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Getting a firm handle on the costs for your agency to provide for solid waste services is a key focus for any solid waste manager. A rate study provides essential data on the revenues and expenses of an agency, and pro forma modeling provides a path to determining the appropriate path for the future.
By Marc J. Rogoff and Giorgio Castro

Over the past 40 years, I have been involved in more than 50 rate studies, including solid waste, potable and reclaimed water, wastewater, stormwater, and street lighting programs. All of these follow a basic pattern from data collection, modeling, report writing, and public presentations. This article focuses on my experiences in solid waste management since, unlike the others, there is no standard textbook to help practitioners begin their assignments.

When I was starting this role in the public sector, my department engaged an experienced accounting firm to help prepare their department鈥檚 first-rate study. Given that I had just started my MBA program at a local university in Tampa, FL, I tagged along with these experienced rate analysts to learn the 鈥渢ools of the trade.鈥� Much of what I soon learned, and my later experience in conducting solid waste rate studies, is briefly summarized in this article.

Background Materials for Your Assignment
Unlike the water and wastewater industry, solid waste does not have a standard manual published by a major public works association. So, several solid waste professionals who were members of the Solid Waste Committee of the American Public Works Association (APWA) decided to write a brief manual to help educate public works and solid waste directors on the bare sides of solid waste rate making. This manual was soon a 鈥渂est seller鈥� for APWA. In addition, we have written almost 25 articles published in various solid waste magazines, which describe lessons learned based on case studies of particular rate study projects. These run the gamut of waste collection, transfer station operations, landfill operations, and solid waste master plans. Several of these are included in the reference section at the end of this article. In our opinion, all these sources should be consulted if you are planning a rate analysis.

Why Do You Conduct Rate Studies?
Most agencies conduct a rate study to evaluate the cost of providing solid waste, recycling, and landfill disposal services. The study is used to develop recommended rates for these services for each new fiscal year and to support uniform services with various service-level options throughout the community. Further, competition from private haulers requires municipal providers of solid waste services to look for ways to enhance revenues by expanding services, such as commercial collection, roll-off pickups, and recycling services. Addressing long-term maintenance and vehicle replacement is complex and risky without a long-term financial plan.

I recommend an initiative-taking approach to engineer, manage, and design a strategic, sustainable, and detailed approach to long-term financial planning. A detailed approach shown in Figure 1 provides the flexibility to show fair and effective solid waste system rates while enabling a decision-maker to compare alternative strategies that address these key issues:
鈥� Revenue Sufficiency
鈥� Fair and Equitable Cost Recovery
鈥� Cost of Service
鈥� Cost Allocation
鈥� Level of Service Standards
鈥� Capital Project Needs
鈥� Customer Classification
鈥� Recycling Incentives

A rate study, if conducted appropriately, can help provide the agency with a long-range financial business plan. Each rate study requires a task plan and a project concept (see Figure 1), and to manage the following:

鈥� Development of a tailored rate model
鈥� Identification of a capital investment plan and fleet replacement schedule, including consideration of closure and long-term care
鈥� Independent evaluation of personnel, materials and supplies, and indirect expenses
鈥� Development of a revenue/rate plan and alternative rate structures
鈥� Ensuring sufficient reserves for near-future facility expansion
鈥� Review and recommendations on the operation of a solid waste system

In short, the rate study provides a deeper understanding of what rates should be and distributes costs appropriately to various functional areas of an operation. Also, it is used by our clients to estimate year-by-year what is possible using various scenarios. For example, a municipality would like to buy five new collection vehicles or expand their landfill or recycling center. A rate study allows the decision-maker to assess the impact of the purchase on the current budget; then, decide if enough surpluses will remain at a specific point during the fiscal year to buy, or if a rate adjustment is necessary, how much to adjust the rates.

Study Planning Steps
Based on our experience, there are generally eight critical tasks that provide a foundation for the conduct of rate studies. Let鈥檚 briefly discuss each of these.

