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 Cost Accounting methodology C. Policy issues D. Detailed example E. Summary F. Questions and answers 2
A. Background
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 36 person firm with offices in Austin, Dallas, Denver, Nashville, and Orlando 4
NewGen Strategies & Solutions, LLC Specific solid waste services include: Cost of Service and Rate Design Operational Reviews Procurement Efficiency Studies Solid Waste Management Plans Valuations Contract and Franchise Agreement Negotiations Financial Feasibility Studies 5
David S. Yanke President Environmental Practice More than 25 years of experience: Planning, operational, financial consulting services Wide range of experience More than 150 financial, economic, feasibility and valuation studies Developed Full Cost Accounting Workbooks Developed Environmental Enforcement Manuals Frequent speaker at WasteCon, STAR, and TxSWANA conferences 6
David S. Yanke (cont d) Through the years Reed-Stowe & Co. (1991-1996) Navigant Consulting (Navigant) acquired Reed-Stowe & Co. (1997-2000) Mr. Yanke left Navigant and helped start Reed, Stowe & Yanke, LLC (2000-2003) R. W. Beck acquired Reed, Stowe & Yanke, LLC (2003-2009) SAIC acquired R. W. Beck in August 2009 (2009-2013) SAIC split into two companies and Mr. Yanke was assigned to Leidos in December 2013 Mr. Yanke left Leidos and joined NewGen as an owner in April 2014 7
A Sampling of Prior COG Experience 8
Full Cost Accounting History 9
Full Cost Accounting History (cont d) 10
Full Cost Accounting History (cont d) 11
Goals of this Workshop Aid governmental entities in identifying all solid waste costs Assist governmental entities in their solid waste planning Help governmental entities to establish solid waste rates 12
B. Full Cost Accounting Methodology
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 14
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 15
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 16
Cost Components Terminology (cont d) Indirect Costs Administration/City or County Manager Purchasing department Finance department HR department City Council/County Commission Legal department City/County engineer Management information systems General insurance 17
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 18
Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Vehicle Expenses Identify MSW Direct Costs Employee Salary Benefits Percentage of Program Employee #1 $40,000 $10,000 Employee #2 $50,000 $10,000 Employee #3 $35,000 $10,000 75% Waste Collection 25% Recycling Collection 50% Waste Collection 50% Recycling Collection 50% Yard Waste 50% Disposal Amount to Program $37,500 $12,500 $30,000 $30,000 $22,500 $22,500 19
Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Vehicle Expenses Vehicle Vehicle Price Amortized Life Amortized Cost Front-Load $350,000 10 $35,000 Side-Load $300,000 7 $42,857 Rear-Load $175,000 7 $25,000 Percentage of Use in Program 75% Waste Collection 25% Recycling Collection 75% Waste Collection 25% Recycling Collection 75% Recycling Collection 25% Yard Waste Identify MSW Direct Costs Annual Cost by Program $26,250 $8,750 $32,143 $10,714 $18,750 $6,250 20
Step 1: Identify MSW Direct Costs Direct Costs (abbreviated list) 1. Salaries, Wages & Benefits 2. Vehicle Capital Costs 3. Vehicle Expenses Identify MSW Direct Costs Vehicle ID Fuel Repair Labor Total Annual Cost FL185 $15,000 $20,000 $35,000 SL102 $9,000 $30,000 $39,000 RL190 $10,000 $25,000 $35,000 Percentage of Use in Program 75% Waste Collection 25% Recycling Collection 75% Waste Collection 25% Recycling Collection 75% Recycling Collection 25% Yard Waste Total Annual Cost by Program $26,250 $8,750 $29,250 $9,750 $26,250 $8,750 21
Cost Components Indirect cost allocation methodologies Internal Assessment Employee Based Other 22
Step 2: Identify MSW Indirect Costs Indirect Costs (abbreviated list) 1. Administration/Manager 2. Purchasing Department 3. Finance Department Identify MSW Indirect Costs * Oftentimes indirect cost allocation to Environmental Services Department is already done! 2 Part 1 Department Internal Assessment Method Dept. Budget % Attributable to MSW Dept. $ Attributable to MSW Dept. Purchasing $700,000 30% $210,000 Finance $750,000 30% $225,000 TOTAL $435,000 23
Part 2 Step 2: Identify MSW Indirect Costs 2 Identify MSW Indirect Costs MSW Program Internal Assessment Method % of Total MSW Direct Costs Total from Part 1 Table Indirect Cost to Program (% of Total MSW x Total from Part 1) Waste Collection 50% $435,000 $217,500 Disposal 25% $435,000 $108,750 Recycling Collection 15% $435,000 $65,250 Yard Waste 10% $435,000 $43,500 100% $435,000 24
