan also accounts for the recovery of back rent on closed portions of the landfill since 2004-05, CMR:373:06 Page 1 of 3 which is consistent with the applicable two-year statute of limitation for collection of back payment. The statute of limitations applies from the date of the forthcoming written lease agreement which will be completed once Council considers the payment plan. In her review of the Environmental Services Center proposal, the City Auditor noted several complicated land use issues with regard to locating a facility on the landfill site. The report states: ’°The landfill site is dedicated parkland with flat, natural wetlands on three sides. Identification and discussion of all California Environmental Quality Act (CEQA) issues, regulatory agency permit and approval processes, and land use approval processes add complexities and costs to the proposed project. Use of dedicated parkland requires voter approval." Given the complexities of locating a facility on the landfill site, staff has considered that it may be difficult to readily convert the landfill area to the land’s highest and best use designation. Therefore, staff presents a payment plan whereby the rent charged on the closed portions of the landfill is based on a return on the land value of five percent, which is less than full market value, but which accounts for some possibility that the land could be converted to non-park use at a later time. As such, based on the square footage of the landfill, the amount charged would be $7,420,925, which is less than the full market rental return of ten percent as determined by the independent appraiser. To avoid the need for customer rate increases due to increases in the amount of rent owed, the annual rental payments would follow the current payment schedule previously adopted by Council, which calls for annual payments of $4,288,747 through 2011-12, and payments of $2,094,332 in 2012-13 and $2,094,331 in 2013-14 (CMR:238:0_4). At the end of 2010-11, or when the landfill is scheduled to close and be developed as a park, the cumulative difference between the amount charged and the rent payments made would grow to $21,925,247. This plan would add $13,447,837 to the current payment schedule. Annual rent payments of $2,094,331 would continue from 2013-14 through 2019-20 with a final payment of $881,851 due in 2020-21 (see Attachment A). RESOURCE IMPACT The current Long Range Financial Plan reflects projected net operating deficits for the General Fund in 2014-15 and beyond, due in part to the elimination of rental payments according to the existing smoothing schedule. These projected net operating deficits could be reduced or eliminated entirely under the proposed payment plan. The plan could have an impact on Refuse Fund rates and charges to the ratepayers over the long term. POLICY IMPACT This change to the Refuse Fund rent responds to an audit recommendation and will not impact the rent charges of other utility funds. In addition, a policy question still needs to be addressed related to how much Refuse Fund rent shall be set aside for park development. Staff will return at a later time with a recommendation addressing this policy question. CMR:373:06 Page 2 of 3 ENVIRONMENTAL REVIEW This matter is not a project for the purposes of the California Environmental Quality Act. PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: DALE WONG k_) Senior Financial Analyst ~ ~(’~" ~.,&D’jrect°r of Adminis~rative~ces GLENN S. ROBERTS Director of Public Works E~ILY HARRISON Assistant City Manager ATTACHMENTS Attachment A: Schedule of Landfill Rent Attachment B: CMR:441:05 "Response to the Audit Recommendation Regarding Rent Charged by the General Fund to the Refuse Fund on Unopened Portions of Landfill" CMR:373:06 Page 3 of 3 Attachment A City of Palo Alto Landfill Rent Schedule 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28 2028-29 Rent Charged 4,700,821 4,700,821 4,700,821 4,700,821 4,700,821 4,700,821 4,700,821 Current Rent Payment 4,288,747 4,288,747 4,288,747 4,288,747 4,288,747 4,288,747 4,288,747 0 4,288,747 0 2,094,332 0 2,094,331 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Proposed rent payments beyond current schedule Proposed Rent Charged 7,420,925 7,420,925 7,420,925 7,420,925 7,420,925 7,420,925 7,420,925 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Rent Payment 4,288,747 4,288,747 4,288,747 ~4,288,747 4,288,747 4,288,747 4,288,747 4,288,747 2,094,332 2,094,331 2,094,331 2,094,331 2,094,331 2,094,331 2,094,331 2,094,331 881,851 0 0 0 0 0 0 0 0 13,447,837 ATTACHMENT B City of Palo Alto City Manager’s Report. TO:HONORABLE CITY COUNCIL ATTENTION:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE: SUBJECT: DECEMBER 6, 2005 CMR:441:05 RESPONSE TO THE AUDIT RECOMMENDATION REGARDING RENT CHARGED BY THE GENERAL FUND TO THE REFUSE FUND ON UNOPENED PORTIONS OF LANDFILL RECOMMENDATIONS Staff recommends that the Finance Committee recommend that Council establish the City’s policy on rent charged by the General Fund to the Refuse Fund on closed but unopened portions of the landfill by choosing one of the following alternatives: 1) The Refuse Fund should pay rent on unopened portions of the landfill and staff is directed to update the appraised value of the landfill ~area, review legal issues, and return with a proposed payment plan. 2) The