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CITY COUNCIL AGENDA ITEM NO. 15

Meeting Date: March 9, 2004

Subject/Title: Consideration of a Resolution amending the Master Fee Schedule for the Solid Waste Enterprise Rates for Fiscal Years 2005-2009 and accepting the Solid Waste Rate Study as prepared by R.W. Beck dated March 1, 2004.

Prepared by: Jon Carlson, Solid Waste Manager

Submitted by: Paul Zolfarelli, Director of Public Works / Pam Ehler, Director of Finance & Information Systems

RECOMMENDATION
Consideration of a Resolution amending the Master Fee Schedule for the Solid Waste Enterprise Rates for Fiscal Years 2005-2009 and accepting the Solid Waste Rate Study as prepared by R.W. Beck dated March 1, 2004. New rate schedule to be effective July 1, 2004.

PREVIOUS ACTION
Council approved Resolution No. 2551 on May 28, 2002 authorizing the City Manager to execute an agreement with R.W. Beck for conducting a collection efficiency study, a rate study and a master plan for the Solid Waste Division.

BACKGROUND
The City has been operating the solid waste collection service for nearly ten (10) years. Initially, to get the operation off the ground, all new trucks were purchased, along with new carts and bins for the customers. In 1998, the City built a small volume transfer station to ensure the operation’s efficiency.

The transfer station has made a significant contribution to reducing our trucking costs. It allows us to consolidate up to four (4) collection truck loads into one (1) transfer trailer. This operational savings has helped the City keep rates stable for the last ten (10) years.

When the facility was built in 1998, it was designed to handle up to 200 tons per day. At the time the City was handling about 50 tons per day. The City now handles up to 120 tons per day and within five (5) years the City could be at the maximum daily throughput. With the City’s ultimate build-out estimate (70,000 residents by 2020), staff projects our facility will eventually process over 300 tons per day.

Due to the continued growth of the City, staff recommends the Solid Waste Enterprise build a larger, permanent transfer facility - one that could meet the City’s needs through its ultimate build-out of 70,000 residents and that could eventually handle some direct public drop-off.

With the current operation’s small footprint of land, staff feels now is the best time to coordinate the construction of a new transfer station on-site, while simultaneously operating the existing transfer station. Logistically it makes sense to begin construction before the work load is too great at this site. Financially, if the City can avoid closing the site to our trucks while under construction for up to a year, it can benefit from not having to direct haul our trucks to another facility and pay increased payroll and trucking costs.

This issue necessitated staff to examine the rate structure needed to fund a new facility in the coming fiscal years.

DISCUSSION
Rate studies are critical to ensure that proper funds are collected to operate the various City of Brentwood enterprises. In 1994, staff utilized much of the rate structure the previous hauler employed to develop the City’s rate structure. Overall, the rate structure covered the required expenses sufficiently for 10 years without the need for an increase. The current rate structure generates enough revenue to cover its core operational expenses such as new equipment, personnel, disposal costs etc. while fully funding its vehicle replacement program. Our solid waste operating reserve is currently at approximately 10% of our operating budget. Our City’s required target cash reserve is 30%. Therefore, our rates currently do not generate sufficient cash to meet our required 30% target reserves or to make substantive capital improvements to our transfer station.

City staff contracted with R.W. Beck for a comprehensive assessment of our Solid Waste Enterprise. Included in this assessment was an analysis of our operation’s efficiency, along with conceptual drawings and cost estimates of a new facility and finally, preparation of a rate study to examine revenue requirements for five (5) fiscal years that would be required to cover a new facility.

In R.W. Beck’s final analysis, they concluded that we would need a new facility to keep up with the anticipated growth. We were provided with conceptual drawings and cost estimates. They estimated $4.8 million would be required to build a new facility that could process the City’s ultimate build-out figures (estimated at approximately 300 tons per day) and provide for public drop-off.

