Item 23a Staff Report Public Hearing to Consider Solid Waste Management Issues: a) Refuse Collection Rate BaseCOUNCIL AGENDA
DATE: 1-3-95
ITEM NO. az
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
DATE: December 29, 1994
TO: MAYOR AND TOWN CONCIL
FROM: TOWN MANAGER
SUBJECT: PUBLIC HEARING TO CONSIDER SOLID WASTE MANAGEMENT ISSUES:
a) Refuse Collection Rate Base
RECOMMENDATION:
1. Accept public testimony.
2. Close the public hearing.
3. Accept the Rate Review Committee's (RRC) report and adopt Alternative B for rate setting purposes.
BACKGROUND:
Council opened the public hearing to consider the Green Valley Disposal Company performance audit and
the rate base on November 21. An informational report regarding rate base.was presented to Council on
December 5.
The RRC developed two rate base alternatives. These are discussed in its report to the City/Town Managers
(Attachment 1). Exhibit A summarizes the primary assumptions used in preparing the two rate base
alternatives and compares them with GVDC's past and current proposals.
Both rate base alternatives are consistent with previous patterns of change. For example, both eliminate
profits earned on disposal surcharges. Monte Sereno has adopted rates based on Alternative A. Campbell
staff is recommending rates based on Alternative B, but is recommending to Council that it pay its share
of the consultant fees. Saratoga's recommendation was not available at the time of this writing.
The following RRC recommendation summary is taken directly from its report. The assumptions listed apply
to both alternatives, except as noted:
PREPARED BY: Regina A. Faik4
Community : ' Director
RAF:dr
CSD04:A: \CNCLRPTS\COLLBASE.RAT
ATTACHMENT$:
DISTRIBUTION: See page 1 for distribution.
Reviewed by:
y
Revised: 12/29/94 1:51 pm
Clerk Finance Treasurer
COUNCIL ACTION/ACTION DIRECTED TO:
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT:
DATE
A. Operatinq Expenses
1) Use operating expenses reviewed and approved by HF&H for fiscal year 1993-94 for both
Alternatives A & B.
2) Disallow, as operating expenses, any fees incurred by GVDC for the services of Barakat and
Chamberlin, Inc. (BCI), to assist in the 1993-94/1994-96 rate review process.
B. Disposal Costs
1) Use a disposal fee of $42.96/ton, rather than the $46.83/ton requested by Guadalupe
Rubbish Disposal Company (GRDC).
2) Reduce projected tons disposed to 105,490 tons in fiscal year 1994-95 for the five West
Valley jurisdictions, rather than the 119,075 tons proposed by GVDC, in order to account
for the reduced tonnage disposed as a result of the new recycling and yard waste services,
and the current allocation of disposed tonnage among each jurisdiction's residential,
commercial and industrial sectors.
C. P
Alternative A:
1) Disallow any profit on franchise and disposal fees;
2) Provide for a 5.8% after-tax return on allowed operating expenses, excluding franchise and
disposal fees.
Alternative B:
1) Allow a profit on franchise fees and on disposal base fees
2) Disallow any profit on disposal surcharges in fiscal years 1993-94 and 1994-95.
3) Provide for a 5% after-tax return on allowed operating expenses, franchise fees and disposal
base fees.
D. Taxes
Use the estimated effective tax rate, as proposed by HF&H in the Final Audit Report (35%), rather
than the marginal tax rate (49.5%) requested by GVDC.
E. Balance Accounts
Balance accounts wia be used in fiscal years 1994-95 and 1995-96, after which time the desirability
of balance accounts will be reviewed.
F. Future Considerations
The Committee will consider strategies for implementation of all or portions of the recommendations
contained with the recently completed performance audit of GVDC.
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT:
DATE
DISCUSSION:
Rate Base
Alternative B results in a $12,997,035 operating budget for GVDC. Los Gatos' share, including five months
of the new recycling and yard waste collections costs is $4,999,748.
The budget for FY 1993/94 was agreed upon by the GVDC and the consultants, HF&H base on the
performance audit review. The 1994/95 budget was developed by Increasing the operating expenses from
the 1993/94 budget by the CPI and reducing some expenses due to anticipated savings from recycling and
yard waste collection.
ogeratin4 Examma
Alternatives A and B recommend disallowing fees paid by GVDC to Its consultant, Barakat & Chamberlin,
Inc. (BCI), not be included as an operating expense. BCI claims its fee is justified because it was able to
validate approximately one million dollars in expenses which HF&H had disallowed. In fact, the
reconciliation was based on GVDC providing information it had previously withheld. HF&H's preliminary
findings were based on information provided to HF&H at the time. After the draft audit was issued, GVDC
staff provided information requested by HF&H . Most of the original findings were subsequently resolved.
