Local Government Meetings

Comment

Comment by Janice Kroger on December 13, 2010 at 7:04am

I also asked about the liability issues seeing that the City will be closely monitoring the service & performance of the franchisees. I was concerned that when there are property or personal damage issues it could come back to the City. Here is his response:

Over the past 25 years, there have been other attempts to privatize commercial solid waste. They were all unsuccessful do to the strong lobbying efforts of the union and the lack of political will be past councils. The extraordinary times we live in today have created the window of opportunity to finally privatize this service. You can see by the close 4-3 council vote that political will is still a major obstacle to overcome. The union message is to confuse and scare the public with claims of service declines and price increases. They have even compared privatization to the financial disasters of the Met Museum and Granite Park. The City is making money not losing money on this transaction.

Once the transition is successful the City should be removed from all direct responsibility. You would be surprised at the number of claims we receive when a bus or garbage truck causes property damage or injures somebody. The City's role in oversight is to insure customer complaints are properly handled and review and audit of financial documents. The City consultant, Bob Hilton, has many years of experience of transitioning City's to private commercial solid waste. If anything, the service contract is a over kill in terms of protecting the City.

It is always possible for a proposition 218 or proposition 26 related lawsuit but the City has that covered by making both Allied and Mid Valley indemnify the City. The only other possible litigation could come from one of the vendors who was not selected. Remember anybody can sue anybody but most frivolous lawsuits never make it to court.

Lee

 

Comment by Janice Kroger on December 13, 2010 at 7:00am

Here is some info from Lee regarding his rationale for his yes vote:

EXPLANATION OF PRIVATIZATION OF COMMERCIAL SOLID WASTE VOTE

I approached my evaluation of the privatization of commercial solid waste from the perspective of both a businessman and a Council member. I know, first hand, the cost of doing business in Fresno and I certainly can appreciate the need to maintain service levels and keep prices down for solid waste and recycling.

I voted yes to privatize commercial solid waste in Fresno. I know some people have reservations and have raised some valid questions. Let me first say that the plan we approved on Thursday was not perfect. It is never black and white on most major issues. We have to work within time constraints, listen to subjective opinions from others, and rely on information provided by the City Manager and our own due diligence. I cannot say with 100% certainty that it was the right decision. Given the options to choose from, I felt this was the best path to follow. Nobody ever said it was going to b easy.

I do believe that the consultant hired by the City, Bob Hilton, did a good job in objectively evaluating vendors, developing the business model that we would use, developing a transition plan to insure a smooth transition, negotiating competitive rates and negotiating a very structured service contract to protect City interests and insure quality services and reasonable pricing.

The process to investigate and analyze privatization of commercial solid waste started over six months ago. The City let out an RFP to solid waste companies and about seven companies responded. The original plan was to divide the City into quadrants and select four vendors. This theory was to promote competition among the selected vendors. It became apparent early on that the market-pricing model was better suited to divide the City into two sectors and only select two vendors. The Southeast and Southwest sections of the City were clearly the most profitable because of the density of commercial clients and distance to solid waste disposal sites. We could have used on vendor for the entire City but it was felt that having two companies in the mix would promote competition. To retain optimal pricing for services and have a competitive situation, two vendors dividing the City in half was the final model selected.

The privatization model proposed by the City was not a true market form because only two providers were selected for the entire City. Some people have suggested that a true privatization model would allow for all commercial solid waste providers to directly solicit commercial accounts and let the final decision be up to the property/business owner. The best example of this would be selecting a cell phone company. The problem with the pure privatization model, as applied to our situation in the City of Fresno, is: 1) we are divesting ourselves of the commercial solid waste services and must sell off millions of dollars worth of vehicles, equipment and bins; 2) we have on-going legal obligations such as landfill site costs; 3) optimal customer pricing for solid waste, recyclables, and disposal of organic materials is achieved through economies of scale (i.e. offering an exclusive franchise for half of the City); and 4) a diminished value of the franchise fee for the City. The other major problem would be control. As I mentioned above, a competitive RFP was completed that insured we selected the best-priced and best service options. In the end, you would probably have reduced service quality and higher prices to commercial customers. I know there are people who have valid concerns about the City charging a franchise fee. I will discuss that issue below.

