TO:
Honorable Mayor and Members of the City Council
THROUGH:
Bruce Moe, City Manager
FROM:
Erick Lee, Public Works Director
Jeff Page, Utilities Manager
Anna Luke-Jones, Solid Waste Administrator
SUBJECT:Title
Discussion of Waste Management’s Requests for an Extraordinary Rate Increase and for Modifications to the Diversion Requirements Specified in the City’s Franchise Agreement for Integrated Solid Waste Management Services (Public Works Director Lee).
(Estimated Time: 30 Mins.)
DISCUSS AND PROVIDE DIRECTION
Body
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RECOMMENDATION:
Staff recommends that the City Council discuss Waste Management’s requests for an extraordinary rate increase and for modifications to the diversion requirements specified in the City’s franchise agreement for integrated solid waste management services.
FISCAL IMPLICATIONS:
There are no fiscal implications associated with the recommended action.
BACKGROUND:
The City has franchised its residential and commercial solid waste services with a private hauler since the early 1980s. The last Request for Proposal (RFP) process for solid waste hauler selection was awarded to Waste Management (WM). The franchise agreement is for seven fiscal years (FY) plus three one-year optional extension years, for a potential of 10 total years (July 1, 2020 through June 30, 2027 + optional FY28 + optional FY29 + optional FY30).
Proposition 218 and Extraordinary Increases
The Proposition 218 process governs a City’s ability to raise utility rates, including solid waste rates. The state of California requires that proposed solid waste rates and any rate adjustment methodology be approved through the Proposition 218 process, allowing voters 45 days to submit protests to proposed rate changes. A public hearing is held after the 45-day protest period where the City Clerk announces the number of protests and determines if there is a majority protest (50% + 1) to overturn the proposed rates. The City went through this solid waste rates Proposition 218 process with property owners and rate payers in spring 2020, with City Council adopting a resolution to approve the rate sheet from July 1, 2020 and the methodology for annual rate increases through FY24-25.
The Proposition 218 approval lasts for five (5) years. The City is currently in its fifth and final fiscal year of the approved solid waste Proposition 218 period. The resolution does not have any language permitting the Council or city staff to approve extraordinary rate adjustments. Thus, a Proposition 218 process would be required to pursue any extraordinary rate increase during this current five year period.
Staff has already been working on timelines and planning materials for the next Proposition 218 process, which will begin in early 2025. The 2025 process will include the rate sheets for FY25-26 and the methodology for annual rate increases through FY29-30 (if the optional extension years are exercised by the City).
Liquidated Damages for Diversion
The City assessed WM with liquidated damages for missed diversion rates required by Section 3.8.1 of the agreement for calendar years 2021 and 2022. The calendar year 2023 diversion rate is currently being reviewed by the City and verified by HF&H Consultants as part of a biennial audit. In 2021, WM achieved 43% of the 50% requirement and was assessed $53,000. In 2022, WM achieved 45% of the 50% requirement and was assessed $36,177.
On July 15, 2024, WM sent a request for the City Council to consider an extraordinary rate increase and consider solutions to its ongoing diversion challenges. At that time, WM’s request for an extraordinary rate increase had previously been denied by the City Manager, and staff was working to schedule a meet and confer sessions with WM-in accordance with the agreement-to address their diversion request.
On August 6, 2024, the City Council requested that this item be placed on the agenda for discussion.
DISCUSSION:
WM submitted their annual rate adjustment request letter on March 22, 2024 (attached). The request included an extraordinary rate adjustment for unforeseen wage increases as well as new rates for organics and roll-off collection. The City responded in a letter dated June 26, 2024 (attached), denying the extraordinary rate adjustment request per Section 5.5 of the agreement because the agreement specifically precludes adjustments for “changes in wage rates or employee benefits.” The letter also addressed the reasons for not adding requested new rates for organics and roll-off collection. WM also requested modifications to the diversion rate required in the franchise agreement, decreasing its obligations for diversion. A meet and confer is scheduled for August 27, 2024 to begin discussions on the diversion request.
WM submitted a letter to the City Council on July 15, 2024 (attached) requesting the City Council’s consideration to approve an extraordinary rate adjustment for a significant and unforeseen wage increase and discuss ongoing diversion issues. Below is a summary of the rate adjustments and diversion achievement rates that have occurred since the beginning of the current agreement.
Rate Adjustments
The franchise agreement requires that the hauler submit a request for the annual rate adjustment at least 90 days before the first date of the next contract year. Under the agreement, the rate adjustment is based on the percentage change to the Consumer Price Index (CPI) for Trash and Garbage Collection (CUUR0000SEHG02), U.S. City average, as published by the United States Department of Labor, Bureau of Labor Statistics.
To comply with this, WM submits their rate adjustment letters each March for the following fiscal year. Staff reviews the rate adjustment calculations, and HF&H Consultants, LLC is also utilized to review the calculations. The City’s response typically is sent to WM in June with finalized rate sheets and final responses on any additional requests. WM then inputs the finalized rate changes in their billing system. Commercial customers receive bills every month, and residential customers receive bills bi-monthly.
City Approved CPI Adjustments Under the Existing Agreement
FY20-21: 3.5% increase*
FY21-22: 3.5% increase
FY22-23: 4.7% increase
FY23-24: 5.2% increase
FY24-25: 7.3% increase
*The agreement was awarded to WM on February 12, 2019, but Council included a start date of July 1, 2020 to utilize the last extension year from the 2011 agreement. Because the rate sheets were approved at the award, they had to be adjusted per CPI for FY20-21.
Diversion
Diversion refers to material that is diverted from the landfill and either reused or recycled. Section 3.8.1 of the franchise agreement with WM requires the hauler to divert a minimum of 50% of the material they collect under our franchise agreement from the landfill. A tonnage report is submitted to the City monthly for every material type that they collected that month under the franchise agreement, from residential curbside recycling to City shred events.
Sectors of collection include residential and commercial curbside collection and local government solid waste. The school district is a state entity and can select any hauler, and MBUSD chooses to be a commercial WM customer under the City’s franchise agreement.
Some material types are “open market” and WM does not collect them under any program in the franchise agreement - notably, private construction and demolition material. The construction and demolition material WM collects when directly hired by a resident or business for a project at their property is not part of the franchise agreement, nor is the tonnage included in the monthly tonnage report.
Also, a customer can legally sell or donate their recycling as long as the customer does not pay the receiver for removing it. This is called “Third-Party Recycling.” This sold or donated tonnage cannot be placed on the tonnage report. (The City previously allowed third-party recycling in the 2001 - 2011 agreement, but Cal Recycle directed the City to discontinue this practice because the tonnage numbers could not be verified after multiple attempts).
Calendar Year Diversion Requirement Diversion Achieved Liquidated Damages Paid
2021 50% 43% $53,000
2022 50% 45% $36,177
2023 50% Pending (under review as part of a biennial audit)
PUBLIC OUTREACH:
After analysis, staff determined that public outreach was not required for this issue.
ENVIRONMENTAL REVIEW:
The City has reviewed the proposed activity for compliance with the State of California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines the activity is not subject to CEQA. Thus, no environmental review is necessary.
LEGAL REVIEW:
The City Attorney has reviewed this report and determined that no additional legal analysis is necessary.
ATTACHMENTS:
1. WM Letter Dated March 22, 2024
2. City Letter Dated June 26, 2024
3. WM Letter Dated July 15, 2024