Making Solid Waste Decisions with Full Cost Accounting


Introduction

The costs of municipal solid waste (MSW) management services
have risen steadily over the past decade. In 1992, the price
tag for solid waste management in the United States was an
estimated $30 billion, and this cost is still rising. Local
governments are trying to control MSW costs through a
variety of measures, including restructuring waste services
and encouraging waste reduction. However, making solid
decisions and developing cost-effective waste management
strategies can be difficult without complete cost
information. 

Full cost accounting (FCA) provides decision-makers with a
method of compiling detailed cost information on MSW
services in their communities. Knowing what MSW management
really costs enables local government officials to make
informed decisions about their programs, identify
opportunities for streamlining services, facilitate
cost-saving efforts, and better plan for the future. This
primer briefly explains what FCA is and how it works, along
with its benefits and potential barriers. It also provides
snapshot examples of how communities across the country are
using FCA to improve their MSW operations.

As of 1995, four states (Florida, Georgia, Indiana, and
North Carolina) passed laws that require local governments
to use FCA in reporting MSW costs to citizens. Other
communities implement FCA voluntarily and are finding it an
important and useful tool to help manage their solid waste
programs.


What Is Full Cost Accounting?

FCA is an accounting practice that can help local
governments identify and manage the actual costs of MSW
services. FCA is different from other common government
accounting practices. It helps decision-makers understand
the direct and indirect operating costs of MSW services, as
well as upfront (past) and backend (future) expenses.
Through FCA, decision-makers systematically identify,
analyze, and report all the monetary costs of resources
associated with MSW management activities, including:

   - Acquisition of equipment and materials.
   - Siting and construction of facilities.
   - Collection and disposal of MSW.
   - Collection, processing, and marketing of recyclables.
   - Transportation.
   - Operation and maintenance of facilities (e.g., transfer

     stations, landfills, and materials recovery 
     facilities).
   - Clean up of illegal dumping sites.
   - Landfill closure and postclosure.
   - Program promotion.
   - Administration/overhead.
                                                            
 
     
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          FCA helps MSW managers account for all monetary   
          costs of resources used or committed, thereby     
          providing the "whole picture" of MSW management  
          costs on an ongoing basis.
    ********************************************************

Many local governments use cash flow accounting, which is
based on cash outlays (when the cash flows), not on costs
(when the resource is used). These costs can be obscured
using cash flow accounting because communities can incur
significant expenditures before and after the operating life
of specific management services. For example, in cash flow
accounting systems, capital expenditures for garbage trucks
and recycling equipment are recognized entirely in the year
of purchase, while FCA spreads the expenditures over the
useful life of the item. Also, cash flow accounting does not
consider future costs that are directly related to current
activities, such as landfill closure and postclosure. For
all these reasons, cash flow accounting can give a distorted
picture of the actual costs of MSW management.

FCA is a method of accounting for all monetary costs of
resources used or committed, thereby providing managers with
the "whole picture" of MSW management costs on an ongoing
basis. It goes beyond the limits of cash flow accounting,
but does not negate cash flow principles.


What Costs Are Included?

FCA recognizes upfront, operating, and backend costs.
Upfront costs include acquisition of buildings, vehicles,
equipment, and landfills; operating costs include salaries
and wages, power and fuel, supplies, tipping fees, and
indirect (overhead) costs (including services such as
executive oversight, legal services, data processing,
billing, and purchasing); backend costs include landfill
closure and postclosure and retirement benefits.

FCA does not take into account environmental, health, and
social costs. These costs cannot be measured easily or
valued readily in the marketplace. Consideration of the full
spectrum of costs could be called "true cost accounting" or
"environmental accounting," which is beyond the scope of
FCA.


What Are the Benefits of FCA?

Implementing FCA can have positive short- and long-term
benefits for local governments. Actions taken today can help
ensure efficient and sustainable solid waste programs in the
future. FCA can help communities:

   - Explain MSW costs to citizens more clearly. In many
     communities, the cost of providing solid waste services
     is obscured in the general fund. Although most people  
     realize that these services cost money, there is      
     confusion about the scope of activities and costs. FCA 
     reveals these costs, enabling solid waste managers and 
     decision-makers to explain solid waste management
     budgets to the public.

