The rate increase for Intermountain Disposal (IMD) just didn’t make sense to me. After further research, I discovered that Plumas County Public Works is making a significant accounting error when calculating the ‘operating ratio’.
The operating ratio is based on net income divided by net expenses. This ratio determines if the garbage collector is entitled to a rate increase. If the operating ratio is greater than 92%, a rate increase is warranted.
The accounting error involves how ‘non-allowable’ expenses are dealt with. Yes, contrary to common sense, non-allowable expenses are allowed. For example, the two IMD officers are allowed a certain salary (e.g. $95,000 each) as specified in the franchise contract. But, they are allowed to pay themselves more than the limit and accounting adjustments are made in the rate review process. Excess retirement plan contributions also non-allowable expenses.
The attached marked-up document is the worksheet used to determine the operating ratio. It shows $70,437 in non-allowable expense. This $70,437 is correctly removed from expense. But, here is the account error: the $70,437 is not added back into net income. It violates generally accepted accounting principals (GAAP) of double-entry accounting principals.
The County must treat non-allowable expenses as if they never occurred. The Profit & Loss statement must reflect these changes by re-computing the net income. The attached document properly reflects removing a non-allowable expense.
One can see that the correct operating ratio is 87.9% and thus a rate increase for IMD is not warranted. The same error also resulted in an unwarranted rate increase for IMD in 2021.
I presented this same analysis to Public Works and they replied that this is per contract! Public Works is saying that the contract allows a garbage contractor to take a large amount of non-allowable expenses such that it results in a rate increase every single year, all the while ignoring proper double-entry accounting principles.
The contract doesn’t allow this devious activity. The contract (pg. 10-6) mandates the use of GAAP accounting principals. Furthermore, page F-2 ‘Operation Ratio’ states ‘Operating Ratio” means the ratio, expressed as a percentage, of the net operating costs actually incurred by Contractor, exclusive of Pass-Through Costs and Non-Allowable Costs…”
Does Public Works and County Counsel actually think a judge would allow this corrupt accounting practice to continue in a public service franchise contract?
The best way to deal with this issue is simply to have the Board of Supervisors mandate that Public Works properly compute the Operating Ratio. A Special BOS meeting is scheduled for June 30th at 10 a.m. County residents must encourage the BOS to do the right thing thru the Public Comment period.