Chesterfield(text of case)

Chesterfield(text of case) - it it A PROBLEMS AND...

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Unformatted text preview: it it A PROBLEMS AND CASES—ADVANCED LEVEL 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 upcom- ing 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 haz- ardous waste sites. As the current owner of the property, the city of Chesterfield was desig- nated 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 prelim- inary 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 multi—layer 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 con~ tractor 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 9m; costs of cleaning up the landfill. However, the annual maintenance would have to be met from annual rev- enues. 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 for the replacement of this principal. Sharon began her analysis by reviewing contracts the city had signed for work at the Brownsville site. These included two groundWater 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 potential PRP’s. Sharon knew that in addition the city attomey’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 inter- est rate of eight percent paid semiannually. The entire principal is due in 20 years. Required: 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 issue? ' 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 6. Assume you are a new city manager of a small city. Jim is a friend of yours and has told you about Chesterfield’s experience. What lessons can you learn to help your city avoid similar problems? 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 account- ing background, so the memo must explain the technical accounting issues in layman's terms. Limit the length of the memo to no more than two single—spaced typed pages. ...
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Chesterfield(text of case) - it it A PROBLEMS AND...

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