To: HONORABLE MAYOR AND From: Carl W. Mosher

CITY COUNCIL

COUNCIL DISTRICT: City-Wide

SUBJECT: PUBLIC HEARING ON RECYCLE PLUS RATE INCREASES AND ADOPTION OF RESOLUTIONS REVISING RECYCLE PLUS RATES AND COMMERCIAL FRANCHISE FEES AND AB939 FEES EFFECTIVE JULY 1, 2003

RECOMMENDATION

It is recommended that the City Council:

1. Conduct a public hearing on proposed Fiscal Year 2003-04 Recycle Plus (RP) rate increases;

2. Adopt a resolution revising RP rates for services beginning July 1, 2003, and increasing single family and multi-family rates by 9%, as shown in the attached charts;

3. Adopt a resolution revising the Commercial Solid Waste Collection Franchise Fee for services performed on or after July 1, 2003, as follows:

a. For each uncompacted cubic yard collected, increase the Franchise Fee from $2.98 to $3.24 per cubic yard.

b. For each compacted cubic yard, increase the Franchise Fee from $8.94 to $9.72 per cubic yard.

c. Provide an exemption from the Franchise Fee for the first 21,600 cubic yards of un-compacted solid waste (or the equivalent of compacted solid waste) collected in any fiscal year (July 1-June 30).

4. Adopt a resolution amending the Schedule of Fees and Charges to revise the Commercial Solid Waste Source Reduction and Recycling (AB939) Fee effective July 1, 2003, as follows:

a. For each uncompacted cubic yard collected, decrease the fee from $0.86 to $0.60 per uncompacted cubic yard.

b. For each compacted cubic yard collected, decrease the fee from $2.58 to $1.80 per cubic yard.

BACKGROUND

Proposition 218 Public Notices were mailed on April 11, 2003, to over 205,000 residential property owners advising them of a proposed RP rate increase of 9% for both single-family (SFD) and multi-family (MFD) properties, effective July 1, 2003. Information included in each notice described the need for this rate increase and its impact on San Jose residents. As of Saturday, May 3 (Day 22 of the 45-day protest period), 448 letters of protest from property owners had been received by the City Clerk’s Office. The Clerk’s Office will report the final tally at the conclusion of the public hearing on May 27, 2003. In addition, the City’s Call Center and the Recycle Plus Customer Service Center have been receiving an average of three or four calls a day from residents inquiring about the rate increase. Further information is presented in the Analysis and Public Outreach sections of this memorandum.

The proposed 9% increase for single-family dwellings would amount to an increase of $1.40 per month for the standard 32-gallon garbage cart. The proposed rate of $16.80 per month for 32-gallon service is still well below the countywide average of $18.39. This rate increase is designed to bring the SFD and MFD garbage and recycling programs closer to cost recovery in order to reduce reliance on other funding sources and is consistent with Council policy that programs be self-supporting whenever possible.

As stated in the FY 2002-03 Adopted Budget, an additional benefit of achieving cost recovery in the Recycle Plus program is that it will allow the continuation of a gradual reduction in the Commercial AB939 Fee going to the Integrated Waste Management (IWM) Fund over a three-year period, with a commensurate increase to Commercial Solid Waste Franchise Fees going to the General Fund, with no increase in the total solid waste fee load on businesses. The fee shift proposed for FY 2003-04 is the second phase of a three-year plan to increase revenues to the General Fund. This fee shift is contingent upon the approval of the Recycle Plus rate increases.

ANALYSIS

Recycle Plus

The new Recycle Plus service contracts implemented July 1, 2002, narrowed the cost recovery gap that had been growing under the old contracts where increasing costs far outpaced revenues in the IWM Fund. The cost avoidance gained with the new contracts allowed a brief deferral of immediate rate increases in 2002, and very modest increases in February 2003. However, recent analyses of the current economic climate and the City’s own budget shortfall crisis now indicate that greater rate increases than those previously projected will be required.

The continuing economic downturn has caused a decline in both waste generation and disposal, which has resulted in lower than anticipated solid waste fee revenues to both the General Fund and the IWM Fund. A variety of solutions are being proposed in this year’s budget process to reduce costs in order to offset these revenue losses, bring the garbage and recycling programs closer to cost recovery, and also contribute to the General Fund to the extent possible:

General Fund Assistance

· Increased Commercial Franchise Fees. A key component in the RP rate strategy is the restructuring of commercial solid waste revenues from the IWM Fund to the General Fund. The proposed revenue shift represents the second phase of a three-year plan to reduce by 50% the amount of Commercial AB939 Fee revenue going to the IWM Fund, with a commensurate increase in Commercial Franchise Fee revenue to the General Fund. The initial revenue shift was approved by Council on October 8, 2002, and if the remaining planned shifts are approved by Council, it is projected there will be additional annual General Fund revenues of $1.3 million by FY 2005-06. With this loss of revenue to the IWM Fund, it is critical that the Recycle Plus Program become self-supporting. Further details on the proposed fee shift can be found in the Commercial Solid Waste Collection Fee section of this memorandum.