   - Identify the actual costs of MSW management. FCA
     enables decision-makers to learn the full costs of MSW
     services in their communities. Because the costs of
     these services can get lost among other expenditures,
     FCA provides a systematic approach to isolating MSW
     costs. With the knowledge of what drives MSW costs,
     local officials can make more informed decisions about 
     how to manage their services.

   - See through peaks and valleys in expenditures. Using
     accounting techniques such as depreciations and
     amortization, FCA provides a more accurate picture of
     total MSW program costs than results from focusing 
     solely on cash flow.

   - Foster more cost-efficient MSW management. By assessing
     the actual cost of services, FCA allows local
     governments to identify a more businesslike approach to
     MSW management. It allows decision-makers to consider
     the balance between the cost of providing a service and
     its utility. FCA also helps local governments evaluate 
     whether an alternative method could provide a service
     for less money or greater value. By using FCA, for 
     example, local governments might decide to change from
     two weekly trash pickups to only one, to initiate a
     curbside recycling program on addition to a dropoff
     recycling program, or to establish a pay-as-you-throw
     program.

   - Improve negotiating power. For communities seeking to
     privatize MSW services, FCA allows them to adopt a
     stronger negotiating position with vendors - public
     agencies can be in a much stronger bargaining position
     if they understand the costs involved in providing the
     services. FCA also can help communities with publicly
     run operations determine whether their costs are
     competitive with the private sector.

   - Achieve solid waste management goals. FCA can help
     communities achieve important informational goals by
     accurately determining and reporting what it currently
     costs a community to manage its MSW. It can support
     management goals by enabling the identification of
     potential cost savings and providing a sound basis for
     determining whether to provide services in-house or to
     privatize. FCA also can support a community's planning
     goals by documenting current benchmarks for making or
     evaluating projections.

    
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                        Benefits of FCA

          Solid waste managers, planners, and financial
          personnel have identified the following benefits
          of FCA:     
             - Set rates/tipping fees
             - Defend budget requests
             - Evaluate options and alternatives
             - Evaluate privatization decisions
             - Communicate cost information
             - Plan new facilities
             - Determine actual program costs
             - Assist in making investment decisions
             - Target cost reduction efforts    
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FCA in Action


A Successful Pay-As-You-Throw Program

Seekonk, Massachusetts, used FCA to achieve its successful
pay-as-you-throw program. (Pay-as-you-throw is a system
under which residents are charged for trash services per bag
or can they place at the curb. The less they throw away, the
less they pay.) Seekonk used FCA to determine a fixed fee
for each household to cover the program's fixed costs, and
the variable pay-as-you-throw fee as well. While a
neighboring town tried pay-as-you-throw without using FCA
and wound up $300,000 in debt, Seekonk was able to generate
enough money to cover disposal fees and the cost of the
pay-as-you-throw bags. Its two-tiered fee system enabled
Seekonk to decrease its trash by an average of 350 tons per
year and increase the collection of nonpaper recyclables by
approximately 300 tons each year. FCA was instrumental in
allowing Seekonk to learn exactly how much its solid waste
services cost, thereby providing the town with the
information needed to determine the correct rate for its
two-tiered pay-as-you-throw fee structure. As a result,
Seekonk realized significant waste reduction benefits.

FCA was also beneficial in helping Seekonk achieve
credibility with residents. The town was able to explain to
people exactly how much the solid waste program cost and how
the pay-as-you-throw fees were going to be used. Educating
citizens and helping them understand the various changes
involved with implementing pay-as-you-throw was vital the
program's success.

Not Privatizing MSW Services

Palm Beach County, Florida, used FCA data to determine the
cost-effectiveness of privatizing an MSW services. A
contractor approached the Palm Beach Solid Waste Authority
with a proposal to transport and dispose of the county's
waste at a different landfill for seemingly less cost. The
authority used FCA to isolate the county's current costs for
landfill disposal. The county found that it could provide
the same services for less money than the contractor FCA
provides an accurate basis for making this kind of decision.

More Services for Less Money

FCA allowed Franklin, Indiana, to reduce costs while
providing more services to its citizens. Through FCA, the
city discovered that waste disposal accounted for more than
half of all program costs for solid waste management. Also,
municipal efforts to provide recycling services were not
successful: the program wasn't cost-effective and
participation was low.

