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3.18% to address the current collective operating deficit through March 2009. In order to reduce the impact of this cost center, staff is recommending that the payment occur through the end of the franchise. As a result, future rate requests will show this item as an expense. If projected revenues exceed projected expenses, the excess revenue may be assigned to this expense thus reducing its impact on future rate requests. 4.38 % to address general inflationary pressure related to operating costs, including wages, fuel, insurance, and repairs over the projected through March 2011. 3.5% to cover the cost of the existing food scrap program. Since the program was implemented in 2004, the City has used Measure D funding to cover the full cost of the program. However, funding cannot be used for ongoing programs and the City's reserve is no longer adequate to cover these costs and therefore, the funding must be incorporated into the collection rates. Currently, the annual cost of the program is approximately $635,000 annually. At the time the program was implemented, it was assumed that that the cost of the program would be incorporated into the rate base with the next rate adjustment. As indicated previously, commercial accounts will increase by an additional 1.71 % for a total of 14.71% (not including the 1% franchise fee) which represents the cost of providing commercial services including its share of the existing deficit. Transfer station costs will also be increased above the 13% residential base to reflect the cost of these services and to make Pleasanton's costs similar to other landfills and transfer stations. As part of this rate adjustment, PGS has agreed to participate in a City directed efficiency audit that will analyze its operational efficiency. The purpose of this study is to determine that PGS is adhering to best business practices and is taking the appropriate steps to control costs and provide effective services. While staff has not identified any issues that would lead to a conclusion that best practices are not being followed, it has been some time since the City last conducted this type of an audit and due to escalating refuse and recycling costs in general, it seem prudent to pursue this study. II. Proposed Changes to Recycling Services As referenced above, all residential waste collected from residences is processed currently at the transfer station where it is placed on a conveyor belt from which recyclable material is removed. This operation, commonly referred to as a "dirty MRF," is cost effective but has limitations in terms of the total amount of available recyclable material. The City of Pleasanton is the only City in Alameda utilizing a dirty MRF for recycling. While dirty MRF's were popular in the 1980's most cities have moved to curbside separated programs that rely on residents to separate recyclable material from refuse and the hauler to separate and market the recyclable material to brokers of recyclable materials. The ultimate use of the material made available to these markets is generally subject to market conditions, technologies and demand. Page 5 of 9