For Palo Alto residents, garbage bins and trash rates have long enjoyed a simple and direct correlation -- the smaller the can, the lower the rate.

This link, however, would be weakened under the city's plan to significantly change its method for calculating trash rates. Under a proposal that the City Council's Finance Committee endorsed Tuesday night, March 6, "conservation pricing" (providing cost incentives for residents to switch to smaller cans) will remain in place, but it will be supplemented by new flat fees geared toward recovering for the city the costs of providing services.

The new method means that instead of seeing a lump sum -- based on trash-can size -- on their refuse bills, residents will soon start seeing a variety of flat fees. This year, these will likely include an additional $2.09 fee for street sweeping and additional fees to pay for the city's household-hazardous-waste program and its Cleanup Day.

The goal is to bring revenues and expenditures for each type of customer into balance and to comply with Proposition 218, a state law that bars cities from setting rates that exceed the cost of providing services. In Palo Alto, the commercial sector currently pays more than its share for refuse services while the residential sector pays less. The new rate structure aims to fix this problem.

A recently completed "cost of service" study points at the extent of this disparity. The study shows that the revenues from commercial customers exceed the costs of providing service to these customers by 27 percent. The residential sector, by contrast, has expenses exceeding revenues by about 32 percent.

The study considers much broader revisions to the city's trash-rate formula -- including ones that would eliminate conservation pricing (charging less for smaller trash bins) and more than double residential rates. Staff and the committee opted Tuesday not to go that far but to pursue a series of small, incremental increases that would keep conservation pricing in place but lessen its influence on the bill as a whole.

The change in trash-rate methodology is part of a broader set of changes that the city has been making to its Refuse Fund in recent years. The fund has been hampered, in large part, by the success of the city's Zero Waste program, which encouraged residents to conserve by using smaller trash containers. While this reduced the residents' trash bills, it did not bring down expenses. This resulted in dropping revenues for the Refuse Fund.

In the last two years, Palo Alto officials have righted the ship through a series of cost-cutting measures, including shutting down the city's Recycling Center and closing the landfill at Byxbee Park. The council also agreed last year to add a flat rate of $4.62 to each residential bill.

The steps have succeeded in bringing financial stability to the fund. The fund is projected to have a balanced budget this year and to have small revenue surpluses in the coming years. Brad Eggleston, the city's solid-waste manager, noted Tuesday that the refuse fund is now in "good fiscal condition" and does not need any rate increases to balance its budget.

State law, however, is another matter. Proposition 218 requires cities to bring rates and costs of providing services into alignment. This means the city has to either raise residential rates, lower commercial rates or do both, to comply with state law.

"Any changes we are making are really to address Proposition 218 and the results of our cost-of-service study," Eggleston said.

Staff proposed what Eggleston called a "hybrid approach" -- coupling new flat fees with small increases based on trash size. The proposal would increase the rate for customers using mini-cans from $20.52 to $23.69 this summer and would raise it by about $3 a year in each of the next two years. Rates for 32-gallon cans, under this proposal, would go up this year from $37.48 to $41.54, while those who use 64-gallon cans would see their rates go up from $72.46.

"We're suggesting compromise. We're suggesting phasing in. We're suggesting trying to do it better and better every year," Assistant Public Works Director Phil Bobel said. "We would take baby steps."

The Finance Committee generally supported staff's approach but decided to include two other fixed fees in the bill. Members agreed that both the household hazardous waste program and Cleanup Day are programs that benefit the entire city and have a weaker connection to conservation pricing than refuse collection.

Committee members acknowledged that the issue of setting trash rates is incredibly complex, given the huge number of factors involved in the Refuse Fund. The fund not only pays for trash collection but also includes such services as recycling, composting and street sweeping.

Committee members also questioned some of the assumptions of the detailed new study, which staff acknowledged is far from perfect and will require further refinement. But council members voted 4-0 to pursue the changes in the rate-setting methodology to include the new fees in the trash bill starting this summer -- steps that will bring the city closer to compliance with state law.

Members acknowledged that the rates could face opposition from the community but agreed that the city must make the needed changes to comply with state law.

"We'll have to go back and continue to explain to people what that proposition means," Councilman Pat Burt said.