POLICY REPORT FINANCE Date: August 25, 1995 Dept. File No.: 4600 TO: Vancouver City Council FROM: General Manager of Engineering Services and General Manager of Corporate Services SUBJECT: Solid Waste Utility (SWU) RECOMMENDATION A. THAT Council approve the creation of a Solid Waste Utility with all solid waste operations and accounts, except for street cleaning, litter collection and abandoned garbage collection, organized under the Utility Fund as of January 1, 1996. B. THAT user fees for both Residential Refuse and Recycling services be billed annually to each customer unit effective January 1, 1996. C. THAT the customer unit for the Residential Recycling service be defined as each residential property registered on the property tax roll, and co-op dwelling units receiving City refuse can service. D. THAT the basic customer unit for the Residential Refuse service be defined as each residential property registered on the property tax roll, and co-op dwelling units in buildings receiving refuse-can service but that the maximum mandatory number of customer units per non-rowhouse building be two. E. THAT rental apartment properties with a City can account or residential properties receiving lift-on-board container service be excluded from the Solid Waste Utility. F. THAT additional Refuse and Recycling customer units for a building be permitted to be included in the Solid Waste Utility upon application and payment of the User Fees by the property owner. G. THAT the can limit be set at three cans per each customer unit. H. THAT the maximum number of customer units receiving refuse can collection and blue box service be five per building with the restriction to be relaxed at the discretion of the General Manager of Engineering Services where appropriate. I. THAT $40,000 for the initial decaling costs be funded in 1995 from the Solid Waste Capital Reserve, and that $30,000 be provided in the 1996 SWU Budget for processing additional customer unit applications. J. THAT the tax-funded container service provided to strata- titled, co-op and 99 year leased buildings be discontinued on December 31, 1995, and these buildings be then allowed to contract for City container service with the fees set on an at-cost disposal rate basis until Council receives the report on the review of the container operation. K. THAT the Director of Legal Services be instructed to request the provincial government to amend the Vancouver Charter to provide for the collection of Solid Waste Utility charges separately on the property tax bill, and to prepare the necessary Refuse By-law changes. L. THAT $20,000 be provided in the 1996 Landfill Operating Budget to hire a consultant to study the magnitude of the Vancouver Landfill closure and post-closure costs, and that staff investigate the possibility of providing for these future costs through the Refuse User Fee. M. THAT the removal of refuse collection costs from the general tax levy be made from the residential property class only. N. THAT the Solid Waste Capital Reserve be used to stabilize the annual Refuse and Recycling User Fees. O. THAT the disposal cost component of the Refuse User Fee be based on the at-cost disposal rate. P. THAT the annual commercial tipping fee surplus be transferred to the Solid Waste Capital Reserve until the closure and post-closure funding needs of the Vancouver Landfill have been reviewed. GENERAL MANAGERS' COMMENTS The General Managers of Corporate Services and Engineering Services RECOMMEND approval of recommendations A through P. Establishing a Solid Waste Utility will allow the City to provide a long-term viable financing structure for the refuse collection and recycling operations. A Solid Waste Utility will also allow a more effective incentive system to be created for achieving refuse reduction targets through the "user-pay" principle. Although staff have tried to anticipate and deal with any potential problems due to the implementation of the Solid Waste Utility, some unforeseen problems may arise. Any unforseen problems will be dealt with as quickly as possible. Corporate Services and Engineering Services believe that the Solid Waste Utility will be a significant improvement, and that the benefits to be realized from the new system will outweigh any transitional problems. COUNCIL POLICY There is no specific Council policy regarding the Solid Waste Utility. However, during the review of the merits of accepting a fully integrated regional refuse plan versus independent solid waste operations, Council established the following in May 1991: 1. Retaining the ownership of the Burns Bog landfill; 2. Continuing the operations of the Landfill for the City of Vancouver and the designated "western" municipalities; and 3. Retaining the net revenue from Vancouver's commercial refuse for future improvements at the Landfill and to support recycling efforts. In January 1993, Council approved retaining a minimum balance of $10 million in the Solid Waste Capital Reserve for future necessary landfill expenditures. On several occasions Council has deferred some of its solid waste management decisions pending a report on the creation of such a Utility. SUMMARY This report proposes the creation of the Solid Waste Utility (SWU). The major impact which will flow from