A GUIDETO MANAGING FINANCIAL RESOURCESinfohouse.p2ric.org/ref/26/25032.pdf · A GUIDETO MANAGING FINANCIAL RESOURCES ... techniques and financial options the RMSWM should become familiar

I Z L 3 L P D F

RURAL MUNICIPAL SOLID WASTE MANAGEMENT SERIES: ~

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A GUIDETO

MANAGING

FINANCIAL

RESOURCES

Prepared by:

SWAN& The Sohd Waste boclahon of North Amenca 1100 Wayne Ave., Smte 700 P.O. Box 7219 Sllver Spnng, Maryland 20907-7219

and

NAD0 Research Foundation 444 North Capitol Street, NW Suite 630 Washington, DC Zoo01

Made possible with funding from the.:

Umted States Department of Agriculture Rural Development Admnistrahon Water and Waste Dlsposal Divlsion Solid Waste Management Grant Program

TABLEOFCONTENTS

I . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

I1 . FACTORS THAT AFFECT COST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Key Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Populations and Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Collection Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Government Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Hiddencosts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

111 . BASIC CONCEPTS OF FINANCIAL ACCOUNTING . . . . . . . . . . . . . . . . . . 4

Arm’s Length Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Going Concern Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Double Entry Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Accrual Versus Cash Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Governmental Fund Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The Cost Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

IV . BUDGETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Purpose of Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Types of Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Budgeting Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Dysfunctional Budgeting Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Functional Budgeting Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Effective Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

V . FINANCING SOLID WASTE SYSTEMS . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Institutional and Legal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Debt Afford Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Procurement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 UserFees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Revenue From Sale of Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Types of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Other Types of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

APPENDIX A

Organizations and Associations Resource List .................... 44

Series 1 - Assuring Capacity for the Future - Integrated Solid Waste Management Systems

Series 2 - A Guide to Decision Making in the Public Sector

Series 3 - Managing Financial Resources o

For ordering information on any of the Guidebooks available in this series contact SWANA, P.O. Box 7219, Silver Spring, Maryland 20907-7219.

These Guidebooks were developed by SWANA and NADORF with funding through the USDA, Rural Development Administration, Water and Waste Disposal Division - Solid Waste Management Grant Program and under the guidance of the following Review Team members:

Mike Goering Washington County Engineer Washington County Highway Department Salem, Indiana

David Grimes, Executive Director Southern Colorado Economic Dev. District Pueblo, Colorado

Gregory C. Jacob Solid Waste Manager Tuolumne County Sonora, California

Ron Mace Bluestem Solid Waste Agency Cedar Rapids, Iowa

Roger Mack, Executive Director First District Association of Governments Watertown, South Dakota

Patrick B. O’Connor Solid Waste Advisor Tennesee Valley Authority Chattanooga, Tennessee

Bill Parsons, Executive Director Lake Cumberland Area Dev. District Russell Springs, Kentucky

John 0. Smith, P.E. Environmental Resources Management, Inc. Exton, Pennsylvania

Kathy Thomas ThomasNright, Inc. Tigard, Oregon

Lee Tillman, Executive Director Eastern Plains Council of Governments Clovis, New Mexico

Vernon Martin, Executive Director Coastal Georgia Regional Dev. Center Brunswick, Georgia

I. INTRODUCTION

Municipal Solid Waste Management (MSWM) has undergone monumental changes in the past decade, with much of the change occurring in the past 3-5 years. Just a decade ago, the concept of solid waste disposal in rural areas seemed to be an issue overlooked due to the seemingly interminable amounts of open space and minimal cost involved to dispose of refuse. However, as public awareness increased, so did concern for the environment. This is reflected in stringent state and federal mandates elevating Municipal Solid Waste (MSW) in the rural sector to the forefront of the environmental arena. Many historical practices such as, roadside dumping and open-dumps are no longer acceptable. The rural municipal solid waste manager will have to implement sound MSWM systems to comply with new mandates and regulations, and finance and fund their development and operation. The term Rural Municipal Solid Waste Manager (RMSWM) is used throughout this publication as a general term to represent municipal solid waste officials in the rural sector.

Financing and funding for MSW was, and continues to be in many places, provided through the local government general fund from property taxes. This has created the illusion that garbage disposal is free and has proven to be a disservice to citizens due to increases in local collection charges in revenue-strapped rural communities. Citizens have a very clear picture of their costs for water and sewer usage, because they receive a separate bill for these utilities. The MSWM system is slowly moving towards this type of system called an enterprise fund where all costs are covered by charging system users for their fair share of the service.

Landfill siting and 30-year closure oversight, waste-to-energy facilities, material recovery facilities, transfer stations, compost operations, collection systems, and public education programs all cost significant amounts of money to implement. MSWM in rural communities has become one of the most expensive budget items following education, road construction and maintenance. The RMSWM must decide which of these options are feasible and develop ways to pay for them in areas where solid waste disposal has almost assuredly never been charged for directly.

Economic factors are a principle concern in implementing an effective MSWM system in the rural sector. The intention of this Guidebook is to provide a suitable overview of budgeting techniques and financial options the RMSWM should become familiar with to assist in financial management decisions. The factors that affect cost introduces the RMSWM to the fundamental framework in designing a sound economic plan for decision making.

11. FACTORS THAT AFFECT COST

Many factors affect the real costs for solid waste management. In order to understand what they used to be, currently are, and forecast what they will be, the RMSWM must understand many factors that go into the solid waste management cost equation to implement a MSWM system by defining the financial parameters involved. A fundamental understanding of the various factors affecting cost, the decision to implement a MSWM system and

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maintaining the system for a projected number of years into the future is essential to the rural sector because budgets are usually smaller in this arena. There are several definitions and cost philosophies that f i t need to be reviewed to provide the reader with an introduction to various financial terminology.

KEY DEFINITIONS

There are several definitions and cost philosophies that first need to be reviewed:

"System" means waste generation through management/disposal.

"Revenues" do not equal "Profit". Pictures of public officials getting checks for sale of a recyclable presents an incomplete picture of profit. The cost to collect/process/market the product needs to be included.

"Amortization vs. Depreciation" -- The public sector amortizes, i.e., takes EL part of the capital cost as an expense while the private sectox depwoiates oapital invested on its VS tax filings pxprding to a,Rrescribed schedule. B to conqerve cash by expensing the use of the asset over its useful expense doesn't really occur, but hopefully, the fuads are set wide. Generally? the expense helps build reserve funds in the public secmr and imprave cash flow in the private sector.

"Enterprise Accounting" -- All revenues and costs go to a cost center. Revenues don't go to the General Fund, debt service isn't paid for by Finance, benefits by Pefsonnel, or fuel by Transportation Department, e&., which is often the case when of a munic@al&'s omtion -3 this*has been evolutionary. costs and sinking funds established in enterprise accounting, and it is possible to tell the cost for solid waste service and charge for it -- by the ton, by the household, by the business address, etc. Enterprise Accounting methods take us closer to full cost accounting.

"Risk-Reward" -- Assigning risk to a private party costs money; if it doesn't, and the risk not paid for occurs and the private patty is responsible, your private contractor will reduce the level of service a n d / ~ r go out of business.

