Local governments seek flow control options
Only a few years ago, waste-to-energy (WTE) plants were hailed as a progressive and environmentally efficient method of disposing of solid waste. More than 100 such plants were built, and cities and counties adopted flow control ordinances to ensure that waste generated within their jurisdictions would be delivered to specific plants for disposal. Guaranteeing a steady stream of revenues that could be used to pay off the cost of the plants — typically from $80 million to $100 million — the plants enjoyed early success.
Problems were lurking, however. Recycling programs and compost plants diverted a significant amount of the garbage that was supposed to go to WTE facilities. Additionally, by the early 1990s, improvements in the landfill linings and stringent regulations implementing the Solid Waste Disposal Act had reduced the risk of pollutants leaching into groundwater, thereby enhancing the acceptability of landfills. Then, in 1994, in Carbone, Inc. v. the Town of Clarkstown, N.Y., the Supreme Court ruled that flow control ordinances were an unconstitutional infringement on interstate commerce. Suddenly, cities and counties with WTE plants were facing major financial problems.
In the absence of flow control restrictions, haulers may transport waste to disposal facilities offering the lowest costs, while a relaxation of the regulatory pressure to close or restrict the use of landfills has substantially expanded the country’s waste disposal capacity. The combination of those two factors is the ultimate nightmare for cities and counties operating WTE plants built with fixed debt service requirements and relatively high operating costs.
As tipping fees exceed the market’s rates, waste flows decrease; as waste flows decrease, the plants’ operating deficits increase. (Because of the time lag between the Supreme Court’s decision prohibiting flow control ordinances and the waste business’s conversion to a price-driven market,WTE plants have only recently begun to post major operating deficits.)
In fact, about $2 billion worth of bonds have been downgraded as a result of the Carbone ruling, according to John Skinner, executive director of the Silver Spring, Md.-based Solid Waste Association of North America (SWANA). The operating deficits precipitating those downgrades will continue and are likely to increase unless local governments take decisive action to respond to the changed market conditions.
Because of the potential magnitude of the operating deficits, the problem demands a full examination of the alternatives available to mitigate the effect of the new market realities. The following responses, individually or in combination, are important alternatives that should be considered in any situation involving a WTE plant operating at a deficit.
1) “Stuffing the plant.” A jurisdiction may maximize the waste flow through its plant by reducing tipping fees. Frequently, revenues realized from a “stuff the plant” approach will reduce, but not eliminate, a plant’s operating deficit. The reduced operating deficit will have to be paid from a jurisdiction’s general fund or from collection of an assessment fee.
Waste haulers are reluctant to rely entirely on the spot market for waste disposal services because of the volatility of the market. Capacity to provide disposal services and the pricing for those services are subject to rapid change in the spot market. Because haulers often are anxious to ensure some stability in the availability and cost of disposal services, they may accept medium- to long-term, “put or pay” contracts with cities or counties. The tipping fee under those contracts typically is higher than the spot market rate but may be below the rate necessary for a local government to meet its WTE operating expenses and debt services. Nonetheless, such contracts can be attractive because they ensure a reliable, if reduced, revenue stream.
2) Imposing assessments. Without flow control and with competition from landfills, market-driven tipping fees are unlikely to generate the revenues necessary to meet the operating expenses and debt service on a WTE plant. In many instances, local governments will have to impose a sanitation fee to cover the shortfall. The fee, such as an environmental impact assessment, is a charge for the disposition of waste and is imposed on all residences and businesses within the jurisdiction.
To implement a program of assessments, a jurisdiction first must adopt an ordinance that requires it to collect and dispose of all waste generated within its boundaries and to charge a sanitation fee to the residences and businesses within the jurisdiction. The fee can contain several rate schedules reflecting the costs of servicing various types of customers (e.g., residential customers, apartments and office buildings). In all instances the basis for setting the rate must bear a reasonable relationship to the cost of providing the service to a specific type of customer. A sanitation fee does not violate the Supreme Court’s prohibition on flow control ordinances because the fee is payment for a service local governments are authorized to provide.
Residents and businesses are not required to deliver their waste to the plant, but they are required to pay the sanitation fee. (Local governments generally are entitled to impose fees on their citizens for services they are required to provide, even if certain citizens elect not to use the service.) The practical effect of a sanitation fee is to force use of the plant, because the only economically rational decision is to use the service customers are paying for, even if a cheaper alternative is available. The use of the cheaper, alternative service would merely increase the cost of customers’ waste disposition expenses.