the creation of the utility is that the solid waste services to the residential sector, including both basic residential collection plus recycling, will be funded through user charges to homeowners, rather than from the property taxes and other sources. This action will provide a secure funding structure for the recycling operations and address the present perceived inequity in the system, where some taxpayers receive free refuse collection service while others have to pay for the same service. It will also introduce a system where incentives may be built-in for waste reduction. The user charges would consist of a Refuse Collection Fee and a Recycling Fee for each customer unit. Most residential properties registered on the property tax roll, plus co-op dwelling units, which currently receive refuse can and blue box service would be treated as a customer unit. Upon application and payment of the user charges by the owner, additional customer units may be added for a property. The refuse can limit would remain at three for each customer unit. A decaling system would be implemented to allow the collection crews to identify the number of customer units per building. The refuse user fee would include a collection cost and a cost for disposal based on the "at cost" disposal rate. Based on the 1995 budgeted costs, the estimated per customer refuse and recycling user fees would be $96 and $34 respectively. As part of the creation of the SWU, the tax-funded container service provided to strata-titled and co-op buildings would be eliminated. Owners of these properties would have the option of contracting for their container service with the City or a private firm. Staff recommends that the refuse collection costs currently funded from the general purposes property tax be removed from the residential property class only. Staff is also recommending that a consultant be hired to estimate the Landfill closure and post-closure costs. When the study is completed, a decision will have to be made to determine how to fund these costs. In the interim, staff is recommending that the annual commercial waste tipping fee surplus be transferred to the Solid Waste Capital Reserve. PURPOSE This report proposes the creation of the Solid Waste Utility and outlines the supporting reasons and policy issues associated with establishing the Utility. BACKGROUND On May 15, 1991, while considering a report from the City Manager on the Regional Solid Waste Agreement and the future of the Vancouver Landfill, Council passed the following recommendations: A. That Council instruct the General Manager of Engineering Services and the General Manager of Corporate Services to investigate the creation of a Solid Waste Utility. B. That Council instruct the General Manager of Engineering Services and the General Manager of Corporate Services to investigate the financial and operational implications for a range of options regarding the role and status of the Vancouver Landfill and Vancouver South Transfer Station within any Regional Solid Waste Management Plan. On December 8, 1992, Council examined numerous solid waste and recycling policy questions. During the discussion, Council adopted the following resolution: - That staff report back, as part of the Solid Waste Utility report, on cost recovery options to fund the operating costs of the proposed solid waste management programs. During a Council workshop on March 9, 1993, staff from Engineering Services and Corporate Services introduced and discussed various issues related to the Solid Waste Utility. Following the meeting, Council instructed the staff to proceed with this work and to report back on the first stage of the Utility creation. On October 21, 1993, a report was submitted to Council recommending the creation of the Solid Waste Utility. It proposed financial reorganization of the solid waste activities as a first step toward a self-financing entity and outlined the subsequent policy and operational issues that would have to be addressed in the future. After a lengthy discussion, Council approved the following recommendation: - That the policy report dated September 14, 1993, on the Solid Waste Utility, be deferred pending receipt of a report back containing detailed information on: - the tax effect of creating a utility; and - alternate costing arrangements. Recently, there have been two other developments supporting the creation of a Solid Waste Utility in the City of Vancouver. First, the Greater Vancouver Regional District has approved the Stage 3 Report of the regional Solid Waste Management Plan, and submitted it to the Minister of Environment for approval. In the Plan, which was supported by City Council, user-pay charges are considered to be a main element in the implementation of the overall waste reduction strategy. At the present time, in the region, Vancouver, Burnaby, White Rock, District of North Vancouver, and New Westminster do not bill separately for solid waste management services. Further support for the creation of the SWU came from the Task Force on Property Taxation that presented its report to Council on April 22, 1994. While discussing various ways to adjust the tax burden among different property classes, the Task Force identified the implementation of user fees for