"Force MajeureNncontrollable Cimumstances" -- Events that are beyond control of anybody. The service recipient pays for this either now or later. Change in law, strikes, hurricanes, hazardous waste are among events commonly targeted.

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The R M S W is charged with the management of financial resources to effectively maintain and/or implement a sound municipal solid waste management system. To accomplish this, the R M S W must understand the prevailing factors affecting cost as a fundamental basis for sound management decisions.

Population and Demographics

The population and demographics present affect cost -- the larger the population, the more that __ have to be served. Absolute cost, the total amount of money expended, is greater in the City of Chicago than certainly in the City of Gary. However, the per capita cost of trash collection (not necessarily disposal) is greater in rural areas than in a typical suburban subdivision, due to the greater distances that must be traveled to collect trash and the lower population density.

Laws and Regulations

Laws and Regulations affect costs dramatically. The landfdl that was an open dump first went to daily cover, then to natural liners and now to synthetic liners to protect groundwater -- all have increased cost. Worse yet, the inability to site a new landfill has required purchasing out-of- jurisdictional disposal capacity. State recycling laws and public pressure have caused a landslide of adding drop-off centers and separate curbside collections for recyclables -- perhaps 2 or 3 extra collections per week. This adds more cost to the system for both the collection and processing/marketing services. Costs are further impacted if new recycling mandates take away waste/recyclables from landfills, transfer stations and material recovery facilities sized prior to these new mandates.

Collection Control

The manner in which collection of waste and recyclables is controlled affect cost significantly. The more control on the collection, the less the cost, because there are greater opportunities for efficiency in delivering the service. In "open" market collection systems, there can be unlimited haulers from which to choose. Their fees have to be high to support being in competition with each other for the same business. In residential settings, we have seen this to be twice as expensive than in a more controlled situation, e.g., with contract collection. Contract collection can provide the control of waste or recyclables if the jurisdiction wants to have facilitiedservices it provides supported with the flows present. If control isn't achieved and tonnages go down, revenues (usually collected on a per ton or per household basis) may not be adequate to cover costs. Economic controls work if a region has a competitive tipping fee everywhere, or zero tipping fee -- the waste generally stays in the area. (It is easier to enforce keeping waste/

situation, tipping fee revenues must come directly from generators or the jurisdictions participating in the regional system.

recyclables out than it is to enforce keeping waste/recyclables in a jurisdiction/ region.) In this -

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Markets

The sale of marketable products, materials and energy products, has become an increasingly important element of system cost. Various factors come into play in determining the marketability of a product and its "net" value to the solid waste management system. For example, composting operations which generate a marketable product in the form of compost or mulch for use by landscapers and homeowners. Since markets in essence become part of the solid waste management system, securing long-term contracts for the purchase of products would give a solid waste system more comfort if it were from stable, significant, and long-term suppliers.

Government Cooperation

Govemment cooperation affects costs both positively and negatively. The conflicts between cities and counties are classic. However, there are such compelling arguments for cooperation in siting, capacity planning and administering that parochial differences need to be set aside. Regional authorities, although adding an administrative layer, can offer much greater savings due to economies of scale, centralized management, and faster decision making since their management is more sheltered from the typical two-year election cycle than are municipal officials.

Financing

General obligation financing for capital requirement is least expensive if the debt capacity exists. Project financing gets around the debt limit, if you can dedicate a flow of revenues from electricity/steam sales, user fees, or "put or pay" provisions. However, materials and compost revenues are not counted since they are too uncertain, have no track record, and thus are not "bankable".

Hidden Costs

Hidden costs or "surprises" cause havoc when they hit your system. A force majeure event can cause out-of-jurisdiction hauling-disposal; a bad economy coupled with recycling requirements can reduce your tonnages and put you below "put-or-pay'' obligations; and a change in the waste stream's assay due to consumerism, product bans, or deposit legislation can give you less revenue to offset costs.

111. BASIC CONCEPTS OF FINANCIAL ACCOUNTING

Introduction

Accounting is simply a service activity designed to gather, measure, and communicate economic information about organizations.' The RMSWM must be concemed about accounting for two reasons. First, accounting information is key to effective decision making. Second, public agency managers have a fiduciary trust to use the public's money

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efficiently. Financial accounting procedures allow the public to scrutinize the use of public funds and ensure the proper management of those funds by public managers. The use of accounting information for management decision making is known as management accountin%. The organization of economic information for external scrutiny is known as financial accounting. The RMSWM must be accounting literate. This doesn’t mean every RMSWM should be a C.P.A., but good RMSWMs should be able to converse coherently with their accountants.

Assumption of Arm’s-Length Transactions

Transactions are events that have economic impact on the organization. A transaction can be an exchange of goods or services between entities, or internal events that have a financial impact on the organization. Financial accounting assumes there is no bias involved in transactions. Both the buyer and the seller are working in their own best interest, free to act independently. Each is trying to make the best deal possible.

Setting a collection fee is an example of an arm’s length transaction. A RMSWM manager is willing to set a price only if it covers your costs and allows the RMSWM to meet the budget. The customer is willing to pay a reasonable fee for service. If the RMSWM charges an exorbitant amount, say $450.00 per month, customers will find other ways to get rid of their garbage. If, on the other hand, the RMSWM charges too little, say $1.00 per month, when costs are $8.00 per month, the city council will find other people to manage the MSWMS.

The Cost Principle

The value of assets owned by an organization fluctuates constantly. An asset may increase or decrease in value, depending on many variables. To maintain some rational base line to work from, accountants record transactions at historical cost. Historical cost is the original cost of the item paid in an arm’s-length transaction.

I I For example, if a county purchased land for a recycling facility for $lOO,OOO the historical cost would be recorded at $100,000. Although the market value may increase over time, the recorded value will remain at $100,000. If the county sold the property in 5 years for $150.000, the additional $50,000 would be recorded as a gain on the sale, a second transaction. This concept is important to keep in mind when examining financial statements. Long held assets are reported at historical cost and may not give a true picture of the current market value of the assets.

Going Concern Assumption

Normal financial accounting assumes that the entity is a going concern, that it’s expected to continue in operation in the near future. If the entity were about to go out of business, assets and liabilities would be recorded at liquidation values and a different financial picture would develop. -

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Double Entry

Double entry accounting is the standard form of accounting in use today. The basis of double entry accounting is known as the accounting formula:

ASSETS = LIABILITIES + EQUITY

This equation defines that both sides must be equal. All accounting transactions are structured to keep the accounting formula in balance. For example, adding $10,000 on the left, or asset, side of the equation, requires the addition of 510,000 to the right, or liabilities and equity side of the equation.

Accrual Versus Cash Accounting

Cash basis accounting is the simplest method of accounting. Cash basis is how most of us manage our check books. Outflows are measured when the money leaves our hands, and inflows are measured once we receive the cash. Accrual based accounting measures income when it is earned. and costs when thev are incurred, regardless of when the cash changes hands. Most private sector firms record expenses and revenues using the accrual method of accounting. Governmental accounting practice varies somewhat from agency to agency. A few governmental agencies still use only cash basis accounting, many use a hybrid form called Modified Accrual Based Accounting, while others use the more standard accrual based accounting.

