Full Cost Accounting and Solid Waste Rate Structuring

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September 28, 2016 8:30 AM New Mexico Solid Waste & Recycling Conference Full

1 September 28, :30 AM New Mexico Solid Waste & Recycling Conference Full Cost Accounting and Solid Waste Rate Structuring Presenter: Mr. David S. Yanke

2 Workshop Agenda A. Background B. Full Cost Accounting methodology C. Detailed example D. Summary E. Questions and answers 2

3 A. Background

4 NewGen Strategies & Solutions, LLC NewGen is a management consulting firm specializing in providing economic, strategic, stakeholder, and sustainability services Solid Waste Water/ Wastewater Energy Gas 37 person firm with offices in Austin, Dallas, Denver, and Nashville 4

5 Full Cost Accounting History 5

6 Full Cost Accounting History (cont d) 6

7 Full Cost Accounting History (cont d) 7

8 Goals of this Workshop Aid cities, counties, etc. in identifying all solid waste costs Assist in their solid waste planning Help to establish solid waste rates 8

9 B. Full Cost Accounting Methodology

10 Full Cost Accounting Defined Modified cash basis versus Accrual basis Accrual basis may result in a potential cash shortfall Cities budget and operate on a cash basis Investment community s familiarity with cash basis 10

11 Comparison Modified Cash Basis Salaries, wages, and benefits O&M costs Predevelopment costs Closure/Post-Closure care costs Principal payments Interest expense Cash capital outlays Accrual Basis Salaries, wages, and benefits O&M costs Predevelopment costs Closure/Post-Closure care costs Depreciation expense Interest expense 11

12 Cost Components Terminology Direct Costs Salaries, wages, and benefits Debt service Annual cash capital outlays General O&M Equipment O&M Predevelopment costs Closure/post-closure care costs Contract services Utilities Professional services 12

13 Cost Components Terminology (cont d) Indirect Costs Administration/City Manager Purchasing department Finance department HR department City Council Legal department City engineer Management information systems General insurance 13

14 Full Cost Accounting Process Flow Chart Identify MSW Direct Costs Identify MSW Indirect Costs Identify Cost Per Program Identify Cost Per Customer Class Calculate Rates 14

15 Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Annual Vehicle Expenses Identify MSW Direct Costs Employee Salary Benefits Percentage of Program Mandy Sines $40,000 $10,000 Robert Recycler $50,000 $10,000 75% MSW Collection 25% Recycling Collection 50% MSW Collection 50% Recycling Collection Amount to Program $37,500 $12,500 $30,000 $30,000 15

16 Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Annual Vehicle Expenses Identify MSW Direct Costs Vehicle Vehicle Price Amortized Life Amortized Cost Front-Load $350, $35,000 Side-Load $300,000 7 $42,857 Percentage of Use in Program 75% MSW Collection 25% Recycling Collection 75% MSW Collection 25% Recycling Collection Annual Cost by Program $26,250 $8,750 $32,143 $10,714 Rear-Load $175,000 7 $25, % Recycling Collection $25,000 16

17 Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Annual Vehicle Expenses Identify MSW Direct Costs Vehicle ID Fuel SW185 $15,000 REC102 $20,000 Repair Labor Supplies Total Annual Cost Percentage of Use in Program 75% MSW Collection 25% Recycling Collection 75% MSW Collection 25% Recycling Collection SW190 $17, % Recycling Collection Total Annual Cost by Program 17

18 Cost Components Indirect cost allocation methodologies Internal Assessment Employee Based Other 18

19 Step 2: Identify MSW Indirect Costs Indirect Costs (abbreviated list) 1. Administration/City Manager 2. Purchasing Department 3. Finance Department 2 Identify MSW Indirect Costs * Oftentimes indirect cost allocation to Environmental Services Department is already done! Part 1 Department Internal Assessment Method Dept. Budget % Attributable to MSW Dept. $ Attributable to MSW Dept. Purchasing $500,000 25% $125,000 Finance $700,000 30% $210,000 TOTAL $335,000 19

20 Step 2: Identify MSW Indirect Costs 2 Identify MSW Indirect Costs Part 2 Internal Assessment Method MSW Program % of Total MSW Direct Costs Total from Part 1 Table Indirect Cost to Program (% of Total MSW x Total from Part 1) MSW Collection 50% $335,000 $167,500 Disposal 25% $335,000 $83,750 Recycling Collection 15% $335,000 $50,250 Yard Waste 10% $335,000 $33, % $335,000 20

21 Step 2: Identify MSW Indirect Costs Employee Based Method 2 Identify MSW Indirect Costs Department Department Budget Purchasing $500,000 Finance $700,000 Total $1,200,000 Part 1 MSW Employees 100 Total Municipal Employees 500 Ratio (MSW:Total).20 Amount Allocated to MSW $240,000 Part 2 21

22 Step 2: Identify MSW Indirect Costs 2 Identify MSW Indirect Costs Part 3 MSW Program Employee Based Method SW Employees by Program % of Total MSW Employees $ Amount from Part 2 Indirect Cost to Program (% of Total MSW x Total from Part 1) MSW Collection 40 40% $240,000 $96,000 Disposal 25 25% $240,000 $60,000 Recycling Collection 32 32% $240,000 $76,800 Yard Waste 3 3% $240,000 $7, % $240,000 22

23 Allocation of Costs by Program Direct costs Directly assigned whenever possible (example: salaries, debt issues, etc.); or Allocated based on professional judgement or estimate by City Staff (example: public education program); or Allocate based on composite of directly assigned costs Indirect costs Allocated based on composite of directly assigned costs 23

24 Step 3. Identify Cost Per Program Identify Cost Per Program Collection Disposal Recycling Yard Waste Direct Costs Salaries, Wages & Benefits Vehicle Capital Costs Annual Vehicle Costs Total Direct Costs Total Indirect Costs (Employee Based or Internal Assessment) Other Revenue Interest Income Sale of Recyclables Total Other Revenue (Total Direct Costs + Total Indirect Costs Total Other Revenue) TOTAL FULL COST 24

25 Allocation of Program Costs by Customer Class This step is not necessary for all cities Typically two customer classes Same allocation methodology used Directly assign; or Allocate based on professional judgement; or Allocate based on composite Residential Commercial Customer Classes 25

26 Step 4. Identify Cost Per Customer Class Direct Costs Salaries, Wages & Benefits Annual Vehicle Expense Vehicle Capital Costs Total Direct Costs Total Indirect Costs (Employee Based or Internal Assessment) Other Revenue Interest Income Sale of Recyclables Total Other Revenue (Total Direct Costs + Total Indirect Costs Total Other Revenue) TOTAL FULL COST Program Cost Residential Commercial Other Identify Cost Per Customer Class 26

27 Development of User Fees Determine billing units Per Household Per Ton Per Container (residential or commercial) Calculate rates for each program Implement rates which are cost of service based 27

28 Step 5. Calculate Rates Calculate Rates Program Rates Total Full Cost MSW Collection Disposal Billing Units (households, dumpster lifts, tons, etc.) Cost per Billing Unit Recycling Collection Yard Waste Total 28

29 C. Example

30 Overview City in Texas Population of approximately 40,000 ~$4.7 million revenue requirement Various solid waste services Commercial Residential Transfer Station 30

31 Solid Waste Services Offered Residential Refuse collection (weekly collection via side-load trucks) Curbside recycling (included in monthly fee) Heavy trash/large waste collection (on-call service) Yard waste (2-3 times per month) Commercial Front load dumpster (2, 4, 6, 8 CY up to five days per week) Roll-off (20, 30, or 40 CY up to five days per week) Transfer Station (7:30 am 5:00 pm, Mon-Sat) 31