Taxes
HF&H recommends, and the RRC supports, using a tax rate of 35%. In its original proposal, GVDC argued
for a 49.5% tax rat. HF&H arrives at its recommendation by taking the profit, dividing it by four (assuming
each shareholder receives an equal share) and determines a 35% state and federal tax rate. GVDC assumes
that shareholders are taxed at the highest rates because they have revenues from other sources.
Staff has requested GVDC to provide copies of shareholders tax returns to determine actual taxes paid
(Attachment 3). GVDC has denied this request (Attachment 4).
Balancing Accounts
According to HF&H, the West Valley balance account deficit under Alternative B is $1,087,207 through FY
1993/94. The deficient exists because rates did not cover expenses plus profits in those years. The
1994/95 deficit is estimated at $1,892,500 and Is due to rates not increasing until February 1, 1995.
Rather than Increase the rates to cover the entire deficit in one year, staff recommends amortizing the
increase over three years. This approach results in a 25.7% Increase February 1, and a 10.2% increase July
1, 1996, Including recycling services, yard waste collection, and other AB 939 related projects.
A full report regarding balancing accounts will be provided to Council prior to the end of the fiscal year.
Staff will work with the RRC, HF&H, and GVDC representatives to provide a full description and analysis of
the balance account. For rate setting purposes staff recommends that HF&H's assumptions be used as
recommended by the RRC. Any adjustments to the balancing account can be made prior to setting new
rates effective July 1996. Even if balancing account deficits are adjusted downward, it is unlikely that the
proposed rates will result surplus revenues to GVDC.
PAGE 4
MAYOR AND TOWN COUNCIL
SUBJECT:
DATE
ENVIRONMENTAL ASSESSMENT$:
This is not a project as defined under CEQA, and no further action is required.
DISTRIBUTION:
Jean Cushman, 16123 Loretta Lane, Los Gatos 95032
Dan Williams, 304 Harding, Los Gatos 95032
Margaret Woosley, 18 Fulmer, Los Gatos 95032
Gene Humphlett, 18400 Overlook Road, Box 39, Los Gatos 95030
Rate Review Committee
Green Valley Disposal Company, Gerard Wen, P.O. Box 1227, Los Gatos 95031
John Sneiham
Ron O'Neill
Attachments:
1. Memorandum to City and Town Managers
2. Letter to GVDC regarding effective tax rates
3. GVDC's response to proposed tax rates
4. Letter to Town Manager dated 12/20/94
5. 1994-95 Projected Revenue Requirement: Alternatives A, B. and GVDC Proposal
Amortization Schedule
Memorandum
ATTACHMENT 1
December 29, 1994
To: City and Town Managers
From: Rate Review Committee
Subject: Recommended Rate Base for Rate Setting Purposes: FY 1993-94/1994-95
RECOMMENDATION:
That Council establish a rate base based on Alternate A ($13,091,448) or Alternate B
($13,273,432).
L SUMMARY
The Rate Review Committee met on December 12 to finalize its recommendations concerning
the assumptions to be used in calculating profit due Green Valley Disposal Company (GVDC)
for rate setting purposes for fiscal years 1993-94 and 1994-95. The assumptions are outlined
below and the reasons for the assumptions are explained in subsequent pages of this memoran-
dum. This memorandum also contrasts GVDC's request, the recommendations from our
consultant, Hilton Farnkopf and Hobson (HF&H) and the Committee's recommendations.
The Committee proposes two alternatives. Alternative A uses the recommendations proposed
by HF&H and disallows a profit on all franchise and disposal fees, also referred to as pass -
through expenses. Alternative B disallows profit on a portion of the pass -through expenses, and
allows profit on the remaining pass-throughs. GVDC requests that they receive a profit on all
pass-throughs.
The following assumptions apply to both alternatives, except as otherwise noted:
A. Operating Expenses
1) Use operating expenses reviewed and approved by HF&H for fiscal year 1993-94
for both Alternatives A & B.
2) Disallow, as operating expenses, any fees incurred by GVDC for the services of
Barakat and Chamberlin, Inc.(BCI), to assist in the 1993-94/1994-95 rate review
process.
B. Disposal Costs
1)- Use a disposal fee of $42.96/ton, rather than the $46.83/ton requested by
Guadalupe Rubbish Disposal Company (GRDC).
Recommended Rate Base for Rate Setting Purposes: Page 2
FY 1993-94/ 1994-95
2) Reduce projected tons disposed to 105,490 tons in fiscal year 1994-95 for the five
West Valley jurisdictions, rather than the 119,075 tons proposed by GVDC, in
order to account for the reduced tonnage disposed as a result of the new recycling
and yard waste services, and the current allocation of disposed tonnage among
each jurisdiction's residential, commercial and industrial sectors.