Armed with new information, the city decided to try
privatization. The lowest bidder was able to provide trash
collection and disposal services, as well as recyclables
collection, processing, and marketing, for 36 percent less
money than it had cost the city to provide garbage services
alone. In 1992, Franklin reported a cost of $112 per
household for collection and disposal. The private company
was able to provide the same services plus recycling for
only $71 per household. This led to a savings of about
$174,000 per year, a substantial amount for a community of
14,000 people.

Best Service for Less Cost

Since 1979, Phoenix, Arizona, has been using a competitive
process and FCA for all city services. By doing so, it has
created a system that consistently provides the best service
for the least cost. Phoenix has been able to accurately
compare 13 service areas, including solid waste management,
by involving city departments in competition with private
contractors in a public-bid situation.

Phoenix was able to identify areas where efficiency could be
improved by better equipment and management. By having cost
data to back this up, the city has been able to purchase
higher-quality equipment, improve the service level, and
extend the life of the landfill many years beyond what was
expected. Specifically, the city was able to justify the
purchase of high-quality collection trucks and was able to
provide monetary incentives to a contractor to compact
material in the landfill to extend its useful life. In
addition, by using FCA, solid waste services (and all other
city services) were able to continue at the same level of
service during times of recession because the program was
streamlined enough for the city to be able to afford it.

Streamlining and Adding Services

Houston, Texas, has been using FCA for about a decade. Most
recently, the city used FCA to identify the activities that
drive the costs of its solid waste program. The city found
that labor (including benefits and workers' compensation)
was the single largest cost. To reduce labor costs, the city
bought two new automated trucks that reduced the crew needed
for bulky pickups from five people to four. It has purchased
automated trucks for regular trash collection for 78,000
households and plans to buy automated trucks to service
256,000 remaining households. These changes will reduce the
collection crew from 550 to 436 through attrition, and will
save the city between $6 to 8 million in operating costs
alone.

FCA also helped Houston realize that a great deal of money
was spent on disposing of yard trimmings. To
cost-effectively collect yard trimmings, while maintaining
adequate trash collection services, the city reduced regular
trash collection from twice weekly to once weekly and added
a once-a-week yard trimmings pickup. To help residents
manage their garbage in between pickups, the city provided
them with larger cans. Now Houston is diverting yard
trimmings from the landfill and is providing an additional
service at no additional cost.


How Does FCA Work?

To evaluate the full costs of MSW management, local
governments must compile information on upfront, operating,
and backend costs. Local governments can use FCA for all
municipal services, for one department or division, or for
individual components of the solid waste program. In other
words, if a solid waste program is implemented by several
different departments, FCA can be used to assess the total
cost of the program or the services provided by one
particular department. To acquire and report this
information systematically, communities need to: 

   - Develop descriptive information about the solid waste
     program, including its history, scope, and future
     plans. Local governments will want to know how much
     waste is managed, who moves it, how often it is moved
     and by what means, and where it goes. By determining
     all the activities that make up the system, and the
     paths that solid waste takes from generation to 
     disposal or sale, communities can identify most cost
     items. To assist with this task, local governments may
     want to draw a flow chart of their current solid waste
     system to ensure that they account for all activities,
     develop a history or a chronology of the program from 
     its onset, and review future plans to identify any
     backend costs that might be incurred such as landfill
     closure and postclosure.

   - Take an inventory of publicly owned assets that support
     the MSW management program, such as vehicles,  
     buildings, equip- ment, and land. Communities should 
     note whether assets are owned or leased, when they were
     acquired, at what costs, how long the useful remaining
     life is, and what percentage of their use supports MSW
     activities. The inventory can serve as the basis for 
     developing depreciation schedules and identifying
     operating costs. Also, communities can include an 
     inventory of municipal employees, identifying those who
     support the MSW program on a full-time or part-time
     basis, and a list of their activities. This inventory
     can be crosschecked with the description of the 
     program, ensuring that all physical costs required for
     each program activity are found on the inventory list.

   - Review the organizational structure of the MSW program.
     This might include executive oversight (e.g., Mayor's
     Office, publicly supported citizens advisory boards,   
     and planning commissions) and relevant service 
     providers (e.g., legal, payroll, purchasing, and 
     accounting). The goal of this review is to identify
     those public sector organizations to which the solid 
     waste program reports or is otherwise responsible, as
     well as those organizations that provide services to
     the solid waste program. Both types of organizations
     may incur costs that should be recognized.