The decision to adopt a service fee for waste disposal represents a major policy initiative that will require time to implement successfully, and the adoption of the ordinance authorizing the service fee will be the culmination of a lengthy process requiring the resolution of important legal, political and public relations issues. Senior managers of local governments estimate that a service fee program typically takes from 18 months to two years to implement. A successful assessment program must address the following issues:
* The development of a comprehensive waste disposition plan that explains and justifies the modifications to the existing waste disposal process. The plan should include a description of the service fee and its calculation, but it should not be limited to a description of the service fee. City or county officials should present the plan to the public and make recommendations for the management and disposition of the jurisdiction’s waste, given current environmental, market and legal conditions;
* Early and repeated consultation with, and education of, the jurisdiction’s governing body as to the nature of the problem, the alternatives being considered and the basis for the recommendations. A caveat: The governing bodies of many jurisdictions initially may react with disbelief or outrage at the realization that the economics of their waste disposal problem have deteriorated to the point that they must impose a politically unpopular fee. Workshops, consultants and examples of how neighboring jurisdictions are addressing the problem can be valuable tools in devel oping an institutional understanding and acceptance of the problem and a consensus as to the desirability of the various alternatives available to the jurisdiction; and
* The use of a multi-media public relations effort to educate and persuade the general public of the necessity and fairness of the assessment program. The public relations message should focus on both the environmental and economic aspects of the problem with the objective of establishing a public awareness of the problem and hopefully a general consensus as to the resolution of the problem. Meetings with citizens’ groups, press interviews with government representatives and broad distribution of information are effective means of educating the general public about the problem and the proposed solution.
Any assessment program will be unpopular and will draw out a predictable group of opponents. It is not always possible to persuade the opponents to accept the service fee. However, a successful public relations program should at least help focus the public debate on the jurisdiction’s waste disposition problem rather than on the myriad of distracting side issues that often arise when there is a perception that the public is being ignored.
3) Privatization. Contracting a plant’s operation and maintenance may be advisable for economic and public policy reasons. The conversion to private operation should reduce the plant’s operating expenses and, by extension, the operating deficit.
For existing plants, the benefits of privatization are found in more efficient and more economical operations. However, those benefits are unrelated to the fundamental cause of a plant’s deficit: operation in highly price-sensitive markets with cheaper, competing alternatives. Privatization may alleviate the pressure on publicly operated plants but it is unlikely to eliminate entirely the operating deficit.
4) “Municipalization.” In the exercise of their authority to provide for public health and safety, most jurisdictions are authorized to collect the waste generated within their boundaries. By ordinance or local statute, they often impose responsibility for disposition of a portion of the waste on the residents and businesses in the area. Residential and commercial wastes are common lines of demarcation, with local governments responsible for the collection of residential waste and private operators handling the commercial waste.
If a local government assumes responsibility for the collection of all waste within its boundaries, it has the discretion to dispose of the waste in any prudent manner including incineration at its own plant. It has even been suggested that local governments may enter into transportation contracts with private haulers for the collection and delivery of the waste to their WTE plant.
Such practices do not represent the constitutionally proscribed interference with interstate commerce because the jurisdictions themselves are, directly or through sub-contractors, engaged in the business of collecting and disposing of the waste rather than in merely regulating its disposition.
That form of “economic flow control” enables jurisdictions to secure a reliable waste flow for their WTE plants, but it also requires them to accept expanded responsibility for waste disposition. The concept of municipalization of waste disposal services or economic flow control has not been very popular with local governments, in part because any new approach to a public service risks challenge in the form of lawsuits from activist groups or waste associations. Additionally, any proposal to expand services or responsibilities is met with great skepticism.
Variety of solutions
Local governments often combine several alternatives to maintain the solvency of their WTE plants. Hennepin County, Minn., for example, lowered its tipping fee over a three-year period at the Hennepin Energy Resource Co., from $95 per ton prior to Carbone to $41 per ton today. The county also has taken two key steps toward restructuring its revenue stream, according to Janet Leick, director of environmental
services. First, the solid waste haulers doing business in the county collect a solid waste fee from their customers, and that revenue goes into the county’s solid waste fund. Second, the county collects a separate solid waste management fee (based on assessed property value) on the property tax statements it sends out. “We’re now collecting the same amount of revenues that we used to collect on the tipping fee only,” Leick says.