32 Project Approach 1. Methodology overview 2. Development of the Test Year 3. Allocation of costs to service categories (programs) 4. Allocation to customer classes 5. Determination of billing units 6. Calculation of the cost of service 7. Current rate recovery 8. Proposed rates for consideration 9. Projected revenue with rate increases 10. Policy issues and recommendations 32

33 1. Methodology Overview Development of the Test Year Total revenue the utility will need to recover to fund all expenses associated with the provision of services. Development of revenue requirement forecast Revenue requirement adjusted to project changes in costs due to inflation, salary increases, new equipment, etc. 33

34 1. Methodology Overview (cont d) Allocation of costs to service categories Represent the primary solid waste services provided by the city Allocation to customer classes Grouped based on the customer classes that will recover each category s costs. (residential refuse and recycling, commercial front load, etc.) 34

35 1. Methodology Overview (cont d) Determination of billing units Example: cart rate charged by customer Calculation of the cost of service Distribute costs for each customer class utilizing the appropriate billing units 35

36 2. Development of the Test Year Selection of the test year Compare budget to prior FY financials Must reflect expenses that occur regularly Make adjustments to achieve a normalized test year 36

37 2. Development of the Test Year Develop the revenue requirement forecast Inflationary assumptions used to develop the forecast 37

38 3. Allocation of Costs to Service Categories Critical step in determining adequate rates to reflect the cost of providing service Residential Refuse Commercial Refuse Recycling Collection Transfer Station Solid Waste Yard Waste Heavy Trash Front Load Dumpster Roll-Off Non-Profit Residential Curbside Recycling Drop-off Center Transfer Station Brush Disposal Administration 38

39 3. Allocation of Costs to Service Categories Allocations to Commercial Collection 39

40 Summary by Category 40

41 4. Allocation to Customer Classes Allocate service category costs to each customer class 41

42 4. Allocation to Customer Classes 42

43 4. Allocation to Customer Classes 43

44 4. Allocation to Customer Classes 44

45 5. Determination of Billing Units Determine cost of service by dividing the cost of service by the appropriate billing units Cart billing units Flat monthly fee for each cart account Zero percent growth for conservative analysis 45

46 5. Determination of Billing Units Commercial Front Load (3 components) Frequency of collection Volume of disposal capacity Number of containers 46

47 5. Determination of Billing Units Commercial Roll-Off Collection Conservative analysis (zero percent growth) 47

48 6. Calculation of the Cost of Service 48

49 6. Calculation of the Cost of Service 49

50 6. Calculation of the Cost of Service 50

51 6. Calculation of the Cost of Service Example Calculation In FY 2015, a six-cubic yard container collected three times per week (13 collections per month) would result in the following monthly rate: $ $ $ = $ Container Fee Cost Per Collection Cost Per CY Monthly Charge 51

52 7. Current Rate Recovery Forecasts projected revenue recovered using current rates 52

53 8. Proposed Rates for Consideration Consultant expertise guides the proposed rates 53

54 9. Projected Revenue with Rate Increases Revenue projection assumes the proposed rates are effective at the beginning of each fiscal year 54

55 D. Summary

56 Summary Full cost accounting is a systematic method for identifying, summing, and reporting costs incurred in providing services Can use to determine the true costs of MSW management 56

E. Questions and Answers Mr. David S. Yanke dyanke@newgenstrategies.

57 E. Questions and Answers Mr. David S. Yanke Direct: (512) Cell: (512) Executive Center Drive Suite 165 Austin, TX Phone: (512) Fax: (512)

Full Cost Accounting for Municipal Solid Waste Services Workshop Capital Area Council of Governments

June 21, 2017 9:00 AM to 3:00 PM Full Cost Accounting for Municipal Solid Waste Services Workshop Capital Area Council of Governments Presenter: Mr. David S. Yanke Workshop Agenda A. Background B. Full