Assessment of Revenue Options

Section 2: Solid Waste Fees and Collection

Lower Merion Township provides weekly residential trash pickup and bi-weekly collection of recyclable materials. Each home, and multi-family homes with fewer than 4 units (and optional for buildings with 5 to fifty dwelling units), are provided with both services, and the Township sends all of its non-recyclable municipal solid waste to a trash-to-steam facility owned by the Waste System Authority of Eastern Montgomery County (the “Authority”). Since 1992, the Township has assessed a fee for the collection and disposal of household refuse (recycling collection is done at no cost to the user), but it does not charge a premium for non-curbside collection (referred to as “rear yard” collection). Under the current system, and as described more completely below, users annually notify the Township of the number of containers they expect to use weekly, and are charged accordingly.

As part of this review, an examination has been made both of the Township’s solid waste fee system and the prospect of setting fees which differentiate between curbside and rear yard collection. The analyses include commentary on how adjustments in both existing fees and the current collection system might impact the amount expected to be received by the Township. While the discussion of the prospect for an adjustment in fees is supported by generally good data and experience, moving to premium pricing for rear yard collection is more speculative in terms of estimation of possible financial results.

Lower Merion Township’s solid waste fund does not support itself from the revenues it generates from user fees or recycling income. The 2001 CAFR notes that the fund had an operating loss of $1,378,594 in 2001, offset in part by fund earnings. One of the issues under consideration is what mix of revenues might be used to move the fund towards self-sufficiency as a user-financed entity. The estimates below are based upon both an increase in per container subscription fees and a combination of changes in per container charges and an additional fee for rear yard collection.

Solid Waste Volume

Although the Township’s fee income is not tonnage-driven, the individual and collective behavior of its citizens is in some degree influenced by their perception of the amount of disposal capacity which is necessary to meet their needs, and acting on those perceived needs in the aggregate in turn relate to actual waste production expressed in terms of tonnage. On an intra-year basis (and to some degree on a year-to-year basis) as users imprecisely estimate their needs, the Township (which pays for disposal on a per ton basis, but has other costs not directly related to volume which are relatively inelastic) can recognize some benefits in the form of lower costs. When additional costs are introduced as a factor, they are added as an element in the analysis of what is “necessary”.

The Township’s tonnage of non-recycled solid waste has grown by 7.2% since 1995, when it expanded the range of paper products eligible for recycling, and there has been a 4.6% growth in its principal curbside recycling items (paper and commingled - glass/metal/plastic) over the same period. Table 2.1 illustrates those changes:

Table 2.1 - Lower Merion Township Solid Waste Volume (Tons) 1990-2001
Year	Refuse	Paper	Commingled	Total	Total Recycling¹	Recycling %
1990	22,408	3,330	2,367	30,095	5,697	18.93%
1991	21,515	3,191	2,397	29,094	5,588	19.21%
1992	19,646	3,290	2,378	27,306	5,668	20.76%
1993	18,529	3,386	2,467	26,375	5,853	22.19%
1994	18,540	3,550	2,375	26,459	5,925	22.39%
1995	17,739	4,469	2,200	26,403	6,669	25.26%
1996	18,719	4,842	2,216	27,773	7,058	25.41%
1997	18,391	4,954	2,127	27,469	7,081	25.78%
1998	18,182	5,339	2,108	27,627	7,447	26.96%
1999	18,298	6,026	2,148	28,471	8,174	28.71%
2000	18,563	5,589	2,157	28,309	7,746	27.36%
2001	19,017	4,903	2,072	27,993	6,975	24.92%
TOTALS	229,547	52,869	27,012	309,428	79,881	25.82%
Source: Lower Merion Township, July 19, 2002. Note 1: “Total Recycling” excludes leaves, brush, scrap metal, tires, textiles and white goods, which if included would increase both recycling volume and its percentage of total collections. Paper and commingled recyclables are more easily diverted to and from the residential refuse stream, and therefore are regarded as valid indicators of elasticity of demand.

Waste generation for the Township, Authority and nationwide has varied year by year, but since 1998 the rate of increase in residential refuse for the Township and the Authority has increased, albeit at a substantially greater rate for the Authority.

Table 2.2 - Refuse Volume Change 1996-2001
Years	Township	Authority	National
1997 to 1998	-1.14%	1.51%	2.96%
1998 to 1999	0.64%	2.50%	3.00%
1999 to 2000	1.45%	2.64%	*
2000 to 2001	2.45%	2.85%	*
Sources: Township data from Township, July 19, 2002; Authority data from "Residential Tonnage" figure supplied Authority to Township, July 26, 2002; national data from Statistical Abstract of the United States, 2001, p. 217 (* indicates that 2000 and 2001 data are not available).

