Item No. 1
Town of Atherton
CITY COUNCIL STAFF REPORT – STUDY SESSION
TO: HONORABLE MAYOR AND CITY COUNCIL
FROM: GEORGE RODERICKS, CITY MANAGER
DATE: NOVEMBER 6, 2024
SUBJECT: REVIEW AND DISCUSSION OF CONTRACTUAL REFUSE RATE ADJUSTMENTS FOR JANUARY 2025 AND THE POTENTIAL USE
OF THE RATE STABILIZATION FUND OR FRANCHISE FEE TO
OFFSET THE INCREASE
RECOMMENDATION
It is recommended that the Council review and discuss the pending contractual rate adjustment from Greenwaste Recovery for January 2025 and the potential use of the Rate Stabilization Fund or Franchise Fee to offset the increase.
BACKGROUND
Greenwaste Recovery (GWR) holds a franchise with the Town for the collection and processing of waste, mixed compostable materials, recyclable materials and yard trimmings. Section 13.2 of the Franchise Agreement specifies the Annual Adjustments to the Franchisee’s Compensation which translates directly to increases in rates charged by GWR to resident.
Per the Franchise Agreement, the following table reflects the agreed upon adjustments:
Contract Year Adjustment
January 1, 2022 4% (CPI Inclusive)
January 1, 2023 4% (CPI Inclusive)
January 1, 2024 11% (CPI Inclusive)
January 1, 2025 11% (CPI Inclusive)
January 1, 2026 11% (CPI Inclusive)
January 1, 2027 8% (CPI Inclusive)
January 1, 2028 3% + CPI-U
January 1, 2029 and thereafter CPI-U
The larger adjustments were in part to account for the Town’s exit costs from the South Bay Waste Management Authority (SBWMA). When the Town exited the SBWMA, the Town was required to reimburse the SBWMA for sunk capital costs as a member of the SBWMA. At the time, the Discussion of Refuse Franchise Fee and Rate Adjustments NOVEMBER 6, 2024
Town had a Rate Stabilization Fund that was used to offset rate costs to residents and was used to true up costs for service from Recology. The Town used its Rate Stabilization Fund to pay its exit costs. However, the Rate Stabilization Fund was not sufficient to pay off the entirety of its exit costs and the Town used General Funds to cover the difference. The Franchise Agreement with GWR stipulated that GWR would reimburse the Town $585,000 for the exit fee difference. GWR remitted this amount in total to the Town by January 1, 2022. In addition, GWR was required to reimburse the Town for its costs related to franchise negotiations in the amount of $175,000. These costs were distributed over the life of the contract. All of these funds have been remitted to the Town and replenished the Town’s Rate Stabilization Fund. The current balance in the Fund is approximately $537,000.
Since beginning the Franchise with GWR, the Town has continued to use the Rate Stabilization Fund to offset annual adjustments. For example, the table below reflects how the Rate Stabilization Fund works with a normal monthly billing from GWR.
1 Monthly Gross Billings $354,838.06
2 Monthly Compensation to GWR $319,305.20
3 Net (Line 1 minus Line 2) $35,532.86
4 Revenue Due Town
5 Franchise Fees Due Town (10%) on Gross Billings $35,483.81 6 AB 939 Administrative Fee $1,309.41
7 Street Sweeping Monthly Fee $2,244.70
8 Total $39,037.92
9 Net (Line 3 minus Line 8) ($3,505.06)
If line 9 is a positive number, GWR collected more revenues via its monthly rates than necessary to meet its monthly required compensation and required remittances to the Town. If line 9 is a negative number, GWR did not collect sufficient revenues via its monthly rates and GWR owes the Town additional revenues to meet the required obligations. In this case, the Town uses the Rate Stabilization Fund to subsidize this difference and transfers the amount shown in line 9 from the Rate Stabilization Fund to the Town’s General Fund as a revenue. All the Revenues shown above due to the Town are considered General Fund revenues and over the course of a year total approximately $420,000. The Town used its Rate Stabilization Fund in a similar manner under its contract with Recology.
A fundamental requirement is that the rates charged to ratepayers cannot exceed the cost to provide the service. The contractual adjustments impact rates paid by ratepayers. Rates are adjusted based on the contractual increase to franchisee compensation. This does not trigger a Proposition 218 process. However, if the Town were to adjust rates outside of the contractual obligation in order to bring those rates closer to full cost recovery (i.e. to make up the difference in line 9 above), the adjustments cannot exceed actual costs and a Proposition 218 process must be followed for the adjustment.
The Proposition 218 process involves a formal public notice mailed to all residents/ratepayers 45 days in advance of a public hearing at which the Council would adopt the rates. The notice must Discussion of Refuse Franchise Fee and Rate Adjustments NOVEMBER 6, 2024
include the details with respect to the proposed increase. At the public hearing, members of the public are allowed to provide testimony about the proposed rates. Additionally, property owners and customers with accounts are allowed to submit written protests against the proposed rate increase. If written protests are submitted on behalf of a majority of the subject parcels, the Town is prohibited from adopting the new or increased rates.
A Franchise Fee is a remittance from a franchisee to the Town for the right to operate a franchise.