sanitation and sewerage services as a main alternative to funding these activities through property taxes. DISCUSSION The following discussion deals with the reasons behind the creation of the Solid Waste Utility and basic principles that might apply to the - 5 - Utility's operations. It also presents various issues related to pricing and service levels that need to be addressed under the new Utility. Solid Waste activities in the City are currently the responsibility of the General Manager of Engineering Services (operations, pricing) and the General Manager of Corporate Services (pricing, billing). Operations are recorded within the City's Operating Budget and the costs are funded from a variety of sources. - Residential refuse removal and disposal is funded from property taxes - Container and small-can service for businesses and rental apartments is funded by user fees - Recycling programs are funded from the commercial refuse surplus revenues at the City's disposal sites. Most operational aspects of solid waste management are not expected to change significantly, however, the Utility has major implications for the operation's financial structure and funding sources. Rationale for a Solid Waste Utility Creating a Solid Waste Utility may be advantageous to the City for a number of reasons. 1. The current financial structure for operations will become increasingly difficult to maintain. The expansion of recycling programs, in particular apartment recycling, and the costs associated with them could soon exceed available funds. Furthermore, the annual commercial surplus revenues may decline in the near future due to disposal costs increasing faster than the tipping fee, and due to lower commercial tonnages. Creation of a Solid Waste Utility would provide a long-term viable financing structure for the refuse and recycling operations. 2. The Utility would remove collection and disposal costs from the general purposes property tax and establish a separate user charge. The cost to taxpayers for refuse service would be directly linked to usage instead of to assessed property values. This would help to mitigate the impact on property taxes of changes in assessments. Also, linking costs directly to usage would allow a more effective incentive system to be created for achieving refuse reduction targets through the "user-pay" principle. 3. The costs of solid waste and recycling operations are expected to increase at a greater rate than inflation. By separating out these costs from the general purposes property tax, taxpayers will have a better understanding of why the cost of City services is increasing. Also, the rising refuse costs will not skew the inflation rate increase to the general purposes property tax. 4. The current costs associated with refuse disposal include only direct operating costs and exclude provisions for the City's investment in the Landfill and the costs of closing and replacing the facility once its life has expired. Creation of the Utility provides an opportunity to establish a cost structure which would reflect the "true" operating costs of the waste disposal system, including the landfill, the transfer station, and any future expenditures that might be required to address various environmental issues. - 6 - 5. Removal of solid waste expenditures from the general purposes property tax would also address the issue of a perceived bias against commercial properties. Presently, commercial properties are seen as contributing to the solid waste management operations (through their share of general taxes) even though they must pay separately for all the costs of their refuse collection and disposal. With residential properties paying direct user charges, the commercial sector would no longer be able to claim that it incurs double payments. While there are issues that need to be resolved, the preceding reasons clearly support the concept of a Solid Waste Utility. Principles for the Solid Waste Utility's Operations In order to proceed with implementation planning, underlying principles of operation must be established that are fair to all users and that ensure the City's ability to provide services in the future. It is staff's view that all solid waste operations with the exception of abandoned waste removal, litter pickup and street cleaning should be accounted for within the Solid Waste Utility and that the following principles should apply to the operation of the Utility: 1. The Utility would be self-financing, generating sufficient revenues from operations to pay all operating and debt service costs. 2. The basis for pricing individual services would be "user-pay/cost- recovery" such that each service would be self supporting, with users paying the full costs as is the case in most other municipalities. It is not anticipated that there would be any subsidies among the various solid waste operations or from outside the Utility, although these might be considered as an interim measure to ease perceived transitional problems. 3. Operations within the Utility would be accounted for separately from the Operating Budget, although annual operating budgets for the Utility would be established in the same manner. Fees would be subject to Council approval, as is the current case with Waterworks, which currently works on a utility basis. 