C. Profit
Alternative A:
1) Disallow any profit on franchise and disposal fees;
2) Provide for a 5.8% after-tax return on allowed operating expenses, excluding
franchise and disposal fees.
Alternative B:
1) Allow a profit on franchise fees and on disposal base fees
2) Disallow any profit on disposal surcharges in fiscal years 1993-94 and 1994-95.
3) Provide for a 5% after-tax return on allowed operating expenses, franchise fees
and disposal base fees.
D. Taxes
Use the estimated effective tax rate, as proposed by HF&H in the Final Audit Report
(35%), rather than the marginal tax rate (49.5%) requested by GVDC.
E. Balance Accounts
Balance accounts will be used in fiscal years 1994-95 and 1995-96, after which time the
desirability of balance accounts will be reviewed.
F. Future Considerations
The Committee will consider strategies for implementation of all or portions of the
recommendations contained with the recently completed performance audit of GVDC.
Recommended Rate Base for Rate Setting Purposes: Page 3
FY 1993-94/ 1994-95
IL BACKGROUND
A. Key Agreement Terms and Current Policies
HF&H performed a rate review process in compliance with Sections 6(E)(i) through
6(E)(iii) of the Franchise Agreement. The resulting budget (or "rate base") is used to
establish a refuse collection rate. These sections delineate the Rate Review Committee's
responsibility in reviewing a service rate request and read as follows:
"6E(i) Take into consideration the acceptability of expenditures, performance incentives
and sanctions, rate comparability, and other information as the Committee
determines to be appropriate.
(ii) When determining the profit level, use the operating ratio method with a five (5)
percent after-tax return (excluding tax credits and operating losses) as a guideline.
(iii) When calculating the revenue side of the operating ratio, exclude:
(a) Prior years' earnings from short-term investments generated from prior
profits or retained earnings in each fiscal year;
(b) Tax credits; and
(c) Prior year net operating losses."
B. Operating Expenses
The Agreement specifies that each jurisdiction's Council "... shall determine what are
the proper expenses to be used in the calculation of a rate base for a rate adjustment after
COMPANY has been given an opportunity to provide documentation to CITY's adminis-
trative staff and the City Council." (Section (G)(i)).
The term "rate base" as used in Section (G)(i) of the Agreement refers to the expenses
that GVDC is allowed to recover through the refuse rates. It does not refer to the
expenses on which profit is calculated, i.e., operating expenses. The distinction is
important since the total revenue requirement includes operating expenses, allowed
profit, and franchise and disposal fees on which profit may or may not be allowed.
C. Franchise Fees
The Franchise Agreement stipulates that GVDC pay ten percent of its gross revenue to
the City/Town.
Recommended Rate Base for Rate Setting Purposes: Page 4
FY 1993-94/ 1994-95
D. Pr li
The Agreement specifies that the RRC is to consider the schedule of rates proposed by
GVDC as part of the review. The Committee is to use an operating ratio method with a
guideline of a 5% after-tax return.
E. Disposal Fees
GVDC's primary disposal site is owned and operated by Guadalupe Rubbish Disposal
Company (GRDC). GRDC is owned by the same four stockholders who own GVDC.
Each of the West Valley jurisdictions has a separate Agreement with GRDC to dispose of
refuse at Guadalupe Landfill. The Agreement specifies that the per -ton tipping fee
be determined annually based on a survey of comparable tipping fees charged at other
Bay Area landfills.
IIL DISCUSSION
A. Operating Expenses
1) The operating expenses for both Alternatives A and B have been reviewed by
HF&H.
2) Consulting Fees
GVDC retained BCI to assist in its evaluation of the recommended rate adjust-
ment contained in the Draft Audit Report issued by HF&H in January 1994.
During meetings with GVDC and BCI through November, the estimated cost was
$73,500, and in December, Gerard Wen, General Manager, revised that amount to
$48,387 for FY 1994-95 and $93,000 for FY 1993-94.
The Committee recommends denial of GVDC's request to include the fees
incurred as an operating expense since BCI assisted GVDC with evaluating a
recommended rate adjustment, and GVDC is contractually obliged to Section
6(D), to provide the information concerning the rate submittal at no cost to the
jurisdiction. BCI confined its comments to profit discussions. It did not respond
to any of the findings.
B. Disposal Fees
1) Calculated Fee
Disposal fees are comprised of a base fee and surcharge fees. The base fee is
retained by the disposal operator. Surcharges include various state, County and
Recommended Rate Base for Rate Setting Purposes: Page 5
FY1993-94/1994-95
local fees over which GRDC has no control. For rate setting purposes, the
Committee recommends a $42.96/ton fee; this retains the disposal base fee of
$26.60 approved by the Council for fiscal year 1992-93 plus $16.36/ton as FY94-
95 surcharges. The Committee is meeting with GRDC representatives to deter-
mine a new base fee to be presented to the Councils for approval. The new fee
will be effective July 1, 1994, and be applied retroactively using a balance
account when rate adjustments are made in July 1996.