Regardless of which course solid waste jurisdictions pursue, they must do something rather than look to Congress for the answer. Several flow control bills, including S 899, the Municipal Solid Waste Disposal Act of 1997, sponsored by Sen. Christopher Dodd (D-Conn.); S 443, the State and Local Government Waste Control Act of 1997, by Sen. Max Baucus (D-Mont.); and HR 943, the Municipal Solid Waste Flow Control Act of 1997, by Rep. Robert Franks (R-Va.), have been introduced. Nevertheless, flow control is “pretty much a dead issue at this time,” says David Tubman, legislative/regulatory analyst with SWANA.
To many local governments, WTE plants represented the wave of the future. They were environmentally progressive and politically acceptable because they often reduced government’s role in the delivery of a service that the private sector was capable of providing on a cost-effective basis.
Abandoning programs conceived as progressive and innovative, and adopting a service fee that many perceive as inefficient and regressive, will be a bitter pill for many local governments to swallow. In most cases, however, residents can pay the fee now or pay the price later.
The author is a shareholder in the Washington, D.C., office of Verner, Liipfert, Bernhard, McPherson and Hand, specializing in the development and financing of public infrastructure.
New life has been breathed into two showcase sections of midtown Manhattan as a result of some $54 million in capital improvements funded and implemented by property owners in two Business Improvement Districts (BIDs). BIDs are private, non-profit organizations that raise money from local property owners to fund capital improvements such as new street lights, planters and signage.
In New York, the Grand Central Terminal area and the neighboring 34th Street section to the south and west had deteriorated badly since the 1970s. With the city strapped for funds, property owners decided to take the initiative in an effort to revitalize their neighborhoods. As the first step, they created the Grand Central Partnership in 1989. Three years later, the 34th Street Partnership was formed.
New York-based Vollmer Associates served as liaison between the city and the two partnerships and as design consultant for all capital improvements. Workin g with property owners in the two BIDS, the firm drew up plans for physical improvements. The plans were scrutinized at every level of city government and by all appropriate agencies, most notably the New York City Department of Transportation (NYCDOT), which will be responsible for maintaining most of the improvements when they are completed.
New York City goes to great lengths to make certain that the improvements proposed by a BID are equal to or better than those it would make itself. Changes that are implemented are ultimately the city’s responsibility, and local officials must be assured that they are consistent with the city’s goals and criteria.
Once a redevelopment plan receives the support of a majority of the owners and tenants in the area, a BID proposal must be approved by a series of government officials, including the city and state comptrollers, city council and mayor. The state legislature must ultimately create a BID through enactment of legislation.
When the plans are approved (a process that can take several years) the city agrees to act as collector of surcharges on real estate taxes assessed to property owners in the district. The surcharges are held in an escrow account to be turned over to the BID as needed.
While the BID has flexibility in implementing its program, the city still holds the reins when it comes to capital improvements. The BID is supervised by the department of business services, whose board includes members of the city council and representatives of the offices of the borough president and city comptroller.
“A close relationship with the city and utilities providers is the key to maintaining a fast pace of capital improvements,” says Herbert Kozlow, director of capital projects for the Grand Central and 34th Street Partnerships. “When a new street light goes up, we notify Con Edison immediately to be sure that a conduit is already in place. The light is then up and running in a matter of hours rather than weeks.”
(Although BIDS have enjoyed a certain degree of autonomy, the New York Times reported last month that Mayor Rudolph Giuliani wants to strengthen the city’s control over the districts. Proposed new rules would require BIDS to receive the department of business services’ approval for all major undertakings such as the staging of street fairs or the acquisition of new computer equipment.)
While both the Grand Central and 34th Street areas needed renovating, the texture of the two neighborhoods was quite different. Grand Central traditionally had been a mid- to high-range retail area, while 34th Street catered recently to a mid- to down-scale shopping clientele, offering a wide selection of sports equipment, toys and apparel.
The Grand Central BID therefore focused on the improvement of public spaces, such as: * “signature corners” with inclines to accommodate wheelchairs and handcarts; * old-fashioned streetlight stanchions that emit white as opposed to yellow light; * easier-to-read street signs; * unobtrusive newspaper boxes; * trees, planters and trash receptacles; * newly striped streets and crosswalks; and * private street-cleaning and security crews.