Financial Statements

Financial statements are standardized reports designed to provide financial information to managers, creditors, analysts, and citizens. There are three basic financial statements: the balance sheet, the income statement, and the funds statement.

Balance Sheet

The balance sheet shows an organization’s financial position at a point in time. Although a balance sheet can be prepared at any time, it is usually prepared at the end of an accounting cycle, such as quarterly or annually. The balance sheet shows the relationship between the organization’s resources (assets) and the claims against those resources (liabilities). In private sector accounting the claims of the owners or stockholders (equity) is also reported. In governmental accounting there are no stockholders per se, but fund equity is reported along with liabilities.

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Income Statement

Governmental Fund Accounting

The income statement reports the organization’s activities over a period of time in terms of its overall income or loss. Revenues are stated for the sale of goods and services, as are expenses to produce the goods and services. The final result is the net income or loss the entity experienced over the defined period of time.

Funds Statement

The funds statement reports the sources and uses of financial resources during a specific period. It helps to explain how the entity funds its operations.

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Governmental entities provide a wide variety of services. The accounting requirements for many of these services can differ widely. To accommodate these needs, separate funds are set up to account for the resources of each activity separately. This is known as fund accounting. There are three basic types of Funds used in govemmental accounting: Governmental Funds, Proprietary Funds, and Fiduciary Funds.

A Governmental Fundr

Most traditional govemmental functions such as parks and planning are accounted for with governmental funds. Governmental funds report only current assets and current liabilities on their balance sheets. The primary operating statement is the statement of revenues and expenditures. Quity is known as fund balance and reserves. The reported fund balance is considered available spendable resources.

Proprietary Funds

Proprietary funds are accounted for similarly to private enterprises. This type of accounting is used for governmental activities fmanced primarily through user fees. Proprietary funds can be further divided into enterprise funds and internal service funds.

Enterprise Funds

Enterprise funds operate similar to private business operations. Enterprise funding is the best way to finance a MSWM system. Costs are clearly identified and recovered and citizens can easily understand the full cost of modern MSWM. A properly constructed enterprise fund can be protected from the volatility of tax increases and competition for limited tax revenues.

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InternaUService Funds

Intemal service funds are used for service activities provided internally, yet charged out at a user fee rate. In-house print shops or data processing are commonly funded through internal service funds. Proprietary funds report all assets and liability, whether current or non-current on balance sheets. Their primary operating statement is the statement of revenues and expenses. Equity consists of contributed capital (funds injected from another source, usually the general fund) and retained earnings (profits).

Fiduciary Funds

Govemmental agencies often undertake activities for other individuals or groups, such as a special improvement district. In these cases the government acts as trustee for the activity. Fiduciary funds can be accounted for like governmental funds or proprietary funds, depending on the nature of the responsibilities assigned to the governmental entity?

Time Value of Money

A dollar today is worth more than a dollar next year. This is the time value of money. Two factors enter into the time value of money. The first factor is inflation. Although not as much of a problem as it was in the late seventies, inflation still affects how we make financial decisions. If the inflation rate is 4%, then $1.00 next year is worth only $0.96 in today's dollars. Another factor in the time value of money is the assumption that we don't just stuff our money into a mattress to save it. Money is invested to eam an acceptable rate of return. In the public sector, money is invested in relatively risk free instruments with the promise of a reasonable return.

Since there is a time value to money, there is a future value and a present value to all financial decisions. RMSWM must fully understand the concepts of future value and present value to make sound financial decisions. The following example illustrates this point.

The future value of an investment is the value at some point in the future, given a certain retum, or interest rate. Mathematically, it is expressed as:

FV = C, x (l+i)'

FV = future value of the investment C, = initial cash outlay i = interest rate per time period t = time period

Where:

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If you invest $1000 in a certificate of deposit with an interest rate of 9%, Compounded monthly, how much would the investment be worth after 10 years?

c, = $1000 i= 9% annually

Since compounding is monthly, the monthly rate is 9%/12 months = 0.75%.

t = 10 years

Again the compounding is monthly, so there are 12 monthdyeax x 10 years = 120 periods

FV = $1000 x (1+0.75%)120 = $2451.36

By solving for the initial cash outlay, or present value (PV), we can calculate how much must be set aside now for a specified amount in the future.

PV = FV/(l+i)t

If a new landfill compactor will cost $250,000 in ten years, how much should be invested at 9% annual interest, compounded quarterly, to have enough to buy the compactor?

FV= $250,000 i= t=

PV = $250,000/(1+2.25%)40 = $10,266.14

9% annually or 9/4 quarterly = 2.25% 10 years or 40 quarters

An annuity is a series of equal amounts to be received or paid at the end of equal time intervals. Payments on a car loan or house mortgage are examples of annuities. To determine the present value of an annuity each payment must be discounted with a different time period. Luckily most business calculators and computer spreadsheets will do these calculations for you. The formula for the present value of an annuity is:

PV = (C/i)( 1-[l/(l+i)t]}

Likewise you can calculate the future value of an annuity:

FV = C{[(l+i)t-l]/i}

C= cash flow per period i= interest per period t= number of periods

Where

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If a new landfill compactor costs $250,000 and payments will be made quarterly for ten years, at 9% annual interest, compounded quarterly, what will the payments be?

PV = $250,000 i = t = 10 years

C = PV/[(l/i) - (l/(i(I+i)*))] C = 250,000/[(1/2.25%)-(1/(2.25%(1+2.25%)4~)] c = $9,544.34

9% annually or 9/4 quarterly = 2.25%

The concepts of compounding and time value of money are important to developing long range financial plans for solid waste facilities. Spreadsheet models are invaluable for doing sensitivity analysis ("what if'), and long range financial planning.

Some problems can be solved on a basic financial calculator to provide valuable answers such as, cost and payment structures. XYZ County is planning a new landfill and wants to set aside an amount each year to cover the closure cost at the end of the projected 20 year life of the facility. Closure of XYZ landfill is estimated to cost $1.2 million dollars in 1990 dollars. In order to include the closure cost in the tipping fee, how much should be budgeted each year to have enough money for closure in 2010?

The assumed inflation rate for landfill construction is 7% per year, and the county e m s an average of 8.75% on its investments annually.

Solution:

Interest = 8.75% Inflation = 7.00%

The solution can easily be determined by using a basic financial calculator. To determine the cost of closure:

$1,200,000 * (1+.07) = $4,643,621

To determine the payments per year:

FV = C([(l+i)t-l]/i} C = FV/{[(l+i)t-l]/i} C = 4,643,621/((((1+.0875)")-1)/.0875) C = 84,276.64

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IV. BUDGETING

Purpose of Budgets

Budgets are quantitative expressions of the priorities of the organization. Since budgets constitute a large portion of the finances of managing a rural municipal solid waste management system, the manager should understand the basics involved in budgeting. The budget should

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1) 2)

Formalize resource allocations and future plans. Coordinate and integrate goals and objectives of all departments within the organization, balancing individual departmental priorities with the overall goals and objectives of the organization. Identify bottlenecks which will interfere with reaching the goals of the organization. Provide a benchmark or yardstick for measuring the perfomance of individual departments and managers? Budgets are often misused and misunderstood.

