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FINANCIAL STATEMENT The City's expenditure for garbage service is budgeted at $535,000 for Fiscal Year 2023/2024. Additionally, the City will receive from PGS an estimated $1,185,786 — $1,200,329 in franchise fees in Fiscal Year 2023/2024 depending on the rate set by the City Council. BACKGROUND On March 20, 2018, the City Council approved a Franchise Agreement with PGS for solid waste, recyclable materials, and organic materials collection services which commenced on July 1, 2018. The Franchise Agreement was amended to comply with Senate Bill (SB) 1383 on June 7, 2022. The Franchise Agreement outlines the processes for annual rate adjustments which includes an index-based rate adjustment and a cost-based rate adjustment. July 1, 2023, begins rate period six which incorporates an index-based rate adjustment. As stipulated in the Franchise Agreement, all rates are set by the City Council. Due to the special rate adjustment performed for rates effective January 1, 2023, a new cost basis of$31,961,907 was established in place of the rate period 5 cost basis of $31,727,125. This new cost basis is the amount which the projective revenue requirement must be compared to when calculating the coming increase in rates, as the new cost basis reflects the rate increases and annualized revenues that the mid-year special rate adjustment is set to generate. This adjustment of the cost basis results in the adjustment being lowered from PGS's requested 8.1 percent to 7.3 percent. The Franchise Agreement stipulates in Section 6 of Exhibit H that the City has the option of capping a rate increase at 6 percent. The City may defer (carry-forward) the excess of a 6 percent rate increase to be applied in the subsequent rate period. The City may elect to carry forward a portion of or the entire excess increase above 6 percent. DISCUSSION Index-based rate adjustment As noted, rate period six stipulates the use of an index-based rate adjustment. PGS applied for a rate adjustment on March 28, 2023. City staff and the City's consulting firm, HF&H, reviewed the application and determined that the calculation of the index- based rate adjustment was correct, and HF&H provided a letter of findings which notes the application indicates that an 8.1 percent indexed rate increase was calculated and after adjustment for the mid-year special rate adjustment, the rate increase required is 7.3 percent. (Attachment 1). Based on staff and HF&H's review and adjustments, the current rate increase is 7.3 percent. If the City does not want to enforce the 6 percent cap, the rates will increase by the entire 7.3 percent. If the City elects to use the 6 percent cap, the City may carry- forward $417,786 for rate period seven, or approximately 1.3 percent. Another option discussed by the City Council Waste and Recycling Subcommittee was applying a cap Page 2 of 7