Step 2: Identify MSW Indirect Costs Employee Based Method 2 Identify MSW Indirect Costs Department Department Budget Purchasing $700,000 Finance $750,000 Total $1,450,000 Part 1 MSW Employees 100 Total Municipal Employees 500 Ratio (MSW:Total).20 Amount Allocated to MSW $290,000 Part 2 25
Part 3 Step 2: Identify MSW Indirect Costs 2 Identify MSW Indirect Costs MSW Program Employee Based Method MSW Employees by Program % of Total MSW Employees $ Amount from Part 2 Indirect Cost to Program (% of Total MSW x Total from Part 1) Waste Collection 40 40% $290,000 $116,000 Disposal 25 25% $290,000 $72,500 Recycling Collection 32 32% $290,000 $92,800 Yard Waste 3 3% $290,000 $8,700 100 100% $290,000 26
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 Staff (example: public education program); or Allocate based on composite of directly assigned costs Indirect costs Allocated based on composite of directly assigned costs 27
Step 3. Identify Cost Per Program Waste Collection Recycling Collection Disposal Yard Waste Identify Cost Per Program Direct Costs Salaries, Wages & Benefits $67,500 $42,500 $22,500 $22,500 Vehicle Capital Costs 58,393 38,214-6,250 Vehicle Expenses 55,500 44,750-8,750 Total Indirect Costs (Internal Assessment Method for this example) Other Revenue Total Direct Costs $181,393 $125,464 $22,500 $37,500 $217,500 $65,250 $108,750 $43,500 Interest Income $2,000 N/A N/A N/A Sale of Recyclables N/A $2,500 N/A N/A Total Other Revenue $2,000 $2,500 N/A N/A TOTAL FULL COST (Total Direct Costs + Total Indirect Costs Total Other Revenue) $396,893 $188,214 $131,250 $81,000 28
Allocation of Program Costs by Customer Class This step is not necessary for all governmental entities 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 29
Step 4. Identify Cost Per Customer Class Program: Waste Collection Direct Costs Program Cost Residential Commercial (from previous slide) Salaries, Wages & Benefits $67,500 Vehicle Capital Costs 58,393 Vehicle Expenses 55,500 Total Indirect Costs (Employee Based or Internal Assessment) Other Revenue Total Direct Costs $181,393 $217,500 Interest Income $2,000 Sale of Recyclables N/A Total Other Revenue $2,000 TOTAL FULL COST (Total Direct Costs + Total Indirect Costs Total Other Revenue) $ 396,893 Identify Cost Per Customer Class 30
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 31
Step 5. Calculate Rates Calculate Rates Program Rates Total Full Cost (from the bottom of Step #3) Billing Units (households, dumpster lifts, etc.) Waste Collection Recycling Collection Disposal Yard Waste $396,893 $188,214 $131,250 $81,000 5,000 (households) 5,000 (households) 5,000 (households) 5,000 (households) Cost per Billing Unit/Year $79.38 $37.64 $26.25 $16.20 Cost per Billing Unit/Month $6.61 $3.14 $2.19 $1.35 Total Monthly Bill $13.29 32
C. Policy Issues
Observations Policy issues always arise during the study Oftentimes policy issues create pressure for a study to be undertaken Not rocket science but an independent 3rd party with industry experience is often needed 34
Goal To make you aware of various policy issues To get you thinking how these issues apply to your solid waste utility To get you to act, if necessary, regarding a policy issue 35
Remember: These are policy issues There is not necessarily a right or wrong answer The answer may be different for different governmental entities 36
Disclaimer #1 David Yanke s Top 10 List 37
Disclaimer #2 These are not ranked Different cities have different issues 38
Policy Issue #1 Should outside city limit customers be charged a multiplier? Typically there is an increase in cost Check regulatory requirements (municipal ordinances, state law, etc.) Typically see an increase of 10% to 50% 39
Policy Issue #2 Should apartments be charged on a per unit basis or on a dumpster basis? The most equitable method would be on a dumpster basis Typically conversion from per unit basis to a dumpster basis will result in a loss of revenue Most cities charge on a dumpster basis, but still a sizeable percentage that charge on a per unit basis 40
Policy Issue #3 Should bulky collection services be charged a separate user fee, or included in the monthly residential user fee? 15 years ago most cities embedded the cost of this service in the total monthly residential user fee More cities are beginning to assess a separate user fee for bulky collection Fee is not nearly 100% of the cost Balance fee with illegal dumping risk 41