The proposed facility includes construction of new, full-grade separation loading pits to increase loading efficiency. Average loading times would be reduced from thirty (30) minutes to five (5) minutes. The building itself would be constructed with concrete floors and loading bays and would be covered to minimize litter migration. Our current uncovered facility’s asphalt pad requires regular patching. The open design unnecessarily exposes the materials to wind and rain, exacerbating the litter migration while increasing the processing costs.

Public Works and Finance staff has reviewed the final analysis from R.W. Beck. Their analysis has determined percentage increases as follows and will be necessary to generate adequate funding for a transfer station improvement project.

4% in FY 2004/05
3% in FY 2005/06
3% in FY 2006/07
3% in FY 2007/08
2% in FY 2008/09

The Solid Waste Enterprise residential and commercial rates for Fiscal Year 2004/05 are as follows:


Furthermore, with the intent of reaching our required 30% reserve, staff is recommending Council authorize rate increases of an additional 0.5% each fiscal year beginning in Fiscal Year 2009/10 and continuing until the 30% reserve requirement is met.

Below is a comparison of our current rates and projected rates for Fiscal Year 2004/05 with the current rates of the three other Contra Costa County solid waste hauling operations. City of Brentwood rates remain extremely competitive as compared to the other companies. Our rates are structured in a variable rate format to encourage the use of our recycling/yard waste carts. This method, now widely used throughout the state, discourages high volume refuse service levels and encourages, through lower rates, diversion of material from the landfills with the use of the recycling programs.

Not all haulers utilize a variable rate structure to encourage use of their recycling programs. Additionally, many companies only provide their customers with only 14-gallon crates for recycling. The City of Brentwood offers up to two (2) 95-gallon carts for recycling.

Our subscription levels, shown on the first row of Table 1 below, reflect the effectiveness of our rate structure, as do our recycling rates. Our latest recycling rate as reported to the State of California for the year 2002, demonstrates a 62% recycling rate. The statewide average is approximately 42% and the goal is 50%. A full comparison of both residential and commercial rates of some standard sized containers can be found on Attachment B.

TABLE 1
RESIDENTIAL RATE COMPARISON

Hauler Cart Size
32 gallon 64 gallon 96 gallon
City of Brentwood
Estimated Percentage of Customers 60% 30% 10%
CURRENT RATE FY 2003/04 $ 19.32 $ 28.72 $ 34.47
PROPOSED RATE-FY 2004/05 $ 20.09 $ 29.87 $ 35.85

Garaventa Enterprises(1)-2003 (average of areas below)
CURRENT RATE FY 2003/04 $ 22.64 N/A $ 25.64

Allied Waste Systems(2)-2003(average of areas below)
CURRENT RATE FY 2003/04 $ 21.27 $ 29.20 $ 42.29

Republic Services(3)-2003 (average of areas below)
CURRENT RATE FY 2003/04 $ 22.57 $ 43.09 $ 63.62

TOTAL AVERAGE OF ALL AREAS - 2003 $ 22.16 $ 36.15 $ 43.85
(1) Garaventa Enterprises service areas surveyed include: Unincorporated Brentwood, Oakley, Discovery Bay, Byron and Pittsburg
(2) Allied Waste Systems service areas surveyed include: Antioch, Pleasant Hill, Martinez, Walnut Creek and Orinda
(3) Republic Services service areas surveyed include: Richmond, Pinole, El Sobrante, Tara Hills and North Richmond


Attachment A1 contains R.W. Beck’s Financial Planning Model for the five (5) year starting in Fiscal Year 2004/05 to Fiscal Year 2008/09.

Attachment A2 contains all the detailed assumptions and estimates used in developing the Financial Planning Model on Attachment A1.

