TO:
Honorable Mayor and Members of the City Council
THROUGH:
Talyn Mirzakhanian, City Manager
FROM:
Erick Lee, Public Works Director
Jeff Page, Utilities Manager
Anna Luke-Jones, Solid Waste Administrator
SUBJECT:Title
Consideration of Request from Waste Management to Adjust Solid Waste Diversion Requirements in the City’s Franchise Agreement for Integrated Solid Waste Management Services and a Resolution Authorizing the City Manager to Prepare and Execute a Corresponding Amendment No. 3 to the Franchise Agreement with Waste Management (No Budget Impact) (Public Works Director Lee).
(Estimated Time: 30 Mins.)
A) DISCUSS AND PROVIDE DIRECTION
B) RESOLUTION NO. 25-0079
Body
_________________________________________________________
RECOMMENDATION:
Staff recommends that the City Council: (1) consider the request from Waste Management (WM) to adjust solid waste diversion requirements in the City’s Franchise Agreement; and (2) (if the City Council agrees to adjust diversion requirements and secure a corresponding rate reduction for solid waste customers) adopt Resolution No. 25-0079 authorizing the City Manager to prepare and approve an Amendment to the Agreement.
FISCAL IMPLICATIONS:
If City Council adopts Resolution No. 25-0079 and the parties agree upon the terms of an Amendment to the Agreement, the contractor rate for both FY 2025-2026 and FY2026-2027 would be reduced by 1% each fiscal year. Residential and commercial billing rates would be reduced accordingly. The Proposition 218 process would not have to be repeated to enact this change, as that process is only required to increase rates to the ratepayer, not reduce rates.
BACKGROUND:
Diversion refers to the process of redirecting waste from landfills, primarily through recycling and other recovery methods. Under the Franchise Agreement for Integrated Solid Waste Management Services (“Agreement”), WM is required to divert at least 50% the waste it collects from landfills.
Liquidated Damages for Diversion
WM has struggled to achieve the agreed-upon diversion rates since the inception of this Agreement. Under Section 10.7.b of the agreement, the Liquidated Damages for “Diversion Efforts” non-compliance are assessed in the following manner:
“For every ton of diversion Company falls below the minimum necessary to meet the diversion requirement each year per Section 3.8.1, beginning with the first full calendar year 2021, and including any partial calendar year at the end of the term: $25.00 per ton.”
The City assessed WM with liquidated damages (LDs) for missed diversion rates for the following calendar years:
• In 2021, WM achieved a 43% diversion rate, resulting in $53,980.75 in LDs.
• In 2022, WM achieved a 45% diversion rate, resulting in $36,177.00 in LDs .
• In 2023, WM achieved a 32% diversion rate, resulting in $145,064.25 in LDs.
There are two main reasons WM has struggled to achieve diversion goals in this franchise agreement. First, there was a gap between the tonnage projected in WM’s 2018 proposal and actual recycling performance from 2020 onward. In their proposal, WM projected that meeting its diversion goal would include recycling 4,000 commercial tons annually. However, in 2021 and 2022, annual commercial recycling was under 2,000 tons. Secondly, because commercial recycling was underperforming, WM engaged in more transformation (Waste to Energy) than they originally anticipated. However, this opportunity was eliminated by AB 1857 when the use of transformation from a Waste to Energy facility for diversion credit was prohibited in 2023.
February 4, 2025 City Council Meeting
On February 4, 2025, the City Council received a presentation regarding Waste Management’s request to reduce the required diversion rate in the franchise agreement. City Council directed staff to 1) analyze and confirm that 37% is the maximum diversion rate that WM can reasonably achieve and 2) analyze the valuation of the loss in diversion and return at a later date with recommendations.
DISCUSSION:
Since the February 4, 2025 City Council meeting, staff has worked with WM and HF&H Consultants, LLC on analyzing, confirming, and valuing WM’s request. HF&H provided the City with a letter summarizing the Council-requested analysis performed, which is included as an attachment to this report.
Objective 1: Analyze and confirm that 37% is the diversion rate that WM can produce
To determine whether 37% diversion is the maximum rate that is feasible for WM to achieve, HF&H utilized information from WM’s proposed diversion improvements, provided by WM as part of the diversion realignment discussions in the fall of 2024. WM proposed a 5% diversion improvement based on improved processing (2%), outreach and volume changes (1%), enforcement of commercial recycling and organics (1%) and a residential organics campaign (1%).
Next, HF&H calculated WM’s diversion performance from 2021 - 2024, minus transformation (since it is no longer allowed as a diversion credit option). WM’s diversion (minus transformation) averaged at 32% annually. With the average 32% diversion, plus the WM-proposed 5% diversion improvement plan, the total proposed diversion is 37% annually. HF&H concluded the following:
- Diversion rate of 37.2% was reported by WM for calendar year 2024.
- Combining WM’s current 32% diversion rate with an additional 5% from proposed improvements results in a total projected diversion rate of approximately 37%.