Budgets DO NOT:

Save Money Control Costs Increase Productivity Increase Efficiency

3) 4)

Types of Budgets

Historic Base Budgeting

Traditionally, most governmental budgeting is historically based. Budgets are prepared by comparing the budgeted amounts and the expenditures for the previous year, and adjusting each item. Adjustments are made keeping in mind any differences in operation from the previous year, and inflationary effects on prices. This is probably the easiest method of preparing an annual budget.

Advantages: ease of preparation. works well for an operation that does not change significantly from year to year. Adjustments made over a period of years "fine tune" a budget making it more and more accurate if everything else remains equal.

Disadvantages: management does not necessarily analyze the appropriateness of what is being done,

misplaced priorities are continued from year to year. only how it is being paid for.

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assumptions made in the base year budget may no longer be valid. doesn’t work well in a rapidly changing field or in an agency whose work plans change significantly from year to year.

Program Budgeting

Program budgeting focuses attention on the results achieved by individual programs rather than the resources used. Programs are a set of activities with a specific objective. Many times programs will cross departmental lines and require cooperation between departments in preparation. A RMSWM may incorporate a variety of programs. Some will be ongoing, some may be short-term projects. Programs for the R M S W M may include:

- Public education - Solid waste disposal - Environmental monitoring - Administration - Collection services - Fleet management - Site acquisition and permitting - Site design - Site closure and post-closure care

Many costs must be allocated across a number of accounts to provide a true picture of the total cost program lines of a program. The Director’s salary and telephone charges, for example, may be distributed over several different programs. Program budgeting has four distinguishing characteristics:

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2) 3) 4)

It develops a program structure with a statement of goals and objectives for each program. It identifies evaluation criteria to measure the results achieved. It measures the total cost of the program. It assumes a zero base as a starting point:

Advantages: Objectives are priority ranked so resources can be allocated over several objectives. Managers and the public can clearly see what the agency is doing, as well as the costs

The effects of eliminating or adding responsibilities to the agency are clearly visible. of each service offered the public.

Disadvantages: Can be very time consuming to prepare. Allocation of costs can be difficult, and errors in allocation can provide misleading

Can be difficult to administer, once adopted. information.

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Zero Base Budgeting

In zero-base budgeting, every expenditure is assumed to be zero until the manager can justify why it should be higher. This is in contrast to traditional budgeting that starts with the current level of expenditure and justifies only increases. There are two basic steps to zero-base budgeting: preparing decision packages and ranking decision packages.

A decision package is similar to a program budget. A decision package identifies and describes an individual activity or function for comparison with other functions. With each decision package the manager must decide what level of effort to expend on each activity and present the minimum effort level necessaty. Any increase in effort toward the activity must be justified.

Decision packages are ranked based on how they advance the goals and objectives of the organization. Decision packages which cannot be funded at the present time are often included in a budget proposal. Management must decide which packages to approve and which to deny. The result is to set the priorities for all activities of the organization. If conditions change, such as adding a new funding source, or a change in a legislative mandate, decision packages can be added or removed from the agency budget.

Advantages:

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The priorities for the organization’s activities are clearly defined. It is easily adaptable to changes in conditions by avoiding perpetuating assumptions year after year.

Disadvantages: Can be time consuming to prepare. It often generates a large amount of paperwork. Managers learn to play games with decision packages circumventing the procedures,

5 resulting in little improvement in the allocation of resources.

Flexible Budgeting

Flexible budgets are built around production levels. Flexible budgets are rare in the public sector, but could be used more in areas such as MSWM. In a flexible budget, expenditure levels are tied to levels of output. As output of services increases, individual budgets increase. If output decreases, the budget amounts decrease. Actually, traditional budgets are developed the same way, but they are based on an expected level of output. If output varies, then the budget is no longer an accurate plan for the organization. MSWM agencies are tied closely to the volume of MSW managed.

Advantages: The budget adjusts to increases and decreases in demand. Managers identify incremental costs of service. Changes in demand do not require budget modifications.

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Disadvantages: Incremental costs are sometimes difficult to identify. Flexible budgets make it difficult for higher level decision makers to allocate resource

It works only in areas where costs are a function of the level of output. when output is variable.

Budgeting Problems

American industry's incredible dependence on quantitative analysis and rigid rule structures has been a major factor in its loss of leadership in the world market to the Japanese. Government, including local government, is equally guilty of this error. To be successful in a rapidly changing environment, managers must have room to manage, to adapt, and to change quickly. This ability to change is as important in the public sector as in private industry. Unfortunately budgets, rules, regulations and restrictions can hamstring managers into ineffectiveness.

The price we pay of course is in inefficiency, inflexibility, indolence and impersonality. All too often, a federal bureau will fail to do that which makes sense because common sense does not fit the rules. All too often, bureaucrats trained not to allow personal values to intrude on decisions will treat us, their customers, in an unfeeling manner. All too often, the machinery of government will respond slowly and inefficiently with poor coordination between agencies because they have learned not to trust one another, not to rely on subtlety, not to develop intimacy! This is important in budgeting to the RMSWM because main focus of the primary goal to serve the needs and welfare of the citizens. Any bureaucratic rules, regulations, policies, or procedures which interfere with this goal are dysfunctional and should be eliminated or at least minimized.

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Dysfunctional Budgeting Behavior

'Xcross The Board" Budgeting

Across the board budgeting is the practice of allocating a flat percentage increase or decrease to all budgets in an organization. Across the board budgeting has a dysfunctional effect on the organization in that it encourages waste of financial resources, reinforces poor management, and discourages superior managers. Across the board actions are based on two false assumptions: that all departments are equally managed with the same amount of budgetary "padding," and that all functions are of equal priority.

Managers vary in effectiveness and performance. Some departments budget with a large amount of cushioning, while others try to reflect true costs and keep budgets to a minimum. Across the board cuts have little effect on departments with heavily padded budgets, yet may have major effects on healthy, lean budgets. The result: the lean manager l e a s quickly that attempting to operate within a realistic budget is courting disaster; in fact, that manager is penalized for not "padding" the budget. The lean manager learns that to survive he must play the game and pad the budget.

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The second assumption is that all activities are of equal value. To say that funding for a solid waste awareness day poster is equally deserving of funding with the need for safety equipment is clearly wrong. It may be more appropriate to eliminate the poster program altogether rather than cut each program by an equal percentage.

Line Item Budgeting

The practice of budgeting on a line item basis, rather than on a functional basis can be extremely dysfunctional and unproductive. In line item budgeting, managers may not exceed individual line item amounts and cannot transfer funds from one line item to another without a new appropriation.

"The practice of line-item budgeting prevents effective management of government programs and service delivery. The long standing practice of line-item rather than programmatic budgeting denies public sector managers the freedom and flexibility that private sector managers have. Typically business managers operate in an environment that sets goals and objectives and lets them manage to a total budget, while making them accountable for meeting the targets within that budget. Even where there are line-item amounts managers have some flexibility to transfer funds."'