The majority of the adjustments to the Fee Schedule were made on the percentage discussed. Staff has been aware of some additional fees that need to be added, as well as some miscellaneous fees that need to be amended to address various issues not foreseen 10 years ago. Since most of these changes affected such a small percentage of our overall customers, staff decided to wait until a requested rate increase to overhaul some of the items. These specific items are discussed below:

• Third Blue/Green Cart – Most companies limit recycling/yard waste containers to one (1) per customer. To promote aggressive recycling, we have always provided a second cart upon request, at no charge. We want to continue this practice, but when a 3rd cart is requested, staff feels this is well beyond what a typical single-family home would generate and might resemble the recycling levels generated by at-home businesses and thus should not receive more than 2 free carts, which is the limit we place on commercial businesses. We currently have less than 30 customers with three (3) blue carts. The cost would be $10/mth.

• Cart Exchanges – We would place a limit on the number of free cart exchanges a customer could receive. Currently, residents can swap their cart sizes, up or down, every few days, weeks or months if they choose, at no charge. Each time they get a clean, washed cart. If this practice is allowed to continue, it is too easy to circumvent the fee we charge for a cart wash. We recommend all new residents get one free cart exchange on each cart within the first year of service. Then, any additional exchanges will be charged to cover our costs to wash a cart, drive to the home, perform the exchange and place the cart back into inventory. We currently perform an average of 150 exchanges per month for no charge. The cost would be $26.22/cart.

• Front-load Compactor Service - This fee is not new, but we would like to formally adopt this rate. Front-load compactors did not exist in Brentwood ten (10) years ago. So when we began having customers purchase these compactor units, we exercised the clause “additional time/materials” to calculate our additional costs and charged accordingly. If a customer buys a compactor unit, one that can typically triple or quadruple the capacity of their container, we then have doubled our regular non-compacted rate. This covers our costs, while still giving the customer a cost savings. We currently have 5 customers with this service level. The cost would be twice (2x) the regular non-compacted rate.

• Roll-off Compactor Service – For roll-off service, a special handling fee will be charged on all compactor built with the door on the hook-up side of the unit. Many compactors are designed to be handled just like any other roll-off box. But some units, due to their design, require the unit to be dropped back down and re-hooked in order to dump the compactor. This process must then be completed again after it is dumped. This takes additional time to execute and should have a different per haul fee than regular roll-off boxes or compactors. We currently have about 4 customers with this service level. The cost would be the regular hauling fee plus $25.

• Commercial Carts – The current fee schedule has a skewed tiered structure. For example, 1-95 gallon cart, serviced 1x/week costs $40.73, but the cost for 2x/week is merely $47.00, only a 15% increase for twice the level of service! A schedule was developed to more accurately reflect the cost to provide on Commercial carts requiring 2 or 3 times per week service. We currently have about 6 customers with this service level.

• Apartment Carts – This rate schedule for multi-family dwelling units has unbalanced, or consistent tiers as well. For instance, the 64- and 95-gallon cart rates are 10-15% lower than the residential rates. But the 32-gallon rate is 14% higher than the comparable residential rate. Staff proposes we adjust the apartment schedule to be consistent with the standard residential rates. The service level matches single-family service in that we provide recycling and yard waste service at no additional charge. There are currently about 50 customers that subscribe to apartments rates.

• Frontload Bin Hard-to-Service – For commercial front-load bin customers with bins that must be consistently moved by more than one person due to their weight or uneven or poor rolling surface shall pay a 10% surcharge on top of their regular service charge. There are currently 10-15 customers that could be categorized as “hard-to-service”.

• Vacation Hold – For residential customers who would like to discontinue their collection service while they are on vacation, a fee would be charged to process their request. This is requested by 40-50 residents per year. This fee would be $30.

FISCAL IMPACT
This new rate structure will insure that revenues generated meet our needs by providing funding for the necessary improvements to our transfer station and to meet our required 30% cash reserve target. Failure to implement the proposed rate structure will have a negative impact on our solid waste operation. Ratepayers will be burdened with significant costs in future years that exceed the proposed rate adjustments.

