To illustrate how the contractor payment is set, the components of the annual payment for Fiscal Year 2003/04 are shown in the table below.

EXISTING POLICY

Solid Waste Sub-Element

Goal 3.2A. Ensure that all municipal solid waste generated within the City is collected and transported in a manner that protects public health and safety.

Policy 3.2A.1 Provide convenient, competitively priced solid waste collection services.

Action Statements

·         3.2A.1a. Establish, enforce, and periodically update collection service standards.

·         3.2A.1c. Evaluate methods of achieving increased efficiencies in solid waste collection.

·         3.2A.1d Compile and analyze information regarding collection operations to ensure that existing operations are operated in a safe, sanitary, and efficient manner and that collection costs are necessary and reasonable.

Goal 3.2G. Contribute to an economic development environment that is supportive of a wide variety of businesses.

Policy 3.2G.1. Provide solid waste services desired by businesses at competitive rates

Program Outcome Measure 322-2

The charge for collection of refuse in Sunnyvale is 98% of charges for comparable services in similar local cities.

Program Outcome Measure 322-6

Major contracts are managed so that annual unit cost increases are limited to the rate of inflation.

DISCUSSION

On March 18, 2002, BCWS presented a contract extension proposal to the City.  This proposal had three key elements:

1.      Extend depreciation of trucks and equipment to 10 years from 7 years and 5 years, respectively

2.      Savings from the extended depreciation to be split 50/50 between BCWS and City, treating this as a Return on Efficiency proposal

3.      Extend the contract term to 27 years (moving the end date from 2011 to 2018)

On November 11, 2003 (see RTC #03-381, shown as Attachment C) the City Council directed the City Manager to negotiate and return to Council a contract amendment with Bay Counties Waste Services that accepts the BCWS proposal.

Because in doing so the City gives up the ability to rebid the contract in 2011, the Council required additional steps intended to at least partially capture some of the benefits of such a competitive process.  Thus the Council’s action also:

• required BCWS to submit its operations to a detailed performance review (by a consultant to be selected by the City) to identify opportunities for route reductions and other efficiency improvements
• required BCWS to pay 50% of the cost of the performance review and to make changes to its operations that are identified by the review and approved by the City
• directed staff to incorporate into the franchise agreement City-desired changes to the contract in the areas of service standards, assignment, and remedies.

The work plan for implementation originally anticipated that the revised franchise agreement would be ready for Council approval in June 2004.  However, the contract drafting step has taken considerably longer than anticipated, due primarily to the unusual size (200+ pages) and complexity of the document.  However, the delay has had virtually no real impact to date, since the FY 2004/05 contractor payment review process was conducted as if the key financial provisions of the BCWS proposal were already in place.

Performance Review

The performance review was conducted by Brown Vence Associates (BVA).  BVA was awarded the contract by the Council on February 3, 2004 following a Request for Proposals that was issued and evaluated by City staff.

In the interests of minimizing the size of this RTC, the Executive Summary of the BVA report is shown as Attachment B.  The full report is available for review by the public and Councilmembers on request.  The scope of work of the performance review contract did not extend to detailed financial analysis of the impacts of BVA-recommended changes to practices and policies.

BVA’s report is generally complimentary to BCWS, but did make a number of recommendations for improvements.  Recommendations that require changes to the contract have been incorporated into the amended franchise agreement shown as Attachment A.

Other recommendations are technical in nature and will be discussed and implemented by the City and BCWS over time, as appropriate.

One recommendation, earlier start times for all commercial collections, was not included in the amended agreement and is not recommended by staff because of the noise impacts that this would have on residences adjacent to commercial properties throughout the City.  The amended agreement does provide staff with the discretion to approve earlier start times for specific areas (e.g. Onizuka Air Force Station) where there are no residential noise impacts.