4. Management of the Utility would be a joint responsibility shared between the General Manager of Engineering Services and General Manager of Corporate Services on much the same basis as the current operation. 5. It is anticipated that the SWU will incur annual deficits or surpluses due to variances between actual and estimated costs. It would be appropriate to use the Solid Waste Capital Reserve to stabilize the annual user fees. Annual deficits would be funded from the Reserve and surpluses would be credited to the Reserve. Setting of the City's Water Rates is based on this same stabilization principle. Flowing from these principles are a series of pricing and service issues that must be settled. Some of these issues now exist within the current structure, while others arise because of the creation of the Utility. A move to a Utility provides an opportunity and an appropriate context to resolve these issues in a methodical and rational way. - 7 - Vancouver Charter Amendment To facilitate the collection of Utility fees, the Vancouver Charter has to be amended. It is not clear whether the Provincial Government will make this amendment in time for the January 1, 1996 start date. If the Charter is amended before January 1, 1996, the Utility fees will be included on the property tax statement. However, if the Charter is not amended before January 1, 1996, the Utility fees will be billed on a notice separate from the tax statement. In this latter case, delinquent fees can not be collected through the tax-roll, but will have to be collected through small claims court. If the property is occupied by a tenant, it is possible that the delinquent fee would have to be collected from the tenant. Customer Unit for Residential Refuse Service Determining the customer unit is critical because it must be workable from both the refuse collection and billing perspectives. Staff recommends that the mandatory customer unit for residential refuse collection be each residential property registered on the property tax roll, and each co-op dwelling unit currently receiving refuse can service. Additional customer units would be permitted to be added for a property upon application and payment of the annual refuse user fee to the City by the owner. Residents would still have the option of purchasing refuse tags for garbage removal in excess of the can limit for their property. An exception to the customer unit policy would be non-rowhouse buildings which contain more than two strata or co-op dwelling units. (For the purposes of the SWU a rowhouse building is one which contains a row of attached side-by-side dwelling units). Many of the dwelling units in non-rowhouse buildings are currently entitled to a one can limit, whereas the can limit for most rowhouse dwelling units is three. It would be appropriate to keep the can limit for units in non-rowhouse buildings as close as possible to the current can limit. Therefore, staff recommends that non-rowhouse buildings containing more than two strata or co-op dwelling units be billed for only two customer units unless they apply for additional customer units. Rental apartments which have a City can account or properties which have lift-on-board container service would be excluded from the Solid Waste Utility. Engineering staff encourages the use of lift-on-board containers at buildings with a large number of dwelling units. Accordingly, staff recommends that the maximum number of customer units per property be set at five, and at the discretion of the General Manager of Engineering Services, the restriction be relaxed for buildings where container service would not be feasible, due to space restrictions for example. Decaling The customer unit option in its current and recommended form presents an operational problem. Collection crews have difficulty identifying the properties which have more than one customer unit (ie. a can limit greater than three). Because most properties do not have addresses posted in the lanes, crews currently identify the properties with more than one customer unit mainly by memory. However, this is not an effective method. To assist the crews in identifying - 8 - the properties with more than one customer unit, a permanent identification decal will be affixed at each of the properties which would have more than one customer unit. Initial funding of $40,000 for the decaling will be needed in 1995 if Council approves the Utility start-up for January 1, 1996. It is recommended the $40,000 be funded from the Solid Waste Capital Reserve. Also, funding will be needed once the SWU is implemented to process additional customer unit applications. Funding of $30,000 will be needed for 1996 and approved in advance of the 1996 Operating Budget. Staff is considering using the decaling system as a replacement for the current can account system. Can Limit The current basic can limit is three per single-family house and five per duplex. To minimize the transition "pains" for residents to the SWU, the General Manager of Engineering Services recommends temporarily keeping the basic can limit at three for each customer unit. The can limit can be reduced in future years if Council wishes to do so. Residential Refuse Disposal Cost The Refuse