A trove of documents obtained by Mission Local via a records request reveals that San Francisco Public Works spent years analyzing the 2017 Recology rate hike — even though, by at least January 2019, it was aware of a rate error that resulted in San Francisco customers being charged scores of millions of excess dollars per year.
And yet, throughout 2019 and 2020, Public Works continued to examine the matter, even taking the unusual step of hiring an outside consultant to scour the numbers and methodology of the 2017 rate hike. It did not, however, inform the City Attorney or other government officials who could’ve put a stop to San Franciscans being overcharged.
Public Works’ former head of finance Ann Carey and its present finance head Julia Dawson were informed, at least as early as January 2019, of a discrepancy in Recology’s reported revenue that led to San Francisco ratepayers, starting in 2017, being charged 14.42 percent more for their garbage collection, instead of the justifiable rate hike of 6.66 percent — a matter of tens of millions of dollars per year.
In the Public Works documents, dated from 2019 and 2020, this “error” is cited on multiple occasions — as are other factors that allowed Recology to earn scores of millions of dollars in “excess revenues.”
But these overcharges and excess profit continued for years, and Public Works apparently kept the matter to itself.
In the wake of the Mohammed Nuru scandal, City Attorney Dennis Herrera subpoenaed Recology in February, 2020. His office was informed of the rate error by Recology attorneys in December, 2020. And, this month, Herrera announced a settlement in which Recology will repay overcharged San Franciscans some $95 million.
It appears the City Attorney’s office was operating off of financial information and disclosures Public Works had long been sitting on.
Public Works spokeswoman Rachel Gordon says that the purpose of the department’s yearslong analysis of the rate hike it helped to enshrine in 2017 was to ensure the information provided by Recology on the application “was the correct information.”
“If we found there were discrepancies, and we could verify the discrepancies, we would have expected Recology to make right with the ratepayers — as the City Attorney is doing in the negotiated settlement with Recology,” Gordon continued.
But tabulations and written statements within the documents from 2019 and 2020 do note these discrepancies — and do appear to verify them. But neither Recology nor Public Works blew the whistle, and the excess rates continued to be collected, for years.
When asked why this process continued for so long, Gordon replied, “The investigation is complex. There was a lot of back and forth requesting documents. It was moving forward, and that is just where we were.”
Gordon says that the investigation continues regarding who in the department knew about the costly rate error, and when. It is also being investigated whether Dawson acted properly — though Gordon says “we do not believe there was any malicious or criminal activity by anyone on the finance staff.”
The rate error is referred to, overtly, in multiple documents throughout 2020 — most explicitly in a March, 2020, memo penned by Dawson and addressed to since-departed Recology vice president John Porter.
Dawson describes the “apparent error in the rate application” due to Recology’s failure to include certain revenue in its rate tabulation.
“Had these revenues been included, the required rate increase would have been significantly lower than the amount granted in the rate order, estimated at 6.66% instead of 14.42%.”
But, intriguingly, Dawson continues, “the rate error does not account for all of the excess revenues.”
Recology, Dawson states in the memo, “achieved a significantly lower (i.e., more profitable) operating ratio than was anticipated in the final approved rate application.”
An operating ratio is the comparison between a company’s operating expenses and its revenue. Recology’s agreed-upon operating ratio in the contested 2017 rate hike was between 89 and 91 percent — that is, it was expected to spend between 89 and 91 cents for every dollar it earned in revenue.
Recology, in part, justified the rate hike with that ratio — but it spent far less: Various data tables created by the outside consulting firm R3 put Recology’s operating ratio at somewhere in the mid-70s to mid-80s. Recology was not only making more money than it was apparently entitled to, it was also spending less. As a result, Recology was raking in millions of dollars more per year than the numbers it provided as baselines and projections on the 2017 application.
That rate hike became the subject of a November 2020 federal case, in which former Recology executive Paul Giusti was charged in an alleged conspiracy with ex-Public Works boss Nuru to ram through higher charges on San Francisco customers. Giusti allegedly bribed Nuru by funneling nearly $1 million into slush funds he controlled at the Parks Alliance and provided employment for Nuru’s son; in return, Nuru purportedly used his outsize influence in the rate-setting process to aid his benefactor.
Questions posed to Recology regarding both the “rate error” and its low operating ratio have not yet been answered.
Questions posed to Public Works regarding its failure to ring the bell on an improper rate hike that ultimately led to San Franciscans being overcharged nearly $100 million have also not yet been answered. While Nuru certainly had his purported reasons to keep this issue quiet, this matter spread beyond him. Any influence Nuru had in tamping down this information would have dissipated in January 2020 when he was arrested by FBI agents and charged with corruption.
Dawson’s March 2020 memo came months later, and its letterhead is emblazoned with the name of Nuru’s successor, acting director Alaric Degrafinried.
Interestingly, while Public Works did not see fit to inform the City Attorney or others about its analysis of the 2017 rate hike, outside consultant R3 wrote about its work analyzing the 2017 rate hike on its own website in April 2020.
At his March 15 press conference, City Attorney Dennis Herrera bemoaned that his office only became aware of this matter in December, 2020 — and that this required filing subpoenas.
It remains to be seen whether wrongdoing was committed by Public Works — or if, hamstrung by extra work documenting the alleged corruption of its former director and coping with a pandemic, the department was just addressing the overcharging of hundreds of thousands of San Francisco customers at a municipal pace.