Policy Issue #4 Should on-demand roll-off collection be assessed a surcharge? Typically find a surcharge is being assessed Typically $30 to $100 per pull Strong justification for this surcharge 42
Policy Issue #5 How should closure/post-closure care costs be handled from a funding perspective? Fundamental shift/increased awareness since 1993 More cities are establishing restricted reserves (tell your city council this is not a piggy bank for new police stations, fire stations, etc.) Other entities pay as they go Other entities issue debt Educate your city council, board, commissioners! 43
Policy Issue #6 Should we assess private haulers a franchise fee? YES! Politically, the previous bullet is sometimes hard to implement Very regional issue, example: Texas = Yes Arizona = No 4% to 6% of gross revenues most typical 44
Policy issue #7 Should city/governmental accounts receive free service or should they be billed? More cities/counties are billing for this service Streets departments and parks departments can generate 20,000 to 30,000 tons annually Zero-sum game so what are the politics? May encourage diversion programs 45
Policy issue #8 Should our local government offer a senior citizen/disabled discount? More utilities are moving away from this subsidy Discriminatory by nature Income based more equitable One city: 30% senior citizen discount; 20% of residents registered huge impact on other 80% 46
Policy issue #9 How should we fund vehicle replacement? Increasingly, local governments are establishing a restricted reserve to fund vehicle replacement requirements Sometimes difficult if monies are appropriated in fleet services 47
Policy issue #10 Should we implement PAYT rates? If so, how do we price the 30, 60, 90 gallon containers? Differs based on where you are located in the United States, state regulations, etc. What are your goals? Know your marginal disposal costs Forecast movement in can sizes based on pricing Run sensitivity analyses 48
Closing Comments Have a cost basis for your decision Even if your rates or policy decisions are not cost based you need to know your costs to make an informed decision Educate your citizens 49
D. Detailed Example
Overview City in Texas Population of approximately 40,000 ~$4.7 million revenue requirement Various solid waste services Commercial Residential Transfer Station 51
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) 52
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 53
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. 54
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.) 55
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 56
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 57
2. Development of the Test Year Develop the revenue requirement forecast Inflationary assumptions used to develop the forecast 58
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 59
3. Allocation of Costs to Service Categories Allocations to Commercial Collection 60
Summary by Category 61
4. Allocation to Customer Classes Allocate service category costs to each customer class 62
4. Allocation to Customer Classes 63
4. Allocation to Customer Classes 64
4. Allocation to Customer Classes 65
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 66
5. Determination of Billing Units Commercial Front Load (3 components) Frequency of collection Volume of disposal capacity Number of containers 67
5. Determination of Billing Units Commercial Roll-Off Collection Conservative analysis (zero percent growth) 68
6. Calculation of the Cost of Service 69
6. Calculation of the Cost of Service 70
6. Calculation of the Cost of Service 71
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: $25.08 + $7.53 13 + $2.57 6 13 = $323.43 Container Fee Cost Per Collection Cost Per CY Monthly Charge 72
7. Current Rate Recovery Forecasts projected revenue recovered using current rates 73
8. Proposed Rates for Consideration Consultant expertise guides the proposed rates 74
9. Projected Revenue with Rate Increases Revenue projection assumes the proposed rates are effective at the beginning of each fiscal year 75
Summary
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 77
Questions and Answers Mr. David S. Yanke dyanke@newgenstrategies.net Direct: (512) 649-1254 Cell: (512) 773-5494 3420 Executive Center Drive Suite 165 Austin, TX 78731 Phone: (512) 479-7900