How the Houston Recycling Contract Ended Up in Limbo

David Bodamer, Executive Director, Content & User Engagement

March 11, 2016

6 Min Read
How the Houston Recycling Contract Ended Up in Limbo

Houston Mayor Sylvester Turner rejected a new contract on Wednesday with Waste Management, putting the city’s curbside recycling in limbo.

"We will continue with recycling. We just have to put forth a strategic plan where it can continue, where it's cost-efficient, and we'll try to do it in such a way that's the least disruptive," Turner said, according to the Houston Chronicle. "Instead of it being like twice a month, it may have to be once a month for right now, but we are certainly talking to a number of other players out here in the marketplace."

The existing six-year contract between Waste Management and the city expires on March 16. The two sides have been negotiating on a contract extension for months, but have not been able to come to terms. Now it's come to the breaking point.

How far apart were the two sides? According to the Houston Press, “Waste Management presented city officials with a two-year contract (with an optional one-year extension) for $10 million. Turner had previously attempted to shorten a four-year contract for a one-year agreement.”

With no clear compromise solution, the mayor announced the rejection of the contract and said the city is in talks with other companies. Turner plans to announce a new recycling plan on Monday.

Waste Management, in a statement provided to Waste360, said it would like to work out a solution. 

"We want to recycle in Houston and are extremely disappointed to see and hear all the rhetoric surrounding this contract," the statement says. "Waste Management has provided the city several options for a competitive bid. There were attempts to find a solution, but none of what was floated to us was at all workable. Losing money on a recycling contract with the city isn’t a solution in our view. We are open to continued discussions but like you are hearing the city plans to go in a different direction. At this point, we have not been notified one way or the other." 

Here’s a breakdown of the issues involved in the fight.

The city of Houston is trying to close a budget gap and is resisting higher costs.

The city has a budget gap of more than $126 million and possibly as much as $160 million that needs to be closed by July 1. As a result, it's balking at the idea of paying more for recycling than it already does. 

Waste Management, like other haulers, is dealing with the issue that recycling contracts have typically been structured in a way that has become problematic. Haulers are absorbing the costs in periods where the pricing for recycled commodities means it costs more to process materials than they can be sold for.

In the company’s most recent results, CEO David Steiner talked about the company’s efforts to renegotiate recycling contracts with municipalities. Overall, the firm reduced recycling operating expenses by 15 percent in 2015.

On a conference call with investors, Steiner said, “On the recycling front, I would say we're about 75 percent to 80 percent through renegotiating the contracts. And the contracts that we haven't renegotiated, we can't do anything more about, because they're basically sort of long term contracts and we just have to eat the losses on those contracts until the contracts come up for bid and hopefully at a higher rate or they will go to someone else who is welcome to lose money on them.”

Waste Management says it’s been losing $1 million a year on the Houston contract.

In an email that Steiner wrote that Turner shared with the media, Steiner said the firm is losing money in its existing deal.

“The truth is that we have been losing over $1,000,000 per year on the contract, and a year ago we told the City that we could not continue to lose that amount of money,” Steiner wrote. “They completely ignored our requests for a year. Then, two weeks ago the Mayor called me. He said that we realizes that we are no in the business of losing money, but could we just continue to lose money for another 18 months so that he would not look bad as a politician.”

The full email can be seen here.

What are the gaps between the two sides?

According to the Chronicle, “Waste Management currently charges the city $65 per ton to process and resell Houston's recyclables. Under its contract, revenues that exceed that rate are shared between the city and the company, with Houston getting 70 percent. Should sale proceeds fail to cover its costs, Waste Management eats the difference.”

Waste Management is seeking to raise the processing fees in the new contract.

From the Chronicle:

Under a proposed deal negotiated with Houston's Department of Solid Waste Management, the city would have paid the company a $95-per-ton processing fee for at least four years. With commodities now earning $48 a ton, that means each ton of material recycled would cost Houston almost $50. Two years ago, the city made $25 a ton from its recycling program when recyclables sold for about $100 a ton. City Council members balked at the price and the length of the contract two weeks ago, prompting Turner to step in. He had proposed a one-year contract that would pay Waste Management $104 per ton, but the company rejected that idea on Tuesday.

Additional numbers from another Chronicle piece:

To get the cost to the city, subtract from that value the proposed processing fees. That shows a loss of $45 to $54 per ton for each ton of recyclables processed.

On average, Houstonians recycle 5,500 tons of material each month. Thus, the projected annual cost is $3 million to $3.6 million (depending on the processing fee) if residents recycle at the same rate and the commodities market holds steady.

But that figure also omits the recycling-related equipment the city has financed in recent years, and on which it must pay about $2.8 million in debt service annually. Those payments have tended to be covered largely with recycling revenues, but now must be paid from the general fund (i.e. the main operating budget, in which the deficit must be erased).That leaves a total "new" general fund cost of $5.8 million to $6.4 million a year.

Turner has also said previously that he would not consider pushing a garbage fee on Houston residents to help pay for any additional costs. Other big cities in Texas, including San Antonio, Dallas and Fort Worth, all have monthly garbage fees that range between $12 and $50 a month.

Houston’s had a spotty history with recycling.

In 2008, the New York Times reported on Houston being the “worst recycler among the United States' 30 largest cities.” That was based on a study by Waste News, which estimated that, at the time, Houston recycled just 2.6 percent of its total waste.

In 2010, the city began rolling out automated recycling and got the carts to the final 104,000 homes using traditional bins in February 2015.

In 2013, the city won a $1 million grant to implement a “One Bin for All” program that would allow Houston residents to throw all their garbage and recycling into a single bin that would be sorted later. But three years later, the effort still hasn’t been implemented and Turner called the idea “all but dead” last month.

Previously, a 10-page progress report that was released in December 2015, right before Houston’s previous mayor, Annise Parker, left office.

The city does, however, have some pretty nice-looking recycling trucks.

About the Author(s)

David Bodamer

Executive Director, Content & User Engagement, Waste360

David Bodamer is Executive Director of Content & User Engagement for Waste360 and NREI. Bodamer joined Waste360 in January 2014. He has been with NREI since September 2011 and has been covering the commercial real estate sector since 1999 for Retail Traffic, Commercial Property News and Shopping Centers Today. He also previously worked for Civil Engineering magazine. His writings on real estate have also appeared in REP. and the Wall Street Journal’s online real estate news site. He has won multiple awards from the National Association of Real Estate Editors and is a past finalist for a Jesse H. Neal Award. 

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