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Use It Or Lose It

"The current budget-setting process provides virtually no motivation for state agency heads to be completely candid with the Legislature about weak and outdated programs. Under the current system, the reward for forthrightly recommending that a program be cut back or eliminated is a smaller budget the following year -- with no opportunity for the agency to direct a portion of savings into training or new programs .... many agency heads soon follow a 'use it or lose it' mentality with respect to their budgets. Taxpayers lose because of this inefficiency, and capable people drawn into public service as department heads often quit in frustration soon after they have learned the system's limitations."8

Eliminating All The "Messy Human S t u f

Eliminate training, perks, recognition programs, or "unproductive" personnel programs. Get tough and get rid of time wasting personal items such as radios in the work place, recreation items used during lunch hours. This is another classic dysfunctional behavior which led to severe problems.

Industry has leaned on science, robotics, financial analysis, and hard numbers for thirty years to enhance productivity. Thousands of dollars are spent maintaining trucks and typewriters. Financial resources are closely monitored and managed.

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Looking to save money by reducing the preventive maintenance and improvement of the most important resource, the human resource can lead to:

Encouraging good employees to look elsewhere for employment; demoralizing existing employees; producing an "obsolete" work force, who must use obsolete tools; and discouraging good candidates from seeking employment with the organization.

Training should be recognized as an essential productivity tool. Support for training will produce a better motivated, qualified and productive work-force.'

Efficiency vs. Productivity

Efficiency is an important part of any management structure, but as with "Paralysis through Analysis," "Paralysis through Efficiency" is also a real threat. Efficiency is not synonymous with productivity or effectiveness. Efficiency is easily obtained. Efficiency is doing things right; effectiveness is doing things right. Effectiveness and productivity take a little bit of work and skill. Police departments could easily double their efficiency by cutting in half the number of officers on the road at any one time. However, effectiveness would be greatly reduced. Efficiency in operations is critical, but not at the sacrifice of effectiveness and productivity. Budgeting should stress effectiveness in providing service to the customers, not just cutting for efficiencies sake.

Functional Budgeting Behavior

Common Goals and Direction

Budgets should provide the framework for the financial plans of the organization. Budgets must be based on common goals and missions, developed around a strategic position. Government exists to provide services to its citizens in two fundamental ways. First, to protect citizens against threats to public health, safety, and welfare.. Second, to help citizens capitalize on opportunities to improve the state's economy and quality of life. Each program and activity should ultimately be linked to achieving one or both of these basic purpose^.'^

Set Priorities

Our society can be described as having unlimited desires and limited resources. All effective organizations examine the priorities of their activities, and eliminate those with little or no benefit to the customer or the taxpayer. Those resources can then be shifted to more important projects. These priorities should be constantly reexamined and not left to develop through evolution. In preparing the annual budget, every agency should describe links between its programs, activities and the public interest in such key areas as health, safety and legal rights. Impacts of programs should also be analyzed and the programs ranked. The intent is to identify programs that are no

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longer required or affordable. A comprehensive quality management system would require measurable performance, targets for gains in productivity, a citizen orientation, positive work environments, commitment, and participation from all levels of management and emp10yees.l~

The best source of information regarding where an organization can improve is always at the front line, closest to the customer. Involvement of all employees and customers is necessary to properly assess the needs of the organization. For this to be effective, individual managers must not feel threatened by making suggestions that may ultimately lead to elimination of their jobs. It would be irrational for any employee to suggest that their job or program is an unneeded waste of tax monies if the only reward they receive is the welfare line.

Concentrate On The Long Range Interest Of The Taxpayers

Budgeting long term costs for capital improvement and maintenance cannot be avoided. Infrastructure management costs are real and it is short sighted not to plan for these costs. It is pragmatic to concentrate on the short run, but it is certainly not effective management. Programs and activities of lower priority should be eliminated to support long term needs. Industry after industry has failed due to short sighted management in capital investment. Companies go bankrupt, but governments pass the failures of short sighted management on to our children in the form of higher taxes and poor quality infrastructure.

Effective Budgeting

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Simplify The Process

Taxpayers want services: fire protection, law enforcement, good roads, and solid waste management etc ..., not forms to fill out. Every hour spent filling out forms, sorting through procedures, and duplicating numbers is an hour less spent servicing the citizen.

Involve Employees

The people who often best know how to save money and increase productivity are the employees, not necessarily the department heads or elected officials. Involve them in the process. Side benefits to this will be better communication with the employees, and the employees feeling a sense of ownership in the organization. People are less likely to criticize decisions they had a hand in making.

Let Managers Manage

Set goals for managers, both performance and financial, then allow the managers to achieve those goals. Mandating specific cuts to certain line items, or eliminating capital expenditures conveys an explicit mistrust of your management staff. Allow individual managers to decide how best

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to adjust their financial needs to meet the overall goals of the organization and their department. -

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Develop And Fund A Long Term Capital Plan

Capital planning for the long term is critical. Develop a capital schedule and budget for all major capital items. These should be reviewed, ranked by priority and funded completely, or revised, eliminating capital items and the functions surrounding those items. MEASURE PERFORMANCE BASED ON ACCOMPLISHMENTS, NOT PLANS. Government budgets are often scrutinized and dissected as they're being proposed; yet once the budget is adopted, little review follows. Managers should be evaluated based on programmatic goals accomplished, not on paper plans called budgets.

V. FINANCING SOLID WASTE SYSTEMS

Introduction

Financing a municipal solid waste management system in the rural community is potentially the single greatest factor affecting management of a MSWMS. In revenue-strapped rural communities, financing a MSWMS can prove difficult to the RMSWM without an understanding of the aspects that constitute successful financial management of resources. Public solid waste systems are funded in many ways. In most cases funding can be broken down into two major areas: day to day operational funding and capital funding. Operational funding for MSWMS comes from three major sources: tax revenues, user fees, and sale of resources. Tax revenues include general property taxes, litter taxes, single purpose taxes and sales taxes. User fees are fees charged directly to the customer such as tipping fees or trash collection fees. Revenues also come from the sale of resources such as the sale of electricity or steam from a waste bumer, the sale of recyclables, or the sale of landfill gas. Capital funding can come from the same sources as operational funding, however the large amounts of money needed to fund capital projects are rarely readily available. F'ublic entities must at times use debt financing to support large capital projects.

Financing a solid waste facility component or system in today's market presents certain challenges. The industry has developed its own particular set of rules and guidelines that command focused attention by all parties concemed. For example, in the United States, the Tax Reform Act of 1986 (the "Act") changed the way projects were fmanced (particularly for waste- to-energy facilities). Dramatic shifts from project financing to system financing have created new opportunities as well as problems.

In an integrated system financing, one bond issue will be made to finance one or more components of the Integrated Municipal Solid Waste Management System (IMSWMS). Revenues from the various system components would be pledged to cover the debt service on the bonds.

