HomeMy WebLinkAboutStaff Report 1912City of Palo Alto (ID # 1912)
City Council Staff Report
Report Type: Action ItemsMeeting Date: 7/25/2011
July 25, 2011 Page 1 of 5
(ID # 1912)
Summary Title: Finance Committee Recommendation on Refuse Rates
Title: Finance Committee Recommendation for Rate Increases for the FY 2012
Refuse Fund Budget
From:City Manager
Lead Department: Public Works
Recommendation
The Finance Committee and staff recommend that Council direct staff to:
1.Proceed with plans to retain the FY 2011 rate increases of 6% for residential
customers and 9% for commercial customers, and to implement an additional
fixed monthly fee of $4.62 for all residential customers to be effective on
October 1, 2011;
2.Establish a loan of $1.25 million from the General Fund Budget Stabilization
Reserve to the Refuse Fund that will be disbursed in FY 2012 and repaid in FY
2013, with interest on the loan to be based on the average yield on the City’s
investment portfolio for the loan period; and
3.Proceed with the Proposition 218 public notification process for the rate
increases and return to City Council in September 2011 for the public hearing
and adoption of the new refuse rates.
Executive Summary
This report provides City Council with staff’s recommendation for rate increases to close
the $3.7 million Refuse Fund operating deficit for FY 2012. The recommended rate
increases consist of retaining the 6% and 9% rate increases from FY 2011 for
residential and commercial customers, respectively, and establishing an additional fixed
monthly fee of $4.62 for residential customers to be effective on October 1, 2011. To
minimize immediate impact to ratepayers, the Committee also recommended a short
term $1.25 million loan from the General Fund BSR that will be repaid in FY 2013 from
projected savings resulting from scheduled closure of the landfill. The FY 2011 rate
increases are scheduled to expire on September 30, 2011. The Finance Committee
unanimously recommended this approach at its July 19, 2011 meeting.
Background
In September 2010, City Council adopted refuse rate increases for FY 2011 that became
effective on October 1, 2010 and would expire on September 30, 2011. At the April 5,
July 25, 2011 Page 2 of 5
(ID # 1912)
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 the 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
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, while the commercial sector is much
more volatile than residential, the preliminary results indicate 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 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-month
savings) in the refuse rate calculations. The current Recycling Center must be removed
following the closure of the landfill, resulting in the six-month savings regardless of
whether the Recycling Center is fully eliminated. 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 options, as well as an option that does not include a
fixed amount, 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 apparent inequities of the current
rate structure between residential and commercial sectors initially identified by the
July 25, 2011 Page 3 of 5
(ID # 1912)
ongoing Cost of Service Study without subjecting residential customers to a rate
increase that is significantly higher than other rate increases in the past.
On July 19, 2011, staff returned 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
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%
July 25, 2011 Page 4 of 5
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Staff and Finance Committee recommend Option 3 (100% fixed cost), to address rate
inequities at this time. The Finance Committee expressed a strong preference for a
100% fixed cost increase in order to better assure the revenue pending completion of
the cost of service study. 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. The Finance
Committee unanimously recommended that City Council direct staff to proceed with
Option 3, including provision of a $1.25 million loan from the Budget Stabilization
Reserve to the Refuse Fund.
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 directs staff
to proceed with at this time, staff will return to the Finance Committee 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.The
BSR balance would be reduced to $25.8 million or 17.6% of expenditures, which is
above the 15% minimum balance approved by Council.
Timeline
Following direction by City Council, staff will send Proposition 218 notifications to refuse
customers. At the conclusion of the 45 day notification period, staff will return to City
Council for the public hearing and adoption of the new refuse rates in September 2011.
Following City Council adoption, 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.
Attachments:
·A -Refuse Fund Slides (PPT)
July 25, 2011 Page 5 of 5
(ID # 1912)
·B -7/19/11 Finance Committee Draft Excerpt Minutes (DOC)
Prepared By:Brad Eggleston, Manager, Environmental Control Programs
Department Head:J. Michael Sartor, Interim Director
City Manager Approval: James Keene, City Manager
Finance Committee Recommendation
for FY 2012 Refuse Rates
City of Palo Alto
City Council
July 25, 2011
ATTACHMENT A
2
Long Term Strategy
¡Establish rates that fully cover
expenses and establish 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
3
Long Term Strategy (cont.)