Township Solid Waste Fees

Although data is incomplete for some of the years during which the Township’s solid waste fee has been in effect, there is reason to believe that there has been some impact on user behavior as a result of changes in fee levels and other factors.

1992-1998 Solid Waste Fees

Solid waste subscription fees have been levied in several ways since they were first instituted in 1992, when all users were charged a flat $140.00 annual fee. For the 1993-1997 period, the Township charged $125.00 for users selecting the single trash container option, and $190.00 for 2-5 containers.

While subscription data are not available for 1996 and 1997, some inferences may be drawn from the information at hand. In 1994 and 1995 the number of homeowners selecting the “one container” subscription option was essentially constant. Over a universe of all “typical” single family unit participants in the program (excluding multi-family units with multiple subscriptions) which varied minimally - moving from 15,453 in 1994 to 15,488 in 1995 – there were only 4 fewer users of the one container option, and only 31 fewer who chose the “2-4 container” option, a de minimus change (-.03% and +.03%, respectively).

The results were different in 1998, when the Township increased its per container fees by 21.6%:

Table 2.3 - Lower Merion Township Solid Waste Charges 1997-1998
Year	1 Container	2-5 Containers
1997	$ 125.00	$ 190.00
1998	152.00	232.00
Source: Lower Merion Township, July 18, 2002.

Using the same universe of users, in 1998 there was a significant drop in the number who chose the 2-5 container option, and a similar gain in those who opted for 1 container, in comparison with 1995:

Table 2.4 - Lower Merion Township Solid Waste Charges 1995 and 1998
	1998		1995
1 Container	4,746	30.56%	4,245	27.41%
2-5 Containers	10,784	69.44%	11,243	72.59%
Total Users	15,530		15,488
Source: Lower Merion Township, July 18, 2002 and August 6, 2002.

The number of total users increased by .3%, but there was a 11.8% increase in those selecting the one container plan and a 4.1% decrease in users choosing the 2-5 container option. That differentiation also was reflected in solid waste fee revenue, which increased 19.5% from 1997 to 1998, rather than the approximately 22% increase the adjustment would have yielded on a straight line basis.

1999-2001 Solid Waste Fees

It is difficult to assess the impact of the solid waste fee structure on user choices over the life of its assessment in light of institution of the per container system after the initial flat fee, and a significant restructuring of the plan in 1999. At that time, the Township began to charge on the basis of one, two and three-to-five containers, and increased fees. While the Township gave users more choices, those expressing a greater need received a somewhat larger percentage increase. Users of the single can option saw their cost increase by 26.3%. Those who previously paid $232.00 for 2-5 cans were given the option to pay $262.00 for two or $322.00 for 3-5 cans, an increase of 12.9% and 38.8%, respectively, over the prior 2-container charge.

The data indicate that Township residents since 1999 on have tended to select less expensive disposal options. It appears that the income associated with introduction of the 2-container option in 1999 to some degree moderated the fiscal impact of those actions, but there is a clear downward trend in the number of containers chosen and the associated allocation of fee income to the Township.[i]

Examination of information provided by the Township as to total subscription levels showed that from 1999 to 2000 the number of single-can users increased from 34.06% of all subscriptions to 37.81%. In 2002, users selecting the single can option comprise 39.25% of the total, an increase of over 15.3% since 1999. While the total number of subscriptions has increased by 6.5%, the notional subscription fees have fallen. As well, the percentage of subscriptions represented by the 3-5 container option has declined from 52.05% of the total in 1999 to 40.37% in 2002.

In 1998 the Township’s total solid waste fee income was $3,398,136. In 1999, with the shift in the structure of the fee system and associated rate increases, the total received was $4,452,385, an increase of 31%.

Looking solely to income allocable to the base fee amount (assuming 100% “flat period” payments, and aside from considerations of discount, penalty, rebates and collection efforts), there is reason to have concern about whether a fee increase will generate income proportionate to the associated percentage adjustment. Table 2.5 illustrates the trend in revenue versus the current three-tier fee structure on the basis of the fee schedule and user choices.