The Town is authorized to charge a franchise fee to GWR in part for the right to operate as a franchise for refuse collection but also to allow for use and operation by the franchisee on the Town’s streets and rights of way. The amount the Town can collect is limited under State law and court interpretation. Franchise fees are typically between 10% and 12%. The Town’s Franchise Fee is 10%. The Town’s Franchise Fee is considered General Fund revenue and is used by the Town as part of its general operational revenues to maintain Town operations, which includes street and right of way maintenance. As noted above, the Town’s annual Franchise Fee revenue totals approximately $420,000.
ANALYSIS
GWR provided the Town with their annual Rate Adjustment Letter (Attachment 1). The Letter noted the intent to adjust compensation by 11% (reflecting a corresponding increase in rates) on January 1, 2025.
The Town’s City Council Refuse Subcommittee and GWR have been exploring ways to offset that increase to ratepayers. Several options have evolved from those discussions.
Option 1 – Use All or a Portion of the Town’s Rate Stabilization Fund The Town could use the Town’s Rate Stabilization Fund to artificially offset the rate adjustment by remitting a portion of the required increase to GWR directly. This could amount to a payment to GWR of a portion of or all the Town’s Rate Stabilization Fund immediately or over time.
GWR’s required compensation would increase by the 11% (line 2 of the table), but gross billings would increase less (line 1 of the table). The difference in line 9 would end up as a positive number requiring the Town to subsidize the adjustment using the Rate Stabilization Fund with a payment to GWR. Over time and future compensation adjustments, the gap would increase. Eventually, and upon depletion of the Rate Stabilization Fund, the Town would be required to adjust rates to make up the difference or begin subsidizing costs from the General Fund.
Option 2 – Offset the Adjustment by Reducing the required Franchise Fee The Town’s Franchise Fee (10%) is called out in Section 12.5.1 of the Franchise Agreement. The Town receives approximately $420,000 per year in Franchise Fee. Reducing the Town’s Franchise Fee is a contract amendment that can be processed by the City Council at a public meeting. A reduction in the Town’s Franchise Fee would not necessarily trigger a Proposition 218 process (notice, protest hearing, etc.). However, increasing the fee later may require that the Town go through the required Proposition 218 process.
Discussion of Refuse Franchise Fee and Rate Adjustments NOVEMBER 6, 2024
Reducing the Franchise Fee reduces the required remittances from GWR to the Town. Reducing the Franchise Fee would reduce the required gross billings (line 1 of the table). A reduction in the Franchise Fee percentage would represent a loss of General Fund revenue. Each percentage reduction would represent approximately $40,000 (round numbers).
Option 3 – Offset the Adjustment by a Combination of Franchise Fee Reduction and Bin Cost Increase to move toward Full Cost Recovery
As the Council is aware, the Town cannot charge more than the cost of service. Basic bin rates should be set at cost recovery and cannot be set arbitrarily higher to subsidize the lower cost of excess bins. Currently, the Town is subsidizing the cost of excess bins through lower overall contract revenue (line 9).
This option involves an analysis by GWR of the cost recovery of certain excess bins obtained by residents and adjusting the cost of those bins to a cost that is closer to full cost recovery. The assumption here is that GWR is not charging full cost recovery for these excess bins and that by raising the cost to full cost recovery there would be additional revenue to GWR (offset by their cost of service). That additional revenue could offset some of the contractual adjustment of 11% reducing the necessary adjustment to a lower percentage. The Town would then offset an amount of the remainder using the Franchise Fee.
Part of the 11% adjustment is related to cost increase to provide basic service (incorporated cost of service increase). GWR has provided an analysis of the potential increase to full cost recovery, the impact on the 11% contractual adjustment requirement, and the increase amount remaining.
This is (or will be) included as Attachment 2.
Summary Recommendations
At the time of the publication of this Staff Report, the Standing Subcommittee had not had the opportunity to meet and discuss a recommendation. Further, Attachment 2 had not yet been provided by GWR. Staff will attempt to setup a meeting with the members of the Subcommittee early next week and may repost this Staff Report with updated information.
FISCAL IMPACT
None at this time. The Fiscal Impact of any adjustments to the Franchise Fee were discussed in the body of this Report. The potential impact of the use of the entirety of the Rate Stablization Fund was also discussed.
GOAL ALIGNMENT
This Report and its contents are in alignment with the following Council Policy Goals:
• Goal Area F – Be Forward-Thinking, Well-Managed, and Well-Planned Discussion of Refuse Franchise Fee and Rate Adjustments NOVEMBER 6, 2024
• Goal Area A – Maintain Fiscal Responsibility
POLICY FOCUS
The Policy Focus for Council discussion is the policy and financial implications of the use of the Franchise Fee and Rate Stablization Fund as well as the community impact of contractual rate adjustments.
PUBLIC NOTICE
Public notification was achieved by posting the agenda, with this agenda item being listed, at least 72 hours prior to the meeting in print and electronically. Information about the project is also disseminated via the Town’s electronic News Flash and Atherton Online. There are approximately 1,200 subscribers to the Town’s electronic News Flash publications. Subscribers include residents as well as stakeholders –to include, but be not limited to, media outlets, school districts, Menlo Park Fire Protection District, service provides (water, power, and sewer), and regional elected officials.
COMMISSION/COMMITTEE FEEDBACK/REFERRAL
This item has not been before a Town Committee or Commission
ATTACHMENTS
1. 2025 Rate Adjustment Letter – Greenwaste Recovery
2. Greenwaste Recovery Discussion of Rate Adjustment Offsets