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CC - Discussion of Refuse Fund Rate Increases; and (2) Direction to the City Manager as Deemed Appropriate
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Meeting Date: May 10, 2021
Contact Person/Dept: Kim Braun
Phone Number: 310-253-6421
Fiscal Impact: Yes [x] No [] General Fund: Yes [] No [x]
Public Hearing: [] Action Item: [x] Attachments: []
Commission Action Required: Yes [] No [] Date:
Public Notification: (E-Mail) Meetings and Agendas - City Council (05/05/2021);
Department Approval: Charles D. Herbertson, PW Director/City Engineer (04/29/2021)
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RECOMMENDATION
Staff recommends the City Council ( 1) discuss Refuse Fund rate increases; and ( 2) provide direction to the City Manager as deemed appropriate.
BACKGROUND/DISCUSSION
Public Works Environmental Programs & Operations Division (EPO) is the exclusive provider of refuse, recycling and organics collection, construction and demolition
( C&D) collection programs, and transfer services to residential and commercial customers. EPO recovers its cost of operations through refuse rate charges to customers. In 2017, the City Council approved a three-year rate adjustment of seven percent (7%) annually beginning FY 17/18 through FY 2019/2020.
Since that time, the refuse rates have been outpaced by several conditions that were not projected in the last rate analysis including the rising costs in recycling fees due to the China ban; increased tonnage of organics due to SB1383; increased costs of transportation fees as a result of a new contract; and structural improvements to the transfer station tipping floor.
In 2017, China announced that it would no longer accept recyclable materials from other countries unless the contamination rate of the material was less than .5%. Recycling markets in the United States plummeted due to lack of infrastructure to process the materials. This resulted in materials recovery facilities charging municipalities to process recyclable materials. Prior to the China ban on recyclable materials, the City was receiving up to $25 per ton in revenue for all recyclable materials that were sent to the processor. After the China ban, the City was charged as much as $ 86 per ton to process this same material.
The State of California enacted several waste and recycling regulations: AB 341 focused on increasing recycling programs for all multifamily residents as well as all commercial entities. AB 1826 focused on increasing organics programs to divert organics from landfills for all commercial entities, single family and multifamily residents. Additional costs to implement these programs were included in the previous rate increase but those costs were greater than anticipated as a result of the unanticipated increase in fees to process the materials.
What was not considered in the last rate study analysis were the costs that will be associated with the enactment of SB 1383. Although the legislation was enacted in 2016, the State did not provide the actual regulations for compliance until November 2020, leaving most of the cities throughout the state scrambling to determine how to fund and manage this new program which is effective January 2022. SB 1383 focuses on reduction of methane gas production at landfills. The legislation requires that counties and cities:
• Adopt an enforceable ordinance requiring compliance with various SB 1383 requirements.
• Provide organic waste collection services including food, paper, and cardboard to all organic waste generators.
• Conduct route reviews of randomly selected containers for contaminants with all routes inspected annually
• Conduct waste characterizations twice per year
• Label all new containers with SB 1383 compliant labels by January 1, 2022
• Implement a food recovery program that educates commercial edible food generators and increases access to food recovery programs
• Identify Tier One and Tier Two commercial edible food generators
• Increase food recovery capacity if current capacity is insufficient.
• Maintain a list of food recovery organizations/services and update annually
• Provide Tier One and Tier Two commercial edible food generators with information on their requirements, food recovery programs and food recovery organizations/services
• Procure a quantity of recovered organic waste, such as compost, mulch renewable natural gas, or electricity from biomass, that meets or exceeds the annual organic waste product procurement target determined by CalRecycle
• Purchase paper products and printing and writing paper with at least 30% post-consumer, recycled content fibers, that are recyclable and require the vendors that sell these products to the city certify compliance in writing
• Implement a desk-top compliance monitoring program for multifamily and commercial organic waste generators with two cubic yards or more of materials per week
• Implement an inspection program for Tier One and Tier Two edible food generators, and food recovery organizations by January 1,2022
• Provide educational materials to regulated entities not in compliance by 2022 and 2023
• Investigate and maintain records of all complaints received alleging non-compliance with SB 1383
• Take enforcement actions including issuing notices of violations and assessing penalties in amounts consistent with those specified in SB 1383 by January 1, 2024
• Pay penalties if assessed by Cal Recycle
• Annually, provide generators with information on properly separating materials, organics waste prevention, on-site recycling, methane reduction benefits, how to recycle organics and edible food donation
• Provide communications in non-English languages spoken by a substantial number of the public that are provided organic waste collection services
• Annually provide Tier One and Tier two commercial edible food generators with information on the city’s edible food recovery program, generator requirements and food recovery organizations
• File compliance reports beginning April 2022
• Maintain all records in a central file location
• Report on capacity planning activities conducted with and through the County of Los Angeles
The League of California Cities distributed a survey to determine the financial impacts of the regulations associated with SB 1383. Data provided from the survey found that nearly all cities anticipate a rate increase. More than seven out of 10 cities anticipate a 1 - 20% rate increase with more than half of those surveyed anticipating an 11 - 20% increase. Factors for the rate increase include SB 1383 implementation costs, lack of recycling and organic waste infrastructure, lack of recycling markets, and franchise fee negotiations. Culver City is projecting that one-time implementation costs associated with SB 1383 will be approximately $600,000 and annually costs thereafter are projected at $350,000.