2) Projected Tonnages for FY1994-1995 and FY1995-1996
The Committee recommends assuming a projected 106,183 tons disposed in fiscal
year 1994-95 for the five West Valley jurisdictions, rather than the 119,075 tons
proposed by GVDC. The lower figure accounts for waste diversion as a result of
the new recycling and yard waste services scheduled to begin February 1, 1995.
In addition, the Committee recommends assuming 101,182 tons disposed in FY
1995-96. The tons are even lower because the recycling programs will have been
in place the full year as opposed to five months in FY 1994-95.
C. Profit
1) Profit on Franchise Fees and on Disposal Base Fees
The Committee has reviewed records from 1987-92 and notes that profit on
franchise fees and on disposal base fees has been allowed, except for the 1990-91
and 1992-93 rate determinations.
Alternative A disallows profit on all franchise and disposal fees. This is consis-
tent with the HF&H recommendation and completes the direction that the Com-
mittee was moving toward during the last rate setting process to eliminate all
"pass through expenses" for profit calculations.
Alternative B allows a profit on franchise and disposal base fees, but disallows
any profit on surcharges to the disposal fees.
2) Profit on Disposal Surcharges
Alternatives A and B continue a policy begun in fiscal year 1990-91 when the
four jurisdictions' Councils approved disallowing any profit on the increase in
disposal surcharges. In fiscal year 1992-93, the jurisdictions applied the average
percent profit earned by GVDC from fiscal years 1986-92 to operating expenses,
including franchise and disposal fees, so that GVDC would not earn windfall
profits on large increases in disposal surcharges.
Recommended Rate Base for Rate Setting Purposes: Page 6
FY 1993-94/ 1994-95
The Franchise Agreement does not explicitly allow or disallow profit on disposal
surcharges. Disallowing these fees from profit is recommended for two primary
reasons:
a) the jurisdictions have an Agreement with GRDC to dispose of refuse at
Guadalupe Landfill. This Agreement is significant for three reasons:
i) Because it was negotiated and willingly entered into by GRDC, it
must be assumed that GRDC believed that an adequate profit could
be provided through the negotiated disposal rates;
ii) GVDC is not at risk for disposal rate increases or for any minimum
tonnage requirement; and
iii) GVDC has no control over the amounts or the increases in these
fees.
b) Surcharges were never contemplated by the parties at the time the Fran-
chise Agreement was negotiated and are clearly not an expense on which
profit should be allowed. Surcharges were first instituted in 1987-88, four
years after the Franchise Agreement was signed, at $0.07/ton, and were
less than $1.00/ton until fiscal year 1990-91. In fiscal year 1990-91, the
City of San Jose annexed Guadalupe Landfill, making GRDC subject to a
$3.00/ton landfill business tax, which increased the surcharges to
$5.08/ton. Surcharges have steadily increased since then, and in fiscal
year 1994-95 represent 38% of the per ton disposal fee requested by
GRDC.
Please refer to the graph, "Historic and Proposed Disposal Fees, Per Ton, Fiscal
Years 1983-95" (Exhibit B).
GVDC disposed of some garbage at All -Purpose Landfill from July through
September 1993, and paid fees which were much lower than those charged by
GRDC. On request from staff, GVDC provided data on the tons disposed, base
fees and surcharges paid by GVDC to All -Purpose Landfill. The reason for the
request is to determine a profit on base fees and exclude a profit on surcharges
assessed by All -Purpose Landfill, as proposed in Alternatives A and B. HF&H is
unable to reconcile the information provided by GVDC with information pro-
vided by All -Purpose Landfill and received from the City of Santa Clara. For this
reason, HF&H used the same ratio of base fees to surcharges determined for
Guadalupe Landfill and applied them to All -Purpose Landfill.
Recommended Rate Base for Rate Setting Purposes: Page 7
FY 1993-94/ 1994-95
3) Provide a 5% After -Tax Return on Allowed QperatingExpenses
Alternative A proposes a 91% pre-tax operating ratio, which yields a 5.8% after-
tax profit, excluding profit on franchise and disposal fees. Alternative B pro-
poses a 5% after-tax return on allowed operating expenses, franchise fees and
disposal base fees.