Another group of recommendations dealing with changes to how residential garbage service is provided and billed may have merit, but would need further study because it would mean significant changes to City policies and procedures and how customers receive service.  Examples of specific changes that BVA says will improve efficiency and worker safety and reduce customer complaints are:

·         Reduce or eliminate the use of nonstandard containers, in particular the use of bags, boxes, or other containers.

·         Reduce or eliminate Unlimited Service by, for example, limiting customers to the contents of the Toter cart and/or charging graduated rates based on the size of the garbage cart used by the customer.

·         Require pre-pay for extra containers set out by Baseline customers to reduce the number of complaints from customers and to simplify billings

In its report, BVA notes a preliminary conclusion that implementing its residential garbage recommendations could allow elimination of most (0.8) of a single-family residential garbage route.  However, given the impacts on customers staff is recommending that if the Council is interested in pursuing these changes, that it allow time for thorough study of the financial impacts and public discussion of the service impacts.  In order not to delay consideration of the updated franchise agreement, these changes have not been incorporated into this agreement (and, in fact, probably can be implemented without amending the agreement).  If the City Council wishes to study these recommendations it can approve Alternative 2 and establish a 2005 study issue on this topic.

BCWS is in agreement with the contract language and has signed two original copies of the document to make it ready for execution by the Mayor if so directed by the Council.  The amended franchise agreement includes significant changes, discussed below, that arise from three sources:

1.      The BCWS proposal

2.      The BVA performance review

3.      The legal review performed by Constance Hornig, Esq., the outside counsel hired by the City

Other, minor updates have been made to the contract to delete obsolete and duplicative language and to reflect changes in services, case law, etc. in the 14 years since the contract was first drafted.

Contract Changes Arising from the BCWS Proposal

Extension of Term - Expiration date of the contract is extended from June 30, 2011 to June 30, 2018.

Extension of Depreciation – Time period for depreciation and use of assets is extended to 10 years from 7 years (for trucks) and 5 years (for other equipment).

The City and BCWS will share equally in the net cost reduction caused by extending depreciation.

One-time Payment – During the November 11, 2003 City Council meeting BCWS offered to pay to the City, upon execution of the amendment, 50% of the depreciation savings that BCWS had already achieved in FY 2002/03 and FY 2003/04. This amount has been calculated as $907,389 based on the current truck and equipment depreciation schedule.

Performance Review Recommendations Incorporated into the Contract

Staff included in the amended contract new or revised provisions to address the following items identified by the BVA performance review.

Route Training – BCWS will implement and document a systematic training program designed to promote efficient, safe collection vehicle routing.

Customer Service Training – BCWS will implement and document a systematic training program focused on the telephone service provided by the company’s customer service staff.

Telephone System – BCWS will make technological and operational changes to its telephone system to enhance customer service and customer service staff accountability.

Vehicle Lease & Salvage Revenues – Company revenues derived from sale or lease of fully depreciated vehicles will be passed along as a reduction in the contractor payment.

Actual vs. Projected Depreciation – Projected depreciation costs paid to BCWS will be reconciled with actual costs, with a corresponding adjustment to a subsequent year’s contractor payment.

CNG Fuel Revenues - Company revenues derived from sale of compressed natural gas to the public will be passed along as a reduction in the contractor payment.  This is in recognition of the fact that the City is paying, through the contractor payment, the fueling station capital costs above the amount covered by grant funds from the Bay Area Air Quality Management District.

Capital Expenses – Capital expenditures over $50,000 for assets other than vehicles and equipment (which are already covered by the agreement) are to be approved in advance by the City.

Performance Review Recommendations Not Resulting in Changes to the Contract

Staff considered, but chose not to pursue, the following BVA-recommended changes:

Earlier start times for commercial refuse collection routes—BVA concluded that allowing earlier start times improves collection safety and efficiency by putting the collection trucks on the street at earlier hours when there is presumably less traffic.  BVA recommended that commercial routes begin one to two hours earlier than the present 7:00 a.m. limit in the contract.

