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HomeMy WebLinkAboutCC Resolution 14401 (Annual MSS Refuse Rate Review) RESOLUTION NO. 14401 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN RAFAEL AUTHORIZING THE CITY MANAGER TO ENTER INTO A CONTRACT WITH R3 CONSULTING GROUP, INC. IN AN AMOUNT NOT TO EXCEED $88,090 TO CONDUCT A REFUSE RATE REVIEW FOR THE CITIES OF SAN RAFAEL & LARKSPUR, TOWN OF ROSS, LAS GALLINAS VALLEY SANITARY DISTRICT AND ROSS VALLEY-SOUTH THE CITY COUNCIL OF THE CITY OF SAN RAFAEL RESOLVES AS FOLLOWS: The City Manager and City Clerk are authorized to execute, on behalf of the City of San Rafael, an agreement with R3 Consulting Group, Inc. for Refuse Rate Review of Marin Sanitary Service’s Rate Application for the 2018 calendar year, in a form to be approved by the City Attorney. The agreement shall be for an amount not to exceed $88,090.00, the terms described in the August 11, 2017 Proposal from R3 Consulting Group, Inc., attached hereto as Exhibit A and incorporated herein by reference. I, ESTHER C. BEIRNE, Clerk of the City of San Rafael, hereby certify that the foregoing resolution was duly and regularly introduced and adopted at a regular meeting of the City Council of said City held on Monday the sixteenth day of October, 2017, by the following vote, to wit: AYES: COUNCILMEMBERS: Gamblin, McCullough & Mayor Pro Tem Colin NOES: COUNCILMEMBERS: None ABSENT: COUNCILMEMBERS: Bushey and Mayor Phillips ESTHER C. BEIRNE, City Clerk www.r3cgi.com 1512 Eureka Road, Suite 220, Roseville, CA 95661 Tel: 916-782-7821 | Fax: 916-782-7824 2600 Tenth Street, Suite 424, Berkeley, CA 94710 Tel: 510-647-9674 627 S. Highland Avenue, Suite 300, Los Angeles, CA 90036 Tel: 323-559-7470 August 11, 2017 Marin Franchisors’ Group Cristine Alilovich, Assistant City Manager, City of San Rafael, Cory Bytof, Sustainability & Volunteer Coordinator, City of San Rafael Pat Echols, Assistant Director, County of Marin Susan McGuire, Administrative Services Manager, Las Gallinas Valley Sanitary District Dan Schwarz, City Manager, City of Larkspur Joe Chinn, Town Manager, Town of Ross Subject: Proposal for Detailed Rate Review of Marin Sanitary Services Dear Marin Franchisors’ Group: R3 Consulting Group, Inc. (R3) is pleased to submit the attached proposal to the Marin Franchisors’ Group (cities of San Rafael, Larkspur, and Ross, the County of Marin, and the Las Gallinas Valley Sanitary District) to conduct a detailed rate review of Marin Sanitary Services (MSS). This detailed rate review will establish MSS’ revenue requirement under the proposed new rate setting methodology currently being completed by R3. As such, the primary purpose of this review will be to ensure that the forecasted costs of MSS operations are reasonable, with a key focus on excluding costs that are not reasonable for inclusion in the rate setting process. I, Garth Schultz, am Principal-in-Charge at R3’s Berkeley office and will serve as project manager and point-of contact. R3 Principal William Schoen will serve as lead project analyst for this engagement. We are both currently leading the Rate Methodology Review for the City / Marin Franchisors’ Group, and have assisted multiple jurisdictions throughout California with financial analysis projects, including detailed rate reviews, most recently for the City and County of San Francisco. We will be supported by R3 Senior Project Manager David Siddiqui, and R3 Senior Project Analyst Emily Ginsburg and other qualified R3 staff, as necessary. We appreciate the opportunity to submit our proposal to the Marin Franchisors’ Group. Should you have any questions regarding our proposal, or need any additional information, please contact me by phone at (510) 292-0853 or by email at gschultz@r3cgi.com. Sincerely, R3 CONSULTING GROUP Garth Schultz | Principal EXHIBIT A Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 2 of 9 Background In 1995, the cities of San Rafael and Larkspur, the Town of Ross, the Ross Valley and Las Gallinas Valley Sanitary Districts, and the County of Marin (the Franchisors’ Group) adopted a new methodology that would be used to set MSS’ rates for refuse collection and disposal, as well as recyclable and yard waste collection and processing. The methodology is based on a detailed review (performed every three years) with summary reviews (based largely on the detailed review, the use of indices, and the review of a few key matters such as revenues and disposal costs) during the intervening years. In 2002, MSS was awarded the franchise to provide services to the Town of San Anselmo. Also in 2002, MSS was awarded the franchise to provide services to the north area of the Ross Valley Sanitary District. In 2004, MSS acquired the Fairfax franchise. These expansions of service, and the need to allocate MSS’ costs among the Franchisors’ Group and these new jurisdictions, increase the importance of proper allocation of MSS’s costs among the jurisdictions to ensure that the Franchisor’s Group is not paying a share of the costs to service San Anselmo, Fairfax, and the north area of the Ross Valley Sanitary District. In 2005, customers that were in the Las Gallinas Valley Sanitary District franchise area were integrated into the customer base of the City of San Rafael. In 2012, the Franchisor’s Group engaged HF&H to assist in the negotiations with MSS to revise the Contractor’s