D. Taxes
Effective Tax Rate
• In fiscal year 1986-87, GVDC converted to a Subchapter S corporation. GVDC files
federal taxes under Subchapter S, paying no direct federal income taxes, and pays only a
state tax of 1.5% of taxable income in 1994. The profit is reported as income on the
shareholders' personal income tax returns. In 1994, the effective tax rate on that allowed
profit (including the state S-Corp tax and state and federal taxes equivalent to those paid
by a married individual filing jointly) was approximately 35%. GVDC's representatives
apply a marginal tax rate of 49.5%, based on total taxable income from other sources. An
effective tax rate is assumed for rate setting purposes. It is reasonableto set refuse rates
high enough to cover taxes assessed on the Franchise Agreement income. GVDC has
declined to provide copies of shareholders tax returns to document actual tax rates.
E. Use of Balance Accounts
History and current application
Over the past seven to eight years, the Committee has used balance accounts to ensure
that GVDC receives a reasonable rate of return, as specified in the Agreement. Balance
accounting is not mentioned in the Franchise Agreement and is not reflected in GVDC's
financial statements.
Balance accounts are useful because adopted refuse rates adjustments are based on a
proposed budget for the upcoming year and actual expenses may be different in some line
items. If allowed expenses exceed or are lower than the budgeted amounts, then the
resulting overage or deficit is included in the following year's rate adjustment. Similarly,
all disallowed overages are excluded from the balance account figure due GVDC. Use of
a balance account is consistent with many other California jurisdictions.
Use of balance accounts in fiscal years 1994-95 and 1995-96 are important since the new
recycling and yard waste services will divert significant tonnages from disposal, thereby
decreasing disposal fees. In addition, the total cost to collect the garbage will decrease
since fewer trucks will be needed to collect the decreased quantities intended for
disposal. These avoided costs from collection and disposal will be monitored by for
Recommended Rate Base for Rate Setting Purposes: Page 8
FY 1993-94/ 1994-95
disposal. These avoided costs from collection and disposal will be monitored by the
Committee and GVDC over the next 1.5 years. Projected disposal expenses have been
reduced for 1994-95 and 1995-96 for this reason. Adjustments to the currently allocated
costs for garbage collection and disposal assumed by the jurisdictions will be made in
July 1996, when the next rate adjustment is planned. The Rate Review Committee is
currently reviewing a draft rate review manual prepared by HF&H that will present
options for a standardized rate setting methodology that may not incorporate future
balancing accounts.
Three -Year Amortization Schedule
The rate structure that is to become effective February 1, 1995, must consider the
balancing account deficit, in addition to raising enough revenue to pay for existing and
new services. In the consultant's December 5, 1994, letter, HF&H revised the balancing
account amount downward to approximately S778,000. This is the total amount that the
West Valley Cities must collect to pay for previous years' revenue shortfalls. Due to the
added cost of expanded recycling and unlimited yard waste collection services which will
also begin in February 1995, the West Valley jurisdictions are considering amortizing the
balancing account over a three-year period (fiscal years 1994-95 through 1996-97).
Several alternatives were considered, but the three-year amortization provides the
greatest stability in rates, while compensating GVDC for previous years' shortfalls over a
relatively short period of time. Rates would not be adjusted again until July 1996, when
a similar increase would be applied to the refuse rates. The adjustments also assume an
annual inflation rate of 3.5% and provide an interest rate on the balance carried of 8.75%
(one point above the prime rate at the time the calculation was made in November 1994.)
GVDC staff has indicated that they may not be interested in carrying the balancing
account amount over the three-year period. If so, the jurisdictions will propose to carry
the amortized amount through a loan from General Fund reserves. The City would then
collect payments through GVDC's billings and would receive the interest payments on
the balance which would be added to the reserve. The recommended interest rate
compares favorably to the City's current earnings.
F. Future Considerations
1) Strategies for implementating all or portions of the recommendations contained
with the recently completed performance audit of GVDC.
2) Explore the possibility of re -arranging the payment process to GRDC so that the
jurisdictions would issue payments directly to GRDC, rather than GVDC. In this
way, the jurisdictions will avoid paying a profit to both GRDC and GVDC for a
single operational fee.
Recommended Rate Base for Rate Setting Purposes: Page 9
FY 1993-94/ 1994-95
G. Public Comments
Throughout the rate setting process, the public has been given several opportunities to
comment. Although residents are pleased to see the additional efforts to reduce the
amount of refuse thrown away, some residents have questioned the requirement that all
households participate and pay the new fees. The reason that universal service is
recommended (and is provided for in the new recycling and yard waste agreements) is
because these services will directly benefit all customers in the community by containing
future increases in disposal costs, by meeting state mandates and, thereby, avoiding
costly fines -- fines that would impact the cost of solid waste services for all users.
Universal service offers optimum recycling services to all households, since it will be
provided weekly on the same day as garbage collection. The Committee also considered
the effect that elective service could have on rates for those who do participate. Eliminat-
ing a small number of households from the collection route has, at most, a minor effect
on reducing the cost of providing the services to the community. Slightly reduced
collection costs may be completely offset by increased administrative costs. In addition,
any reduction in the number of households paying for the new services will result in
higher rates for residents who do use the services. With even higher service costs,
residents would be less inclined to participate in the new services, resulting in greater
difficulty in complying with state mandates.