The proposed service contract with Allied and Mid Valley does offer protection for both commercial customers and the City. If one or both of the private providers fail to perform required services the City can quickly move in and replace them. The service contract provides the City the right to perform services and possess equipment for non-performance with a 48-hour notice. We can either perform the services with City employees or bring in another private provider. Both providers are required to indemnify the City, submit a surety bond, and provide three months of gross receipts as liquidated damages is they fail to perform their contractual obligations. The service providers will bill commercial customers directly and be required to submit monthly, quarterly and annual reports to the City. The City can inspect all records with a 24-hour notice. Rate adjustments are both cost based and index based with a maximum yearly increase capped at 5%.

A matrix grid was setup to evaluate the companies on pricing, service records, product services, etc. Initially, Mid Valley and Sunset Waste were to the top two qualifiers. Because of the magnitude of the transition from public to private delivery of commercial solid waste (this has never been at this large a scale in recent history) the City negotiating team made every effort to insure we selected the most competitive, strongest vendors. Our venture into privatization is a tried course. Over 200 cities in California have private commercial solid waste service. Fresno is the only large city in California who has not privatized.

The City Attorney extensively reviewed all documents and researched potential legal issues in this transaction including potential problems with Proposition 218. The recent passage of Proposition 26 could tangentially affect our franchise agreements. The City Attorney felt there was only a remote possibility of a Proposition 26 legal challenge. If our franchise fee is challenged than over 200 other cities in California will also be affected. To be safe, however, the contracts with Allied and Mid Valley require those providers to indemnify the City from any potential legal challenges. Other safeguards were required including liquidating damages of three months of revenues, and surety bonds. These requirments caused Sunset to reevaluate their pricing structure. Their initial low bid of $20 million was raised to about $24 million. As a result, they moved to third and Allied was added as the second vendor.

Their franchise fees statewide range from zero to about 40%. Bakersfield is the only city in California that doesn’t charge a franchise fee. We choose the middle or average rate, which was about 16%. None of these cities has been successfully challenged in court for a Proposition 218 violation. Despite claims by union members that service levels would decline or prices would rise, no city in California that was privatized has ever went back to a city run service.

The City cost to run commercial solid waste was very expensive. The City uses two drivers for every truck and offers higher compensation and benefits. Every private sector provider who responded to the RFP uses only one driver. If you do the simple math of having half the labor force and lower wages and benefits it is easy to see the huge cost savings to private providers. The cost differential was so great that the City selected private providers could cover all of their costs, make a profit and pay out close to $3.9 million to the City for franchise related fees. They were also able to provide a lower rate structure to commercial users. The projected net franchise fee to the City was estimated at $2.6 million. This did not include other franchise funds dedicated to oversight of the two private sector vendors. Some people have suggested that the Mayor wanted to overly control the private collection service. I don’t believe that anyone wanted the two selected vendors to have a free rein over commercial solid waste services over a 10-year contract. To insure that serviced levels were maintained, customer serviced complaints were answered, and that detailed, accurate and honest financial information was provided to the City by the vendors, a small amount ($269,000) of the franchise fees was set aside for the City, using a small professional staff, that has the authority to directly intervene in service complaints and audit company financial documents. I did introduce amendments to re-evaluate the over sight services at the end of five years.

Some people have questioned why we exceeded five years on our contracts with Allied and Mid Valley. In our transition from public services to private we had to divest ourselves of a fleet of garbage trucks, garbage bins and other equipment. The Vendors were required to purchase of these capital items as part of the deal. This was a huge multi million cost to the vendors. For them to fully amortize the initial outlay required at least a 10-year amortization period. In other words, these vendors could simply not recover their costs over a shorter five-year period. There are, however, provisions in the service contracts that set performance standards and offer the City the opportunity to step in when service fails.

I know some have questioned the City charging a franchise fee. The expected $2.6 million franchise fees funds will be used to cover a large budget cap. These funds will be used to cover core services costs including public safety. This money could be used to keep two fire stations open, three community centers open or hires 30 police officers. Remember, we are only effectively dealing with about 25% of our general fund budget because the balance of the budget is tied up in public safety labor agreements.