Attachments:
• Attachment A1 – Solid Waste Division Financial Planning Model
• Attachment A2 – Financial Planning Model Assumptions and Projections
• Attachment B – Summary of Refuse Rates by Contra Costa County Haulers
• Resolution

Attachment A2 – Page 1 of 2

Solid Waste Division
Financial Planning Model
Assumptions and Projections

The projected revenue and expense amounts for 2005 have been adjusted from the 2005 budget amounts to reflect actual activity that has occurred since the preparation of the budget.

Revenue

1. Franchise fees in 2005 and 2006 will be $3,500 and eliminated in 2007. The City receives a royalty of 5% of revenue for approximately 150 customers, including 20 commercial customers that are not serviced by the City.
2. Investment income projections for 2005 through 2009 remain constant at $30,900 per year.
3. Late charges were estimated at $51,500 in 2005 and escalated at 5% per year beginning in 2006.
4. Reimbursement for services income for 2005 through 2009 remains constant at $6,000 per year.
5. Solid waste customer growth was estimated at 11.7% for 2005, 8.8% for 2006, 6.4% for 2007, 5.3% for 2008 and 3.9% for 2009.
6. Solid waste rate increases were estimated at 4% for 2005, 3% for 2006 through 2008, and 2% for 2009.
7. Application fees were estimated at $52,900 for 2005 and escalated at 7% for growth beginning in 2006.
8. Solid waste compost bins revenue will remain constant at $1,100 from 2005 through 2009.
9. Public disposal of cardboard revenue will remain constant at $30,000 from 2005 through 2009.
10. Dumpster income is estimated at $461,504 for 2005 and is escalated 12% for 2006 and 5% for 2007. Dumpster income remains flat for 2008 and 2009.

Expense

1. Personnel costs were estimated at $1,785,878 for 2005. Costs were projected to increase 18% in 2006, 10% in 2007, 14% in 2008 and 10% in 2009. Costs are increasing because of the planned addition of one new driver and one supervisor in 2005, and one new driver in 2006 and 2008. Costs also reflect the staffing of the transfer station on Saturday and Sunday beginning in 2006.
2. Equipment/vehicle maintenance cost is estimated at $121, 825 for 2005 and escalated at 5% per year beginning in 2006.

Attachment A2 – Page 2 of 2

3. Disposal costs are escalated to reflect the increased tonnage caused by the additional customers and by the financial terms of the contract that the City has with the landfill operator.
4. Interfund services or administrative costs are estimated to increase at 5% per year beginning in 2005.
5. Contractual services are estimated at $147,304 in 2005 and increasing to $240,144 in 2009.
6. Interest expense for existing debt declines from $36,907 in 2005 to $0 in 2008.
7. Supplies costs are estimated at $354,672 for 2005 and escalated at 3% beginning in 2006.
8. Depreciation is estimated at $31,548 in 2005, increasing to $60,952 in 2009.
9. Fleet maintenance internal service costs are estimated at $409,824 in 20005 and escalated at 7% beginning in 2006.
10. Vehicle maintenance internal service costs are estimated at $476,403 in 2005 and escalated at 7% beginning in 2007.
11. Information services and other internal service costs are both escalated at 3% beginning in 2006.
12. Initial debt service payments for the $4.8 million transfer station begin in 2006. Interest is estimated at 6% for 30 years.
13. Loan principal expense on existing debt is paid off in 2007.
14. New trucks costing $210,000 are purchased in 2005, 2006 and 2008.
15. Container purchases remain flat at $200,632 for the five years.
16. Funding of a facility reserve begins in 2005 at $50,000. In 2009, funding is at $100,000 per year.

RESOLUTION NO.

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BRENTWOOD AMENDING THE MASTER FEE SCHEDULE FOR THE SOLID WASTE ENTERPRISE RATES FOR FISCAL YEARS 2005-2009 AND ACCEPTING THE SOLID WASTE RATE STUDY AS PREPARED BY R.W. BECK DATED MARCH 1, 2004.