Under the pre-1991 franchise agreement all routes started at 6:00 a.m.  Because so many of the commercial accounts are located adjacent to residences (most notably along the length of El Camino Real), resident complaints about noise from commercial collections were frequent and firmly voiced prior to 1991.  To address the noise complaints, the 1991 agreement moved the time of earliest collection to 7:00 a.m.  This one-hour shift in the start time has virtually eliminated the commercial collection noise complaints.

Shifting collections one hour earlier in the day would allow for collection of more business locations along El Camino Real and other arterials prior to the start of the morning commute and lessen conflicts between the collection vehicles and morning commute traffic.  However, the overall safety implications of the shift have not been studied, and it is conceivable that other, unforeseen safety issues could come into play.  Weighing the known, contentious history of the noise issue against BVA’s slimly documented safety conclusions, staff does not recommend altering the basic 7:00 a.m. start time.  However, BCWS has agreed to language that gives the Director of Public Works authority to make specific exceptions to allow early servicing of accounts where noise cannot impact residences.

Computer System and Database Coordination—BVA made a number of technical recommendations on how to better align City and BCWS processes for managing the flow of information back and forth between the two organizations.  Implementing these recommendations does not require changing the language of the contract.  City and BCWS staff are evaluating the feasibility of implementing the various process recommendations.

Owners’ Compensation—The contract currently provides for payment to BCWS of a specified amount each year identified as “owners’ compensation.”  This element of the contract acknowledges and compensates the company for management services provided to it by its owners and directors and was introduced at the time BCWS assumed the contract in 1992-1993.

BVA evaluated the level of owners’ compensation and found that it was, even if viewed as a second component of the company’s profits, reasonable in amount.  BVA recommended that the City do one of the following with regard to this issue: 

1.      Maintain the current arrangement as is

2.      Require documentation of the services and time provided by each director/owner/officer and the rate of compensation per hour

3.      Explicitly reset the operating ratio to reflect as profit any portion that is not compensation for services and time provided

4.      Revisit the language of the relevant part of the contract to determine whether there should be any redefinition of owners’ compensation

Staff recommends, and the updated contract language reflects, maintaining the current arrangement.  BVA used reasonable assumptions about the amount of work performed by owners, and then concluded that the total of officers’ compensation and profit was within a reasonable range for similar collection operations.

Examples of Contract Changes Arising from Council Direction and Legal and Staff Review

Collection Standards language has been revised and updated to clarify the City’s service expectations.

BCWS is to remove graffiti from its containers within three days.

BCWS is to comply with the requirements of the City’s Environmental Procurement Policy (EPP).  The EPP, adopted in 1999, requires both the City and its contractors to comply with the EPP’s provisions.

Descriptions of events triggering liquidated damages have been clarified.

Additional events triggering liquidated damages have been added:

·         Pavement damage that warrants repair and is caused by truck tires skidding during routine collection operations

·         Driving onto properties where the customer is paying for push out garbage service

·         Failure to maintain collection containers in accordance with contract requirements

·         Failure to complete processes related to customer billing

Compressed natural gas fuel costs will be adjusted for inflation using a federal government natural gas price index.

BCWS is allowed, but not required, to provide a letter of credit as an alternative to the current requirement for a performance bond.

The default and remedies section is revised and updated to clarify the City’s rights in the event of a default on the contract. 

BCWS is to comply with applicable provisions of funding agreements between the City and granting agencies (e.g. Bay Area Air Quality Management District).

The assignment section is revised and updated to reflect the current status of the contract and representations BCWS has made regarding the company’s intent to hold the contract and to not sell it. Obsolete and duplicative content is deleted.

FISCAL IMPACT

In evaluating the fiscal impacts between now and 2018, the dollar values of the alternatives available to the Council are presented in terms of net present value (NPV).  Refer to Attachment C for a full discussion of the alternatives considered by the City Council on November 11, 2003 and the fiscal impacts of those alternatives.