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Institutional and Legal Issues

In planning a solid waste facility or program, certain information needs to be determined fmt in order to assess financing and legal options available during the procurement and implementation process. Each area, whether it be local, state, federal, local government, or private enterprise, will have various grants of power that will have a bearing on the implementation of solid waste management facilities or programs. In order to undertake any solid waste project, the following questions should be addressed

Can the participating member(s) assure that its waste will be delivered to the project? Can the participating member(s) enter into long-term agreements to pay for the project

Can each participant enter into cooperative arrangements with other areas and local

Does the local government’s procurement laws permit it to acquire facilities and

costs?

governments with respect to a regional project (if applicable)?

services needed to implement the project?

Control of the waste stream (control) is not necessarily a prerequisite to the implementation and financing of a solid waste management project. For example, no control is needed for a project fmancing if monies are available to pay project costs, whether or not waste is actually delivered. This is the case for solid waste debt issued with a general obligation (G.O.) pledge to secure the bonds. When debt is issued as a revenue bond or backed by a municipal service agreement, however, control may be an important credit consideration. Whenever project revenues primarily depend upon the level of waste deliveries, control becomes necessary to give bond holders adequate assurances that they will be repaid. In many cases, counties and other local governments that participate in solid waste projects find it desirable to have the ability to control the waste stream, even if the power remains unexercised.

One way to enact control is to effect a contract or franchise requirements. Local governments can amend their contract or franchise procedures to establish conditions that require haulers to deliver waste to a designated project. In order to provide for the payment of project costs, the Participating entities and local governments will enter into a multi-year service contract(s). In many cases, payments under these service agreements provide a source of revenues for the repayment of the bonds issued for the project. Consequently, it is important that each participating county or local government have clear authority to enter into long-term service agreements with other project participants.

Once a commitment has been made, an organization for implementing the project must be given responsibility to make the project happen. The organization must be granted a scope of authority to act, and clear benchmark checks on the organization should be established. There should be a line of accountability of that organization to the participating local government(s). For the organization to be successful, it should have trained personnel within the organization as well as

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the ability to select qualified financial, engineering, management and legal support. The organization should be required to select a project site and establish the levels of waste commitments with the concurrence of the local government(s) involved.

In regional projects, the local governments may form an operating committee and make decisions concerning the project by consensus. Alternatively, the staff of one participating local government may take the lead in developing the project and the other participating local governments provide input to the lead agency. Authorities or Commissions provide a more formal mechanism for structuring relations among participating local governments. An Authority or Commission may or may not be responsible for issuing solid waste bonds for the local government@). The local governments may choose to use an Authority or Commission only to coordinate administrative functions. The issuance of debt could be accomplished on a local government-by-local government basis in whatever manner each local government decides is preferable.

Whatever form the issuing agency takes, there will be enabling legislation which either allows or disallows it to perform certain financing and legal functions. Often Authority and Commission enabling legislation authorizes the issuance of tax-exempt revenue bonds for the construction, acquisition, or refinancing of solid waste facilities and properties useful in connection with its waste disposal facilities. Typically, Authority and Commission bonds or notes are special obligations of that entity payable solely from revenues of the entity received in connection with the respective project being financed. This means that an Authority or Commission acts as a vehicle for pass-through financing in which the security for the bonds lies with the participating counties, even though the bonds would not legally constitute a debt of the counties or other local governments. Usually, an Authority or Commission has no taxing power. Bonds are usually secured by a trust indenture and a loan agreement which detail the source and method of payments to the Authority or Commission and the bond holders.

By regulation, an Authority or Commission adopts procurement procedures which govern its procurement activities. A body's enabling legislation empowers it to procure projects through either competitive bids or competitive negotiation. Often it will issue a Request for Qualifications (RFQ) and/or a Request for Proposals (RFP) which establishes the qualifications of respondents and the criteria by which the successful proposer will be selected. These criteria include factors other than cost, such as the proposer's technical and management expertise, the reliability of the proposed project technology, the proposed environmental controls and other matters that may be important to the participating county.

Because of the complex nature of certain solid waste management projects, local governments may acquire the services of a "full-service vendor" to implement a project. This involves contracting with a single private company that will design, construct, and operate the facility for a long-term period, e.g., 20 years. Under these arrangements, the private company, or vendor, must construct the facility for a lump sum fixed price within a specified time period. It must

components and adjust according to an inflation index). The private vendor is responsible for

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also operate the facility for a fixed annual operating charge (which may have formula -

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the operation and maintenance of the facility and must provide personnel. The performance of the project is guaranteed by the vendor, which agrees to process a specified quantity of waste/recyclables each year, generate specified amounts of materials or energy revenue from each ton of input, and meet environmental and other laws and regulations. In order to select a vendor, proposals must be evaluated on the basis of a variety of criteria. Any procurement process that limits the evaluation to cost alone, will not be satisfactory because there may be significant non- price differences in the proposals from the vendors. Consequently, most procurement involve a competitive process in which the proposals received in response to an RFP are evaluated on such factors as: (1) cost; (2) facility design, efficiency, and reliability; (3) performance guarantees; (4) financial strength of the proposer; (5) the project risk to be borne by the vendor; and (6) environmental compliance.

The procurement generally involves competitive negotiations with one or more vendors before a final selection is made and contracts are signed. This process differs significantly from the typical public bid procurement of a facility and operating services. In many cases, local governments, by ordinance, establish special procurement procedures for these projects or make modifications to their existing purchasing practices to accommodate this process. Even where no legal impediments exist, some local governments need to establish a special procurement team to undertake the project or use an outside procuring agency. Members of the project team, beside staff, usually include consultants in the areas of solid waste disposal management, finance, technology, and environmental impact. The financial arrangements between an Authority or Commission and the participating local govemment(s) vary from project to project, but the Authority or Commission endeavors to make all projects self-supporting.

Introduction to Debt Affordability Studies

Financial analysts and rating agencies view net tax-supported debt as an important indicator of a municipality’s credit position. Therefore, as part of any analysis in issuing G.O. or leaselrental bonds for solid waste needs, a debt afford study is required. The purpose of such a study is to match a local government’s needs with available resources. A determination of a local government’s current position in terms of various economic and debt ratios is necessary. By reviewing how much debt a local government has outstanding, and how much is expected to be issued over the next five years, an assessment can be made of how much additional debt issuance capacity is available.

Net tax-supported debt includes all long-term liabilities of an issuer, less self-supporting debt, plus overlapping debt. Long-term liabilities may include items such as leases, bond anticipation notes, guaranteed debt, and contingent liabilities, in addition to normal bonded debt. The criteria for calculating a local government’s net tax-suuuorted debt position differ from the criteria for calculating a local government’s legal debt position. For example, debt paid from special assessment charges (as is most water and sewer debt) is excluded from a county’s legal defmition

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of debt, but is frequently included in the calculation of net tax-supported debt. A contingent liability, which is a category often used by financial analysts for resource recovery debt, would also not legally be considered debt, but could be included in the local government’s tax-supported debt position.