· LIRA. The General Fund has historically subsidized the RP Low Income Rate Assistance (LIRA) Program. The funding mechanism for this program has been re-evaluated, and a proposal has been submitted with the FY 2003-04 Proposed Budget to transfer the cost of the estimated $450,000 in lost revenue to the IWM Fund. This will relieve the General Fund and allow the continuation of this important program for low-income residents.

· Neighborhood Cleanup Costs. Miscellaneous Neighborhood Cleanup costs in the amount of $57,228 previously paid from the General Fund are proposed to be transferred to the IWM Fund when Council considers the FY 2003-04 Proposed Budget in June.

Recycle Plus Program Changes and Cost Reductions

· Reduced Street Sweeping Frequency. In an effort to improve the effectiveness of the residential street sweeping program and to realize significant cost savings in both the IWM and Storm Sewer Operating Funds, residential street sweeping frequency is proposed to be reduced from twice monthly to once monthly when Council considers the FY 2003-04 Proposed Budget in June. Concurrently, the Department of Transportation (DOT) is proposing an expanded parking enforcement and outreach program to improve street sweeping effectiveness and mitigate the decrease in street cleanliness. An increase in the number of enforced curb-miles (forty added miles in FY 2003-04) would allow for more effective residential street sweeping service in targeted areas to maximize the effectiveness of a single street sweep. Additional enforced street sweeping miles will be added over the next five years. Ongoing savings in the IWM Fund ($222,000) would be generated as a result of this action beginning FY 2004-05.

· Large Item Program Restructuring. In accordance with a State law implemented by the California Department of Toxic Substance Control, cathode ray tubes (CRTs), including televisions and computer monitors, can no longer be disposed of in landfills. To address the costs of responsible recycling, it is recommended that the RP Large Item program be restructured to offer collection of either one TV set or computer monitor with peripherals, or three regular large items at the Large Item rate of $21.25. This rate was set in accordance with the 9% rate increase guideline notification to the public and will ensure that the special handling costs associated with CRTs are passed only to the users of the service. The average cost that a resident would have to pay to drop off a CRT at area landfills is $30-$35. The City’s lower cost of $21.25 will make proper disposal easier for residents and will help ensure responsible recycling of these materials.

· MFD Yard Trimmings Cart Subscription Option. In response to requests from property managers at multi-family dwellings, staff recommends adding an optional service for MFD yard trimmings cart collection with a corresponding rate of $7.50 per cart per month. This rate is calculated to be at cost recovery based on the contract rates for cart collection in the existing Recycle Plus yard trimmings contracts. The cart option is a premium service that would allow properties to have yard trimmings collected in instances where on-street collection is impossible (congested areas, private streets), or when the management simply desires containerized collection. Managers would determine the number of carts needed for the entire complex for the most efficient collection service.

Rate Comparisons

San Jose’s monthly service rates rank among the lowest in Santa Clara County. The attached survey of Santa Clara County cities, undertaken in April 2003, shows that even with a 9% rate increase, San Jose’s proposed single-family rate of $16.80 for 32-gallon garbage service will still be well below the countywide average of $18.39 per month. Similarly, even with a 9% increase in multi-family rates, the proposed rate for a 3-cubic yard bin serviced once per week (one of the most common multi-family service levels) will be $138.23, far lower than the countywide average of $197.56 per month, based on an April 2003 survey prepared by the City of Santa Clara.

Recycle Plus Cost Recovery Projections

SFD and MFD revenues and expenditures are tracked separately to ensure that ratepayers are charged only for the services they receive. The tables below highlight projected cost recovery rates for each of the two programs through FY 2007-08. Program totals are for the Residential program only and do not include Commercial revenue streams or expenses, encumbrance reserve balances or contingency reserve levels. Fund balance and contingency reserve requirements are included in cost recovery out-year calculations.