Refuse Fund should not pay rent on the unopened portions of the landfill. BACKGROUND Landfill rent is Charged to the Refuse Fund by the General Fund based on an independent annual appraisal which determines the market value rental amount according to the landfill’s highest and best use (Industrial- Research & Development). For 2005-06, appraised rent for the landfill is $4,700,821. This appraised amount has remained unchanged since 2001-02. The actual annual rent paid by the Refuse Fund is $4,288,747. Annual rental payments have remained at this level since 1995-96. The policy to not pay the full-appraised value was instituted by Council in 1995-96 to avoid steep rate increases that wo~ld have been necessary to cover the increases in appraised rent (CMR:181:95). Council has extended this policy twice (CMR:266:99 and CMR:238:04). To compensate for the difference between the appraised amount and the payments made, Council approved a smoothing schedule in which the Refuse Fund is required to make payments until 2013-14, beyond the anticipated time of landfill closure in 2010-11 (CMR:238:04). The Byxbee Park Master Plan outlines the sequence of phases of landfill closure adopted by the City Council. Each phase of the plan consists of closing a certain area of the landfill, developing that area into park space, and eventually opening the area to the public. Phase I (28.86 acres) CMR:441:05 , .................Page 1 of 4 was .completed in 1990. Phase II is further divided into three sub-phases. Phase IIA (22.47 acres) wasclosed in 1992, and Phase IIB (23..19 acres) was closed in 2001. Phase IIC consists of the remaining 51,24 acres of active landfill area. According to the Byxbee Park Master Plan, the park development stage for Phase II wil! not commence until all Phase II landfill areas are closed completely. Upon closure of each landfill area, rent charges cease. The closure of Phase I was immediately followed by park development and the area was opened to the public shortly thereafter. In contrast, closure for Phases IIA and IIB has occurred, but park development has not started and these areas remain closed to the public. Upon completion of all landfill disposal operations, estimated in 2011, construction would begin for the final closure of Phase IIC and then be followed by park development for the entire Phase II area. Final closure involves installing collection piping and wells underground in Phase IIC, similar to the piping and wells which have already been installed in Phases IIA and IIB. These phases have already received final closure certification reports from California Integrated Waste Management Board (CIWMB). A layer of low-permeability soil will then be put in place to cap the site and a drainage system will be installed, including a system for groundwater monitoring. Finally, a vegetative layer will be put in place. The estimated completion for final closure is summer 2012. Upon approval of final closure certification from the CIWMB, park development could begin in summer 2013, if General Fund monies become available for park development. The Byxbee Park Master Plan recommends park development following landfill closure of the entire Phase II area, (Phgses IIA, IIB and IIC); park development preliminary costs were estimated at $2,067,700. A funding plan for park development has not been determined. However, final closure costs and post closure maintenance costs are fully funded for 30 years in the Refuse Fund. In the City Auditor’s review of the Environmental Services Center proposal, the City Auditor recommended that staff should determine whether the Refuse Fund should be responsible for paying rent on these closed, undeveloped areas. This report provides a response to the City Auditor recommendation. IIISCIJSSION The Byxbee Park. Master Plan does not specify whether the Refuse Fund should be responsible for paying rent on the closed, undeveloped portions of the landfill. Furthermore, current City policy regarding rent paid for General. Fund properties used by Enterprise Fund operations does not address this issue (CMR: 181:95). Past Council discussion has not focused on this question either. This leaves the determination of this matter as a policy decision for the City Council. Therefore, staff has provided two alternatives for Council’s consideration. Alternative 1: The Refuse Fund should pay rent on unopened portions of the landfill. Staff should be directed to update the appraised value of the landfill area and return with a recommended payment plan. CMR:441:05 Page 2 of 4 Even though the closed areas of the landfill are not being used by the Refuse Fund, these areas are still not available for public use as parkland. It could be argued that the Refuse Fund should therefore, pay rein on those areas. Should Council direct staff to conduct an appraisal of the land, staff would ascertain whether alternative cumulative-rent amounts could be derived. The appraisal process is intended to develop options for establishing a value for the land and the rent amount owed by the Refuse Fund so that refuse rates are not overly burdened as a result of charging rent on the unopened portions of land. Staff will also review legal issues related to the impact of rent costs on Refuse rates. Alternative 2: The Refuse Fund should not pay rent on the unopened portions of