   - Review financial records and reports for the solid
     waste pro- gram. What is being bought? What revenues
     are being generated? What payments are being made? Do
     purchases relate to the MSW program? Answers to these
     questions can help pro- duce a more complete accounting
     of costs. How are accounts organized? Accounts may or
     may not be organized to corre- spond to activities that
     comprise the solid waste program. Communities should
     plan to spend time to learn what the accounts contain
     and mean.

These four sources of information together can provide all
the raw material needed by a community to prepare an FCA
report. In compiling FCA information, communities should
strive to avoid double counting or missing costs. 


What Is the Relationship Between FCA, Enterprise Funds, and
Pay-As-You-Throw?

FCA is the basis of two other practices that the U.S.
Environmental Protection Agency (EPA) supports enterprise 
funds and "pay-as-you-throw." Local governments can use
these tools to bring market forces into waste management
practices. Because FCA gives communities full information
about the costs of their solid waste programs, it can be
used as a basis for the development of an enterprise fund
and setting rates for unit-based pricing. 

Enterprise funds are independent, self-sustaining funds
supported primarily by user fees instead of general tax
revenues. They are created to finance and operate local
government services like a private business. The main
purpose of an enterprise fund is to identify and isolate
costs and revenues to increase financial accountability. For
enterprise funds to be successful, communities must
establish detailed revenue and expense budgets and project
costs for future years. FCA is useful in defining the scope
of enterprise funds and identifying costs for which local
governments are responsible.

Unit-based pricing involves charging waste generators fees 
based on the amount and type of waste, recyclables, and
compostable materials collected rather than indirectly
through the tax base. FCA can help communities establish an
equitable unit pricing rate structure that will generate the
revenues needed to cover the costs of providing solid waste
services.  


What Are the Barriers to FCA?

While FCA has many benefits, it also can present some
challenges. Although it might be implemented differently in
each community, every community, regardless of size,
location, or management structure, can use FCA. Some of the
common barriers may include:

   - Lack of standardized methodology. There is no
     standardized methodology for FCA, which can make it
     difficult to make the transition from cash flow 
     accounting to FCA. For communities that use an accrual
     system, there might be variations in the application of
     principles.

   - Allocation of MSW management costs. Allocating 
     overhead costs to the MSW program may be difficult in
     some communities. This is particularly true for costs
     that are shared by other local government programs in
     addition to the MSW program, such as oversight and 
     support costs. Because it might not be obvious that
     these costs are part of the MSW program, they are easy
     to overlook.

   - Accounting system changes. The amount of work required
     to perform FCA can vary from community to community, 
     depending on how communities keep their financial
     records (e.g., cash flow/general fund, accrual). In
     some cases, communities might have to change the way
     that they keep their records and "dig deep" to account
     for all of the costs involved with operating a solid 
     waste program to "uncover" previously obscured costs.

   - Lack of time and resources. Some local governments
     might feel that they lack the staff time and resources
     needed to switch to and begin practicing FCA. 

   - Financial disclosure/political opposition. FCA could
     expose high unit costs and inefficiency or might lead
     to the elimination of favorite projects if they are not
     deemed critical or cost-effective.

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               Anticipated Problems to Using FCA

          Solid waste managers, planners, and financial
          personnel have iden-tified the following
          anticipated obstacles to implementing FCA:
             - Incomplete records 
             - Lack of staff time and resources 
             - Cost of developing FCA 
             - Lack of political support 
             - Disagreement on method
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For More Information

To help communities understand the uses and benefits of FCA,
EPA has developed two additional resource documents. Much of
the information contained in these documents was gleaned
from communities that are currently implementing FCA.

Full Cost Accounting for Municipal Solid Waste: A Handbook
(EPA 530-R-95- 041). This document describes the key
concepts and benefits of FCA and can help communities learn
how other communities have used FCA. It explains many of the
financial terms used in FCA and the specific costs that are
considered. While the handbook is not a step-by-step
"how-to" document, it does describe the steps involved with
implementing FCA for solid waste management. It is a
comprehensive overview and a valuable resource for local
governments.

A Resource Guide for Full Cost Accounting (EPA530-R-95-077).
This document presents an annotated bibliography of
resources available on FCA. It includes journal articles,
federal, state, and local government documents, as well as
contact people implementing FCA in different communities.