In addition, in 2019, it was determined that the transfer station exterior wall was showing signs of structural failure. This is a result of trash and construction and demolition materials being pushed up against the wall daily to stockpile materials until capacity is reached to load a semi-trailer to transport to an end facility. Funds in the amount of
$500,000 were requested in the FY 2020/2021 refuse fund budget for the wall repair. However, in December 2020, a more emergent condition became apparent with a stress fracture on the tipping floor. Rebar was beginning to pop-up from the floor and the concrete foundation needed to have a temporary overlay in order to preserve it to continue with daily operations. Funds originally designated for the structural wall repair were applied to the floor repair due to necessity. The structural wall repair will need to occur in FY 2021/2022 and its cost is estimated at $500,000.
Also, 11 new development projects expect to be operational at 50% and 100% in FY 2022 and FY 2023. As an example, Apple announced that 3,000 employees would be employed at the Culver City facility within the next year. Waste management services will need to be provided. A growth adjustment factor will be included in the rate analysis over the next four to 10 years. EPO staff project that in FY 2022 additional expenditures would total approximately $110,000 in operational costs and $65,000 in disposal and processing costs. These expenditures would increase as new developments meet operational capacities in FY 2023 to approximately $165,000 for operational costs and almost $100,000 in disposal and processing costs. Although these costs will eventually be recovered through additional refuse charges, without a rate increase, the refuse fund would be insufficient to meet the demand for additional and new services discussed above.
EPO published an RFP for a Refuse Fund Rate Study for FY 2020/2021 - FY 2024/2025 and the City contracted with SCS Engineers Inc. in September 2019. Staff was prepared to return to Council in June 2020 with the findings and recommendations of the rate study and request a public hearing to increase rates. However, in March 2020, as a result of the global pandemic and economic downturn, it was determined that the refuse fund would not request a rate increase for FY 2020/2021.
The pandemic did result in loss of revenue to the refuse fund due to business closures. These closures also resulted in numerous accounts defaulting from payment. The refuse fund bad debt amount at the end of FY 2019/2020 was $767,000. As a result, reserve funds were needed to cover essential operational costs to maintain trash collection services for residents and businesses that remained open. Landfill fees also increased in FY 2020/2021 as well as transportation services to various processing facilities, street sweeping services, and recycling processing fees. Table 1 shows a comparison in the loss of revenue from FY 2019/2020 to FY 2020/2021 in the refuse fund:
EPO was aware of the loss of revenues to the fund as those revenue losses were beginning to accumulate in FY 2019/2020 when pandemic closures were first observed. In order to lower expenditures, EPO eliminated a contracted position, did not immediately fill five vacant positions (of which three remain vacant at this time) and landfilled the recycling and organics while the processing facilities were closed. The cost for landfill is $38 per ton while the cost for recycling varies from $50 per ton to $86 per ton dependent upon marketability. The cost to landfill organics is $38 per ton compared to the cost to compost the organics at $84 per ton. All special events such as compost give away, paper shred, electronics waste recycling and household hazardous waste round-up were cancelled. Bulky item collections were put on hold for a brief time. With all of these proactive measures to reduce costs, funds in the reserve are still needed to maintain operations.
EPO can continue to cut costs, service levels and programs but the reality is that the Refuse Fund needs to generate revenue to continue to provide the services the community expects and is accustomed to receiving.
FISCAL ANALYSIS
A comprehensive refuse rate study typically includes the following three components based on general utility industry standard cost of service methodologies: (1) Financial Plan/Revenue Requirements, (2) Cost of Service Analysis, (3) Rate Design Analysis.
FINANCIAL PLAN AND REVENUE REQUIREMENTS ANALYSIS
Projected Revenue Requirements and Rates - A detailed Financial Plan developed from FY 2017/2018 through FY 2019/2020 indicating that the Utility would need at least a seven percent increase annually was approved on July 24, 2017.
In FY 19/20, the City contracted with SCS Engineer Inc. to complete another comprehensive rate analysis for the Refuse Utility for FY 2020/2021 through FY 2024/2025. SCS Engineers Inc. has completed the rate study analysis for the Refuse Fund. This analysis includes the costs of collections operations, transfer station operations and processing/disposal costs. This rate analysis was to be presented in Spring of 2020. However, due to the COVID - 19 pandemic and its effect on the economy, the Utility Refuse rates were not adjusted.
