Recology ordered to repay nearly $100M to customers as part of corruption scandal

San Francisco City Attorney Dennis Herrera announced March 4 that Recology San Francisco, the contractor for the city’s waste and recycling collection, will lower rates and reimburse ratepayers close to $100 million for overcharges that were unearthed as part of a wide-ranging investigation into public corruption tied to former San Francisco Public Works Director Mohammed Nuru and others. The investigation is part of an overarching public integrity review with San Francisco City Controller Ben Rosenfield.

The total savings to ratepayers from the agreement is more than $100 million and covers a four-year rate period from July 1, 2017, to June 30, 2021.

Recology will reimburse ratepayers $94.5 million in overcharges and interest as part of a negotiated settlement with the City Attorney’s Office. Under the settlement, Recology also will lower residential and commercial refuse rates starting April 1, which will save ratepayers $6.1 million from April through June of this year. Together, this is more than $100 million in direct benefits to San Francisco refuse ratepayers. In addition, Recology will make a $7 million settlement payment to the city under the California Unfair Competition Law and the San Francisco Campaign and Governmental Conduct Code.

A four-year injunction to be entered in San Francisco Superior Court as part of the settlement will prohibit Recology from making any gift to any city employee or any contribution to a nonprofit at the behest of a city employee. These restrictions also apply to department heads, commissioners and elected officials. The injunction will also require Recology to disclose any contribution of $1,000 or more to any local nonprofit, comply with city law governing lobbyists, report all contacts with city officials involved in rate-making and disclose material mistakes or errors in any rate-making or rate-reporting document submitted to the city.

Recology was among the 24 companies, nonprofits and individuals that Herrera subpoenaed last year as part of an investigation into corruption linked to Nuru, former San Francisco Public Utilities Commission General Manager Harlan Kelly, former Department of Building Inspection Director Tom Hui and others. The City Attorney’s Office is teaming with the San Francisco Controller’s Office on the investigation. The investigation was set off by the FBI arresting Nuru in January 2020.

Part of the civil investigation has shown that, despite a city law prohibiting gifts from restricted sources, Nuru regularly solicited funds from Recology for the benefit of himself and city employees. From 2016 to 2020, Recology and its affiliated companies, Sunset Scavenger Co. and Golden Gate Disposal & Recycling Co., regularly provided gifts of money, meals and accommodations to city employees, allegedly to influence city decisions affecting Recology.

Some of the gifts were disguised as charitable contributions to nonprofits, but they would be doled out at Nuru’s discretion for activities such as employee holiday parties hosted by the former director of public works and the former city administrator. Over the four years before Nuru’s arrest, Recology funneled at least $60,000 through a nonprofit for the city’s Public Works and General Services Agency holiday party.

Nuru, as the director of public works, was responsible for ensuring that the rate-making process for refuse collection was fair and accurate. He would also make recommendations on whether to approve rate increases.

The lawsuit filed March 4 in San Francisco Superior Court stems from rate increases for Recology that Nuru, as the head of Public Works, recommended in 2017. As laid out in the court filing, Recology failed to accurately account for revenues it was slated to receive from ratepayers in its 2017 application for rate increases. The omitted revenues were not caught during the 2017 rate-making process. The underreporting of these revenues resulted in a recommended rate increase of more than 14 percent, when the actual revenues only supported an increase of about 7 percent.

Although Recology disclosed a revenue error in 2018 to the Public Works Department, then overseen by Nuru, no action was taken by Recology or Public Works to publicly disclose or correct the error. Instead, Recology continued to collect the excessive rates from ratepayers for another two years. After Herrera subpoenaed Recology in February 2020, the company began cooperating with the office’s probe. Counsel for Recology ultimately reported the rate error to the City Attorney’s Office in December 2020.

“With this legal action, we are making San Francisco ratepayers whole and sending a clear message that cozying up to regulators won’t be tolerated,” Herrera says. “Mohammed Nuru may have had his challenges keeping the streets clean, but he clearly excelled at cronyism, slush funds and indifferent oversight. While ratepayers were taking a hit to their wallets, Mr. Nuru was soliciting money for lavish parties from the company he was supposed to be regulating. It’s outrageous. They say a fish rots from the head. Well, the head of Public Works was Mr. Nuru. He has disgraced all of the dedicated public servants at Public Works who go above and beyond every day for the people of San Francisco.”

“The ramifications of our work with the City Attorney on this investigation are not abstract—there are real financial consequences for San Franciscans,” San Francisco Controller Ben Rosenfield says. “It’s only right that our residents are repaid for the unjustified rates they were charged, but going forward, we need stronger regulations that leave no room for systemic problems to occur. How this anachronistic arrangement for setting garbage rates, which dates from almost a century ago, should be administered in the future will be the subject of the next Public Integrity Review that we will be issuing in coming days.”

“We’re in a new chapter at Public Works,” Alaric Degrafinried, the acting director of Public Works, says. “There is new leadership in place, and we’re committed to being a part of the solution. We’ve learned from the mistakes of the past, and so many people in this department are working hard every day to rebuild the public’s trust. We’re committed to ensuring a clean, fair and transparent rate-setting process. The first step is posting these new, lower rates for the public to understand what has changed and what it means for them.”

“I want to note that after we began looking into Mr. Nuru’s dealings, Recology was forthcoming and cooperative with our office about this matter,” Herrera says. “As I have said since the start of this investigation, we are not going to stop until we get to the bottom of this. This is broader than Recology. We are not done yet.”

The comprehensive settlement agreement with Recology is subject to approval by the San Francisco Board of Supervisors.

Reimbursing ratepayers

As part of the settlement, Recology and its affiliate companies will refund San Francisco ratepayers for the overcharges plus 5 percent interest. The agreement covers residential and commercial ratepayers—with the exception of a few limited commercial contracts not based on the approved rates—with active accounts at any point between July 1, 2017, and March 30 of this year.

Refunds are required to be paid to customers with current accounts by Sept. 1. Recology will be required to do robust public outreach through Dec. 31 of this year to inform former customers they are eligible for a reimbursement. Recology must submit monthly reporting of all paid and unpaid balances to the city and provide a report by Jan. 31, 2022, detailing the efforts they have made to disburse the restitution payment to active and inactive account holders. By July 1, 2022, any portion of the restitution balance that has not been paid directly to active or inactive refuse collection customers will be placed in an interest-bearing account to be used to offset any future refuse rate increases.

In a statement on its website, Recology calls the overcharges a "mistake" and noted that the increase was due to an "inadvertent omission," stating, "The 2017 rate model spreadsheet supporting Recology’s rate application did not accurately account for certain revenue that is passed on to the city in calculating revenues at current rates. The inadvertent omission of these amounts resulted in a rate increase that was higher than was necessary."

In the statement, new Recology CEO Sal Coniglio, who took over for former CEO Mike Sangiacomo at the beginning of the year, vows to rectify the issue with its customers. 

“We value our customers, and making them whole for this mistake is our top priority,” Coniglio states. “As soon as we learned of the mistake, we took immediate action. We are grateful to the city attorney for helping us reach a resolution that benefits our San Francisco customers. We are reviewing our internal processes and working with the city to ensure an issue like this never reoccurs.”