Recology will pay San Francisco an additional $25 million in a settlement related to elevated collection rates that have been the focus of a broader federal corruption investigation.
The deal, negotiated with the offices of City Attorney David Chiu and Controller Ben Rosenfield, will see Recology deposit the funds into a balancing account. Those funds will be used to defer planned rate increases negotiated in San Francisco’s 2017 rate-setting process for collection services. Additional funds may also be deposited in the future if Recology makes more than its allowable profit margin.
The settlement, which still needs approval from the San Francisco Board of Supervisors and the company’s lenders, also includes language related to any potential sale of certain Recology property.
“This is an important agreement between the City and Recology that benefits our ratepayers and furthers the necessary reforms we need to make to improve the integrity of our waste management system,” said Mayor London Breed in a statement.
In their own statements, Chiu and Rosenfield thanked Recology for negotiating in good faith and described this agreement as a way to improve the system moving forward.
“Recology strongly supports efforts to increase transparency and improve the rate-setting process in San Francisco,” said CEO Sal Coniglio in a statement. “We appreciate and respect the collaborative work we’ve accomplished with the San Francisco Controller’s Office and other city officials as we work towards a new era of accountability.”
The settlement follows a May report from the controller’s office that found Recology’s profits were $23.4 million more than the 9% profit margin agreed to in a 2017 rate increase application. This covered the 2018-2021 period and factored in a prior ratepayer reimbursement settlement worth more than $100 million between Recology and the city last year. “Recology’s revenues — and additional potential profitability — would have been greater if not for the reduction in Commercial Customer revenue in rate year 2020-21 due to the COVID-19 pandemic,” said a report from the controller’s office.
Recology, which has a lock on city collection services, was approved for a 14% rate increase during the 2017 process. It was later discovered that inaccurate calculations were used to determine this increase, which the company said was inadvertent, but officials said no corrective action was immediately taken after it was discovered.
Former Public Works Director Mohammed Nuru, who had a role in approving these increases, was recently sentenced to seven years in federal prison for honest services wire fraud. A federal investigation into Nuru has led to legal and career fallout for numerous city contractors and public officials.
Prosecutors said Recology was among the city contractors that had a tight relationship with Nuru, providing a variety of benefits to him in exchange for favorable treatment in rate and contract decisions. The company has avoided direct legal consequences, via a deferred prosecution agreement, but two former employees have not. One pleaded guilty to bribery in August 2021 and is cooperating. Another faced related charges, but did not plead guilty. Federal prosecutors are expected to file a superseding indictment in his case shortly.
While local competitors initially saw this series of events as a possible opening to challenge Recology’s control of certain contracts, no notable changes have occurred to date. Officials did reduce the length of a collection contract for city buildings in late 2020, due to the unfolding corruption scandal, but after various extension decisions Recology continues to provide service. In July, an extension of that contract was approved through June 2024.
Voters approved a ballot measure in June that will update the city’s refuse rate-setting process. Recology initially disagreed with the measure, before coming out in support of the changes. That measure puts the controller in charge of the process, rather than the public works director, along with multiple other reforms. Supervisor Aaron Peskin, who was a lead supporter for that measure, said in a statement that this latest settlement “finally makes San Francisco refuse ratepayers whole” and will allow the next rate-setting process to proceed.
The controller’s office now plans to “immediately initiate” a new process for rates that could take effect in October 2023. Recology intends to submit an application for new rates early next year.