Rethinking solid waste franchise agreements

Today, this traditional model is breaking down. During franchise agreement renewals or new procurements, city managers and public works leaders are seeing significant price increases above historical rates, particularly when existing agreements are a decade old or older and have not kept pace with structural market changes.

This cost inflation results from industry-wide changes, including driver shortages, higher fleet maintenance costs, reduced landfill capacity, the growing cost of compliance with state and local recycling, organics diversion, and extended producer responsibility mandates, and volatile global markets for recyclables. When franchise agreements do not address these factors, haulers may request extraordinary rate adjustments or reduce service quality, forcing municipal leaders to address public dissatisfaction and budget gaps.

These cost pressures expose four main structural flaws in traditional franchise agreements:

• Misallocated risk sharing: Traditional franchise agreements often misallocate risk in both directions. Some shift all commodity pricing and regulatory compliance costs onto the hauler, resulting in unsustainable losses that lead to out-of-cycle renegotiations or service defaults. Others lock the municipality into fixed CPI-based annual increases regardless of whether actual costs outpace or lag behind the index, leaving the city to absorb the gap. ‍
• Mismatched rate adjustment indices: Linking annual rate increases to a general Consumer Price Index (CPI-U) does not reflect the true cost drivers of solid waste collection. Fuel, equipment, labor, disposal fees, and regulatory compliance costs increase at rates different from those of general consumer goods. ‍
• Contamination friction: With the growth of single-stream recycling, average contamination rates in many communities range from 15% to 25%, with individual loads reaching as high as 50%. Without clear franchise agreement definitions and enforcement protocols, processing facilities may reject heavily contaminated loads, leading to high surcharges for municipalities. ‍
• Absent regulatory reopener provisions: State legislatures and regulatory agencies continue to adopt new diversion, organics processing, and extended producer responsibility requirements. Franchise agreements without reopener clauses for new regulatory mandates force haulers to absorb unfunded compliance costs or leave municipalities unable to direct compliance activities without renegotiating the entire agreement.

To address these issues, local governments should modernize franchise agreements by incorporating structured, risk-sharing provisions.

Understanding your rate-setting authority

Before modernizing specific franchise agreement provisions, municipalities need to understand the legal framework governing their authority to set, adjust, and collect solid waste rates. This foundation shapes every contractual mechanism that follows.

The legal authority to set, adjust, and collect solid waste rates varies significantly by state and municipality. Home Rule jurisdictions generally have broader discretion over rate structures, while Dillon's Rule states may limit municipal action to powers expressly granted by the legislature. Some states impose additional constraints: California's Proposition 218 requires mailed notice and protest hearings for certain property-related fees, while Colorado's Taxpayer's Bill of Rights (TABOR) can require voter approval for fee increases.

The billing structure also matters. Whether the municipality bills residents directly or the hauler bills under a franchise agreement can affect which legal requirements apply to rate adjustments and what procedural steps are required before new rates take effect.

Because these legal frameworks directly shape what rate adjustment provisions a franchise agreement can include, municipalities should work with experienced solid waste consultants and legal counsel to evaluate their rate-setting authority before finalizing agreement terms. Getting this analysis right on the front end prevents costly legal challenges or procedural missteps after the agreement is executed.

Modernizing solid waste franchise agreement terms

With that legal foundation in place, the focus turns to the specific provisions that make a franchise agreement resilient. Updating a solid waste franchise agreement requires balancing hauler financial viability with municipal fiscal and service goals. Local leaders and waste managers should focus on two categories of provisions: rate and cost provisions that protect fiscal stability, and operational and compliance provisions that maintain service quality and regulatory alignment.

Rate and cost provisions

Split-index rate adjustment formulas

Rather than using a single general CPI index, structure annual rate adjustments with a split-index formula that reflects actual operating expenses. A typical split index weights adjustments across three components, though the specific percentages should reflect the municipality's actual hauler cost structure:

1. Labor and operations (50%–60%): Tied to the BLS Water, Sewer, and Trash Collection Services CPI (Series CUUR0000SEHG01) or a regional labor index. ‍
2. Fuel expenses (10%–15%): Tied to regional Diesel Fuel Price Indices, allowing automatic up-or-down adjustments as fuel prices fluctuate. (See fuel cost adjustment mechanisms below for an alternative approach.) ‍
3. Disposal and processing fees (25%–30%): Handled as a direct pass-through based on actual tipping fees at designated landfills or Material Recovery Facilities (MRFs). In jurisdictions with high tipping fees, long haul distances, or mandatory organics processing requirements, this component may warrant a higher weighting.