Revenue Requirement and Rate Adjustment methodology. Significant revisions included documentation of: 1. Procedures that had been agreed to by MSS and the Franchisor’s Group over the years but not documented; 2. Related-party fees and how they will be adjusted in the future; 3. Additional reporting to be submitted with the rate adjustment applications; and 4. Procedures to develop a reserve for diversion programs by sharing in Marin Resource Recovery Association’s net revenues (net recyclables processing revenues). The last detailed rate review was conducted in 2015 for purpose of setting the rates that became effective on January 1, 2016. Earlier this year, the Franchisor’s Group engaged R3 to simplify both the detailed rate review and indexed rate review process. That work is currently ongoing, and revisions to the current Rate Adjustment Methodology have not been finalized. For purposes of preparing our proposal, we have generally followed the current Rate Adjustment Methodology. Any agreed upon changes to that methodology will be accounted for through appropriate revisions to our Scope of Work below. That Scope of Work also includes an additional task that involves working with MSS to assign and allocate its FY 16 financial statement revenues and expenses by line of business in support of the ability of the Franchisors’ Group to consider setting cost of service rates, should they wish to do so. Scope of Work Our scope of services is comprised of the following tasks: Task 1 Kick-off Meetings/Preliminary Application Review Task 1A Kick-off Meeting with the Franchisors’ Group R3 will meet with the Franchisor’s Group to confirm our understanding of the engagement, timing and identify issues from the perspective of the Franchisors’ Group. Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 3 of 9 Task 1B Kick-Off Meeting with MSS R3 will meet with MSS to receive MSS’ Application and a presentation by MSS of the major matters leading to any rate adjustments. Our project budget assumes that this Task 1B will be held immediately following the Task 1A Kick-off Meeting with Franchisors’ Group, and that MSS’ Application and all supporting schedules will be provided in Excel format. We also request that MSS provide an Excel version of its line item general ledger. Task 1C Completeness and Compliance Review Upon receipt of the Application, R3 staff will test the current Application for compliance with the current procedures. We will seek explanations for any unusual findings and we will inform MSS of any matters that come to our attention leading us to believe the Application is either not in compliance or is inconsistent. Task 1D Mathematical Accuracy and Logical Consistency Review R3 staff will test the mathematical accuracy of all of the tables contained in the Application. We will verify that the Application is internally consistent and that any summary schedules agree to the supporting schedules or worksheets. We will seek explanations for any unusual findings and we will inform MSS in writing of any matters that may come to our attention that lead us to believe that the Application is not mathematically correct or logically consistent. Task 2 Review of Forecasted Cost of Operations Task 2A Review of Expenses We will test the following expenses for reasonableness based on historical trends, consistency with operating data, and consistency with management’s plans: 1. Wages and salaries; 2. Benefits expense; 3. Workers compensation expense; 4. Disposal expense; 5. Commercial mixed waste processing expense (See Task 2B); 6. Organics processing expense (See Task 2B); 7. Recyclable materials processing expense; 8. Adjustment for Non-Franchisors’ Group entities transfer/transport expenses (see Task 2C); 9. Fuel and oil expense; 10. Equipment and vehicle expense; 11. Depreciation/lease expense; 12. JPA Fees; and 13. Other operating / general and administrative expense. R3 will review individual transactions to ensure non-allowable costs, including non-allowable related party transactions, have been excluded from the 2018 forecasted annual cost of operations. We will seek explanations for any unusual findings and we will inform MSS of any adjustments that we believe are necessary to these estimated and projected expenses to ensure that the expenses are reasonable. Task 2B Review of Commercial Mixed Materials Processing Rate and Organic Materials Processing Rate Our Review of Expenses will include a review of MSS’ calculated commercial mixed waste processing expense and organics processing expense to determine if it was calculated in accordance with the rate setting methodology. Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 4 of 9 Task 2C Review of Non-Franchisors’ Affiliate Transfer and Transport Adjustment Our Review of Expenses will include a review MSS’ calculation of the adjustment for non-Franchisor’s Group entities transfer/transport expenses. Task 2D Review Allocation Methodology R3 will review the methodology used by MSS to allocate operating expenses to the individual jurisdictions to ensure consistency with the compensation methodology. We will seek explanations for any unusual findings and will inform MSS of any adjustments that may come to our attention that we may believe are necessary to the estimated and projected expenses. Task 2E Review Management Salaries R3 will review the management salaries to determine the allocation to the operations of the Franchisors’ Group is reasonable based on a time study provided by MSS, and that overall compensation is reasonable based on similar positions in the industry. In advance of submitting its Application, we request that MSS review and update its time study used for its management salaries allocation. Task 2F Variance Analysis As part of its Application, R3 requests that MSS prepare a variance analysis of its actual 2016, estimated 2017, and forecasted 2018 annual cost of operations by developing a variance analysis, with an explanation for significant variances between periods. R3 will then review that analysis and assess the reasonableness of significant variances. Task 2G Review Profit Calculation R3 staff will calculate the allowed profit using a 90.5% operating ratio applied to the forecasted annual cost of operations, as the forecasted annual cost of operations submitted in the Application may be adjusted. Task 3 Review of Rate Adjustment Factor The Rate Adjustment Factor equals the Total Contractor’s Revenue Requirement for the coming Rate Year divided by the Gross Rate Revenues. The Rate Adjustment Factor is determined using the projected contractor compensation based on the projected costs of operations and profit, projected pass-through costs, and projected revenues. Task 3A Review Revenue Projection R3 will review and verify the accuracy of the MSS projected rate revenue at current rates. We will verify the calculation has been done in accordance with the methodology outlined in the agreement. Task 3B Review Non-Rate Revenue R3 staff will review non-rate revenue for consistency and reasonableness. We will seek explanations for any unusual findings and inform MSS of any adjustments that may come to our attention that we may believe are necessary to these estimated and projected revenues. Task 3C Review Calculation of Rate Adjustment Factor R3 staff will recalculate a Rate Adjustment Factor, as the forecasted annual cost of operations and projected revenues submitted in the Application may be adjusted based on our review. Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 5 of 9 Task 4 Review of New Programs R3 staff will review MSS’ cost projections and anticipated rate impact for any anticipated new programs in the coming rate year. Task 5 Survey of Comparable Rates We will compile rates currently in effect in other municipalities in Marin County, as well as neighboring jurisdictions in other counties. Our project budget assumes that MSS will provide complete rate schedules for all of its franchisor and non-franchisor franchised operations as part of this Task. Rates will be presented as reported for each jurisdiction without any adjustments for franchise fees, services or other factors that my impact the rates. Task 6 Review of the Calculation of Reserve Fund Balance R3 will review MSS’ calculation of the increase or decrease to the reserve for future diversion programs in accordance with the procedures developed in 2012. Our findings will be summarized in our Task 8 Reports. Note: The specific handling of the Reserve Fund may be revised pending R3’s current work to simplify the Rate Adjustment Methodology and address the current Reserve Fund shortfall. Task 7 Cost of Service Analysis In conjunction with our review of MSS’s Application, R3 will work with MSS to prepare a cost of service analysis for its FYE 2016 Revenues and Expenses by residential, commercial, roll-off and/or other lines of business (LOBs), and by solid waste, recycling and organic services within each of those LOBs as applicable. Our project budget assumes that MSS will develop appropriate assignments and allocations of revenues and expenses among the agreed upon LOBs, with the associated allocation factors clearly noted. R3 will review those allocations and the allocation methodologies (factors) for reasonableness and confer with MSS as appropriate for purposes of developing a final agreed cost of service allocation by LOB. Task 8 Communication of Results Task 8A Review of Preliminary Findings with MSS R3 staff will meet once with MSS management to discuss the preliminary findings from our review and receive additional information from the Company that may revise our findings. Task 8B Initial Draft Report R3 staff will draft an initial report based on the results from the above meeting and will provide it to MSS management for review. We will subsequently confer with MSS management to discuss its comments regarding our initial draft report. Task 8C Final Draft Report Based on the above meeting, R3 will make any appropriate revisions to our initial draft report and present a Final Draft to the Franchisor’s Group. We will then confer with the Franchisor’s Group to discuss its comments regarding our Final Draft Report. Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 6 of 9 Task 8D Meetings R3 staff will prepare for and attend up to three (3) informational meetings as requested by members of the Franchisors’ Group. Task 8E Final Report Based on the comments from the Franchisors’ Group, we will amend the Final Draft Report and issue our Final Report. Task 8F Presentation of Findings R3 will present our findings at one meeting for each of the members of the Franchisor’s Group. Limitations Every approach to an engagement is limited in its scope. The following are the major limitations regarding our proposed scope of work:  R3 reserves the right to conduct portions of our analyses off-site of MSS’ offices, as we deem appropriate.  