¡Achieve +$3 million operating reserve
¡Achieve:
l All rate payer categories pay their
actual costs
l Full implementation of structural
rate changes
~ 3 Years
~ 3 –5
Years
4
Short Term Strategy
¡Council adoption of FY12 budget (including refuse fund deficit without rate increase)
¡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
¡Continue to develop forecasting model and ongoing Cost of Service analysis
June 2011
early July 2011
early July 2011
mid July 2011
September 2011
October 1, 2011
Ongoing
5
Finance Committee Discussions of FY
2012 Refuse Fund Budget and Rates
¡4/5/11:
l Finance Committee directed staff to prepare FY 2012 budget assuming expiration of FY 2011 rate increases and return in July with rate increase recommendation
¡5/24/11:
l Finance Committee recommended Council approval of FY 2012 RefuseFund budget with $3.7 million deficit
¡7/5/11:
l Staff recommended obtaining $1.25 million loan from Budget Stabilization Reserve, keep 6% residential and 9% commercial rate increases from FY 2011, and raise residential rates by additional 13% to close budget deficit
l Finance Committee directed staff to prepare options for a fixed residential rate in lieu of the 13% residential increase recommended by staff
¡7/19/11:
l Finance Committee recommended Council approval of $1.25 million loan, retaining 6% and 9% rate increases from FY 2011, and fixed rate of $4.62 per month for residential customers
6
Refuse Fund FY 2010 Expense Actuals
(thousands of dollars)
$12,478,39.7%
$2,364,7.5%
$1,944,6.2%
$175,0.6%
$2,633,8.4%
$4,289,13.6%
$741,2.4%
$187,0.6%
$1,853,5.9%
$1,061,3.4%
$345,1.1%
$834,2.7%
$511,1.6%
$2,019,6.4%
GreenWaste Contract - 39.7%
SMaRT Station -7.5%
Kirby Canyon Disposal Fee -6.2%
Kirby Canyon Put-or-Pay - 0.6%
Landfill Operations - 8.4%
Landfill Rent - 13.6%
Interest on Landfill Rent - 2.4%
CIP -0.6%
Allocated G&A,Transfers - 5.9%
Admin -3.4%
Permitting/Enforcement - 1.1%
Zero Waste - 2.7%
HHW - 1.6%
Street Sweeping - 6.4%
7
Landfill Closure Results in Reduced
Expenses in FY 2013 Compared to FY 2012
¡FY12 expenses are higher than FY13 expenses
due to landfill rent and operations costs
l FY12 landfill rent = $4.29 million
l FY13 landfill rent = $2.09 million
l FY12 landfill operations = $2.24 million
l FY13 landfill operations = $1.13 million
¡Loan of $1.25 million in FY12 can be repaid in
FY13 to minimize FY12 rate increase (with no
rate increase in FY13)
8
Options for Residential Rate Increase
(additional to retaining 6% increase from FY 2011)
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
Staff and Finance Committee
Recommendation: Option 3
9
Percent Increases Over FY 2011 Rates
of 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%
10
Staff and Finance Committee
Recommendations
¡Retain 6% residential and 9%
commercial rate increases from FY 2011
¡Implement fixed residential rate of $4.62
per month to be effective 10/1/2011
¡Obtain $1.25 million loan from the
General Fund Budget Stabilization
Reserve to be disbursed in FY 2012 and
repaid in FY 2013
11
Next Steps on Refuse Rates
¡Council direction on Finance Committee
recommendation for FY 2012 rates
¡Mail Proposition 218 notifications
¡Council adoption of FY 2012 rates
¡Complete current Cost of Service
analysis and continue public outreach
¡Prepare options for new structural
changes to rates
¡Implement first of new structural
changes for FY 2013
7/25/11
7/29/11
9/19/11
November 2011
January 2012
July 2012
12
Next Steps on Recycling Center and
Household Hazardous Waste Facility
¡Develop Plan and Options for Recycling Center and HHW Facility considering:
l Community outreach
l Costs for additional Cleanup Day and community’s use of current Cleanup Day program
l Costs for HHW facility improvements
l Options for disposing of universal wastes and other items with limited alternatives
l Role of Extended Producer Responsibility in the HHW program
¡Staff is scheduled to return to Finance Committee with the Plan and Options in September
ATTACHMENT B
FILENAME 1
FINANCE COMMITTEE
DRAFT EXCERPT
Special Meeting
July 19, 2011
1.Recommendation for Rate Increases for the FY12 Refuse Fund Budget
Interim Director of Public Works, Mike Sartor gave a brief presentation on the history
of the rate increase discussions.Staff had initiated the rate increase request to the
Finance Committee in April of 2011. Staff was requested to proceed with a budget
including the 6 to 9 percent rate increases and return to the Committee in July with a
proposal. Staff presented a proposal on July 5, 2011 to take a $1.25 million loan from
the Budget Stabilization Reserve and add 13 percent to the top for residential
customers keeping the 6 and 9 percent which had previously been approved in 2010.
