Santa Rosa Audit slams management of garbage company that also oversees Petaluma’s service

An auditor hired by Santa Rosa to analyze the performance of the region’s largest garbage hauler has issued a scathing critique of the company’s management, recycling efforts, customer service and safety record.

The 42-page audit concluded that North Bay Corp. is in violation of numerous terms of its franchise agreement, the lucrative contract that gives it the exclusive right to collect garbage, recycling and yard waste from nearly 50,000 homes and businesses in the city.

The alleged violations, which could lead to substantial financial penalties for the Santa Rosa-based firm owned by James Ratto, include operating a fleet of aging garbage trucks, not recycling to minimum levels, operating an unpermitted, rat-infested recycling facility and failing to answer customers’ calls promptly.

The shortcomings are so significant that city staff will be recommending the City Council not extend the company’s lucrative contract for another five years after 2017, and instead reopen it to competitive bidding.

“I would not recommend (extension) to council because they are so far out of compliance,” said Gloria Hurtado, deputy city manager.

Company officials said y they were surprised by the conclusions in the audit and question its accuracy, saying they were not given enough time to respond before the audit was released to the public.

The company said it plans to issue a detailed response by June 21, before the City Council takes up the issue July 12.

“I believe there is some legitimacy to the audit that we need to address, but there is also some pettiness that gives it a little more bluster than it should,” said Rick Downey, the company’s new general manager.

A respected former official with Republic Services, the company that took over landfill operations from the county, Downey stressed that he is committed to turning the company around, including hiring new management staff, addressing compliance problems, and upgrading the company’s recycling facility and fleet of 30 trucks. Even so, the audit marks a watershed moment for a home-grown garbage hauler that used low rates and political connections to run off national competition and establish a virtual monopoly on the hauling of garbage, recycling and green waste in Sonoma County.

Since winning Windsor’s franchise in 1997, North Bay has captured every government garbage contract in the county with the exception of the city of Sonoma. The company generates annual revenues of about $130 million, though most goes to tipping and franchise fees, Downey said.

But the implosion of the bulk recycling market, upon which the company relied for a portion of its revenue, has been a game-changer for North Bay, upending its business model and forcing it to take a hard look at its internal operations and service contracts, Downey said.

Revenues from selling bulk glass, paper and metals mostly to overseas markets have plunged 60 percent in recent years. Low oil prices have made new plastic cheaper and recycling industries in Asian countries have matured, sending demand for imported bulk recycled material plunging, Downey said.

Even if the city offered a contract extension, the company wouldn’t accept it because current rates are too low to sustain operations, let alone enhance them, he said.

“I could not operate another five years under the current contract because it is just not a good contract financially,” Downey said, adding that doing so would be “a potential disaster.”

The Santa Rosa contract generated just over $27 million for the company last year, according to figures from the city. The company pays 15.5 percent of its revenue to the city in exchange for the exclusive contract, in addition to other fees. Revenue will likely will be higher this year because of recent pass-through rates for issues unrelated to hauling, he said.

The company plans to compete for the city’s business in the upcoming bidding process, but predicts rates can only go one direction.

“To meet the current conditions in the refuse industry going forward, the rates will inevitably increase, no matter who the operator is,” Downey said.

The current residential rate for a 32-gallon garbage can - the most common size - is $16.83 per month in Santa Rosa, which Downey estimates is 30 to 50 percent below the Bay Area average. The audit confirmed that most of the company’s rates are below market.

The audit comes at a challenging time for the company, which has been beset with financial and regulatory challenges.

In addition to the recycling market woes, since last summer the company has been dealing with the Sonoma County health department’s requirement that it get a solid waste facility permit for its recycling facilities on Standish Avenue.

Recycling centers don’t need such permits if the amount of non-recyclable material collected is less than 10 percent of the total. But levels on Standish have been far higher, as a result of people inappropriately using blue bins for garbage and other items they incorrectly believe to be recyclable, company officials have said.

The company has been fined $291,000 to date for the lack of permits at the facility, though the fines have moderated since the company submitted applications for the required permits, said Christine Sosko, the county’s director of environmental health and safety.