WHEREAS, the Solid Waste Enterprise Rate Study provides a financial vehicle to provide the City with dependable, fiscally responsible solid waste collection services; and

WHEREAS, a resolution of the City Council is required to modify the Fee Schedule for solid waste services; and

WHEREAS, the Solid Waste Enterprise Rate Study prepared by R.W. Beck proposes increases in the Fee Schedule to fund improvements to the City’s transfer station and to meet the City’s target cash reserves; and

WHEREAS, R.W. Beck’s analysis recommends increases of 4% in Fiscal Year 2004/05, 3% in Fiscal Year 2005/06, 3% in Fiscal Year 2006/07, 3% in Fiscal Year 2007/08 and 2% in Fiscal Year 2008/09, plus the miscellaneous adjustments noted in the staff report and reflected in the Fee Schedule; and

WHEREAS, the City has studied the proposed charge per parcel and has concluded that they do not exceed the reasonable cost of providing service and facilities to consumers and is proportionately representative of the costs incurred by the City. The charges reflect the burdens placed on the Solid Waste Enterprise by users and are not in excess of the benefits the users receive from the system; and

WHEREAS, with the intent of reaching a recommended 30% reserve, an additional 0.5% increase beginning in Fiscal Year 2009/10 and continuing until reserve recommendations are met.

NOW, THEREFORE, the City Council of the City of Brentwood does resolve as follows:

1. The City Council accepts the Study attached hereto as Exhibit A;

2. The City Council adopts the rate adjustments recommended in the Study for the years from Fiscal Year 2004/05 through Fiscal Year 2008/09;

3. The City Council adopts the Solid Waste Fee Schedule for Fiscal Year 2004/05 set forth in the study, which shall be effective and applied to all users July 1, 2004;

4. The City Council authorizes an annual automatic adjustment to the rates effective each July 1st based upon the most current San Francisco Consumer Price Indexes (CPI) for the preceding twelve (12) months;

5. The rates, as may be adjusted, shall be effective July 1, 2004 through and including the Fiscal Year 2008/09 unless otherwise modified by virtue of future Council action. If no such Council action occurs relative to the fiscal years following 2008/09 the rates then charged for the Fiscal Year 2008/09 shall continue to apply to subsequent fiscal years;

6. Until the July 1, 2004 effective date specified in Section 1 of this resolution, all solid waste fees as established under previous action by Council shall remain in full force and effect;

7. Notwithstanding any other provision hereof, in the event that any installment sale or purchase agreement, loan, bond or other indebtedness lawfully entered into by the City requires the City to increase the rates and charges to comply with any covenant regarding rates and charges for the City’s solid waste collection, the fees and charges herein provided for may be increased by this Council by resolution; and

8. All resolutions and ordinances, or portions thereof, in conflict herewith are hereby repealed. The City Clerk is directed to publish this resolution in any manner consistent with Government Code Section 36933.

9. The following rates shall apply for refuse collected within the City of Brentwood service area effective July 1, 2004:

PASSED, APPROVED AND ADOPTED by the City Council of the City of Brentwood at a regular meeting held on the 9th day of March, 2004 by the following vote:

Attachment:
• Exhibit A – Solid Waste Rate Study prepared by R.W. Beck

EXHIBIT A

March 1, 2004

Mr. Jon Carlson
Solid Waste Manager
City of Brentwood
2300 Elkins Way
Brentwood, CA 94513

Dear Jon:

R. W. Beck was retained by the City of Brentwood (City) to develop a spreadsheet based model that incorporates the anticipated capital projects, equipment replacement needs, and operating expenses of the Solid Waste Division over a five year planning period. In addition, revenues over the same five year period were to be forecasted and included in the model.

R. W. Beck was also retained to help develop proposed rates to cover any cash shortfall projected in the five year planning period.

