EPA530-K-96-001
June 1996
Solid Waste and Emergency Response (5306W)
Making Solid (Waste)
Decisions With
Full Cost Accounting
)reciatio
Recycled/Recyclable Printed with Vegetable Based Inks on Recycled Paper (20% Postconsumer)
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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.
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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 prac-
tices. 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 system-
atically identify, analyze, and report a]] 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.
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.
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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 expendi-
tures before and after the operat-
ing life of specific management
services. For example, in cash
flow accounting systems, capital
expenditures for garbage trucks
and recycling equipment are rec-
ognized 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 postclo-
sure. For all these reasons, cash
flow accounting can give a distort-
ed picture of the actual costs of
MSW management.
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 pur-
chasing); 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 mea-
sured easily or valued readily in the
marketplace. Consideration of the full
spectrum of costs could be called
"true cost accounting" or "environ-
mental accounting," which is
beyond the scope of FCA.
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.
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What Are
the Benefits
of FC A?
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 commu-
nities, 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 bud-
gets 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 deci-
sions about how to manage their services.
See through peaks and valleys in expenditures. Using
accounting techniques such as depreciation and amortization,
FCA provides a more accurate picture of total MSW program
costs than results from focusing solely on cash flow.
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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 govern-
ments evaluate whether an alternative method could provide a
service for less money or greater value. By using FCA, for exam-
ple, local governments might decide to change from two weekly
trash pickups to only one, to initiate a curbside recycling program
in addition to a dropoff recycling program, or to establish a pay-
as-you-throw program.
Improve negotiating power. For communities seeking to priva-
tize MSW services, FCA allows them to adopt a stronger negotiat-
ing position with vendorspublic 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 com-
petitive 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 manage-
ment 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 sup-
port a community's planning
goals by documenting current
benchmarks for making or
evaluating projections.
Solid waste managers, planners,
and financial personnel have identi-
fied 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 pro-
gram. (Pay-as-you-throw is a system ui ii ii i
which residents are charged for trash services
I >ei 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 5300,000 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 resii i<
! I ie 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 to the program's
success.
Not
Privatizing
MSW Services
Palm Beach County, Florida, used FCA
data to determine the cost-effectiveness
of privatizing an MSW service. 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 cun
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
vices 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 weie
not successful: the program wasn't cost-
effective and paiii' ipation was low.
Armed with new information, the r ny
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.
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h i 1992. Franklin reported a cost of S112
per household for collection and disposal.
The private company was able to provide
the san e services plus recycling for only
$71 per household. This led to a savings of
about S174.000 per year, a substantial
amount for a community of 14,000 people.
Best Service for
Least 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 ser-
vice areas, including solid waste manage-
ment, 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
- id the life of the landfill many years
beyond what was expected. Specifically.
the city was able tojustify 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 pro-
gram. 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 peo-
ple 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 S6 to 8 million in oper-
ating 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 tnmmings, while man naming 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.
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How Does
FCA
Work?
To evaluate the full costs of MSW management, local govern-
ments 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
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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 descrip-
tion 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 generat-
ed? 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.
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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) supportsenter-
prise funds and "pay-as-you-throw." Local governments
can use these tools to bring market forces into waste manage-
ment practices. Because FCA gives communities full informa-
tion 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 rev-
enues. They are created to finance and operate local govern-
ment 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.
n,
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What Are
the Barriers
to FCA?
While FCA has many benefits, it also can present
some challenges. Although it might be implement-
ed differently in each community, every community,
regardless of size, location, or management structure, can
use FCA. Some of the common barriers may include:
I 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 manage-
ment costs. Allocating over-
head costs to the MSW
program may be difficult in
some communities. This is
particularly true for costs that
are shared by other local gov-
ernment programs in addition
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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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.
I 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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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 compre-
hensive overview and a valuable
resource for local governments.
A Resource Guide for Full Cost
Accounting (EPA530-R-95-077). This
document presents an annotated bibliog-
raphy 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.
To order these free materials, contact
the RCRA Hotline at 800 424-9346 or TDD
800 553-7672, or (in the Washington, DC,
area) 703 412-9810 or TDD 703 412-3323.
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