TABLE #1

SFD Revenue, Expenditure, Fund Balance and Cost Recovery Projections

FY 2003-04 through 2007-08

	2002-03 Estimate	2003-04 Proposed	2004-05 Forecast	2005-06 Forecast	2006-07 Forecast	2007-08 Forecast
Proposed SFD Rate Increases	N/A	9%	9%	0%	3%	3%
Total Revenue	44,302,000	50,406,000	54,912,000	55,157,000	56,909,000	58,703,000
Total Operating Expenditures	48,945,000	50,606,000	52,799,000	54,141,000	55,899,000	57,736,000
SFD Fund Balance + Contingency Reserve	(4,643,000)	(200,000)	2,113,000	1,016,000	1,010,000	967,000
Cost Recovery	91%	100%	*100%	*100%	*100%	*100%
Balance Without Proposed Increases	(4,643,000)	(4,147,000)	(6,196,000)	(7,356,000)	(8,936,000)	(10,614,000)
Cost Recovery Without Increases	91%	92%	88%	86%	84%	82%

* Cost recovery rates shown include funding for required contingency reserves.

TABLE #2

MFD Revenue, Expenditure, Fund Balance and Cost Recovery Projections

FY 2003-04 through 2007-08

	2002-03 Estimate	2003-04 Proposed	2004-05 Forecast	2005-06 Forecast	2006-07 Forecast	2007-08 Forecast
Proposed MFD Rate Increases	N/A	9%	9%	0%	3%	3%
Total Revenue	13,629,000	15,267,000	16,814,000	17,016,000	17,717,000	18,445,000
Total Operating Expenditures	15,541,000	15,683,000	16,002,000	16,418,000	17,030,000	17,668,000
MFD Fund Balance + Contingency Reserve	(1,912)	(416,000)	812,000	598,000	687,000	777,000
Cost Recovery	88%	97%	*100%	*100%	*100%	*100%
Balance Without Proposed Increases	(1,912)	(1,698,000)	(1,905,000)	(2,163,000)	(2,617,000)	(3,096,000)
Cost Recovery Without Increases	88%	89%	88%	87%	85%	82%

* Cost recovery rates shown include funding for required contingency reserves.

Fund Balance Projections

The chart below shows revenue, expenditure and fund balance projections for FY 2000-01 through FY 2007-08, which include the rate increases proposed in the two-year public hearing notice, as well as new out-year projections. This chart reflects a revision of the 5-Year Rate Strategy previously approved by the City Council in the FY 2002-03 Adopted Budget. The rates shown in the out-years (FY 2005-06 through 2007-08) represent current estimates of the rate increases that will be needed to maintain a fund balance of approximately $3.5 to $4 million.

CHART #1

	2000-01 Actual	2001-02 Actual	2002-03 Estimate	2003-04 Proposed	2004-05 Forecast	2005-06 Forecast	2006-07 Forecast	2007-08 Forecast
SFD/MFD Rate Increases	0%	0%	3%/4%	9%	9%	0%	3%	3%
Total Revenue	63,800,000	64,800,000	62,700,000	68,900,000	74,900,000	75,000,000	77,500,000	80,000,000
Total Operating Expenditures	65,000,000	68,700,000	68,800,000	70,500,000	73,200,000	75,000,000	77,500,000	80,000,000
Unrestricted Fund Balance + Contingency Reserve	14,074,000	8,949,000	4,032,000	2,456,000	4,042,000	4,107,000	4,188,000	4,241,000

Commercial Solid Waste Collection Fees

City fees for commercial solid waste collection include Commercial Franchise Fees and Commercial AB939 Fees. These combined fees will continue to be set at $3.84 per cubic yard for FY 2003-04. The proposed changes in the fees maintain the $3.84 per cubic yard total fee load, but $0.26 will shift from the AB939 Fee to the Franchise Fee.

For FY 2003-04, it is proposed that the Franchise Fee portion increase from $2.98 to $3.24 per cubic yard, an increase of 8.7%. Currently, the first 23,400 cubic yards of material collected in a fiscal year are excluded from the Franchise Fee. It is proposed that there be a corresponding decrease in the cubic yard exemption from 23,400 cubic yards to 21,600 cubic yards. This change in the Franchise Fee cubic yard exemption maintains the historic $70,000 exemption for each hauler. This exemption is an economic incentive to level the playing field for small haulers who compete with the larger haulers in the City, which in turn helps to maintain competitive pricing for services in the commercial sector.

It is proposed that the AB939 Fee portion decrease accordingly from $0.86 to $0.60 per cubic yard, a decrease of 30%. The AB939 Fee is paid to the IWM Fund.

As noted in the following chart, approval of this recommendation represents the second phase of the planned reduction in the Commercial AB939 Fee, with a commensurate increase in the Commercial Franchise Fee. The chart also shows the results of the decline in waste generation brought about by the continuing downturn in the economy. The fee shift is intended to minimize the decrease in revenue to the General Fund as a result of the economic downturn and increased diversion. The proposed change does not increase the total fees currently paid by the commercial sector.

CHART #2