Alternative 1 (Implement BCWS Proposal)

Alternative 1 would result in a total NPV reduction to expense in the Solid Waste Fund of $2,527,727 between now and 2018.  The fiscal impact of Alternative 1 reflects the following:

·         The City benefits from 50% of the 2004-2011 savings resulting from the extended depreciation proposed by BCWS as a Return on Efficiency measure, reducing City expenses by $1,530,467 (NPV of the total savings over seven years)

·         The City would retain 50% of the depreciation savings post-2011, reducing City expenses by $1,256,315 (NPV)

·         Receipt of $907,389 (50% of FY 2002/03 and 2003/04 depreciation savings) from BCWS upon execution of the amended agreement

·         Receipt of $34,912 reimbursement from BCWS for its half of the $69,824 final cost of the BVA performance review.

·         BCWS projects $92,412 in additional FY 2005/06 costs to begin complying with new contract requirements arising from the customer service, safety, and audit recommendations of the performance review.  Staff has reviewed the projection to verify that it is reasonable and the revised contract provides for this projected cost to be included in the FY 2005/06 contractor payment from the City to BCWS.  A reconciliation will be performed after the end of 2005/06 to ensure that the City has paid no more than the actual costs.  Assuming that the projected amount is accurate and ongoing, 13 years of this additional expense would have a NPV cost of $1,201,356.

Alternative 2 (Study changes to residential containers and pricing structures)

Because Alternative 2 does nothing more than create a study issue, Council approval of this alternative does not in itself reduce expenses.  However, should the Council study the issue and ultimately choose to implement the BVA-recommended changes, refuse collection expenses are likely to decrease.  The amount and timing of the decrease would be projected when the study was conducted.

Alternative 3 (No Change)

Alternative 3 would result in no change to current budget assumptions.

CONCLUSION

The amended franchise agreement (Attachment A) carries out the direction given by the City Council on November 11, 2003.  It does so by:

·         Extending depreciation on trucks and equipment to 10 years

·         Splitting the savings from extended depreciation 50/50 between BCWS and the City

·         Extending the contract term to 2018

·         Making, where appropriate, changes to the contract that arose from the BVA performance review

·         Incorporating City-desired changes to the contract in the areas of service standards, assignment and remedies

The amended agreement has been agreed to and signed by BCWS.  In order to implement the November 11, 2003 City Council direction, the Council should approve Alternative 1 and enact an ordinance approving the amended and extended franchise agreement.

If the Council is interested in further study of ways that City pricing and service policies can be changed so as to lower the cost of residential garbage collection, it may approve Alternative 2 and create a Study Issue on this topic.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

ALTERNATIVES

1.    Approve an Ordinance (Attachment D) that approves the Extended and Restated Agreement Between the City of Sunnyvale and Bay Counties Waste Services, Inc. for Collection of Solid Waste (Attachment A) and authorize the Mayor to execute the Agreement.

2.    Create a Study Issue to consider implementing changes to residential garbage collection rates, containers, policies and procedures necessary to improve collection efficiencies and thus reduce expenses.

3.    Take no action.

RECOMMENDATION

Approval of Alternative 1 is consistent with prior City Council direction.

Council may approve Alternative 2 if it wishes to consider studying the benefits of the BVA-recommended changes to residential garbage service. 

Reviewed by:
                                               

Marvin A. Rose, Director, Public Works

Prepared by: Mark Bowers, Solid Waste Program Manager 

Approved by:

Amy Chan

City Manager

Attachments

A.  Agreement Between the City of Sunnyvale and Bay Counties Waste Services, Inc. for Collection of Solid Waste(A hard copy is available in the City Clerk's Office)

B.  Executive Summary, Performance Review of Bay Counties Waste Services (808kb .pdf format)

C.  RTC 03-381
D.  Ordinance MS Word format