A debt afford study usually organizes its finding by (1) wealth indices, (2) debt indices, and (3) future borrowing plans. It is only through the combined analysis of these three factors that a local government’s overall debt position can be evaluated. The findings of the study will clarify the current and future debt position of the local government based on the best available information. Total debt as a percentage of the fair market value of property in a local government (debt burden) and debt per capita are two commonly used ratios to assess the manageability of debt levels. The percentage of debt retired within ten years, or payout, is another useful measure. Analysts look for above-average or average payout as an indicator of debt afford. The final piece of information which is important to this type of analysis is the level of future borrowing expectations. Although future issuances are primarily based on each local government’s capital improvement plan, it should be noted that sometimes local governments project their future borrowing plans based on historical practices rather than on capital improvement plans. Results of the debt afford study will assist in deciding how much of future solid waste needs will be financed through bonds versus pay-as-you-go funding and in determining the need for self-support.

Procurement Options

There are major differences in the ownership and operation structures available for solid waste facilities under the Tax Reform Act of 1986. Basically, the issue of utilizing a procurement alternative concerns cost and the assignment of risk. Although traditional methods of municipal finance and provision of services continue to be important, responsible municipal officials should be aware of the range of alternatives available, their requirements, advantages and disadvantages. This will allow a reasoned evaluation of the alternatives and the selection of that alternative (or combination of alternatives) which is in the best interests of the municipality, its citizens and waste generators.

The following sets forth the major alternative structures and the key differences between them on such major business issues as the ability to enter into long term energy or materials contracts with predictable prices, risk allocation, the availability of tax-exempt financing, and the price at which the municipality can ultimately acquire the project.

Three standard public procurement approaches are discussed below:

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- (1) A Traditional or Architect and Engineer (A&E) method whereby a project is municipally

owned, operated and financed;

(2) A Turnkey method where a project is municipally owned, but built and operated by a private vendor; and

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(3) A Privatized Full-Service approach where a municipality establishes a full service contract with a private vendor to own, operate and finance a project.

While these outline the basic available spectrum, or range, of procurement approaches, it by no means exhausts the various permutations of procurement approaches often found in more complex facility procurement. Certain unique procurement parameters will be present in all projects, and the following is intended to focus on the principal nature of these approaches.

Traditional A&E Approach: Municipally Owned, Operated and Financed

The A&E approach is frequently used to procure more standard public works improvements such as government office buildings, schools, water and wastewater treatment plants. This approach involves the use of two consecutive procurement; the fmt is for a design engineer, and the second is for actual construction in accordance with the design prepared by the selected design engineer of the first procurement. The selections are generally made according to fairly rigid, low-bid laws goveming local public contracts of that type. A third entity, usually the public body doing the procurement, is then responsible for facility operations.

The A&E approach puts almost all of the project risks on the public entity doing the procurement. There is limited accountability by any other single entity for the correct design, construction, and eventual processing or disposal performance of the facility. The basic structure of this procurement option is that a municipality is in charge of the design, construction funding for (e.g., issues bonds) and ownership of the solid waste facility which is then usually operated and maintained by public sector employees. The reasons that have caused municipalities in the past to provide solid waste services and facilities themselves will cause municipalities to continue to do so. This is especially true of municipalities which have extensive solid waste disposal experience or own their own electric utility. However, reasons such as those set forth below and the ability to place part or all of a project in the hands of a third party will cause the turnkey method or private vendor "full-service contract" option to be used in many instances (discussed in greater detail below). This is especially true for municipalities that are new to the solid waste industry, or are implementing a system component for which they have no operating experience. The mere presence of such options may provide a degree of competition for comparison which will allow municipalities to compare and perhaps improve their provision for such services.

Not all the advantages and disadvantages described below will apply to every project. And often there are intermediate possibilities between the "pure" examples given here where solely a municipality or solely a private party provides a service.

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Advantages of the traditional A&E procurement approach include:

It provides for continuance of traditional, well-established methods of operating. It is typically well-understood by all involved, with little uncertainty. It provides significant competition due to a large number of vendors competing on similar and well understood terms where the vendors are not required to give extensive guarantees. It can be the least expensive method for a municipality. There are fewer impediments to tax exempt financing; the revenues are not shared with a private party; the number of partiedtransaction costs are minimized; operating costs are lower due to exemption from state, federal and local taxes; there are frequently lower pay scales than in the private sector, and there is no need to make "profit." It maintains direct control of vital municipal service. The municipality has direct ownership and control of the project, its employees and service. It is responsive to local needs. It is the most direct means of seeing that the public interest is served. Low cost of capital: municipality can issue bonds at tax exempt rates; bond markets can provide large amounts of capital with substantial interest rate competition. Favorable public perceptiodattitude towards municipally provided service: goal is to serve public, not just to make a profit.

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Disadvantages to this option include:

Municipality bears most of the risks (design, construction, operation, performance expectations, financing risks). May be unable to evaluate or is unwilling to take on these risks, especially if it is relatively new to the solid waste industry (e.g,, MSW composting). Requires largest commitment of scarce municipal managerial and executive timdresources. This can be exacerbated if the solid waste, resource recovery and energy areas are new to the municipality. Inability to issue bonds due to IegaYpolitical restrictions. Issuing bonds may affectlreduce remaining bonding capability of the municipality. Procurement, competitive bid, voter approvals of site selection and bond process may be slower than private sector equivalents. Cost of municipal employees may be effectively higher due to significant pension and other fringe benefits; prevailing wage or union requirements; and civil service and comparable protection for public employees.

Turnkey Approach: Municipally Owned, Vendor Built, Operation Flexible

The turnkey approach shifts certain accountability for design and construction onto one entity which is not present in a standard A&E approach. A turnkey facility generally is operated by a different entity than the design and construction contractor. This entity could be the municipality or a different entity brought in specifically for operation of the facility. The problem of sustaining performance levels during operations can lead to cross-claims, resulting in the public sector still bearing considerable operational performance risks.

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The tumkey method falls between the traditional municipal development, ownership and operation of a project and a "privatized" full-service contract for the development and operation of a project. The basic structure. of the turnkey approach is that a private vendor will design, build, (and possibly) operate and repair the project and assume many of the risks should the project not operate as expected. The municipality owns the project, finances it, and (perhaps) helps operate and repair it. This approach is accomplished through at least four scenarios:

3)

A design/build/operate contract with a vendor; An installment purchase by the municipality from the vendor that built (and continues to operate) the project; A municipal finance lease by the municipality (who leases the project from the vendor that builds and operates it); and A lease by the municipality to the vendor that built the project to operate it for the

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municipality.

The altemative of the municipality owning, leasing or purchasing the project with the third party vendor building and operating the project has forerunners in the energy industry, but is newer in its application in IMSWMS. It provides an attractive altemative for the municipality in that many of the risks of poor construction and/or poor operations can be shifted to the contractor who is best able to evaluate, assume and control these risks, while minimizing the disadvantages to the municipality of full-service development and operation. The contracts between the vendor and the municipality can either be cast as a design/build/operate contract, finance lease/installment purchase contract, or municipal finance lease, among other alternatives.