Step 1: Identify and Prioritize Objectives for the Study
Customer rates must be in alignment with the district鈥檚 overall mission. Rates are an important price signal by which agencies communicate to customers the value of their service. Therefore, at the outset of the rate study, we have found that the district or agency should find and prioritize its ratemaking objectives and consider how they support the organization鈥檚 mission. Some of these may include all or some of the following ratemaking objectives:

• Generate adequate revenues to meet the district鈥檚 financial obligation
• Follow legal, regulatory, and debt covenant requirements
• Achieve fairness and rate equity among customers and customer classes
• Offer increased opportunities to improve recycling rates and possibly increase landfill life
• Design rates that are simple and easy for ratepayers to understand
• Set rates that are competitive with other local governments or agencies
• Avoid significant changes to customer rates; that is, keep rates stable over time

Step 2: Establish a Road Map for the Study
At the outset of the rate study, I typically include a 鈥渂rainstorming meeting鈥� to evaluate tradeoffs between these possible objectives. By finding and prioritizing these aims at the outset of the rate making process, districts are better able to inform the process with a greater knowledge of what they are looking to carry out and some of the tradeoffs inherent in their rate structure. This session will typically culminate in confirming the road map for the study as set up in the scope of work.

Step 3: Gather Historical Information
An important aspect of predicting future revenues and expenditures is to understand the agency鈥檚 past operating performance. Therefore, Step 3 requires gathering and analyzing historical financial and operational information. The financial information typically needed includes the following:
鈥� The general ledger trial balance for the most recently completed fiscal year and the prior four years. This includes detailed line-item revenues and expenditures for the agency, as well as the beginning and ending reserve balance.
鈥� Fiscal year-to-date revenues and expenditures. Year-to-date amounts can be annualized to project the operating results for the current year.
鈥� Debt service and lease schedules.
鈥� Capital improvement and fleet replacement budgets.

The operational information needed in the ratemaking process should include:
鈥� Customer census data, including the number and type of customers, cart or dumpster cart data (number and size, number of weekly pickups, and the number of loads or pulls for roll-off customers)
鈥� Number of labor hours and route-days by the type of customer (single-family, commercial, roll-off, etc.)
鈥� Number of tons of solid waste and recyclables collected by line of business

All this data and information should be evaluated for reasonableness against real-world statistics for best-in-class agencies.

Step 4: Use Current Customer Information to Calculate Actual Revenues at Existing Rates
The next step in the ratemaking process is to use the current customer census information to calculate the existing revenue and compare that calculated revenue to the actual revenue recorded in the district鈥檚 accounting system. Typically, this means that the agency鈥檚 individual solid waste rates are extended by the number of customers or the number of loads in the case of roll-off service.

Based on our experience, there are several important reasons for performing this step. First, this process organizes the customer census information that will be used in designing the new rates and forecasting the expected revenue at the new rates. Secondly, the recalculated revenue for each customer class can be compared to its respective revenue requirement for each service sector. Finally, the recalculated revenue should be compared to the revenue reported in the agency鈥檚 budget, helping to confirm that the customer census data are correct.

Step 5: Project the Revenue Requirement
The revenue requirement is just what it implies. It is the total amount of money the district must collect to pay expenditures needed to provide its targeted levels of service while meeting its financial requirements (e.g., funding debt service obligations, keeping coverage ratios, and maintaining any agency fund balance requirements). The revenue requirement also should include any rate-funded capital expenditures such as new vehicles, buildings, or landfill cell expansions.

Step 6: Design New Rates
Although we have found that there is usually a single revenue target for each customer service area, there are different approaches to hitting that revenue target. The two general approaches we have used in our assignments are cost-based and market-based approaches. The cost-based approach entails designing rates that most accurately reflect the cost of providing a particular type of service. The market-based approach is more focused on how customers will perceive the rate. Typically, we develop a Pro Forma Model using Microsoft Excel where different scenarios can be constructed with an eye on such things as minimizing annual rate shock, accounting for fluctuations in the rate of inflation, and designing funding reserves for future capital expenditures.

Step 7: Evaluate How Rate Rates Confirm to Objectives
Once the new rates have been designed, we collaborate with our client to revisit the original ratemaking aims described in Step 1 and evaluate whether and to what extent the new rates meet the jurisdiction鈥檚 objectives. Thus, the solid waste ratemaking process is completed where it started, with a review of the agency鈥檚 ratemaking objectives.