The permit problems and the company’s decision to tell customers to stop recycling items like plastic bags, which it is required to collect under the contract, are some of the reasons the city required the new audit, Hurtado said. In addition to fines from the county, the penalties stemming from the city audit could add up fast.

Potential fines range from $100 per day for failing to file required reports, to $500 per day for each truck out of compliance, to $100,000 annual penalties for allowing recycling rates to drop below 43 percent - which the auditor claims has happened, though the company says otherwise.

“It’ll be a big chart,” Hurtado said of the potential fines. “And it’ll definitely be negotiated, but I will say it could be substantial.”

The issue of the age of the trucks could be one of the most financially damaging for North Bay.

The audit - conducted by Roseville-based R3 Consulting Group, which specializes in solid waste contracts - noted that nearly all of the company’s ?30 trucks are from the model years 2006 or 2007, meaning they are nine or 10 years old.

The contract calls for trucks used in the city to be rebuilt after five years and not to operate beyond 10 years. The provision is there to ensure the trucks are safe, Hurtado said. The audit said the company could provide no records that any of the trucks have been rebuilt.

Since Downey joined the company in October, it has added four newer trucks to the fleet. He acknowledged that the cost of replacing the trucks was a major challenge for the company. Hurtado, who praised Downey’s work to address the issues, said the cost of full fleet replacement would be “astronomical.”

The fines for non-compliance could themselves be astronomical. Hypothetically, if the fleet has been shown to have been out of compliance for four years, the daily fines for the trucks alone could exceed $15 million.

Such penalties seem unlikely, but it wouldn’t be the first time the company has been slapped for compliance issues. The city found North Bay in violation of the truck replacement requirements in 2006, requiring an additional annual payment of $100,000. A subsequent 2008 audit required North Bay to pay ?$1.2 million in back franchise fees and penalties.

Part of the challenge has been trying to work alternative-fuel vehicles into the existing fleet, Downey said.

The company has tried to add some alternative-fuel vehicles, but the effort has stalled. More than two years ago, Lou Ratto, the company’s chief operating officer, announced a partnership with a Silicon Valley-based company to convert some of its diesel trucks to electric drive, but to date none have gone into operation.

“It’s been a disappointment,” Downey said.

Converting the fleet to compressed natural gas is another option, but that might require more trucks to cover the same ground, he said.

In several instances, the auditors noted that they asked for information from the company but never received a response. This, combined with a lack of a clear organization chart and job descriptions, led the auditor to conclude the company is poorly run.

“R3 identified significant issues with the Company’s management, collection and processing operations, customer service and billing functions, and diversion reporting,” the report found.

In addition to those findings, the auditor said it had “serious concerns about the Company’s internal communications, data management and tracking, and lack of overall management.”

Downey was hired in October to help the company ?deal with regulatory issues ?like the Standish Avenue solid waste permit.

He confirmed the audit’s finding that the company had not had a general manager for ?10 years, but has been managed directly by Ratto, who is now 76.

The audit was managed by the company’s former government affairs director, Steve McAffrey, who left the company several weeks ago, Downey said. He declined to say if the departure was related to the audit.

The company has since been working hard to get to the bottom of all the issues raised in the audit, figure out why sufficient responses weren’t provided, and to respond.

The company takes strong issue with the audit’s claim that its recycling rate, also known as a diversion rate, is below ?45 percent, a key threshold. A previous audit raised “a number of questions about the validity” of the company’s claims that its diversion rates were 45.4 percent in 2013 and 45.08 percent in 2014.

Hurtado said the claimed rates were one of the reasons she wanted a more detailed look at the company’s operations. R3 calculated the company’s recycling percentage at 39 percent.

Eric Koenigshofer, a former county supervisor who now represents North Bay, said the company hired its own expert to analyze the recycling rate and last week found it to be 46.2 percent.

He said he’s focused on making sure the audit findings “accurately reflect the facts.”

Councilman Gary Wysocky said he’s been briefed on the audit’s findings and found them “concerning.”

“Garbage and recycling are a very big part of the services people expect from their local government, and quite frankly I don’t think local government has done its job when it comes to garbage, recycling and composting,” he said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com. On Twitter @srcitybeat.