HomeMy WebLinkAboutStaff Report 1577City 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 Title: Refuse Fund Cost of Service Study Initial Findings
Title: Discussion of Initial Findings 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