Table 2.5 - Lower Merion Township Solid Waste Charges (Subscriptions and Per-Container Pricing) 1999-2002
Pricing		1999		2000		2001		2002
Containers/$		#	$	#	$	#	$	#	$
1	$192.00	5,725	1,099,200	6,357	1,220,544	6,603	1,267,776	6,602	1,267,584
2	262.00	2,335	611,770	3,221	843,902	3,430	898,660	3,427	897,874
3-5	322.00	8,749	2,817,178	7,235	2,329,670	6,788	2,185,736	6,791	2,186,702
Totals		16,809	4,528,148	16,813	4,394,116	16,821	4,352,172	16,820	4,352,160
*1999-2002 Percentage Change:*								*+6.5%*	*-3.89%*
Source: Lower Merion Township, July 18, 2002 and August 8, 2002.

The table above shows that the total notional fee has dropped as the number of subscriptions has increased. A comparison of actual figures for August, 1999 and 2000 reveals that discount and flat period payments fell, while penalty payment period receipts increased, which is another indicator of possible stress in the system.

Whether the decision to move to a smaller number of containers is driven by considerations of cost and/or waste generation, there is reason for caution in predicting revenues. To the extent the change in behavior is attributable to reduction in volume and/or increased recycling, there is a question as to how much more can be done on a case-by-case basis to further reduce waste generation, a matter beyond the scope of this inquiry. It is interesting to note, however, that refuse tonnage generated in the Township increased from 1998 to 1999, and has gradually grown since then.

It is likely that those results are indicative of a combination of both considerations. Literature in the field of solid waste management with a focus on unit pricing supports the contention that there is some elasticity of demand driven by price changes, and that behavior is also influenced by the availability of free or low-price recycling options.[ii]

Solid Waste Container Fee Changes - Projection of Revenue

While it is possible to envision circumstances which could reverse the trend towards consumers deciding to use fewer containers, no empirical evidence has been discovered to indicate that as being likely. The question, then, is on what basis the Township should estimate the likely incremental income which would be generated by an increase in per-container solid waste disposal fees.

On the basis of the experience of the Township in connection with its rate changes in 1998, assuming that the behavior of users in multi-family units will react in substantially the same manner as do single family users, and the utilization and revenue trends which have followed the 1999 restructuring and fee adjustments, it is likely that the Township will receive 96% to 97% of the revenue it would receive absent those factors. Prior solid waste fee increases have varied both in amount and in the structure used, and each has had some impact on behavior. Given the four years since the last increase, and the absence of a range of viable alternatives for individual users apart from unit volume reduction (e.g., opting for fewer containers or using in-home compactors), it is likely that the revenue consequences will be relatively inelastic in terms of percentage volume reduction versus actual percentage price increases.[iii]

Table 2.6 – Comparison of Option 1 as Applied to Per Container Solid Waste Fees
Containers	Current Fee	Option 1 Fee (2005)
1	$192	$ 250.91
2	262	342.38
3-5	322	420.79

The increases in solid waste fees outlined in Option 1, applied in the same percentage on per container fees, on a cumulative basis total 30.68% by 2005 in comparison with the current rates . Absent any considerations as to reductions in the number of containers selected in reaction to fee changes, new revenue would be $1,375,310, bringing the total for solid waste fees to approximately $5,858,069. Applying a 3.5% elasticity factor, that amount would approximate $5,653,037, with new revenue of approximately $1.2 million against nearly $4.5 million in current solid waste fee receipts. While that amount is somewhat less than the estimated 2003 Township subsidy to the solid waste fund, it would eliminate substantially all of it, and the exact results would depend on whether the estimated elasticity factor accurately predicts outcomes.

Other considerations come into play – both positive and negative - in support of these estimates:

Were the Township not experiencing a long-term (although modest) decline in the revenue base for its solid waste system the fall-off might not be as great, but as noted above there is no reason to assume that the trend will reverse.
An offsetting factor could be the continuing increase in volume overall (particularly over recent years), which would argue that at some point the movement towards opting for smaller numbers of containers will slow. This is moderated in some degree by experience which shows the continued movement to smaller numbers of containers over a number of years notwithstanding increased volume during the same period.
While it is possible, on the basis of 1998-2000 events, to conclude that the results could be marginally more adverse, it seems reasonable to ascribe a portion of the outcome from that period to the imposition of two rate changes and significant alterations in program structure over a very short period. In this case, the three-tier system has been in place for several years, and the prospect for such substantial dislocation due solely to a rate change is not great.

Rear Yard Collection Fee Differential

One revenue alternative under consideration by the Township is the institution of a charge for users who choose to continue the practice of rear yard collection in preference to placing refuse at the curb. Unlike increasing the base solid waste fee, a variable fee based on receptacle location provides a greater opportunity for consumers to make choices based on both economic judgments and convenience. As noted above, mandatory municipal trash collection evokes a monopoly pricing model, and increases in basic fees for that service based on volume offer users few alternatives in terms of choice short of reduction in amount of refuse produced and disposed of through the municipal collection system. Much like water conservation during a drought, however, there is a practical limit to how much can be done to reduce consumption.

