{"id":9944,"date":"2016-04-29T22:24:48","date_gmt":"2016-04-30T02:24:48","guid":{"rendered":"https:\/\/wasteadvantagemag.com\/?p=9944"},"modified":"2016-04-29T22:24:48","modified_gmt":"2016-04-30T02:24:48","slug":"planning-and-analysis-financial-tools-assist-in-completing-cost-of-service-studies","status":"publish","type":"post","link":"https:\/\/wasteadvantagemag.com\/planning-and-analysis-financial-tools-assist-in-completing-cost-of-service-studies\/","title":{"rendered":"Planning and Analysis: Financial Tools Assist in Completing Cost of Service Studies"},"content":{"rendered":"

Conducting the master planning efforts along with a formal rate\/cost of service study enables decision-makers to project costs of the various solid waste management options.<\/p>\n

By Marc J. Rogoff<\/p>\n

Solid waste agencies are under more pressure these days to provide high-quality waste collection, facility enhancements and landfill operation services. Coupled with the pressures from ratepayers and local government lean and mean initiatives to keep rates and expenses low, many solid waste agencies are struggling. It is challenging to balance real cost escalation factors such as rising fuel, material and labor costs against the push for keeping static rates. Furthermore, full cost accounting is difficult because agencies oftentimes support activities not directly related to normal operations or provide \u201cfree services\u201d 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\u2019s overhead.<\/p>\n

The scarcity of reliable data available to benchmark solid waste management operations handicaps 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\u2019s 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\u2019s services as well as to stock up capital for new investments or large maintenance. I will use illustrations from recent case studies to introduce some of these tools.<\/p>\n

The Use of Financial Tools<\/p>\n

A Pro Forma Model is a financial tool crafted from the market dynamics influencing the lifecycle of a specific project, cost center or program (see Figure 1)<\/strong>.\u00a0 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 have the maximum flexibility to model multiple scenarios of facility size, energy production\/co-generation, site locations and changes in operations.<\/p>\n

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 or not 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 our 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.<\/p>\n

The use of financial tools to evaluate the agency\u2019s cost of service is another important area where pro forma modeling is used. Such cost of service studies evaluate the financial aspects of solid waste management programs and remain critical for ensuring the 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 and determine if privatizing some services is a reasonable option.<\/p>\n

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. 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.<\/p>\n

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 its citizens. 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.<\/p>\n

In conclusion, the use of financial tools to evaluate current and proposed solid waste programs and facilities is an increasing trend across the nation by many solid waste agencies. These tools provide a useful vehicle for finding optimal management solutions, while at the same time, providing quick answers on their projected financial performance for political decision-makers. A couple of case studies are provided below which illustrate the usefulness of financial tools for long-term planning.<\/p>\n

Case Study #1: Analyzing An Authority\u2019s Cash Flow to Forestall Long-Term Debt<\/p>\n

In the six consecutive years prior to 2013\/2014 fiscal year, the Merced County Regional Waste Management Authority (RWA) in California operated at a deficit despite several disposal rate increases. This trend was the result of the decline in revenue associated with the Great Recession, in combination with several operational inefficiencies including an inadequate unencumbered cash reserve. In addition, the heavy equipment fleet was leased and aging and capacity expansions at both landfill sites would be needed within five years. Old bond debt was $30 million and unfunded closure\/post-closure liabilities added another $20 million to the shortfall. In all, the RWA was underwater by $75 million and it would be losing one of its major municipal solid waste customers in 2015.<\/p>\n

With a change in management in 2012 came the decision to assess RWA\u2019s operational and administrative functions. Throughout this year-long process, a new Regional Waste Director was selected to implement a progressive strategy that would realize operational efficiencies, cost savings, an expanded customer base and lower long-term debt through bond refinancing. These measures provided considerable benefit, particularly in regards to the long-term financial health of the agency; however, it was uncertain that cash would be generated quickly enough to meet the existing need. As a result, the agency hired a rate consultant in April 2015 to assess the anticipated shortfall and prepare a report to the RWA\u2019s governing board.<\/p>\n

A Pro Forma Model was developed at the outset to help the RWA prepare a long-term cash flow analysis and assess whether or not funds were available from operations to forestall a bond issue for the capital improvements as well as to fund adequate emergency reserves. At the beginning of SCS Engineers\u2019 engagement, RWA staff provided background data and information concerning residential collection revenues and operating expenses. Based on data and information provided by the RWA, individual spreadsheets were linked to develop an overall model to conduct the assessment analysis. The following methodology was used by SCS Engineers to conduct the cost of service analysis:<\/p>\n