Just answer question 5
Just answer question 5
Case 1: Chesterfield Municipal Landfill.
“Sharon, we can’t propose close to 50 percent increases in our monthly trash
collection charges! It would be political suicide. I don’t have to remind you that if I
lose November’s election we’ll both be looking for new jobs.” Mayor Jim North of
the city of Chesterfield was meeting with the city’s Director of Finance, Sharon Slater,
to prepare for the upcoming budget hearing.
Sharon responded: “Jim, we’re really caught here. You know we have to
cleanup the old Brownsville Road Landfill. Our planned bond issue will provide the
short-term cash flow for the cleanup, but trash collection fees must pay off the bonds.
The Solid Waste Management Fund cannot make bond payments without this
increased revenue and also comply with City Council’s requirement to operate with
revenues exceeding expenditures by 1.25 percent.”
As Jim and Sharon concluded their meeting, Jim was discouraged. He asked
Sharon to prepare a detailed cost analysis of landfill operations, including cleanup
costs for the Brownsville Road Landfill.
The old Brownsville Road Landfill.
In April 1995 the EPA notified the city that the Brownsville Road Landfill,
which had been closed since 1991, was being investigated as a possible hazardous
waste site. Acting on complaints from citizens about odors and rodents, the EPA had
performed a preliminary Remedial Investigation and Feasibility Study (RI/FS) of the
old landfill site. As a result of the study, the EPA placed the site on its National
Priorities List of the most serious hazardous waste sites. As the current owner of the
property, the city of Chesterfield was designated as a potentially responsible party
(PRP) under the Comprehensive Environmental Reclamation and Cleanup Liability
Act, commonly referred to as the Superfund Act.
The EPA study found that the waste at the Brownsville site contained volatile
organic compounds (VOCs) which represented significant danger of explosion. As a
short-term safety measure, the EPA had fenced the landfill and posted warning signs.
The EPA was seeking reimbursement of $2.2 million from the city for the cost of
conducting the preliminary site investigation and installing the fencing.
The cleanup approach recommended by the EPA was to pump the
contaminated groundwater and treat it by air stripping. This technique forces
contaminated water through a pressurized air stream inside a tower filled with packing
material. In this process, the contaminants are transferred to the air stream which is
then collected and treated. Air stripping is proven technology, and can remove
approximately 95 percent of the contaminants from the groundwater. The cost
estimate for the air stripping process is $28 million.
Following the groundwater treatment, a clay cap would be constructed to
prevent rain water from leaching hazardous materials into the groundwater. A
multilayer design had been proposed which would include a water-resistant layer two
feet thick and a one-foot thick drainage layer. Finally, the cap would be covered with
top soil and vegetation. A contractor had submitted a bid of $5.4 million for the job.
Sharon had estimated that ongoing maintenance of the cap could be done by the city’s
Public Works Department at a cost of $240,000 per year. A bond issue was intended to
fund the one-time costs of cleaning up the landfill. However, the annual maintenance
would have to be met from annual revenues. The city is obligated to pay 8% interest
on these bonds and must set aside 2.7% of the total bond principal in a sinking fund
that is expected to earn 5% return for the replacement of this principal.
Sharon began her analysis by reviewing contracts the city had signed for work
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at the Brownsville site. These included 2 ground water monitoring wells, constructed
at $75,000 each, and extension of the municipal water system at a cost of $720,000, to
replace drinking water wells used by residents near the site. The city also paid
$85,000 in outside attorney fees related to the negotiation and litigation with other
Sharon knew that in addition the city attorney’s office had spent an estimated
600 hours on the case, which was costed at the rate of $150 per hour. The Director of
Public Works also spent over 100 hours providing information to both attorneys’
offices. His time is charged at $35 per hour.
Current trash collection charges and costs.
The city currently serves 29,270 households and 2,150 businesses. Residential
customers are currently charged $12 per month and businesses $28 per month for
trash services. The current operating costs for trash collection and landfill operations
is $4,810,000. This does not include the one-time clean up costs or the additional
maintenance costs for the landfill. The one-time clean up cost, paid by the bond issue,
requires an annual transfer to a debt service fund for the principal and interest on
these bonds. The bonds carry an annual interest rate of 8 percent paid semiannually.
The entire principal is due in 20 years.
1. What is the cost of cleanup for the old Brownsville Road Landfill?
2. What is the annual cost of the landfill cleanup, including amounts to retire the bond
3. What are the net cash flows from landfill operations in the upcoming year?
4. What price increases are necessary to keep the Solid Waste Management Fund
solvent and in compliance with the City Council charter?
5. Should the city price hazardous and nonhazardous waste differently? If not, why? If
so, what should be considered when determining the prices it should charge?
7. Prepare a memo Jim might write for the City Council briefing them on the need for
the increase in landfill charges. Assume that no one on the City Council has any
accounting background, so the memo must explain the technical accounting issues in
layman’s terms. Limit the length of the memo to no more than 2 single-spaced typed