Growing the “Business” of Your Municipal Solid Waste Program: Enterprise Fund Management and You

Enterprise funds can help determine performance goals, develop program specific capital and operating plans, provide scenario analysis to determine best returns and provide the parameters to optimize programs.

Jim Frey

Bringing the “business mindset” to a municipal waste management program can be the key to success in these tough economic times. With an enterprise fund approach to management, municipal programs can build the foundation for sustainable program management, customer oriented service enhancement, stronger environmental performance and more efficient operation, ultimately resulting in a stronger “bottom line” for your community.

These practices may be normal and even required for an efficient private sector waste company—at least for those that strive for high performance. However, the challenges are different for a municipal program—operating at economies of scale sized for their community needs, not for lowest cost operation.

Municipal programs striving for high performance need to drill down to the bottom line financials for each service area—accounting for all costs to provide each waste management service to their residents, much like a private sector business would do for their marketplace goods or services. This total-cost-of-service approach clearly identifies all direct and indirect costs, as well as revenues, for each service area—the basis for strong decision making focused on peak performance.

The enterprise fund approach is commonly used within the government sector for public utilities (water and sewer), recreational areas (parks, golf courses) and transportation services. Increasingly, the enterprise fund approach is the answer for solid waste and recycling programs as well. The enterprise fund creates a “bottom line” focus—building a foundation for prioritizing services, setting rates and fees, and developing and allocating capital. For a municipality, developing a focus on stewardship of their solid waste enterprise fund protects key assets (trucks, facilities, workforce), provides an incentive for cost-effective performance by capturing end of year budget surpluses and fund investment interest, and establishes reserve funds necessary for capital investments that can be defended in the public sector financial management environment.

Financial Challenges Are All Around Us

In this time of deep financial crisis in both the private and public sectors, municipal solid waste and recycling programs are confronted with a myriad of challenges to maintain financial stability. Municipal solid waste and recycling programs are facing common problems. For example:

  • Municipal operating deficits require the solid waste program to cut capital expenditures that are essential to service capacity and program efficiency

  • Operating costs continue to rise, exceeding revenues from current service fees while elected officials and top administrators block needed increases in those service fees

  • Solid waste capital reserves carefully developed over years are being tapped for other governmental projects

An enterprise fund approach to your program will build viable financial program options, even during times of financial instability, while allowing the focus to transfer to better management and operational efficiencies for greater program performance.

Fueling Your Program with Revenues

Many solid waste and recycling programs rely heavily on the general fund or a dedicated millage that provides your program with the benefit of a relatively predictable revenue base. However, it carries a risk from competing uses or artificial caps on services due to constrained revenue. Building a diversified revenue base is essential to program sustainability and garnering overall political strength.

The enterprise fund “business” mindset moves the decision focus away from a tax-based funding limitations and opens the door for higher reliance on justifiable rates and user fees that allow services to be enhanced and your “customers” needs to be met. The enterprise fund structure builds a foundation for the value-added provided by each service and the price points that can be justified for approval by managers and elected officials. Standard mechanisms used to raise this fee-based revenue include cost of service rates/fees, disposal tip fees with surcharges, tip fees for hard to handle or recycle materials and assessments.

Diversifying your enterprise fund with other program revenue sources builds the political support needed to charge the specific rates you need to run your program. Examples of these additional revenue sources include: the sale of recyclables to markets, the sale of energy (e.g., landfill gas), the sale of citizen products including mulch and compost, public/private partnerships (merchant royalties), grants, franchise fees and monetized renewable energy credits.

Understanding the True Cost of Your Program

Providing transparency and linking all of your costs to specific programs develops the value of a program well understood and supported. Isolating costs to specific programs allows for the breakdown of these costs into detailed cost centers. These cost centers allow for the full allocation of direct and capital costs, indirect costs, depreciation and development of targeted reserves. Municipal solid waste and recycling programs often have the following cost centers.

Creating, Building and Protecting Your Program with Reserve Funds

Enterprise funds allow the municipality to create and build reserve funds that ensure long-term viability, stability and sustainability of your solid waste and recycling program. These reserve funds help support the mission, goals and operating procedures of your program with management of these funds becoming integral parts of accounting, budgeting and planning systems.

Reserve funds should be set aside for operations, renewal/replacement funds for MRFs, transfer stations, compost facilities and landfill development, fleet renewal and replacement funds, diversion funds, capital reserve funds and contingency funds.

When looking at reserve funds, it is important to fully fund the depreciation of existing assets, developing an asset inventory, tracking the depreciated value of that inventory and continually updating valuations to include in the annual budgeting process. Through these best management practices, reserve fund allocations are calculated that can then be built into rates and user fees that charged for services. These steps will help build the revenue foundation needed for a best practice and sustainable program.

Enterprise Fund Forecasting for Decision Making

The enterprise fund is a tool for effective decision making which builds the support, value and the future of your program. Taking the time and attention to look at diversified revenue streams, identifying cost centers and building out reserve funds will allow the projection into the future of both “business as usual” base case financial projections as well as the financial “business case justification” for planned improvements, upgrades and facilities. Issues and trends will emerge, the timing of required capital investments can be planned for and the ability to foresee revenues shortfalls well in advance will be developed. Different assumptions, options and alternative techniques can be used to help generate the budget forecast needed to support your program goals.

Enterprise funds can also help determine performance goals, develop program specific capital and operating plans, provide scenario analysis to determine best returns and provide the parameters to optimize programs based on available funds. Your key managers, elected decision makers and public administrators will become your champions once they get this enterprise fund perspective. Over time this enterprise fund will position your program to evaluate emerging trends in solid waste management and allow you to prepare and fully embrace whatever the future may hold for your program.

Jim Frey is the Principal and CEO for Resource Recycling Systems (Ann Arbor, MI). He brings more than 30 years of expertise and innovation in recycling and waste management program development to both public services and private enterprises. With a University of Michigan MBA and a focus on business economics, public policy and strategic planning, Jim specializes in strategic program development using enterprise fund management tools to support municipal and corporate decision making. Active in SWANA as well as numerous industry professional associations, he serves on the boards of a number of corporate, university and non-profit organizations dedicated to a sustainable future for our communities and the businesses that serve them. Jim can be reached at (734) 996-1361, via e-mail at [email protected] or visit the Web site at