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Politics & Policy

$23.4 million in excess Recology profits found in city audit

A view of Recology recycling plant on Pier 96 in San Francisco, Calif. Liz Hafalia / The San Francisco Chronicle via Getty Images | Source: Liz Hafalia/The San Francisco Chronicle via Getty Images

A year after a corruption probe uncovered $95 million in overcharges by San Francisco waste giant Recology, the city has found that the firm earned yet another $23.4 million more than it should have.

But unlike last time, refund checks aren’t coming in the mail.

After a months-long investigation, the city Controller’s Office concluded in a report released Monday that Recology spent less on its workers than the firm projected when San Francisco set its garbage rates in 2017. That discrepancy—among other factors—led the company to reap millions in unwarranted profits from 2018 through 2021.

The report advised Recology to make good on the overbilling by placing the $23.4 million into an account that would offset future rate hikes, including an upcoming cost-of-living adjustment. Controller Ben Rosenfield said he made recommendations in the report to protect ratepayers.

“The city should begin work on a new rate cycle as soon as possible to implement them,” Rosenfield said in announcing the findings.

This audit marks the second time the city found Recology kept more money than it should have from customers since the firm became embroiled in a bribery scandal surrounding former San Francisco Public Works head Mohammed Nuru.

Among myriad revelations to emerge from the controversy: that Recology made more than $1 million in donations on behalf of Nuru, who as public works chief held tremendous sway over its garbage rates.

Last March, Recology agreed to lower prices and repay customers $94.5 million in overcharges and interest after a city investigation uncovered a rate-setting error that went unchecked since 2017. The agreement settled a lawsuit brought by former City Attorney Dennis Herrera.

Homes of the Bayview District are reflected in the window of Recology, the trash giant that serves the city. |Camille Cohen

City Attorney David Chiu—who succeeded Herrera—said Recology “needs to make it right for ratepayers” when erroneous profit projections exceed permitted margins.

The $23.4 million is significantly less than anticipated when The Standard first reported in January that the controller was investigating additional overcharging by Recology. At the time, Supervisor Aaron Peskin figured the amount could be as much as $100 million.

Recology, however, disputes the $23.4 million figure. In response to the draft audit, the company acknowledged $19 million in excess profits. The firm, per the report, also argued that it is entitled to keep profits above the allowable margin.

Recology CEO Sal Coniglio said he welcomes rate-setting reform, but disagrees with some of the findings in the report.

The controller examined various issues that could impact rates beyond the difference between actual and projected labor costs—including Recology selling a property at 900 Seventh Street to Amazon for a reported $202 million.

The report found that Recology could have earned more in “excess profit” if not for the pandemic driving down commercial revenues.

On Monday, Peskin said he and Mayor London Breed intend to reopen the rate-setting process to recover the $23.4 million. 

“The city has been engaging in productive and promising discussions with Recology,” he said. “We are hopeful that these additional charges in excess of $20 million will be credited to the ratepayers in the next rate-setting process.”

Recology has enjoyed a monopoly on the city’s trash-hauling for decades under an ordinance passed by voters in 1932. The company controls all garbage-collection permits issued under the local law.

In June, San Francisco voters will decide whether to reform the process enshrined in the ordinance. Proposition F, from Peskin and Breed, would replace the public works director with the controller as the key player in setting rates.

Recology initially tried to undercut the initiative by gathering signatures for a competing ballot proposal. But the company later dropped the effort and now supports the June measure.

Editor’s note: An earlier version of this story said the controller found that Recology overcharged ratepayers by $23.4 million when the report found that the firm collected $23.4 million in unallowable profits. This story has been updated to clarify.