[[CTA:subscribe]]

Fuel cost adjustment mechanisms

Some franchise agreements include fuel as a weighted component within the annual split-index formula (as described above). However, in jurisdictions where fuel represents a disproportionate share of hauler operating costs, a standalone fuel adjustment mechanism may be more appropriate. Under this approach, fuel is removed from the split-index weights, and a separate surcharge is established using a baseline diesel price set at agreement execution, indexed to U.S. Energy Information Administration (EIA) regional diesel prices and adjusted monthly or quarterly. This allows fuel costs to be trued up more frequently than the annual rate adjustment cycle without distorting the broader formula. Whichever approach a municipality selects, the franchise agreement should clearly state whether fuel is addressed inside or outside the split-index to avoid ambiguity during implementation.

Franchise fee and cost pass-through provisions

Franchise fees, typically calculated as a percentage of the hauler's gross revenue, are a key revenue tool for municipalities. However, the franchise fee percentage directly affects the rates residents pay. Franchise agreements should clearly define how franchise fees, regulatory compliance surcharges, and any pass-through costs are calculated and displayed on customer bills. Separating these line items provides transparency for residents and gives the municipality flexibility to adjust individual components without reopening the entire rate structure.

Extraordinary rate adjustment provisions

Even well-structured split-index formulas cannot anticipate every cost disruption. Franchise agreements should include a defined process for extraordinary rate adjustments (sometimes called out-of-cycle rate adjustments), specifying the triggering conditions (such as new regulatory mandates, force majeure events, or disposal cost increases exceeding a stated threshold), the documentation the hauler must submit, the municipality's review and approval timeline, and any caps on the magnitude or frequency of adjustments. Without these guardrails, extraordinary cost events either go unaddressed until the hauler's financial position deteriorates or result in ad hoc negotiations with no framework for evaluating the request.

Operational and compliance provisions

Recycling contamination thresholds and enforcement protocols

To prevent cost spikes at processing facilities, franchise agreements should set a maximum contamination threshold, typically 10% to 15% by weight. Require haulers to conduct route audits with onboard cameras or cart tagging before imposing contamination fees. Combining clear contamination caps with shared-revenue mechanisms for clean commodities encourages both haulers and municipalities to invest in public education.

Performance-based service level agreements and audit rights

Include specific, measurable Service Level Agreements (SLAs) with reasonable liquidated damages in the franchise agreement. Define clear response timelines for missed pickups, container replacements, and complaint resolution. Retain audit rights so the municipality can inspect haulers' records and disposal tickets annually.

Franchise agreement term length and transition planning

Franchise agreement terms typically range from 7 to 15 years, and term length directly shapes how risk-sharing provisions should be structured. Longer terms (10 to 15 years) require more flexible rate-adjustment mechanisms, robust reopener clauses, and periodic performance reviews because market conditions will shift significantly over the agreement's term. Shorter terms (7 years) shift more risk to the procurement cycle itself and may limit hauler willingness to invest in new capital equipment. Regardless of term length, the franchise agreement should include transition provisions that protect service continuity if the municipality changes haulers at expiration.

Predictable rates and resilient service

When local governments move from outdated franchise agreements to modern, risk-sharing structures, the benefits are clear:

• Rate stability: Split-index formulas and defined extraordinary rate adjustment processes prevent sudden, unexpected rate spikes, creating smooth, predictable cost trajectories for residents. ‍
• Service accountability: Enforceable SLAs and clear audit rights ensure haulers maintain high service quality and meet franchise agreement commitments. ‍
• Diversion progress: Transparent contamination rules and shared commodity terms support long-term diversion and recycling goals without jeopardizing program finances.

Aligning franchise agreement terms with operational realities enables local governments to secure high-quality waste services, protect budgets, and maintain lasting partnerships with service providers.