- WM’s original proposal of a 46% diversion rate, adjusted for lost transformation and inclusion of WM’s diversion improvements, results in a diversion rate of 37%.
Objective 2: Analysis of valuation due to loss in diversion
HF&H analyzed the value of the loss in the diversion rate using the following two valuation methodologies:
Valuation Methodology #1: Transformation Cost Savings
HF&H compared the cost to transform (Waste to Energy) one ton of materials during 2022 to the current cost to landfill one ton of materials. The savings were applied to the City’s actual tons transformed in 2022. This determined a cost savings as a percentage of WM’s rate revenue. This method demonstrated that cost savings realized by WM equated to 2.4% of rate revenue. The calculation of this cost savings can be found on page three of the aforementioned attachment.
Valuation Methodology #2: Liquidated Damages Cost Savings
With this methodology, HF&H calculated the liquidated damages that would be assessed if WM had achieved 37% diversion in 2023. This method demonstrated that liquidated damages would have equated to 1.6% of rate revenue. The calculation of this cost savings can be found on page four of the aforementioned attachment.
When considering both of the valuation methodologies, HF&H averaged the results and concluded that the value of reducing the diversion requirement from 50% to 37% equates to approximately 2% of rate revenue.
As part of the meet and confer process related to this issue and required under the Agreement, staff is working with WM to develop Amendment No. 3 to the Agreement. If authorized by the City Council, this amendment would reduce the diversion requirement from 50% to 37%. It would also provide for a 1% rate reduction in Fiscal Year 2025-2026 and another 1% rate reduction in Fiscal Year 2026-2027. The rate reductions would go into effect on July 1st of each fiscal year.
If Resolution No. 25-0079 is adopted, and the parties subsequently agree on the terms of an Amendment No. 3, the contractor rates previously approved under the Proposition 218 process on May 20, 2025 will be revised to the following:
|
|
CPI (Consumer Price Index) for FY2025-2026 |
One-Time Special Increase for FY2025-2026 |
Total Contractor Rate for FY2025-2026 |
Reduction for FY2025-2026 per Amendment 3 |
New Contractor Rate Increase for FY2025-2026 |
|
Single-Family Residential and Multi-Family Cart Customers |
4.4% |
2.51% |
6.91% |
(1%) minus one percent |
5.91% |
|
Multi-Family Bin and Commercial Customers and Extra Services |
4.4% |
5.4% |
9.8% |
(1%) minus one percent |
8.8% |
|
Temporary Bin Rentals and Roll-Off Bins |
4.4% |
N/A |
4.4% |
(1%) minus one percent |
3.4% |
The rate reductions summarized above would provide the following actual cost reductions for average customers as follows:
|
Class |
Landfill Trash Container Type |
Current FY2025-2026 |
New Rate Under Amendment No. 3* |
Cost Savings |
Frequency of Charge |
|
Residential - SFR |
20 & 35 Gallon Cart |
$18.98 |
$18.81 |
$0.17 |
Monthly |
|
Residential - SFR |
65 Gallon Cart |
$24.65 |
$24.42 |
$0.23 |
Monthly |
|
Residential - SFR |
95 Gallon Cart |
$30.31 |
$30.03 |
$0.28 |
Monthly |
|
Commercial |
2 Cubic Yard Bin |
$197.52 |
$195.72 |
$1.80 |
1x Per Week |
|
Commercial |
3 Cubic Yard Bin |
$253.68 |
$251.37 |
$2.31 |
1x Per Week |
|
Commercial |
4 Cubic Yard Bin |
$303.89 |
$301.13 |
$2.76 |
1x Per Week |
*This total includes the Consumer Price Index (CPI), the one-time special increase, the 1% rate reduction and the City Recovery Cost.
Pursuant to Resolution No. 25-0079, the City Council would be authorizing the City Manager to negotiate and execute the final Amendment No. 3, provided that the Amendment is approved by the City Attorney as to form.
CONCLUSION:
Staff recommends that the City Council provide direction on this matter. Options available to the Council include:
1. Maintain the diversion requirement under the Agreement at 50% with no changes;
2. Adopt Resolution No. 25-0079, authorizing the City Manager to enter into an amendment to the Franchise Agreement reducing the diversion requirement from 50% to 37% and reducing the WM contractor rate by 1% in FY2025-2026 and 1% in FY2026-2027; or
3. Direct staff to pursue another course of action.
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 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:
A draft copy of Amendment No. 3 is included as an attachment to this report. This draft amendment is currently under review by the City Attorney and has not been finalized as of the date of this report. Under Resolution No. 25-0079, the City Council would be authorizing the City Manager to negotiate and execute the final Amendment No. 3, provided that it is substantially similar to the draft and is approved by the City Attorney as to form.
ATTACHMENTS:
1. Resolution No. 25-0079
2.Letter - HF&H Consultants, LLC on Diversion Realignment
3. PowerPoint Presentation