the landfill. This option essentially endorses the status quo. The stoppage of rent on closed areas is based on the premise that the closed, undeveloped portions of the landfill are not utilized by the Refuse Fund. There is no operational or technical reason from the Refuse Fund activity, why the area could not be utilized as park land immediately. The only constraints to such use are the Byxbee Park Master Plan staging recommendations and the lack of General Fund resources for park development. Hence, the Refuse Fund should not be liable for rent on these areas. RESOURCE IMPACT The implications for each alternative are presented below. Alternative 1" The Refuse Fund should pay rent on unopened portions of the landfill. Staff should be directed to Update the appraised value of the landfill area and return with a recommended payment plan. " " .. The current Long Range Financial Plan reflects projected net operating deficits for the General Fund in 2013-14, and beyond, due in large part to the decrease of rental payments according to the existing smoothing schedule. These projected net operating deficits could be reduced or eliminated entirely under Alternative 1, This alternative could have animpact on Refuse Fund rates and charges to the ratepayers over the long term. Altemative 2: The Refuse Fund should not pay rent on the unopened portions of the landfill~ This option provides the General Fund with a steady revenue stream until 2013-14. Compared to Alternative 1, the General Fund would lose this revenue stream much sooner under this scenario. Conversely, the Refuse Fund would be free of its rental commitment much sooner. Resources within the Refuse Fund could then be allocated for other capital or operating needs. Projected net operating deficits would persist from 2012-13 and beyond due primarily to the elimination of the rental payments. New revenue or expense reductions would be needed at that time to balance the General Fund. ENVIRONMENTAL REVIEW This matter is not a project for the purposes of the California Environmental Quality Act. Page 3 of 4 PREPARED BY: DALE WONG Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CARL D rector GLENN S. ROBERTS Director of Public Works EMIL(~L~IARRIS ON Assistant City Manager ATTACHMENTS Attachment 1: Map of !randfill Area Attachment 2: Correspondence from the Santa Clara County and Califomia Integrated Waste Management Board Regarding Acceptance of Closure Certification Attachment 3: Byxbee Park Palo Alto Baylands Update- June 1991 CMR:441:05 Page 4 of 4 ,! w w OL~_sn~ O0 0 W O0 o~ Courtly of Santa Clara Health Department 2220 MoorDark Av~nu~ San Jose. California g5128 ATTACHMENT 2 February 2. 1993 Robert Le City o1: Palo Alto Public Works Depm’tmen~ P.O. Box 10250 Palo Alto, CA 94303 RE:Palo Alto Landfill- Facility No, 43-AM-0001 Phase llA Closure - t=i~nal I)ocumentalion Report Dear Mr. Le: This clepartmen’~ has ~-e-,,iewed and approved the above referenced report.If you have any questions, please ca!l me at (,408) 29%6930. Sincerely, Lisa Clark. R.E.H.S. Solid Waste Program Office of Toxics Enforceme~lt Board of Supervisors: Michael M. Honda. Zoe Lofgren. Ron Gonzales Rod Diridon Dia~~’~e MCl,te~~na Cour~ry Executive: Sally R. Reed Winston H. Hickox Secretary for ~m, ironrnent~l ¯ Protection April 13, 2001 Calif0miaIntegrated Waste Management Board Linda Moulton-Patterson, Chair 1001 1 Street ¯ Sacramento, California 95814 ¯ (916) 341-6000 MailingAddress: P. O. Box 4025, Sacramento, CA 95812-4025 www.ciwmb.ca.gov Gray Davis Governor City of Palo Alto Public Works Department Attn: Mr. Phung Hoang, Senior Engineer P.O. Box 10250 Palo Alto, California 94303 Re:-Acceptance of Closure Certification for Partial Final Closure Activities at Palo Alto Landfill, Phase lib (43-AM-0001) Santa Clara County. Dear Mr. Cummins, Staff of the California Integrated Waste Management Board (C!WMB) RCTSB staff has reviewed the Partial Final Closure Certification Reports for the subject disposal site received Decembe~r 26, 2000, and ygur request for disbursal of closure funds. cIWMB giaff ~a,~ found tha~ ihecertifi~tion rfi~~ts ’the’ ie~ui~’elrfier~ii~.set forth in Title 27, California Co:de bf Regulations (14-CCl~); DiVis-ion ii Ch~i~ter 5~’Aiti~le 3.4, section 21880 and is .h, eLe..by accepted. Acco~-ding to 27 CCR, Division 2, Subdivision 1, Chapter 6, Subchapter 3, Article .1 Section 22235 (a); City of Paio Alto (City) is released from the requirements of demonstratingfinancial assurances for closure of this portion of Palo Alto Landfill. The City, however, is required to maintain financial assurances for postclosuremaintenance until the ClWMB determines that the City has completed postclosure maintenance according to the applicable postclosure plans and permit requirements. If you have any questions, please contact Mr. Jacques Graber at (916) 341-6353. For questions regarding the financial assurances mechanism, please contact Ms. Diana Vaughn-Tfiomas at (916) 341-6323. Sincerely, ul~ie .Nauman . ’Deputy Director- Permitting and Enforcement-Division Cc.’ "Mr.’ Stan Chau, san..~ clara ..c.q.u, n..ty Environrn.ental R, esource.s Agcy. (LEA_)¯Mr. cecifFelix, San Francisco Ba~, Regional Water Q’uality Control B0a~d .... Mr, Jacques Graber ClWMB California Environmental Protection Agency ~ Prlnt~d an Recycled Pan~r ATTACHMENT,. ~3 ©< ;I 0 o c~