User Fee will consist of two basic costs: collection and disposal. Based on the 1995 budgeted costs, the cost of collection is $64 per customer. Engineering Services is currently reviewing operational changes to the refuse collection operation. It is anticipated that the changes will result in appreciable savings, thus, lowering the cost per customer. The second component of the Refuse User Fee will be the disposal cost. There are two options to choose from with respect to setting the cost of disposal for residential refuse: (a) Regional Tipping Fee or (b) at- cost disposal rate. Staff recommends that the at-cost disposal rate be used. The current at-cost rate consists of the per tonne cost of operating the Vancouver Landfill (VLF) plus the per tonne cost of transferring the residential refuse from the Vancouver South Transfer Station (VSTS) to the VLF. The current at-cost rate of $32 per customer is what the current costing of the refuse operation is based on. The at-cost option will allow residents to benefit from the fact the City operates its own relatively low cost landfill. Residents should only pay for the costs they are incurring to dispose of their refuse. Also, support for the Utility may be eroded if the higher regional tipping fee is charged. If the Regional Tipping Fee were used, the annual Refuse User Fee would be about $30 more per customer than if the at-cost disposal rate is used. This current at-cost disposal rate does not include any provision for Landfill closure and post-closure costs. There are no estimates available at this time to indicate how large these costs will be. The General Manager of Engineering Services recommends that $20,000 be provided in the 1996 Landfill Operating Budget to hire a consultant to determine the magnitude of these costs. When the study is completed, it would be appropriate at that time to consider including a closure cost component in the Refuse User Fee, and setting up a closure fund. Multi-Residential Container Service - 9 - The City currently provides lift-on-board container collection service to about 20,000 dwelling units in multi-strata, co-op and 99 year leased premises. This service is funded from the general purposes property tax. Staff recommends that the owners of these units be treated the same as single-family type dwelling owners under the SWU. Namely, the general purposes property tax would no longer fund the cost of their refuse collection, and the owners would have to pay separately for refuse collection. Owners of these units would be able to buy their container service from the City or from a private firm. The tax-funded container service makes up about 50% of the City's total container operations. Once the City begins charging a separate fee for this service, the City will have to compete with the private firms for this business. A consultant will be hired to determine how the container operation's viability will be affected by this change. The results of the study will allow appropriate steps to be taken, if necessary, to allow the container operation to respond to this change. Staff will report back to Council with the results of the study in 1996. In the interim, staff recommend that the container service fees for strata, co-op and leased premises be set on an at-cost disposal rate basis. Recycling User Fee The City currently provides a number of recycling services to its residents. Most of these programs are funded from surplus commercial waste tipping fees. Staff is recommending charging a Recycling User Fee to owners of each residential property registered on the property tax roll, and each co-op unit for these services. Rental apartments with a City can account or those properties which receive lift-on-board container service would be excluded from the Recycling User Fee. Owners who apply to have additional customer units added to the SWU would have to pay the Recycling User Fee as well as the Refuse User Fee. The Recycling User Fee would include the costs of operating the following existing programs: blue box collection, residential Christmas tree collection, autumn leaf bag collection, City Farmer, the GVRD recycling surcharge, and the recycling depot at the VSTS. (The depot cost is currently funded from the VSTS disposal rate). The net annual operating costs of the yard waste composting program would also be included in the Recycling User Fee. Based on 1995 budgeted costs, the annual Recycling User Fee would be about $34 per customer. The annual fee will be subject to fluctuations in the market price which the City receives for blue box recyclables. Council should be aware that not every user of the recycling services would be captured by the user fee. Many residents of dwelling units which are not registered on the property tax roll and do not apply for inclusion in the SWU (and, therefore, will not be billed the user fee) are users of the blue box service. Nevertheless, the City's policy is to encourage recycling efforts of all residents. Further, there will be some residents who pay the recycling fee but do not use any or all of the recycling services available. However, the recycling user fee will provide an incentive for residents who are not recycling to do so. Also, it would be very expensive administratively to construct