Residents have also asked why citizens who already haul their yard waste to the landfill,
or who participate in the annual clean-up events, must still pay for yard waste services.
Clearly, most residents who carefully segregate their yard waste before taking it to the
Guadalupe Landfill or setting it out for the clean-up events believe that it was eventually
being recycled at that landfill. This is not the case. The only yard waste currently being
recycled in the West Valley Cities comes from Saratoga, where the yard waste collection
service was added in 1992. All other yard waste is currently buried, not recycled. Staff
from GRDC, the landfill operator, report that Guadalupe Landfill cannot recycle yard
waste that is not delivered via a recycling service due to a higher incidence of contamina-
tion from trash, rock and other material that can damage processing equipment, whereas a
recycling service provides greater monitoring to eliminate these types of contaminants.
IV. PROPOSAL COMPARISONS
Following is a brief summary of the assumptions used in GVDC's request, and the
recommendations from the consultant's report and the Committee. GVDC's requested
budget increase is enclosed as Exhibit C, and is entitled "Green Valley Disposal Com-
pany, Inc., 1994/95, West Valley Only". HF&H is unable to reconcile the figures shown
on that exhibit in the column titled "HF&H Judgmental Profit Method" to its calculations
as contained in the Final Audit Report.
Recommended Rate Base for Rate Setting Purposes: Page 10
FY 1993-94/ 1994-95
Exhibits:
A. Comparison of FY 1993/94 Rate Setting Assumptions
B. Historic and Proposed Disposal Fees
C. GVDC's Requested 1994/95 Budget (First Proposal)
CSD01:A\znemos\R CReoom.MM3
Exhibit A
Comparison of FY1993-94 Rate Setting Assumptions
GVDC
West Valley
Committee Committee Cities Only
Assumption Alt. A Alt. B GVDC (1) 12/21/94
Profit on franchise fees No Yes Yes Yes
Profit on disposal base fees No Yes Yes Yes
Profit on disposal surcharges No No Yes No
Consultant fees as
operating expense No No Yes Yes
% After -Tax Return 5.8% 5% 5% 4.5%
Assumed tax rate 35% 35% 49.5% 43.3%
Projected tonnages,
FY1993-94 110,645(2) 110,645(2) 119,075(3) 95,747
Disposal Fee/Ton $42.96 $42.96 $46.83 $42.96
Pre -Tax Profit $658,872 $822,658 $1,239,429 $956,586
After -Tax Profit $428,267 $534,728 $625,912 $542,384
Total Revenue Requirement $13,091,448 $13,273,432 $13,757,659 $12,095,736
(1) Provided by GVDC from information on Attachment #3
(2) HF&H estimates
(3) Provided to HF&H by GVDC
Ekhibit B
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Attachment 2
December 8, 1994
CITY OF MONTE SERENO
Gerard Wen
Green Valley Disposal Company
573 University Avenue
Los Gatos, CA 95030-4423
iao40 SARATOGA Las GATOS ROAD
MONTE SERENO. CALIFORN A 95030
TELEPHONE: 4.05-3e4.7e36
FAA: J.05-195•7651
]ATL.
Tf}
CC)
FXi:'F? !1
Nor E./7 Ye:4%1 1i_
FAX i 3ATA c PAGrS
F AY
Via Facsimile; Original to Fo11g
Dear Gerard:
Re: Effective Tax Rates; GVDC Financial Statement, FY93-94
The Rate Review Committee has reviewed the various documents provided by you over the
past two weeks and appreciates your timely response. For reasons outlined in the Final
Performance Audit Report, the Committee has determined that effective tax rates rather than
estimated marginal tax rates will be used for profit calculation purposes for fiscal years 1993-
94 and 1994-95. These rates will be used unless Green Valley Disposal Company provides
copies of the income tax returns for each of the Company's shareholders for the two years
specified. Please respond in writing by 5 p.m., December 9 with your response. If you elect
to provide copies of the tax returns, please provide me with a copy by 11 ate, December 12.
This information is needed as soon as possible since approval of the proposed rates by the
Monte Sereno City Council is now scheduled for December 20.
In addition, this is to remind you of the Committee's request for four copies of the Company's
Financial Statement for fiscal year 1993-94, as was discussed at our December 5 meeting with
you. Please also provide the copies to me by 11 a.m., December 12 for distribution to the
Committee- As you know, the Franchise Agreement requires that the audited report be
submitted by October I, 1994.
Sincerely.