Cash Management and Target Reserve Fund Balances - In FY 2018/2019 and 2019/2020, several negative developments beyond the City’s control caused a huge shift in the operations of the Refuse Fund. Some of the factors were due to changes in the recycling market such as requiring the City to pay $86 per ton for recycling processing rather than receiving $ 25 per ton for that material. Other elements included expiration of the hauling contract that caused a dramatic increase in rates under the new term, retirement unfunded liability costs increased and necessary enhancements for the transfer station building were completed. In FY 2019/2020 the Refuse Fund expenditures exceeded revenues by $1.0 M. This left the fund balance at $2.8M which is $1.5M below the Fund Balance Reserve requirement of 25% ($4.3M).
FY 2019/2020 was the final year of the 7% rate increase approved on July 24, 2017. Another rate study was completed in Spring 2020 and updated in 2021 to find a solution that will enable the Fund to adequately cover ongoing operating costs, replacement of capital cost and to meet fund balance reserve requirements.
Cost of Service Analysis - The purpose of the cost of service analysis is to equitably allocate the refuse utility costs, or the net revenue required from refuse rates, to each customer class. This means that the City is obligated to fairly allocate refuse program costs to the three customer classes (residential, commercial, and drop-box services). The cost of service analysis includes classifying various expenditures to one of several types of costs:
• Collection System related costs
• Transfer Station related costs
• Disposal Related Costs
RATE DESIGN AND PROPOSAL TO NOT INCREASE RATES FY 2020/2021
The purpose of the rate design analysis is to determine how to collect rate revenue from the individual rates for specific services within each customer class. Accurately allocating these amounts of rate revenue improves the overall equity among customer classes. In FY 2019/2020, revenues were estimated at $ 15,658,850 but ended the Fiscal Year with revenues totaling $17,126,715. This is an additional revenue of $1,467,865. Due to the pandemic, revenue losses were imminent in FY 2020/2021 as shown previously in Table 1. Revenues in the last quarter of FY 2020/2021 are uncertain as a result of the economics associated with COVID -19 business closures.
The rate analysis model presented by SCS Engineers demonstrates the rate increases based on the aforementioned factors. The analysis model is a tool to forecast several rate options over five and ten years to meet all of our operational needs, comply with new and existing legislative requirements and meet and maintain the required 25% operational reserve.
The model shows that the City’s worst-case option would be to do nothing at all. If rates are not increased in FY 2021/2022, and if expenditures continue at the current pace, the Refuse Fund will be out of funds by June 30, 2022, including the reserve. This would cause the Utility to borrow money from the general fund in order to continue to provide waste management services to the community. Disposal and material processing costs are increasing in FY 2021/2022. New programs are mandated to be implemented by SB 1383 in January 2022.
As reflected in Table 2, the model also shows the fastest option to reach our operational goals including all funds needed for structural repairs, SB 1383 requirements and to reach and maintain the 25% reserve requirement. This increase in refuse rates is 35.87% in FY 2021/2022. No additional rate adjustments would be needed until the outer years beginning in FY 2026/2027. The rate model can calculate many other options. The model calculated another option that would include funding refuse operational requirements, adding new programs and reaching the 25% reserve over several years. The model sets the rate increases at 15% in FY 2021/2022, 10% in FY 2022/2023, 10% at FY 2023/2024, 2.25% in FY 2024/2025 and 2.25% in FY 2025/2026. The rate increase options are shown in Tables 3 and 4 below:
Table 2: Rate Increase Options to Meet Operations and Reserve Requirements
Table 3 provides the data to show the amount of the increase of the Option 2 rate increases on the existing rates for both residential and commercial collection. The rate shown is a monthly rate for one time per week collection based on container size
Table 3: Option 2 Rate Increase: Monthly Rate One Time Per Week Collection
Table 4 provides the data to show the amount of the increase of the Option 3 rate increases on the existing rates for both residential and commercial collection. The rate shown is a monthly rate for one time per week collection based on container size.
Table 4: Option 3 Rate Increase: Monthly Rate One Time Per Week Collection
The City also researched Refuse Rates on a monthly basis for cities that provide the similar type of service based on one time per week collection and container size. The rates are for FY 2019/2020 and/or FY 2020/2021 as many cities are conducting rate studies now in response to SB 1383. This comparison is shown in Table 5:
Table 5: Rates for Refuse Services Compared to Other Cities
EPO staff have provided these aforementioned options for consideration to enable a discussion for Refuse Fund Rate increases and provide further direction.
ATTACHMENTS
None.
MOTION
That the City Council:
1. Discuss Refuse Rate Increases; and,
2. Provide direction to the City Manager as Deemed Appropriate