a user fee system where a perfect match between user and payer existed. As part of the apartment recycling pilot project, staff will determine the number of dwelling units per building at which point large cart recycling should be used instead of blue box service. Until the City implements an apartment recycling program, staff recommends that - 10 - buildings with no greater than five dwelling units be eligible for blue box service but that the restriction be relaxed at the discretion of the City Engineer where appropriate. In addition to the apartment recycling pilot project, the City is currently providing an apartment recycling mini-depot program. Both these programs are also funded from the commercial waste fee revenue surplus. Once the pilot project is completed, Council will have to make a decision on how to fund a City-wide apartment recycling program. Council has considered the creation of a Solid Waste Utility to be instrumental in the funding of a City-wide apartment recycling program. Commercial Tipping Fee Surplus If Council approves the recycling user fee, a decision has to be made on how to reallocate the annual commercial tipping fee surplus. For 1994, the surplus was $5.5 million and was allocated as follows: Recycling programs - $3.5 million; GVRD Recycling surcharge - $0.7 million; Retained in general revenue - $0.6 million; and, transfer to the Solid Waste Capital Reserve - $0.7 million. Staff recommends that the annual surplus be transferred into the Solid Waste Capital Reserve until the funding needs for the closure and post- closure of the Landfill have been estimated. Removal of Residential Refuse Costs From Property Tax Levy Currently, the cost of residential garbage service (about $9.6 million), including the container service to multi-stratas, is funded from the property tax levy. The non-residential sector pays about 58.5% of this cost and the residential sector about 41.5% of the cost. Staff believes that the removal of this cost should be made without any shift in the tax burden between the non-residential and residential property classes. Because the residential sector will be paying 100% of the refuse collection costs through user fees, staff recommends that the cost of residential refuse collection be removed from the residential sector only. Potential Customer Concerns with a Solid Waste Utility Although there are strong reasons for creating a Solid Waste Utility, there are some potential customer concerns with a SWU which may generate complaints. Some of these potential concerns are as follows: 1. Property owners who are billed the SWU user fees but who do not use the City's recycling services or, in the rare case, who do not set out any garbage, will not be able to opt out of the SWU. The administrative cost would be too great to allow owners to opt out of the SWU. However, the inability to opt out exists under the current system also. 2. Although it may be "tax neutral" to the average residential taxpayer, some taxpayers may perceive the user fees as an additional tax, rather than a "replacement" tax. 3. Property owners will have their sensitivity heightened and may demand a higher level of service for both refuse and recycling services. For example, some owners may become less willing to overlook a missed-garbage pick-up. As a result, Sanitation staff will receive more missed-garbage complaints. 4. The SWU refuse user fee will make visible an inequity which basically exists with the current system. Residents who usually - 11 - set out less cans of garbage than the three can limit may complain that their per can cost is higher than that of the residents who usually set out two or three cans. The cost per can per customer, based on 1995 costs would be: cost per can three cans $0.64 two cans $0.96 one can $1.92 This difference in costs can only be eliminated under a pay-per- can system, which is a recommendation of the regional Solid Waste Management Plan. 5. The decal system will be complex to administer. The decals will be difficult to post at some properties, particularly those with front yard pick-up, and some owners may object to their presence. In designing the decal, we will force the conflicting interests of making the decal as visible as possible to minimize missed pick- ups and making it less visually obtrusive in the neighbourhood streetscape. 6. There may be a small increase in illegal dumping, particularly by residents of non-strata duplexes. Currently, non-strata duplexes have a five can limit. Under the SWU, these duplexes would have a three can limit unless the owner pays a user fee for the second dwelling unit. Some of these duplex owners may choose to illegally dump their refuse rather than pay the user fees. SOCIAL IMPLICATIONS This report proposes billing solid waste costs based on user fees rather than through property taxation based on assessed values. User fees are considered by some as a regressive form of taxation, and, therefore, may be viewed as having some adverse social implications. However, the benefits of a refuse and recycling user fee system are considered to be greater than any adverse effects. Refuse User Fees are considered by some to be an appropriate incentive for residents to achieve the socially acceptable 3R goals. * * * * *