The fact that the City chooses to charge franchise fees does raise questions about the nature of this privatization venture. In a pure privatization model the savings generated by the privatization of City services would be passed directly through to end users at rate reductions. The financial challenges facing nearly all cities across the country has compelled them to retain some level of franchise fee to cover their basic core services in their General Account. As a fiscal conservative and businessman, I struggled with this concept.

I wear two hats now, one as a businessman and one as an elected official. The stark reality of continuing to fund core services in our City is an increasing challenge. Nobody wants to raise taxes but citizens demand services. I had to reconcile my strong beliefs in free markets and the pragmatic realities of managing a City government and protecting its citizens. If we are not diligent, resourceful and creative in financing our City services we will slowly erode to a City that can’t deliver core services and is devoid of essential amenities. This is the austere budget world that I must govern in and make decisions affecting the lives of all of our citizens.

My creative effort to restore more of the savings from the privatization included amendments I offered when I made a motion to approve the privatization of commercial solid waste. My amendments provided for the City to use the Enterprise reserve fund to cover landfill costs and AB939 recycling compliance costs together totaling nearly $1. 0 million or approximately 4% of the projected revenues. This was a cost reduction to the two vendors and ultimately a rate reduction to the end users. Based on the Utility Commission projected rate structure for solid waste for the next five years, the projected privatized solid waste rates will be lower than the projected City rates. The other elements of my motion included a five-year review of whether or not to keep on the oversight provision and the City Manager bringing back a detailed, third party, financial review and analysis of the two vendors selected.

There is so much more I left out given the volumes of documents I reviewed and analyzed. I hope I have shed some light on the reasons I voted yes for the privatization of commercial solid waste.

　

　

　

Comment by Janice Kroger on December 12, 2010 at 9:52am

Thanks, Bob. I also would like to find out more about complete privatization, or even opt for maybe two choices per area that would open up competition. But, I would rather see franchising than no change.

Comment by Bob Gafford on December 12, 2010 at 8:57am

I am a free market kind of guy. I believe that franchizing it is better than having the city do it. However it is a barrrier to innovation that is the free market, and still gives the power to the city rather than the consumer. I am pretty busy this weekend. I will see if I can write something up.

Comment by Janice Kroger on December 12, 2010 at 7:31am

Would those of you who have concerns about the potential franchise agreement for commercial solid waste put together a letter that can be sent to the City Council addressing those concerns. The sooner that can be done, the sooner you will have answers. John Waara has excellent questions & Steve & Bob have voiced concerns. I'm sure there are others who may have more questions, also. So, a letter addressing these questions would be helpful. Brand did say if anyone has questions not to hesitate emailing him. I personally would like to see some form of privatizing. Some Cities have gone the  route of complete privatizing, others have chosen franchising.

Comment by Steve Wayte on December 11, 2010 at 6:20am

PG&E is another good example. While there is a bidding process, once contracts are awarded it is a government mandated monopoly. How many times has the PUC turned down a rate increase for our energy? Free Markets guarantee efficiency and low cost, awarded contracts guarantee back room deals, vote buying, and fudged numbers.

 

 

Comment by Bob Gafford on December 10, 2010 at 10:59pm

I tend to agree with Steve. We heard all of the same arguments about deregulating the airlines and AT&T. What really happens is that several companies vie for contracts and business, and eventually only a few will be left, and rhe service will be better, and it will be way cheaper. Free markets do provide value to consumers every time they are allowed to do so.

Comment by Janice Kroger on December 10, 2010 at 4:10pm

They did put it out to bid to. I believe 5 or 6 bid. I think it was the 2 & 3rd bidders are who they chose. They had some issue wth the top bidder..they will now be getting all the financial info from both companies reviewed by a 3rd party.the reports from city staff are all available.

Comment by Deanne Martin-Soares on December 10, 2010 at 2:59pm

Many people outsource services.  What they ought to do is put it out to bid.  Encouragement can be given that they consider the existing employees for hire.  City should take the best price for service delivery.  But the franchise issue sounds fraught with problems.  I agree with Steve about what a true free market system would be but unfortunately the city is no way set-up to make that jump.  Fresno would be overflowing with trash.

Comment by Janice Kroger on December 10, 2010 at 1:12pm

Steve, wouldn't it be appropriate to also ask how much money the Union has given to any seated politician? We know that's the case and that seems to be an accepted part of business as usual with the Unions buying the politicians.

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