The Committee had requested Staff consider a flat rate which was what had been
brought forward for discussion.
Solid Waste Manager, Brad Eggleston presented the 3 options Staff had brought
forward for discussion: Option 1 was 100 percent variable, essentially the proposal
presented on July 5th; Option 2 had a fixed rate incorporated into the option where 50
percent of the revenue was generated through the fixed and 50 percent was generated
through the variable;and Option 3 was a 100 percent fixed rate which ended up being
$4.62 per month per residential customer. The Staff recommended the Committee
select Option 3. Staff was on the City Council agenda for July 25, 2011, if Council
decided to move forward the Proposition 218 notices would be mailed out to the public
by the end of the week. The goal would be to return to the Council in September for
approval and set the rate changes in effect for October 1, 2011. He stated the Cost of
Service Analysis was scheduled to be completed by November.
Mr. Sartor stated Staff had been requested to review options for eliminating the
Recycling Center.He noted Staff had engaged the community in a discussion at an
environmental partners meeting last week, there had been feedback received by a
number of the users of the recycling center. He noted Staff was looking into the cost
for an additional clean-up day and the use for the community of said day.
ATTACHMENT B
FILENAME 2
Chair Scharff asked for clarification on hazardous items being included in the Household
Hazardous Waste (HHW) recycling center, items such as anti-freeze.
Mr. Sartor stated yes, anti-freeze was an items that would be accepted at the HHW
center.He stated used appliances and electronics were not accepted at the HHW
center; although, those items would typically be collected at an annual household
clean-up day.
Council Member Shepherd asked if a customer had a large box or an oversized piece
which did not fit into the household bin, what happened.
Mr. Sartor stated there were two options for the customer if the recycling center were
to be eliminated;1)the customer could store the item and wait for the clean-up day or
2)the customer could haul the item themselves to the sMaRt Station in Sunnyvale.
Council Member Shepherd confirmed it was not within the Green Waste contract to pick
up items which were not in the bin.
Mr. Eggleston asked for clarification on the type of box.
Council Member Shepherd stated a large cardboard box filled with recycled materials.
Mr. Eggleston stated that would be considered a curbside item and could be placed on
the curb next to the bin.
Council Member Shepherd stated they would pick it up with the regular recycle bin.
Mr. Eggleston stated yes, as long as the items were contained within a biodegradable
container such as a cardboard box or a paper bag.
Council Member Schmid asked if the advantage of a fixed rate was secured revenue.
Mr. Sartor stated there were two answers for your question; 1) the fixed rate may
reduce the impact of switching from a larger can size to a smaller one, and 2) it had a
greater impact on reducing the inequities between the can sizes.
Council Member Schmid stated the gaps between the can sizes were considerable.
Mr. Sartor stated yes, there were inequities which would be addressed with the Cost of
Service Study. He noted Staff had previously mentioned there were still uncertainties
with the model.
ATTACHMENT B
FILENAME 3
Council Member Schmid stated Palo Alto retained conservation pricing and added an
element where we know the amount of money being generated. He asked how much
would be generated by the increased figure.
