Artesia Trash Contract Has Foul Stench, Paying Over $3 Million in Up-Front Fees

By Brian Hews

An investigation by Hews Media Group-Community News related to the lucrative Artesia trash hauling contract, set to be awarded to CR&R during next Monday’s Special City Council Meeting, has uncovered several serious concerns in the negotiation and selection process of the contract.

Also, and furthering the lack of transparency in the award process, the negotiations were reportedly handled exclusively by Artesia City Manager William Rawlings.

All City Council-members, along Rawlings, did not respond to repeated questions about the process.

Normally, a consulting firm is hired to study the bids, generate a report, and present their findings to the City Council and residents for debate and approval, ensuring a transparent process.

Lastly, and most egregiously, two reliable sources related to the negotiations have told HMG-CN that the $350,000 “negotiation fee” that is being paid by CR&R to the city is going as a “bonus” to the city and City Manager Rawlings for negotiating the contract.

Again all City Council-members, along with Rawlings, also did not respond emails related to the question of the bonus.

The first concern is the huge fees paid by CR&R to become the exclusive trash hauler for the City, along with the length of the contract, which is 15 years.

The contract includes a clause where CR&R will initially pay $2 million as a “franchise fee,” along with “a $510,000 fee, paid annually in quarterly installments.”

CR&R is also paying $350,000 to “reimburse the city for expenses incurred in the negotiation and award of the contract” and “$100,000 in consideration of the right to negotiate the contract.”

It is that $350,000 that two sources told HMG-CN was going to the city and City Manager Rawlings as a bonus for exclusively negotiating the contract, and the $100,000 is going straight into the city’s coffers.

One Artesia resident commented, “isn’t that a slight conflict of interest between CR&R and the City Manager?”

City Manager Rawlings was, according to sources, the exclusive negotiator of the contract; no one other than City Staff was involved.

Other fees paid are an additional annual $50,000 in “administrative fees” and $60,000 for “contract reviews.”

CR&R cited “other city contracts they have that will generate economies of scale and is reflective of the business judgment of CR&R” as the reason they can pay such a large fee.

Experts contacted by HMG-CN say that there is no way CR&R can make money on this contract, and here is why:

The projected revenue in Artesia is just over $2 million per year. The one-time and ongoing fees over the life of the contract amount to $10,850,000. Amortizing that number over 15 years equates to CR&R  paying over $737,000 each year, which amounts to a 36% franchise fee, unheard of in the trash hauling business.

CR&R is cashing in on the up front fees it is paying. The contract term calls for an initial seven years; then 5.5 years after that, provided CR&R has “lived up to their promises,” and a 2.5 year extension after that at the “sole discretion of the City Council.”

The second concern pertains to Section 11.3.2.2 of the contract and calls into serious question why the city is accepting a huge franchise fee and not lowering rates for Artesia residents.

The Section is entitled “Reduction in Annual Franchise Fee” and gives the city the option to lower the franchise fee with a 30-day notice.

In exchange CR&R would “propose [their own] methodology for reducing maximum rates for both residential and commercial customers in proportionate amounts.”

One observer commented, “why wouldn’t the city just give lower rates instead of taking in these huge fees?”

Another issue buried in the back of the agreement is Section 24.6, “One-Time Commercial Sector Structural Rate Review,” which only pertains to commercial service not residential service.

The City allowed CR&R to submit an arbitrary number for commercial services annual revenue at $1,567,000.

CR&R said, “due to the fact that the commercial services revenue cannot be determined at the time of the execution of this Agreement, we will perform an audit to determine the actual number.”

If the number is below the $1,567,000, then “CR&R can request an increase of no more than 4%.” CR&R and the City agreed that the audit would be done by January 2016, three months after the contract, if approved, goes into effect.

The fourth concern is the additional fees CR&R can charge after the first year of the contract.

CR&R will be allowed a maximum 8% increase within 1.5 years of the beginning of the contract, and could raise rates every two years after that. During the life of the contract from Nov. 2015 to Nov. 2030, the increase clause would amount to a 56% increase in trash fees to Artesia residents

The contract also states in a entirely vague manner that, “there is a possibility of discretionary adjustments [in the rates] due to unusual change[s] of providing service. The City Council has the authority to approve or deny the increase.”

Research by HMG-CN shows that this is CR&R’s method of operating city trash contracts, that is, pay huge fees up front and raise rates after a short period of time.

In 2010, residents in Laguna Hills were slammed with an 11% rate increase partly blamed by the high franchise fees paid to the city.

In a 2010 article, a local Orange County blog quoted Dean Ruffridge, vice president of CR&R Waste and Recycling Services, as willing to negotiate down the rate increases for Laguna Hills. However, part of the deal, Ruffridge said, would be that the cities would have to lower their franchise fees.

“We’d do that — not a question — whatever they [the city councils] want to do,” Ruffridge said.

A high-level industry consultant, who did not want to be identified, told HMG-CN, “there is no rush to award the contract, what’s the hurry? Why would the city not go out and hire a Consultant to study the bids and then report on the findings. There is no transparency in the process.”

“It is a small city, who is going to pay for the over $3 million in fees the City is paying upfront?

Several emails into all Artesia City Council members and Rawlings went unreturned.

In response to the questions and impending article, the City sent out a press release at 4:20 Thursday July 16  touting the Agreement as good for the City with only a slight mention of the huge fees.

In one part of the press release, Rawlings stated, “this structure is important because this revenue can be used to stabilize the City’s financial foundation and to pay for important basic services like public safety.”

A resident who commented on the statement told HMG-CN, “isn’t that a tax?”

Rawlings commented on the rates in the proposal, “the proposed contract maintains current rates for residents and businesses and… includes a provision to allow the lowering of rates in the future as the City stabilizes its long-term financial situation.“

HMG-CN emailed the City once again asking for comment after the press release was sent out, with no reply.

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