Given that a combination of economic and non-economic motivations are relevant (and in varying degree dependent upon a range of idiosyncratic factors), any analysis of the probable fiscal impact of a new non-curb collection fee is as much an exercise in behavioral psychology as financial analysis. The estimates of revenue yield are therefore highly susceptible to variance. In making the estimates in this section, no allowance was made for changes in Township refuse disposal costs as a result of changes in the collection process other than those specifically noted.

Township staff surveyed its routes as to collection points and approximate distance from the curbside during 2000, and developed the following matrix:

Table 2.7 - Lower Merion Township Solid Waste Collection Points¹
Distance from Curbâ	Less than 5’	More than 5’ but less than 30’	More than 30’ but less than 100’	More than 100’	Total Collection Points
Collection Points (2000)	5,036	4,198	6,901	1,661	16,796
% Allocation	29.98%	24.99%	41.09%	9.89%
Note 1: “Total Collection Points” is a larger group than the single family homes used as a basis for comparing residents’ year-to-year choices of containers, above. Source: Lower Merion Township, Departments of Finance and Public Works, May 8, 2001.

The initial judgment made was that refuse deposited within 5 feet of the curb would be regarded as “curbside” for the purposes of evaluating how a fee might be assessed.

Township staff judged that all users in the “More than 5’ but less than 30’ ” category would deposit all refuse at the curb, that forty percent in the “More than 30’ but less than 100’ ” cohort would do so, and that all of the current users in the most distant category (“More than 100’ ”) would elect to retain rear yard collection. Working on the assumption that the allocation of then-current per-container subscription levels would remain the same, Public Works Department staff also estimated that 25% of households electing rear yard collection would be one container users, 22% would be two container households, and that the remainder (53%) would be in the 3-5 container group. The impact of the estimates is to reflect an elasticity of demand for the service (rear yard collection) based on an assessment of a combination of convenience (and other factors related to the “physical” aspect of curbside collection), as well as some economic judgments.[iv] Given the extensive experience of the Township’s Public Works Department with refuse collection and the associated behavior of residents of the Township, there is no basis to believe that assessment to be incorrect, and the estimate seems to be a reasonable basis from which to work.

Staff estimated direct rear yard refuse collection costs of $982,000, and that operating savings of $259,000 would be realized by the Township if the assumed choices were made by residents to move their collection points to the curb. That results in a net cost of rear yard collection of $723,000, to be covered by rear yard collection fees.

On the basis of Township staff estimates as to user elections to deposit refuse at the curb, 28.59% of the collection points would continue to have rear yard collection. Table 2.8 shows what the fees (imposed solely on those with rear yard collection) would be were they designed to cover the allocated expenses of that service, and without regard to any other subscription fee per container adjustments. The amounts shown in the Table produce a 57.2% increase in current fees, and no allowance has been made for inflation through 2005.

Table 2.8 – Impact of Revenues Users Selecting Curbside Collection (Based on Total Collection Points)
Containers	Number Selecting Curbside	%	Current Fee	New Fee	New Revenue
1	1,146	25	$ 192	$ 301.63	$ 125,593
2	1,008	22	262	411.60	150,816
3-5	2,429	53	322	505.86	446,534
Total	4,582				$ 722,942

Combining Increases in Per Container Fees and Rear Yard Fees

If the Township were to adopt the rear yard collection fee described in Table 2.8, the amount which would have to be obtained from a general subscription fee increase to close the projected $1.3 million solid waste fund gap would be reduced by over 60%. Given that Option 1 anticipates a phased approach to increasing per container fees (an approach which could also be taken with respect to rear yard charges) there are many different alternatives which could be considered. As a general matter, however, the burden on the Township’s general fund will be reduced if incremental revenue is generated sooner rather than later, and Option 1 anticipates that the solid waste fund subsidy will be reduced over the next several years.

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Section 2: Solid Waste Fees and Collection

Solid Waste Volume

Total

Table 2.2 - Refuse Volume Change

Township Solid Waste Fees

Table 2.4 - Lower Merion Township Solid Waste Charges

Total Users

Table 2.5 - Lower Merion Township Solid Waste Charges

Solid Waste Container Fee Changes - Projection of Revenue

Table 2.6 – Comparison of Option 1 as Applied to Per Container Solid Waste Fees