The 34th Street BID required changes of a more basic nature. For example, storefront canopies and signs on the sides of buildings that gave the area the look of an overgrown flea market were removed to spruce up the neighborhood. Private sanitation and security forces, increased lighting levels and upgraded streetscaping also were included, as was the revitalization of Greeley and Herald squares, which had earned a reputation as hangouts for derelicts.
The Grand Central BID also provided an outreach program for the homeless. “The homeless have a right to be on the streets,” says Daniel Biederman, president of the Grand Central and 34th Street Partnerships, “but if they have a decent alternative, they’ll go there.” The BID’s homeless facility provides meals, seminars and job-training programs, the goal being to place residents into their own apartments.
As work proceeded, large commercial enterprises began moving into the 34th Street area. A huge K-mart opened at One Penn Plaza, connected to the Long Island Railroad concourse.
The nation’s largest HMV music store, along with a mega-size Woolworth’s and Gap, have opened on 34th Street and Sixth Avenue, as well as a 17,000-square-foot Disney Store.
Real estate usually is one of a municipality’s largest assets (and greatest expenses), but its management can range from highly centralized to extremely lax. Overall, however, appreciation for the importance of real estate — as well as for the need to capitalize on internal and external resources in its management — appears to be increasing.
According to a recent survey, local governments are bringing day-to-day real estate functions such as strategic decision analysis and joint ventures in-house. At the same time, many respondents rely on external expertise where appropriate in such areas as construction management, appraisal/valuation, and architectural and design services. The results of the survey, conducted by American City & County and Hartford, Conn.-based MBIA & Associates Consulting/Bartram & Cochran, are strikingly different from those of a survey conducted five years ago.
The survey drew 90 responses from some of the largest cities in the country to some of the smallest jurisdictions. Interviews were conducted with 11 entities. Forty percent of respondents said the importance of the real estate function had increased in the last year, while 6 percent reported a decline in importance. Centralized real estate management, a structure that appears to allow for better strategic focus, was reported by 66 percent of the respondents. Just 8 percent of respondents reported privatizing either all or part of their real estate management functions in the last year.
Funding availability was cited by 53 percent of the respondents as the most important factor influencing real estate management, compared with 46 percent five years ago. Respondents identifying asset and facilities management as the most important factor increased from 9 percent to 24 percent.
Five years ago, a plurality of responding jurisdictions selected their consultants from a list of pre-qualified firms. Municipalities now look almost equally to advertised public bid, sole source selection and pre-qualified firms. The trend toward forming long-term relationships with vendors is rooted in the desire for increased efficiency. Respondents indicated that, with long-term relationships, municipalities are likely to obtain better pricing, enjoy a shorter learning curve and have better-prepared vendors.
The frequent inability of local governments to provide information on real estate values, the numbers and types of properties they own, annual leasing costs and how they manage the real estate function was one surprising aspect of the survey. Nearly a third of respondents failed to provide even an estimate of their holdings or leasing costs.
Governments can vary widely in their approaches to outsourcing and privatization. Federal officials, for example, sometimes show creativity only when they run up against the reality of contaminated sites and functionally obsolete facilities.
According to survey-related followup interviews, officials at the state government level appeared to succeed when they centralized and introduced strategic planning. (Some officials had no idea whether their state had surplus real estate. In those cases, officials have not identified real estate as an important asset class — a prerequisite for outsourcing.)
Privatization frequently dictates the need for specific expertise rather than a “blanket solution.” Large and small “boutique” firms regularly team up to win large assignments by combining their areas of expertise to best serve the client. That is particularly true in areas in which a minority and/or woman-owned business received preference in the vendor selection. In most instances, such a preference may represent 15 to 25 percent of the evaluation score.
The survey data indicate that outsourcing and privatization in the public sector is a maturing process spearheaded by a growing appreciation for the importance of managing real estate. State and federal governments have started large contract outsourcing in the last few years. Smaller governments, however, seem to have led the way in developing in-house capabilities for ongoing functions.
At the same time, local governments rely heavily on outsourcing for the expertise they need, particularly in areas where a more entrepreneurial and better-capitalized private sector can do the job. Often, local governments discover that private companies can fill a technological or resource void with such assets as computer technology or attractive financing.
This article was written by Maura Cochran, a principal with MBIA & Associates Consulting/Bartram & Cochran. For full survey results, call (860) 549-5000 or send e-mail to [email protected]