Mr. Eggleston stated he did not have the exact figure; although he noted it was close
to $800,000.
Council Member Schmid asked if the amount being generated per household was $4.62
multiplied by 17,500 households.
Mr. Eggleston stated 17,500 households was the number used.
Council Member Schmid stated that amounted to approximately $100,000.
Mr. Eggleston stated the amount was $4.62 per month and there were considerations
in there was not a complete 12 months in the remainder of the year since the rates
would not be affective until October 1, 2011.
Council Member Schmid stated to refer back to the budget, taking into account the $6
million reserve there was a $3.6 million deficit and $1.25 million would come from the
loan and $1.2 million from the earlier rates, then through the upgraded savings there
was approximately $500,000.
Mr. Sartor stated the $500,000 was the savings from the landfill.
Council Member Schmid stated the rate increase was designed to cover the gap.
Mr. Eggleston stated $500,000 for the landfill seemed high, but that was the process
followed.
Mr. Sartor stated a valid point to mention was the $3.7 million assumed the 6 and
percent would not be retained.
Council Member Schmid stated Staff would be returning in September.
Mr. Sartor stated yes, with the Recycling Center and then in January of 2012 with the
next round of the 2013 budget and the Cost of Service Study results.
Council Member Schmid stated the rate changes currently being discussed; the 9
percent and the 6 percent would complete the rates for 2012.
ATTACHMENT B
FILENAME 4
Mr. Sartor stated that was correct.
Council Member Schmid stated a concerned he had was with the use of the term fixed
cost.
Mr. Sartor stated another term used in the Staff Report was flat rate which was a flat
rate of $4.62 for a residential customer plus the 6 percent from residential and the 9
percent from commercial.
Chair Scharff stated it was critical to have community outreach and have them agree to
the decisions made in the Committee and Council. He stated he was satisfied with the
direction of the rates and he felt it managed to move the City into the direction it
needed to go, while it maintained a differential while completing the Study and
encouraged people financially switch to the mini-can.
Council Member Shepherd stated her concerned for using the term flat rate. She felt it
sounded as if were a steady rate for everyone. She agreed to the terminology of 100
percent fixed costs which made more of a clear message.
Mr. Eggleston stated another term Staff considered was a base rate.
Council Member Shepherd stated the purpose of the increase was to recover or begin
to differentiate the fact that there were four vehicles moving throughout the streets
weekly. She stated the end result was to have a rate for the movement and possibly
separate out the refuse collection.
Mr. Sartor stated there were four vehicles plus a street sweeper; Staff was reviewing
options for the street sweeper as well.
Council Member Shepherd stated the cost was a service cost not necessarily a fixed
rate.
Mr. Eggleston clarified at this stage;it was difficult to identify the process with
precision since it was not calculated based on fixed costs or service costs.He stated
there was revenue needed and rather than doing a percentage increase Staff went in
the fixed rate direction.He noted when Staff returned with the Cost of Service Study
there would be a clearer rate structure.
Council Member Shepherd stated since this structure would be a first she suggested
researched other communities to see what their structures and rates were.
ATTACHMENT B
FILENAME 5
Mr. Sartor stated there were steps in the Proposition 218 process.
Council Member Shepherd stated she understood the Proposition 218 process but
wanted to ensure Staff included incentives and what needed to be analyzed beyond the
218.
MOTION: Council Member Shepherd moved, seconded by Council Member Schmid to
recommend that the 6 percent residential and 9 percent commercial rate increases
from FY 2011 be retained, that a fixed residential rate of $4.62 per month be
implemented, and that a $1.25 million loan from the Budget Stabilization Reserve to
the Refuse Fund be provided in FY 2012 and repaid in FY 2013.
Council Member Shepherd stated her appreciation to Staff for their attempts to
stabilize the refuse by reviewing the fact that the landfill would be closing. She stated
there was flexibility by easing into the process.
Vice Mayor Yeh stated from the revenue perspective the fixed rate made clear sense
and it was a mid-term step prior to the completion of the Cost of Service Study.
Chair Scharff stated it was important for people to realize the goal was still to achieve
zero waste and encourage people to use mini-cans but there was a cost to recycling.
MOTION PASSED:4-0