' l/L4a- Alas -
Vera Dahle-Lacaso
West Valley Cities Solid Waste Manager
AuditlEffrxRt. GVD
(] �fiJJy:J 1 GC)."
Tot Gahla-Lacers, Vera
From: Gerard tin
LLB ♦J 1 1✓ JV
. ...... .. . ..
12-13-14 7:43a. p. 1. of 1
To- Vera Dahle-Laca7e
FAX
Attachment 3
December 12, 1994
From: Gerard Wen la
Green Valley Disposal Company, Inc.
I have received your December 8, 1994 night letter requesting copies oldie
individual tax returns for each stockholder for the years 1993/94 and 1994/95.
Green Valley respects the privacy of its employees and owners, and as such, we
will not be providing copies of the personal tax returns of the individual owners.
As I told you cm December 9, 1994, that in fact even if we wanted to provide copies
of the returns, the tax returns for those years have not been prepared.
We continue to believe that consistent with past practice, it is most appropriate to
use the marginal rather than the effective tax rates. As has been explained, Green
Valley converted from a C-Corporation to an S-Corporation in 1987 in order to
allow the jurisdictions to take advantage of the lower combined S Corporation and
individual tax rates. The decision to move to the S-Corporation was evaluated
using marginal tax rates for comparison.
The aforementioned decision was never based on the hypothesis that the S-
Corporation status would allow the jurisdictions to take advantage of dividing the
income evenly among the four shareholders and there using the lowest possible
effective individual tax rate four times. We believe it is very inappropriate and
unfair to now attempt to use the lowest possible individual tax rates to penalize the
owners of Green Valley. As offered previously, Green Valley's certified public
accountant from Hood & Strong. CPA is available to answer any questions the
Rate Review Committee may have regarding the appropriateness of using the
marginal tax rates for the calculation of taxes on the profits for Green Valley's
owners
DEC 2 2 igga
GREEN VALLEY DISPOSAL COMPANY, INC.
Attachment 4
573 UNIVERSITY AVENUE • PO BOX 1227 • LOS GATOS. CA 95031-1227 • PHONE(408) 354-2100
December 20, 1994
Dave Knapp
Town of Los Gatos
110 E. Main Street
Los Gatos, CA. 95030
Dear Dave,
I have attached for informational purposes only, a letter which was delivered today
by Green Valley Disposal to the Monte Sereno Council and Staff' We wanted you
to be aware that we have been forced to take this step with the City of Monte
Sereno as a result of the recommendation proposed by staff for Council action
tonight. It is our understanding that the West Valley cities/town agreed to wait for a
proper legal interpretation of the contract before going any further. It appears that
Monte Sereno staff has unilaterally departed from that agreement.
We remain hopeful that we will be able to resolve the outstanding issues with the
remaining West Valley cities/town, within the proper legal context, prior to
requesting action by your Council.
Please call if you have any questions. We remain available to discuss the
outstanding issues.
Very truly yours,
t-ett--/(
Gerard Wen
GREEN VALLEY DISPOSAL COMPANY. INC.
73 UNIVEGTv -VENUE •
Pamela Bancroft, Mayor
City of Monte Sereno
17288 Eaton Ln.
Monte Sereno, CA 95030
? C. 3GX • _ S IS.a=v3' • u CNE =C8i 3.5_,CC
December 20, 1994
Re_ meeting agenda for December 20, 1994
Dear Mayor Bancroft
We received the Report to Monte Sereno ,n k :)anal - ?roposed Rate Schedule
'or C ollecnon and Disposal or. Solid Waste We have now been advised that staff is
asking Council to take action on December =.0. i 994. on this subject.
At this point in time. Green Valley must express its concern and refuse to parncipate
in what we believe to be an inappropriate action.
On November 30, 1994, our attorney met with Mike Riback, legal counsel for the
Rate Review Committee, for discussions regarding the appropriate legal
interpretation of the contract documents. An agreement was struck whereby our
attorney agreed to provide initial documentation to Mr. Riback regarding the proper
historical assertion and in return? Mr. Riback had assured us he would review the
documents and go through any additional documents in the possession of the
jurisdictions which would shed light on the subject. Then the attorneys were to
provide a proper legal interpretation of the contract before going any further.
It appears that staffnow has unilaterally departed from that agreement,. with staff
recommending Mr_Hobsoa's inappropriate recommendation, regardless of
both the proper legal history and the agreement to await the interpretation_
from the attorneys_
1.
In view of the fact that we see absolutely nothing to be gained for either side by a
public display of discord and the fact that we believe the action now being legal
recommended is unilateral rate setting, totally disregarding the contract and the
ris+its of Green Valley Disposal, we will not be in attendance at the Council session,
although we will send our retained consultant to answer any questions that might
arise.
We truly dislike finding ourselves in this position, but under the circumstances, we
believe we have no choice.
cc: Cotmcilmembers
Carolyn Lehr
7
Very truly yours,
1
Gerard Wen
General Manager
1 L,Lts�'i4 14:22
a 7111 i13 S2i4 P.62
Attachment 5
Operating Costs:
Labor
Operating Coats
Depreciation and Interest
Administrative Costs
Subtotal
Disposal Costs
Franchise Pees
Total Operating Costa
Profit
Exl rr Iv
1994-95 Projected Revenue Requirement
and Required Overall Rate Increase
RRC Alternative A
1994-95
Projected
West Valley
Cities
$3,700,216
1,550,362
5930189
415,523
$6,259,590
4,076,908
1,216,916
$11,553,414
615,749
Co+npany's Projected 1994-95 Revenue $12,1669,163
Requirement
Estimated 1993-94 Cumulative Shortfall
Surcharges
Grass Revenue Requirement
Revenue fmm Current Rates
1994-95 (Surplus)/Dcfkit
Required Overall Rate Adjustment
832,409
1,789,483
$14,791,055
13,752,876
$1,038,179
7.5%
(Includes four West Valley Cities and County area 3.)
(page 1 of 4)
12/28/94 14:22
E 510 1t3 3234 P.B3
EXHIBIT IV
1994-95 Projected Revenue Requirement
and Required Overall Rate Increase
RRC Alternative B
1994-95
Projected
West Valley
Cities
Operating Costs:
Labor $3,700,216
Operating Costs 1,550,362
Depreciation and Interest 593A89
Administrative Costs 415,523
Subtotal $6,259,590
Disposal Costs 4,270,134
Franchise Fees 1,257,524
Total Operating Costs
Profit
$11,787,248
787,992
Company's Projected 1994-95 Revenue $12,575,240
Requirement
Estimated 1993-94 Cumulative Shortfall
Surcharges
Gross Revenue Requirement
Revenue from Current Rates
1994-95 {Surplus}/Deficit
Required Overall Rate Adjustment
1,087,207
1,982,929
$15,645,376
13,752,876
$1,892,500
13.8%
(Includes four West Valley Cities and County area 3.)
(page 2 of L)
4
l L/ La+ 74 1 4: L4
A ,Lo rc„ JL14
b4
EXHIBIT IV
1994-95 Projected Revenue Requirement
and Required Overall Rate Increase
CVDC Proposal
1994-95
Projected
West Valley
Cities
Opel a Ling Costs:
Labor $3,766$93
Operating Costs 1,548,979
Depreciation and Interest 588,789
Administrative Costs 597,780
Subtotal $6,502,441
Disposal Costs 4,270,134
Franchise Fees 1,299,703
Total Operating Costs
Profit
$12,072,278
924,757
Company's Projected 1994-95 Revenue $12,997,035
Requirement
Estimated 1993-94 Cumulative Shortfall
Surcharges
Gross Revenue Requirement
Revenue from Current Rates
1994-95 (Surplus)/Defidt
Required Overall Rate Adjustment
1,604,784
1,983r427
$16,585,246
13,752,876
$2,832,370
20.6%
(Includes four West Valley Cities and County area 3.)
(page 2 of 'If)
12/28/94
14:29 2 516 713 3244
P.65
Town of Los Gatos
Balancing Account 3-Year Amortization Schedule
1994-95 1995-96 1996-97 1997-98
Revenue from 4,176,365 5,667,291 5,667,291 6,245,354
Current Rates (b)
Revenue 4,999,748 5,579,165 5,774,436 5,976,541
Requirement
Current (823,383) 88,126 (107,145) 268,813
Surplus/(Deficit)
Beginning (413,537) (687,908) (656,119) (247,298)
Surplus/(Deficit)
Interest on BA (72,207) (56,336) (62,098) (9,878)
Ending Surplus/ (1,309,127) (656,119) (825,362) 11,637
(Deficit) before rate adj.
Amortized Portion (a) 621,219 0 578,064 0
Ending Surplus/
(Deficit)
(687,908) (656,119) (247,298) 11,637
Required Rate 25.70% 0.00% 10.20% 0.00%
Adjustment
Assumptions:
Operating Ratio
Inflation Rate
Interest Rate
5.00% after-tax profit on op. exp. excl. disposal surcharges
3.50%
8.75%
1994-95 rate adjustment effective 2/1/95
No rate adjustment on 7/1/95
1996-97 rate adjustment effective 7/1/96
1994-95 revenue requirement includes 5 months of g/w and recycling
1995-96 revenue requirement and beyond includes 12 months of g/w and recycling
(a) 1994-95 amortization includes an additional $174,000 generated from residential rates
(b) 1995-96 revenues and beyond include an additional $417,600 from residential revenues
(page 4 of 4)