Managing Tomorrow’s Resources Today
590 Ygnacio Valley Road, Suite 105 Robert D. Hilton, Emeritus Walnut Creek, California 94596 John W. Farnkopf, PE
Telephone: 925/977-6950 Laith B. Ezzet, CMC
www.hfh-consultants.com Richard J. Simonson
Marva M. Sheehan, CPA
Robert C. Hilton
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MEMORANDUM
Date: September 15, 2023
To: ‘Andra Lorenz, Principal Management Analyst, City of Foster City From: Rick Simonson, Senior Vice President, HF&H
Copy to: Megan A. Burke, Partner, Burke, Williams & Sorenson Subject: Proposed 2024 Solid Waste Rates
This technical memorandum reports the results of our analysis to update the City of Foster City’s (City’s) solid waste rates.
BACKGROUND
The City is a member of the South Bayside Waste Management Authority Joint Powers Authority (SBWMA). Under the SBWMA Joint Powers Authority Agreement, each member agency sets its own solid waste rates for residential and commercial customers. Each of the eleven SBWMA member agencies has a franchise agreement with Recology of San Mateo County (Recology) for residential and commercial solid waste, residential recycling, and residential green waste collections. The current franchise agreement runs from January 1, 2021, through December 31, 2035. Recology provides service to approximately 6,740 residential accounts and 415 commercial accounts in the City.
In addition, a contract w ith South Bay Industries (SBI) provides for operations at the Shoreway Environmental Center (SEC), which is owned the SBWMA. The Shoreway facility serves as a regional solid waste and recycling facility for the receipt, handling and transfer of refuse, rec yclable, and organic materials collected by Recology.
For the annual contractors’ compensation review process, staff reviews the various cost components attributable to its solid waste services, which in turn determines the revenue required from its customers for subsequent rate years. Each member of the SBWMA has specific rates that will apply to their respective service areas. The rates are then applied based on the garbage cart/bin size of the customer and frequency of collection services. All customers are billed by Recology for all solid waste costs.
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Rates are developed to cover costs for the following components:
• Recology's compensation to collect and deliver materials to the SEC. • Tipping (disposal and processing) fees at the SEC.
• City fees, including the franchise fee paid by Recology and street sweeping fees.
Annual Revenue Reconciliation/Balancing Account
Annually, revenues collected are compared to Recology’s SBWMA-approved compensation for services to the City. If actual revenues collected exceed the approved compensation, the excess revenue is held by Recology in a balancing account. When actual revenues collected are less than all solid waste costs (including Recology’s approved compensation), the City’s balancing account is decreased. As of December 31, 2022, the City has a positive balancing account with Recology of $629,035. The balancing account can go negative if sufficient revenues are not collected. However, any negative balance will accrue interest at the current prime interest rate plus one percent. At the expiration of the franchise agreement, the City will owe Reco logy if the balancing account is negative or Recology will owe the City if the balancing account is positive.
Study Purpose and Objectives
The purpose of this solid waste rate study is to conduct a comprehensive analysis of the City’s solid waste rates, in cluding documentation of the analysis, underlying assumptions, and the rationale for the recommended rates.
This study has several key objectives:
• Determine the revenue requirement (expenses) which the City’s solid waste rates need to cover , including Recology’s compensation, tipping fees at the SEC, and City fees, while maintaining an adequate balancing account balance with Recology;
• Determine the cost of service attributable to each customer based upon the type and size of container serving the account and the subscribed service level; and, • Conduct a preliminary analysis of the City’s franchise fees to determine the amounts the City is entitled to charge for its services and the use of its public right of ways.
These objectives are met by applying industry best practices and by complying with all applicable laws.
ANALYSIS
A spreadsheet model was developed to derive revenue requirements for the five-year period of calendar years (CY) 2024-2028. The revenue requirements represent the costs that must be cove red by revenue
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from rates and other sources. For this study, we have relied on Recology’s 2024 compensation application (which was audited by the SBWMA), the SBWMA’s estimate of 2024 tip fees for the processing of material at the SEC, and the City’s existing fees. With the assumption of inflationary increases, the five -year projection of the City’s revenue requirement is shown in Table 1.
Table 1. 5-Year Revenue Requirement Projections
Recology Collection Costs
Recology's collection costs are identified in their annual compensation report and were calculated in accordance with the Franchise Agreement with the City. Recology’s final 2024 compensation is scheduled for approval at the SBWMA’s September Board meeting. Recology’s costs were estimated to increase annually by 4% in 2025-2028.
Disposal and Processing Fees
Disposal and processing fees at the Shoreway Environmental Center for 2024 we re estimated by the SBWMA based on projected volumes collected within the City and the per-ton tip fees by material typeset by SBWMA . Like Recology’s collection costs, the SBWMA’s 2025 -2028 tipping fees are projected to increase by 4.0% each year.
City Expenses
City expenses are made up of the City’s street sweeping contract and franchise fees. In 2024, the City’s street sweeping contract is $131,000 and is anticipated to increase by 3.5% annually . Franchise fees are levied by the City on Recology pursuant to the Franchise Agreement. The franchise fee is an obligation of Recology’s, paid out of the total revenues received by Recology for services provided to residents and businesses.
Based on preliminary analysis, HF&H found the current franchise fees from now through the end of the rate period are less than the City is entitled to charge for its services and the use of its public right of ways.
Table 2 provides a summary of the cost of the services the City provides under the franchise agreement with Recology.