Introduction
To provide for the continued operation of the Solid Waste utility on a sound financial basis, revenue must be sufficient to meet the cash requirements of operation and maintenance expenses, administrative and debt service expenses, and routine equipment replacements as well as any necessary non-operation expenses or capital costs. In addition, cash reserves should be sufficient to provide needed funds in the event of emergencies and fluctuations in revenue. The sum of these cost or expense components is referred to as a utility’s “revenue requirement.” Projections of the City’s revenues and revenue requirement for the study period, fiscal years 2005-2009, are described in the following paragraphs.

Methodology
There are two common methodologies used in determining the revenue requirement of a utility. The first method, the “cash-needs approach,” is based on the projected cash needs of a utility. The components analyzed include operations and maintenance expense, debt service expense, debt service reserves (where applicable) and cash-financed capital improvements. In this method, depreciation (as a non-cash item) is not included in the analysis. The second method, the “utility approach,” involves the calculation of a rate of return on the utility’s rate base or assets and includes depreciation as part of the analysis. For the most part, operations and maintenance expense under both methodologies are the same. Another method used by some utilities is a combination of the two above discussed approaches.

Most government-owned utilities use the cash-needs or combination approach in determining the revenue requirement. These approaches are used by government-owned utilities because they are not required to make a profit or earn a return on rate base, but are more concerned with having the necessary cash on hand to pay the expenses to operate the utility.


Key Assumptions
The following is a summary of the key assumptions used to develop the revenue and revenue requirement projections for the study period:
 The City will continue to experience rapid customer growth. Growth projections are 11.7% in 2005, 8.8% in 2006, 6.4% in 2007, 5.3% in 2008, and 3.9% in 2009.
 A targeted cash reserve goal that is equal to 30% of the Solid Waste Division’s total costs has been established but is not forecasted to be reached by the end of the study period.
 Rate increases will be needed to provide a positive cash flow for each of the forecasted years. The rate increases are projected at 4% in 2005, 3% in 2006 through 2008, and 2% in 2009.
 A $4.8 million transfer station will be built in 2006. The transfer station will be financed over a 30-year period.


Expense Projection - Operating Expenses
Projected operating expenses were based on an analysis of historical operating results, adopted FY 2004 budget, and discussions with City staff regarding expectations of future expenditure levels. Operating expenses are categorized into three categories. They are personnel services, supplies and services, and internal service costs. Salaries and disposal costs show the largest increases over the forecasted period. This is because of the rapid growth in the number of customers results in the need for additional solid waste drivers/employees. Also, the additional customers cause an increase in the amount of waste disposed, thereby causing increased payments to the landfill operator.

Capital Outlay
To meet the needs of the Division, the forecasted plan includes $3.8 million in capital outlay costs over the next five years. These costs include debt service on the planned transfer station, payments for existing debt, and purchases of new trucks and containers.

Revenue Projection
The utility’s main source of revenue is derived from monthly solid waste charges and fees. In 2009, solid waste charges and fees are projected to comprise 90% of the Division’s total revenue. The remaining revenue is forecasted to come from:
 Franchise Fees
 Investment Income
 Late Charges
 Reimbursement for Services
 Application Fees
 Compost Bins
 Public Disposal of Cardboard
 Dumpster Income

See Attachment A1, Financial Planning Model and Attachment A2, the Assumptions and Projections used in developing the Financial Planning Model for more detailed information.

Results
It is projected, based on the assumptions used in the Financial Planning Model, the City will need to increase its solid waste charges and fees from 2% to 4% over the next five years. These increases are needed to help fund the proposed transfer station and assist the City in establishing a cash reserve that is 30% of the costs to operate the Solid Waste Division. Since the actual results could differ from the projections, the City should, at a minimum, update the model on a yearly basis to ensure that the cash flow requirements of the Division are being met.
Thank you giving R. W. Beck the opportunity to work on this project. If you have any questions, please call me at (858) 485-4663.

Sincerely,

R. W. BECK, INC.

Greg Broeking
Management Consultant

C: Robert Craggs
 

City Administration
City of Brentwood City Council
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Brentwood, CA 94513
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Fax (925) 516-5441
E-mail allcouncil@brentwoodca.gov