In an era where the mantra of “doing more with less” is on the lips of most political decision-makers, it is critical to asses the financial performance of operating and proposed solid waste programs. Rate modeling is a useful analytical item in a solid waste manager’s tool box.
By Marc J. Rogoff, Ph.D. and Laurel C. Ureña, M.S.
Solid waste agencies are under more pressure these days to provide high-quality waste collection, facility enhancements and landfill operation services. Those pressures, coupled with the pressures from ratepayers and local government “lean and mean” initiatives to keep rates and expenses low, have many solid waste agencies struggling to balance the budget. Balancing real cost escalation factors such as rising fuel, material and labor costs against the push for keeping static rates is challenging. Furthermore, full cost accounting is difficult because agencies oftentimes support activities not directly related to normal operations or provide “free services” such as street sweeping or free collection and disposal for community events (i.e. fairs, farmers markets, runs for charity, art shows). Allocating shared costs across agencies is complicated and many times inaccurate adding to the agency’s overhead.
A useful screening tool to quickly assess where an agency’s fees stand relative to other comparable solid waste agencies is benchmarking. Benchmarking, or the establishment of a representative standard operational metric such as cost of service, establishes an industry “comparable”, much similar to the comparables used in real estate appraisals. Similar solid waste agencies are identified, reviewed and organized in order to compare among one another for a particular metric of concern, whether operational costs, levels of service or costs of service. While useful, the scarcity of reliable data available to benchmark solid waste management operations can inhibit timely comparisons among solid waste systems. Benchmarking rates or service fees for collection and disposal is challenging, but not impossible using financial tools now considered critical to focus on an agency’s primary policy and management issues. These tools are the basis for budgeting, cost accounting, financial monitoring and evaluation aiming at recovering sufficient money to cover recurrent operational expenditures of the agency’s services, accounting for rising consumer price index, as well as to stocking up capital for new investments or large maintenance. We will use illustrations from a recent case study to introduce some of these tools.
Pro Forma Model
A Pro Forma Model is a financial tool crafted from the market dynamics that influence the lifecycle of a specific project, cost center or program (see Figure 1, page 56). In the solid waste business, every project is unique, and the design of the pro forma financial model should reflect these differences. To accommodate the various types of business models needed to analyze the feasibility of recycling projects, we have developed different types of pro forma models that allow the client to tailor the financial statements to the particular project. Thus, each agency receives models that are specifically tailored to their unique solid waste operations and that have the maximum flexibility to model multiple scenarios of facility size, energy production/co-generation, site locations and changes in operations.
For example, we have had clients desiring to evaluate the feasibility of a single stream recycling program with multiple cart sizes, evaluate alternative landfill cover systems, and collection equipment and whether a change from manual to automated collection made long-term economic sense. Another client, a private waste hauler, wanted to evaluate the business case for implementation of a leachate evaporator. Cost of leachate disposal was increasing, and the client needed to make a business case for the project. In each of these cases, a pro forma model was developed to help quantify the capital and operating costs for the proposed facilities or programs and then compare these long-term costs against current programs. The results from these modeling efforts enabled the clients to quantify the payback or return to their agency. The use of financial tools to evaluate the agency’s cost of service is another important area where pro forma modeling is used. Such cost of service studies evaluates the financial aspects of solid waste management programs and remain critical for ensuring sustainability of the agency. In short, these studies show how an agency determines the means to fill the gap between cost and revenues, alert authorities to options of how financial sustainability can be improved, recommend if a rate increase is necessary and determine if privatizing some services is a reasonable option.
A Full Understanding of Costs
The lack of specific financial monitoring and analysis of data is one of the major barriers for not being able to sustain any envisioned improvement of an agency system. This concerns budgeting, cost accounting, financial monitoring and evaluation aiming at recovering sufficient money to cover recurrent operational expenditures of the collection service as well as to stock up capital for new investments or large maintenance. Without accounting for these factors, many agencies do not know the actual cost of providing specific services. Before strategic decisions are made, an important step is to establish a full understanding of the historical or current costs for provision of the services and the respective revenues. The studies serve to project financial sustainability in the short-term as well as long-term.
The growing national trend toward privatization of government-provided services demonstrates that the public sector solid waste agencies must operate efficiently and cost-effectively if they wish to continue providing these services to their citizens and stakeholders. Municipal governmental agencies must optimize the performance of their service utilities to ensure that costs are contained, while at the same time, service levels and customer satisfaction remain high. In fact, it is necessary for public agencies to think and act like the private sector service providers and spearhead efficiency gains and identify cost reduction measures to reduce operating costs while improving customer satisfaction.
Case Study: City of Wauchula, FL
An example of the benefit of a solid waste rate study is illustrated by a recent project. Earlier this year, our team was selected by the City of Wauchula (City), FL to conduct a solid waste rate study. At the outset of the work effort, Geosyntec developed a Microsoft Excel™ spreadsheet-based, pro forma model (Model) to assist in the completion of the rate analysis. This model includes the following facets:
• An analysis of operational expenditures (personnel, contract and purchased services, materials and supplies, transfers.
• Analysis of capital outlays (equipment replacement and capital projects).
• Revenue sufficiency analysis (annual revenue projections and rate plan to provide sufficient revenues).
• Funds analysis (reserve requirements, transfers to general fund, administrative costs, beginning and ending fund balances).
Based on data and information provided by the City, these individual spreadsheets were linked to develop an overall model to conduct the rate and assessment analysis. The City currently offers municipal solid waste collection and disposal services to its stakeholders. In order to account for increasing costs, the City currently increases its fee by 3 percent each year. At the end of 2018, the City upgraded its solid waste collection system to automated collection, but it currently has no fleet replacement reserves in place.
After considering the City’s unique solid waste operational circumstances, five different model scenarios for fiscal years (FY) 2019 to 2023 were developed for analysis of possible customer rate impacts and revenue/expense shortfalls over the five-year planning horizon:
1. Scenario 1—Discontinuing Annual 3 Percent Customer Rate Adjustment
2. Scenario 2—Continuing Annual 3 Percent Customer Rate Adjustment
3. Scenario 3—Fund Needed Fleet Replacement Reserve with No Annual Customer Rate Adjustment
4. Scenario 4—Fund Needed Fleet Replacement Reserve with Annual 3 Percent Customer Rate Adjustment
5. Scenario 5—Fund Needed Fleet Replacement Reserve with Annual 4 Percent Customer Rate Adjustment
In addition to the multiple scenarios examined in the pro forma model, rate benchmarking was performed by comparing solid waste collection rates for selected similar-sized cities in Florida. The findings and recommendations are currently under consideration by the City Council.
Financial analysis is an increasingly important issue in solid waste decision making. In an era where the mantra of “doing more with less” is on the lips of most political decision-makers, it is critical to assess the financial performance of operating and proposed solid waste programs. We have found that rate modeling is a useful analytical item in a solid waste manager’s tool box. | WA
Marc J. Rogoff, Ph.D. is a Senior Consultant with Geosyntec Consultants (Boca Raton, FL) and is a member of the firm’s solid waste advisory practice. He has conducted more than 50 solid waste rate studies during his career. Marc can be reached at (813) 810-5547 or e-mail email@example.com.
Laurel C. Ureña, M.S., is an environmental consultant active in the solid waste industry and is founder and CEO of Montani Semper Liberi, LLC (Tampa, FL), providing support on projects located through the nation. She can be reached at (813) 459-5510.