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, has many solid waste agencies struggling. Balancing real cost escalation factors such as rising fuel, material, and labor costs against the push for keeping static rates is challenging. Further, full cost accounting is difficult because agencies often support activities not directly related to normal operations or provide “free services” such as street sweeping or collection and disposal for community events (i.e. fairs, farmers markets, runs for charity, art shows). Allocating shared costs across agencies is complicated and at times inaccurate adding to the agency’s overhead.
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’s primary policy and management issues. These tools are the basis for budgeting, cost accounting, financial monitoring and evaluation aimed at recovering sufficient money to cover recurrent operational expenditures of the agency’s services as well as to stock up capital for new investments or extensive maintenance.
A Pro Forma Model is a financial tool crafted from the market dynamics influencing the life cycle of a specific project, cost center, or program. 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’ve developed different types of pro forma models that allow us to tailor the financial statements to the particular project. Thus, each client receives models that have the maximum flexibility to model multiple scenarios of facility size, energy production/co-generation, site locations, and changes in operations.
For example, we have had clients wanting 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. The 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 of the proposed facilities or programs and then compare these long-term costs against current programs.
The use of financial tools to evaluate the agency’s 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 to ensuring 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.
The lack of specific financial monitoring and analysis of data is one of the significant barriers to 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 significant 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 the provision of the services and the respective revenues. The studies serve to project financial sustainability in the short-term as well as in the long-term.
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.
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.
Contact Marc Rogoff, the SCS National Expert on Solid Waste Rate Studies or read more about using financial tools to balance current and future rates while planning for high-quality waste collection, facility enhancements, and landfill operation services.
Solid Waste Planning, City of Killeen, Texas, in Waste Advantage
An SCS pro forma model for waste management gives you the much-needed ability to analyze how different elements of a business plan will impact your cash flows and value. Subsequently, using individual forecasts and operations data, you can analyze when in the future you might need financing allowing you the time to plan to acquire sufficient resources, permits, and equipment. Read the Merced County case study here to learn more.
SCS Engineers assisted the Merced County, California, Regional Waste Management Authority (RWA) in developing a Pro Forma Model that encompasses projected operational costs and revenues to help decision-makers develop timely cash flow forecasts. The RWA now has a useful tool for annual budgeting and developing long-term capital policies.
After several years of revenue declines for numerous reasons, including the recession, a change in management in 2012 ordered a re-assessment of RWA’s operational and administrative functions. Throughout the 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 not clear if cash could 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’s governing board.
The RWA owns and operates two disposal and recycling facilities, each located near the population centers of Merced County. Both landfills need expansions to increase disposal capacity in the coming years. SCS Engineers developed a Pro Forma Model 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’s engagement, RWA staff provided background data and information concerning residential collection revenues and operating expenses.
The Pro Forma Model estimated annual net revenues during the 12-year planning horizon; determined that the current debt service is a major drain until the bonds mature in FY 2026/27; calculated that funds for projected capital improvements, fleet replacement, and a new “Rainy Day Fund” can be realized even if the RWA receives low waste deliveries to the landfill; and projected cash reserves. The model recommended that the RWA consider funding a landfill gas to energy project out of cash reserves rather than bond proceeds and projected annual revenues from methane sales.
The RWA adopted the findings of the proposed pro forma model in October 2015. Conducting the pro forma modeling effort enabled the RWA’s decision-makers to project costs of the various capital, fleet, and waste flow options. Key among the lessons learned was the implementation of a “Rainy Day Fund” to provide a long-term financial backstop for unforeseen events in landfill operations that cannot be predicted today. Such events could include groundwater and landfill gas remediation, issues with landfill liners, and weather events. The fund is capped at 25 percent of the RWA’s annual operating costs, which can also provide three to four months of operating expenses. While typical of many large County or municipal General Funds, it is less typical of individual enterprise funds in the past. Such Rainy Day Funds are becoming more and more prominent across solid waste agencies in the United States.
Lastly, the RWA now has a financial tool that can be updated annually and will continue to project future revenues and capital expenditures and ultimately forecast rate needs more accurately.
Marc Rogoff, Ph.D., is a Project Director for SCS Engineers’ and our National Expert on Solid Waste Rate Studies. Marc has over 30 years of experience in solid waste management as a public agency manager and consultant and has managed more than 200 consulting assignments across the United States on all facets of solid waste management. He has written and co-authored many articles, including the following: