Company claims money motivated Ann Arbor to terminate recycling contract

ANN ARBOR, MI - There's been a lot of talk about the city of Ann Arbor's decision to fire the private operator of its recycling plant.

City officials say they terminated the longstanding contract with North Carolina-based ReCommunity, which was in the 20th year of a 26-year agreement, because of poor performance and safety concerns.

Sean Duffy, ReCommunity's president and chief operating officer, is now telling a different story, claiming the city was motivated by money.

In an interview with MLive and The Ann Arbor News, Duffy said the city wasn't receiving the financial returns it was used to seeing under the revenue-sharing agreement with ReCommunity following a downturn in the marketplace for recyclable materials.

He claims the city was looking for an excuse to get out of a deal that wasn't working financially for the city and chose to terminate, while ReCommunity was willing to renegotiate terms.

Due to the threat of legal action, city officials are choosing not to respond to ReCommunity's claims at this time, said Lisa Wondrash, a city spokeswoman.

Mayor Christopher Taylor, left, and City Administrator Howard Lazarus at the Ann Arbor City Council meeting on July 18, 2016.

However, city officials have said the marketplace for recyclable materials has changed such that the city needs to reexamine the existing business model and contract structure for operating the recycling plant.

The city hired a consultant earlier this year for $121,780 to do just that, stating a desire to "optimize the financial impact," records show.

The city's adopted 2016-17 budget includes a notation saying the city's recycling revenue share has been reduced to zero due to market conditions.

Duffy shared his thoughts on the fallout between the city and his company with the trade publication Resource Recycling for a story published Tuesday, July 19.

"All the pieces of the puzzle keep leading back to they didn't like the financial deal that left them exposed in a lower market," he told the publication, saying the contract provided a substantial windfall for the city in prior years.

"When the markets turned and they had to pay us $20,000 or $30,000 a month, everything changed."

ReCommunity was under contract to operate and maintain the city's Materials Recovery Facility, where recyclables are processed, at 4150 Platt Road.

Duffy said the city used to receive sizable revenue shares from the operation, but commodity pricing has gone down, and glass is one part of that.

The city acknowledges it actually has not been able to recycle the glass that residents place in their recycling bins for the last few years.

"For a few years now, glass has not been a desirable product in the recycling marketplace," Wondrash stated in an email.

At this time, Wondrash said, the city will continue to accept glass in recycling bins because it provides a productive use as daily landfill cover.

"The city has a long-term contract with our landfill provider, so in the normal course of business, glass from Ann Arbor's recycling operations is used beneficially as daily cover," she said. "Daily cover is a mandated landfill operation. Many other recycling operations are not accepting glass or send it directly to a landfill."

As soon as the city's plant is back up and running, Wondrash said, the city will once again reuse the glass in the recycling stream for landfill cover.

City officials said last week Ann Arbor's curbside recyclables were temporarily being processed by the Western Washtenaw Recycling Authority, and they expected the temporary measures to continue for the next month.

Duffy said he's been in the business for more than 30 years and this is the first time he's ever had a contract terminated.

He said ReCommunity was flexible and the contract was amended several times before, and he thought both parties were headed in the direction of a new mutually beneficial agreement when the city decided to pull the plug.

"They wanted to get out of this contract and start fresh and not have a commitment to take in third-party tons and just recycle their own," he said. "They made it clear they didn't want to subsidize other people's volumes."

He added, "On their own products, they got 80 percent of the commodity revenue. It was a very good deal for them when markets were above the threshold."

City records show 40.17 tons of recyclables were collected per day last fiscal year, which ended June 30, 2015. That was down from 42.4 tons per day the year before, though up from 38.1 tons per day the year before that. The Ann Arbor News has requested information from the city regarding third-party tons.

Recycling is not necessarily about making money, Craig Hupy, Ann Arbor's public services administrator, said in a statement.

"Ann Arbor, as a community, believes, and has put in place policies, that have generated programs that reduce waste and push us to behave in a sustainable manner. This set of values is why recycling is so popular in Ann Arbor and continues to be a service the city provides," he said.

Thinking simplistically about waste, Hupy said, normally trash is picked up curbside, taken to a transfer station and loaded to go to a landfill.

Recycling, on the other hand, requires more handling. After pickup at the curb, the material must be sorted at a facility by a number of manual and mechanical processes, then each material type must be aggregated, bundled and stored for shipment. After a market is identified, Hupy said, the material is transported, likely much farther than the distance to a local landfill.

Based on that comparison, Hupy said, recycling is inherently more expensive than normal trash, and it is unlikely that conditions often would be aligned such that recycling would turn a profit.

"The goal then would be that the net cost of recycling after sale would be less than a comparable volume landfilled," he said. "With recent down markets, recycling was more expensive than landfilling; but the values of our community are such that there is benefits other than monetary for recycling."

The Ann Arbor News has requested information from the city on the recent financial history and status of the city's recycling operations.

"As far as specific data on recycling, that is not a subject we can discuss at the moment because of potential legal issues regarding ReCommunity," Hupy said.

The city put ReCommunity on notice in a letter dated June 10, saying the city reserved its right to terminate the contract if safety deficiencies continued.

City officials haven't gone into detail, but they have claimed the plant's operating practices jeopardized employee safety.

In a followup letter dated July 7, the city informed ReCommunity of the decision to terminate the contract effective July 11, saying both city safety personnel and the city's contracted safety inspectors had observed and documented that safety deficiencies had continued without break since June 10.

The letter was signed by Hupy, who has noted there have been multiple fires at the plant this year, something ReCommunity doesn't dispute.

The contract between the city and ReCommunity allowed either party to terminate for cause if there were repeated substantial breaches of contract. The city cited "continuing unsafe operations" as a violation of the contract.

"This notice of termination does not replace or end the discussions regarding net revenues. The city will respond separately to ReCommunity's July 1, 2016, letter on that topic," the city's termination letter stated.

The city hasn't yet released the July 1 letter, which The Ann Arbor News has requested through the Freedom of Information Act, along with other records.

Duffy acknowledges there have been operational issues at the plant, but he said those things happen and safety remains the company's top priority.

He points his finger at the city, saying the company tried for two years to convince the city of the need to purchase a new baler for the plant.

He said the baler used for processing recyclables required continual repairs, and that caused tremendous disruptions in operations.

As a result, Duffy said, there were times when ReCommunity had to send employees home and have them come back on weekends to catch up. He said that didn't lead to a stable workforce and there was high turnover.

"That facility only had one baler and all the product other than glass has to go through there," Duffy said.

Eventually, Duffy said, there was a major failure of the cylinder and the replacement couldn't be delayed any longer.

Within days after purchasing a new baler, he said, ReCommunity received notification of the contract termination.

As the news was announced at a recent City Council meeting, the council voted to approve spending $116,507 for the city's share of costs for the emergency replacement of the baler, estimated to cost $582,535 in total.

At last week's council meeting, City Administrator Howard Lazarus relayed what he characterized as a success story about what's happening right now while operations at the recycling plant are temporarily disrupted.

"Since the cancelation of the operator's contract, 100 percent of the recyclables picked up within the city of Ann Arbor have been routing to recycling facilities or stored for routing to recycling facilities for processing," Lazarus said.

"I know last time I mentioned there may be some material that may temporarily have to go to landfill, but that did not occur," he said. "And that's really due to the remarkable job in finding processing capacity and arranging transportation for our recyclables by the public works staff. It's kept faith with the city's core sustainability values in making sure that the flow was not diverted to a landfill."

Lazarus said city staff will be bringing resolutions to the City Council for approval on Aug. 4 to confirm emergency purchase orders with Waste Management, Royal Oak Recycling and the Western Washtenaw Recycling Authority related to changes in the city's MRF operations and materials handling.

Lazarus said the city is working with a consultant called CB&I to develop a new contract that is fair and reasonable and has proper incentives for all parties to ensure materials are properly handled. He said the consultant also will be providing a tip-floor throughput analysis of MRF operations.

"Because we believe that the former operator was exceeding plant capacity, and that was the root cause of some of the operational issues," Lazarus said.

The City Council approved a $121,780 contract with CB&I in January for services related to developing a new MRF contract.

The contract between the city and ReCommunity was a 217-page document amended 10 times.

"The complexity of this contract has become an impediment to the management of this aspect of the city's solid waste program for both the city and ReCommunity," Christina Gomes, the city's solid waste and recycling program coordinator, wrote in a memo to the City Council in January.

"In addition to the complexity of the contract that has evolved over the duration of the contract, the marketplace for recyclable materials has also evolved over this same period. As a result of these conditions, it is desirable to reexamine the existing business model and contract structure for operating these facilities."

CB&I was hired to "evaluate the current market risks and develop strategies that optimize the financial impact on the operations of the city MRF and Transfer Facility and support sustainable operations."

"The city is seeking recommendations in revising and streamlining a new contract with current industry best practices/standards," Gomes wrote. "The contractor has provided a work plan that will examine these issues and make recommendations regarding a recommended business model for recycling and transfer station ownership and operation and a clear, concise, and modern model contract."

Asked for a response to the issues raised by ReCommunity, Mayor Christopher Taylor's only comment, shared via email, was: "Environmental stewardship and recycling are deeply important to Ann Arbor. Our residents of Ann Arbor demand that the operation of our MRF be safe and effective."
