What should Assistant City Manager Chris Smith recommend to the

Sheet1

Contracting for Trash

The city of Newglade is located in a large metropolitan area and has a population of approximately 100,000. At the time the case unfolds, Newglade faced a problem with the collection of solid waste, or garbage. Communities in the metropolitan area used several different methods of collection, and Newglade found itself forced to evaluate its present collection system and to consider alternatives.

The case has the following cast:

Charles Veracruz, city manager

Chris Smith, assistant city manager

Thomas H. Moses Jr., new director of public works

Alfred E. Newhouse, budget director

Pat Chamber, administrative assistant, public works

Kay Hernandez, administrative assistant, finance

The case unfolds through the communication among these officials. The memo that launched the development of this case problem summarizes critical elements of the background.

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5/3

Tom, here’s a project to help you get your feet wet here! Could you and the public works staff look into contracting out residential garbage collection? There’s some interest on the part of council.

CV

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5/3

Al, please have your budget staff do some analysis on the pros and cons of billing residents directly for garbage collection. Who pays for it now? What would we have to charge? How would this affect residents?

CV

Contracting for Trash

Contracting for Trash

Contracting for Trash

Contracting for Trash

1. What should Assistant City Manager Chris Smith recommend to the city manager? Use the attached work sheet (Table 1) and the analytical methods described in the sidebar in this chapter to formulate a recommendation for the city manager. Here are steps to analyzing the cost of the two options. (You may find that entering the table into an Excel spreadsheet simplifies the computa- tional tasks.)

Step 1. Complete the annual costs for the row labeled Total Manual System. Do the same for the row labeled Total Automated System before equipment. Then compute the total annual costs for the row labeled Total Automated System with new equipment. (Note that net equipment cost is computed. Add the annual lease/ purchase cost to the labor and workers’ comp cost to arrive at amounts for Total Automated System with new equipment.)

Step 2. Compute the row labeled Annual savings. Note this is the cost before investment in new equipment. Then compute the next row, Cumulative savings, which is a running total of the cost savings from automation.

Step 3. Compute the Simple payback period using the formula for uneven cost streams described in the sidebar.

Step 4. The next section involves computing the present value of the two options, the manual collection system and the automated collection system. Begin by completing the row labeled Net annual savings. This is the net savings from automation including the cost of the new equipment, both leased and purchased. Then compute the discount factor using the formula described in the sidebar. Assume a 6 percent discount rate for this problem. Then compute the row labeled

Contracting for Trash

Contracting for Trash

Discounted savings by multiplying each of the net annual savings by the discount factor for that year. Sum the row to get net present value (NPV) of savings.

Step 5. An alternative approach is to compute the present value of the manual system costs, compute the present value of the automated system costs, sum the two rows, and compute the difference in the sums. This value should be the same as the NPV of savings found in step 4. In the event the city manager asks about the present value of the two options, you will have those figures readily available.

= + =

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1 (1+ r)n

1 (1+.06)1

= 0.943396

× Cost. 1

(1+ r)n PV =

2. City staff in Newglade analyzed the questions of automation and privatization simultaneously. Was this the best way to proceed, or should these issues have been addressed separately? Give reasons for your answer.

3. Was the mayor correct in his assessment that voters “are rarely encumbered by concepts of economic rationality” when considering tax and service fee ques- tions? What role should these considerations play in the decision to be made here?

4. As the city manager, how would you have responded to the memo of July 10 in which the public works director opposed consideration of a merger of commer- cial and residential sanitation services? Would you include a combined system in your policy recommendation?

5. Under what circumstances would it be desirable to implement an automated collection system immediately? If such a change should be made, should the entire system be automated at once or gradually? What considerations factor into such a decision?

6. Questions of privatization involve both ideological preferences and objective, analytical considerations. List the ideological and analytical considerations. Under what circumstances should ideological considerations weigh more heav- ily than dispassionate analysis in making privatization decisions? What factors should weigh most heavily in this decision, and why?

7. How should long-run and short-run cost and savings considerations be weighted in this decision? Are elected officials and professional administrators likely to agree on the answer to this question? If not, how should administra- tors handle differences in perspective?

Chris Smith, assistant city manager Staff assistant Pat Chamber, administrative assistant for public works Kay Hernandez, administrative assistant for finance