Our project budget assumes that MSS Application, supporting documentation, including general ledger, and follow-up requests for information will be provided electronically, in Excel format (as applicable), in a complete and organized manner.  Our project budget assumes that Task 1B will be held immediately following the Task 1A Kick-off Meeting with Franchisors’ Group, and that MSS will provide the Task 2F Variance Analysis along with its Application. It also assumes that MSS review and update, as appropriate, its time study used for its management salaries allocation, and that MSS will provide a complete accounting of individual officer and management salaries and benefits (e.g., company cars, expense allowances etc.), in support of Task 2E – Review Management Salaries.  The scope of work described above is different from an audit of financial statements performed in accordance with Generally Accepted Auditing Standards, which is performed by MSS’ auditor.  We will perform the tasks presented above in a manner that will allow us to achieve the objectives of the review in a cost-effective manner. We will rely on MSS’ auditor with regard to matters related to MSS’ internal controls.  We will conduct our review in accordance with the Contractor’s Compensation and Rate Adjustment Methodology adopted by the Franchisors’ Group, with adjustments to reflect agreed upon changes to that methodology resulting from R3’s current work with the Franchisors’ Group and MSS to simplify that methodology.  The Rate Adjustment Methodology includes the review of MSS management’s projection of the future results of operations. We will review these projections for reasonableness and propose adjustments, as appropriate. We accept no responsibility to update these adjusted projected results after the date of our report. Additionally, the projections result from assumptions regarding future events and management’s planned response to them. Frequently, future events do not occur as anticipated and the difference can be material.  Our scope of work and budget does not include modifications to rate structures of any of the individual Franchisors’ Group members. If any member of the Franchisor’s Group would like us Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 7 of 9 to perform modifications to their rate structures, we would be pleased to do so based on arrangements made with the requesting Franchisor.  Our scope of work and budget includes one (1) presentation to the governing bodies of the Franchisors’ Group. If additional meetings are requested, we would be pleased to do so based on arrangements made with the requesting Franchisor. Schedule Table 1 below includes the tentative project schedule, which is subject to change. Table 1 Tentative Schedule Key Task Completion Date MSS Submits Application TBD Kick-Off Meeting with Franchisors’ Group/MSS Week 1 R3 Commences Field Work Week 1 R3 Completes Field Work Week 7 R3 Reviews Results with MSS Week 8 R3 Provides MSS Draft Report Week 9 MSS Provides Comments on Draft Report Week 10 R3 Presents Draft Report to Franchisors’ Group for Comment Week 11 R3 Presents Final Report Week 12 Board / Councils Receive Report and Adopt Revised Rates As scheduled Rates Effective TBD Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 8 of 9 Proposed Cost R3 initially proposes to complete our proposed scope of work for a total, not-to-exceed amount of $88,090. The project cost includes labor, travel, and project expenses. We would be happy to discuss changes to our scope or budget as may be needed to align with the needs of the Franchisors’ Group. Table 2 Project Cost Principals Senior Project Manager Senior Project Analyst Associate Analyst 205$ 185$ 145$ 120$ 1 24 4 24 0 $9,140 52 2 60 80 80 0 $38,700 220 3 2 2 10 0 $2,230 14 4 12 4 12 0 $4,940 28 5 0 4 0 8 $1,700 12 6 Review of Calculation of Reserve Fund Balance 8 4 8 0 $3,540 20 7 Cost of Service Analysis 4 8 16 0 $4,620 28 8 Communication of Findings 60 12 60 0 $23,220 132 Total Hours 170 118 210 8 506 Total Cost (1)34,850$ 21,830$ 30,450$ 960$ 88,090$ (1)Includes all expenses Task Cost Hours Kick-Off Meeting / Preliminary Application Review Survey of Comparable Rates Review Forecasted Cost of Operations R3 Consulting Group Review of Rate Adjustment Factor Review of New Programs Marin Franchisors’ Group August 11, 2017 Proposal for Detailed Rate Review of Marin Sanitary Services Page 9 of 9 Billing Rates Table 3 R3 Hourly Billing Rates Category Hourly Rate Principal / Project Director $205 per hour Senior Project Manager $185 per hour Project Manager $160 per hour Senior Project Analyst $145 per hour Project Analyst $135 per hour Associate Analyst $120 per hour Administrative Support $100 per hour REIMBURSABLE COSTS Consultants/Subcontractors Cost plus 10% Lodging and meals Direct cost Travel — Private or company car $0.535 per mile Travel — Other Direct cost Delivery and other expenses Direct cost Payments Unless otherwise agreed in writing, fees will be billed monthly at the first of each month for the preceding month and will be payable within 30 days of the date of the invoice. Escalation Fees will be escalated annually in accordance with the change in the Consumer Price Index.