Step 8: Present Business Case
Step 8 is essentially where the 鈥渞ubber meets the road.鈥� That is, providing enough information and data to the political decision-makers so that they can make an informed decision on ratemaking for the agency. Over the years, we have found that long and detailed reports are often not read by decision-makers, so we have changed our overall approach. We now tend to provide a short and crisp report, frequently in PowerPoint, that gets to the facts and overall recommendations and lets the model tell the entire story.

Some Lessons Learned
We would be remiss in not providing lessons learned in conducting successful rate studies. First, we have found that most clients undertaking a rate analysis want a simple and non-proprietary software program as a 鈥渓eave behind鈥� at the end of the assignment. This usually means Microsoft Excel, which most Windows and Apple users buy with their computer. Often, we provide a task in the assignment to teach their users how to use the model and any special drop-down menus or 鈥渢oggles.鈥� This allows the customer to continue to use the model for annual budgeting. Second, we have also found that the issue of reserves has taken off in recent years with many agencies. That is, setting up long-term reserves or funds for future fleet and capital purchases, emergency funding for unforeseen emergencies such as Acts of God, damage to landfill liners, vehicles, or weather events.

Moving Forward
Getting a firm handle on the costs for your agency to provide for solid waste services is a key focus for any solid waste manager. Oftentimes, the spotlight of public attention is focused on agencies by political decision makers because of perceived high labor, equipment, and capital costs to provide essential sanitation services. Furthermore, the current paucity of reliable data to benchmark solid waste management operations handicaps timely comparisons among various solid waste systems. The rate study provides essential data on the revenues and expenses of an agency. Pro forma modeling provides a path to determining the appropriate path for the future. The APWA manual and associated reference papers noted in this paper provide illustrations on how an agency can move forward. It is our hope that these materials will help solid waste managers better understand the issues involved in cost-of-service analysis and rate making. | WA

Marc J. Rogoff, Ph.D. is an experienced rate consultant who is a Senior Consultant at Geosyntec Consultants. He has completed a variety of solid waste rate studies over his 40-year career. He has published and presented widely at solid waste professional conferences and webinars. Marc was author of APWA鈥檚 Solid Waste Rate Setting and Financing Guide 鈥� Analyzing Cost of Services and Designing Rates for Solid Waste Agencies. Marc can be reached at (813) 810-5547 or [email protected].

Giorgio Castro, M.Sc., is a young professional consultant who is an Analyst at Geosyntec Consultants. He has completed more than 10 solid waste rate studies over his seven-year career. He has published and presented widely at solid waste professional conferences and webinars. Giorgio can be reached at (202) 854-2698 or at [email protected].

References
Giogio Castro, et. al., Solid Waste Rate Analysis: Lessons Learned from Recent Rate Setting, 国产麻豆, March 2023.
Marc J. Rogoff, Willaim Bensing, and Anastasia Welsh, Developing a Master Plan for the City of Kirkwood, MO, 国产麻豆, March 2017.
Marc J. Rogoff, The Value of Solid Waste Rate Analysis, Florida APWA Reporter, September 2016.
Marc J. Rogoff, Current Leading Issues in Solid Waste Financial Planning, MSW Management, November-December 2016.
Marc J. Rogoff, Jeff Arrington and Michael Cleghorn, Conducting a Rate Analysis as Part of a Mater Plan Study, 国产麻豆, August 2015.
Marc J. Rogoff and Brooks Stayer, Cash Flow Analysis Forestalls Long-Term Debt, Waste Advantage, January 2015.
Marc J. Rogoff and Richard Allen, Assessing a Solid Waste Agency鈥檚 Financial Health 鈥� A Case Study of Recent Tipping Fee and Assessment Cost of Service Study in Charlotte County, MSW Management, March-April 2014.
Marc J. Rogoff, et. Al., Solid Waste Rate Setting and Financing Guide 鈥� Analyzing Cost of Services and Designing Rates for Solid Waste Agencies, American Public Works Association, 2007.
Marc J. Rogoff and Donald Ross, Developing a Roadmap of Your Cost of Waste Services, APWA Reporter, March 2006.