2024 2025 2026 2027 2028
R
ecology Collection Costs $4,480,793 $4,667,866 $4,854,581 $5,048,764 $5,250,715 Disposal & Processing Fees 2,856,803 2,971,075 3,089,918 3,213,514 3,342,055 City Expenses 497,880 517,532 537,555 558,356 579,964
Total Revenue Requirement $7,835,475 $8,156,473 $8,482,054 $8,820,634 $9,172,734
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Table 2. City Services Provided under the Franchise Agreement
In addition to the services provided by the City, HF&H analyzed a reasonable fee that the City could charge for the use of its public rights-of-way. On-street collection requires temporary placement of containers in the public right-of-way. The access to containers afforded to Recology personnel serves as a temporary encroachment to on-street parking.
Based on preliminary calculations, we have determined that the City could charge at least $380,000 for the use of public right of ways to place containers for the purpose of solid waste collection. This amount was determined by using the $180 per square foot land value in Foster City, calculated by the Commercial Linkage Fee Nexus Study, prepared by Economic & Planning Systems, Inc. in January 2022, and applying that land value to the square footage of public right of way used for solid waste containers throughout the City. Several additional assumptions were employed to calculate the rental value of the encroachment area of the solid waste containers placed in the right -of-way: 1) a rental realization rate value of 26; 2) weekly solid waste collection occurs once per week; 3) the encroachment area of the containers, including the mandatory 2 feet of spacing between containers specified by Recology, is 33.60 square feet; and 4) all 7,082 accounts have the authorization under the franchise agreement to place containers in the street for collection. The resulting public right of way rental value for solid waste containers was $380,000.
This calculation represents a very conservative estimate of the value of the City’s public right of ways. This area of the law is currently evolving, and as such, we recommend that the City revisit its fran chise fee calculations in five years to determine if a higher fee is warranted.
Collectively, the sum of the cost of services provided by the City is $404,585 and the reasonable fee for the use of public right of ways for container placement is $380,000, equaling a total minimum value of $784,723. The projected franchise fees range from $497,880 to $579,964 through the rate period. Thus, the City’s franchise fee is less than the total amount of justified fees throughout the rate period.
Revenue Projections
HF&H annualized 2023 revenues received through June to estimate annual revenues for 2024 at current rates. Tables 3 and 4 provide an overview of 2023 revenue projections and the projected revenue shortfall Services Provided Expense
Trash Capture/Street Sweeping $145,367
C
ontract Admin & Enforcement $205,200
Legal Support $20,000
Street Tree Trimming $4,354
Government Facility Allocation $29,664
Total $404,585
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if rates are not increased over the next five years. Collectively, the City faces a cumulative shortfall of more than $6.2 million through 2028.
Table 3. 2023 Annual Revenue Projections
Table 4. Projected Revenue Shortfalls 2024-2028
The projected 2024 shortfall of $600,498 would require a revenue increase of 8.3%. Instead of increasing existing rates by this figure, a phased approach is proposed to provide more gradual increases over the five-year period. Table 5 provides the recommended revenue increases and corresponding annual shortfalls that would be absorbed by the balancing account with Recology.
Table 5. Recommended Revenue Increases and Revised Shortfalls 2024-2028
Cost-of-Service Analysis
HF&H conducted a cost-of-service analysis by service level and customer. The analysis determined that the rates charged to commercial/multi-family customers and roll-off customers are currently sufficient to meet their cost of service. However, r esidential customers are not meeting their cost of service. As a result, increases to r esidential rates are recommended to reduce the revenue shortfall and to move residential rates towards alignment with the cost of service.
Customer Class
Revenue at
Current Rates
Residential $2,422,456
C
ommercial, Multi-Family $4,176,894
Roll-off $635,628
Total $7,234,978
2024 2025 2026 2027 2028
P
roj. Revenue at Current Rates $7,234,978 $7,234,978 $7,234,978 $7,234,978 $7,234,978 Net Revenue Requirement ($7,835,475) ($8,156,473) ($8,482,054) ($8,820,634) ($9,172,734) Surplus/(Shortfall) ($600,498) ($921,495) ($1,247,076) ($1,585,657) ($1,937,756) 2024 2025 2026 2027 2028
P
roposed Revenue Increase 6.0% 5.0% 5.0% 4.0% 4.0%
Revenue with Increase $7,669,076 $8,052,530 $8,455,156 $8,793,363 $9,145,097 Net Revenue Requirement ($7,835,475) ($8,156,473) ($8,482,054) ($8,820,634) ($9,172,734) Surplus/(Shortfall) ($166,399) ($103,943) ($26,898) ($27,272) ($27,636)
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RECOMMENDATION
Table 5 provides the recommended five-year schedule of rate increases to residential rates. The increases reduce the revenue shortfall that will be absorbed temporarily by the Recology balancing account and reduce the gap between current revenues and the cost of service.
Table 6. Recommended Residential Rate Increases 2024-2028
It is not recommended that rates for solid waste, recycling, or organics services to commercial/multi- family and roll-off customers be increased during 2024-2028.
Absent these necessary increases, the City will build a balancing account deficit that must be paid off by the end of the franchise agreement in 2035. We recommend the City increase rates, as indicated in Table 6, to avoid any balancing account deficit and the corresponding interest that would accrue.
Residential Bundled Service Current Rates 2024 Rates 2025 Rates 2026 Rates 2027 Rates 2028 Rates 20 Gallons $17.18 $22.58 $27.32 $32.30 $36.49 $40.84
32 Gallons $27.52 $32.92 $37.66 $42.64 $46.83 $51.18
64 Gallons $55.02 $60.42 $65.16 $70.14 $74.33 $78.68
96 Gallons $82.55 $87.95 $92.69 $97.67 $101.86 $106.21