The advantages to this procurement approach include:

It, in general, allows the municipality to obtain many of the advantages of third party development and operation of solid waste projects without many of the disadvantages of a tax-oriented full-service privatized approach. It allows the municipality to get the experience in design, construction and operation of a vendor specializing in the industry. It shifts more of the risks away from the municipality and onto the vendor. It avoids artificial constraints imposed by the tax laws in a tax-oriented full-service privatized approach. The vendor typically assumes the risk that the facility will not be designed or built correctly or will not operate as expected as these are matters in which the vendor is experienced and which it can largely evaluate and control. It avoids the municipality only being able to obtain the project at the end of the contract with the private party at its then fair market value (required by tax laws on a tax-oriented privatized approach) and hence the municipality likely potentially having to "pay twice".

The disadvantages to this procurement approach include:

The private sector tax benefits present in a fully privatized approach are lost. In retum for the vendor taking many of the risks of poor construction or poor operation, the nominal contract price to the municipality will be increased.

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Private parties profit motive may conflict with and may jeopardize the goal of the municipality to serve the public interest. Private parties will usually not be regulated. Only "regulation" will come from service contract with municipality which may not cover all eventualities which will occur over the 10 - 20 year term of the contract. Prevailiig wage and other restrictions applicable to public projects may apply to the private operator. PoliticaVorganized labor opposition if existing municipal employees are displaced by private employees. Inability to have restrictions on negotiated contracts for service when complicated structure and non-price concerns make competitive bid process inappropriatddifficult to

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apply.

Privatized Approach: Full Service Contract with Private Vendor

The full-service, or privatized approach puts accountability on a single private entity for the design, construction gnJ operation of the facility. The full-service approach has historically been used for privately owned facilities, but this does not have to be the case. The essential ingredients are that private system vendors respond to an RFP by submitting proposals to design, build, operate and possibly own the facility under a contract with the municipality.

The basic structure for this procurement approach is an arrangement whereby a private vendor has a long-term contract with the municipality to provide certain waste disposal services. The vendor has total responsibility for the ownership, design, financing, construction, operation, and maintenance of the facility over the life of the facility. In some cases, the vendor is required to provide a site, as well. The vendor pays all costs associated with the project, including financing it. The municipality pays a tipping fee to the vendor in return for the project's service. Typically, the vendor is completely responsible for providing the service, while the municipality determines the size of the project and its performance standards.

A privatized approach can be a good approach and has been used on a number of projects in recent years. Although its tax advantages have now been significantly reduced, it can sometimes still lead to a lower initial tipping fee than the other options. An event that significantly changed the attractiveness of this approach occurred with passage of the Tax Reform Act of 1986. The Act created offsetting changes for tax-oriented solid waste contracts. Virtually all tax benefits became less attractive and, along with it, the attractiveness of this option due to:

1) Lower tax rates; 2) 3) 4) 5 )

Passive loss limitations for non-corporate taxpayers; Limited deductions during construction (interest must be capitalized); Alternative Minimum Tax (AMT) provisions; and Substantial reduction in tax benefits if tax-exempt debt is used.

On the other hand, passage of the Act allowed for very rapid depreciation for many waste facilities (5-7 year, 200% declining balance). This tax-oriented approach is often disliked by municipalities because the restrictions for the private vendor to obtain maximum tax benefits prevent the municipality from operating or controlling major waste disposal projects which are

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critical to the municipality and to the public interest. Not all of the advantages and disadvantages listed below apply in every instance; especially in intermediate situations where maximum private sector tax benefits are not sought, private participation is; therefore, diminished and municipal participation enhanced.

The principal advantages of this procurement approach are:

It minimizes long-term demand on the municipality (managerial time, etc.). The municipality’s primary obligations are at the start of the project to structure the arrangement and select the private vendor, and then to make payments and monitor performance over the life of the project. The beginning, or structuring, of the project is the most critically important as all the contracts are developed which dictate the parameters of the relationship between the municipality and vendor for the next ten to twenty years. It may provide for a less complex procurement: the municipality contracts directly for a specific solid waste service rather than having to put the project together itself. It often provides means to accomplish a project where the municipality otherwise lacks funds or does not want to issue debt. There is often a greater perceived efficiency with the private sector than with the municipality due to profit motive, competition, flexibility, and the ability to move quickly to put projects together. It avoids adding employees to municipal payroll which can have an adverse public perception, with associated difficulties to layoff or transfer employees if change is needed. The private vendor can more easily pay the high wages necessary to get the skilled technical people necessary for the best operation of a complex project. It can remove solid waste projects from certain political influencdcontrol and provides some insulation to politicians from responsibility for the project (particularly if it goes away). It may provide potential flow through (in terms of reduced service fees) to the municipality of private sector tax benefits (e.g., depreciation and deductibility of interest). Depending on the structure of the arrangement, a tax-oriented service agreement can provide the private vendor with the greatest tax benefits which can result in lower costs to the municipality. Extemal enforcement of compliance with tax requirements effectively place most of the project risks on the private vendor. It supports public perception that the private sector should supply a service rather than a municipality if it can do so on competitive terms.

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The principal disadvantages to this procurement approach are: -

Although changing, a private sector provision for solid waste disposal services is newer and can be more difficult to structure than traditional methods. There is more uncertainty and risk due to lack of long-term experience with this method. Inexperienced or poorly advised municipalities can end up with few of the benefits, most of the risks, and possibly in court. The risks may not be shifted away from the municipality. Risks do not necessarily follow ownership, and the municipality will still be responsible for added costs due to changes

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in law, especially due to tightening of environmental standards. As a practical matter, the municipality will still be held responsible by its citizens if problems occur, yet will have little, if no, control. And the municipality may have to step in to provide essential solid waste services or provide funds if the project loses money, or the vendor fails to perform

Due to tax requirements, at the end of the contract term, the private vendor will own the project even though the municipality has paid as much or more than if the municipality issued bonds itself. The municipality will either have to purchase the project at fair market value or continue to make payments to the private paty in order to use it. Therefore, the project could be paid for twice. The municipality will have to comply with certain stringent tax requirements, and, as a result, this could cause the municipality to lose its ability to control the project. If the contractual arrangement is chosen mainly for tax reasons, undue focus by the municipality on private sector tax advantages may lead to unnecessary complexity, and costs, and potentially, to major problems. This focus can be in conflict with other operational goals. Substantial involvement of the private party (with its costs to cover) will increase the total cost to the municipality. It stipulates removal of an important public service from direct public control. Municipality responsiveness to its citizens’ needs will be lessened. The profit motive of the private vendor may conflict with the goal of the municipality to serve the public interest. There can be politicallorganized labor opposition if existing municipal employees are displaced by the private sector. Prevailing wage and other restrictions applicable to public projects may apply.

as required, or goes bankrupt. ~~

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If a private project is structured to obtain maximum federal tax benefits, the service contract with the municipality must be for the operation of a solid waste disposal facility serving some or all of the residents of one or more units of government where substantially all the solid waste comes from the general public. Accordingly, the service contract must meet the following tests:

The municipality may not operate the project. For example, the municipality only determines the performance standards for the project and otherwise has little control over it. The municipality may not bear a significant financial burden if the contract is not performed (with certain exceptions). The municipality cannot receive any significant fmancial benefit if the operating costs of the project are less than the standards in the service contract (less than expected). The municipality may only have an option to purchase all or part of the project at fair market value at the end of the contract. The municipality can have the right to inspect the project; exercise any sovereign powers (e.g., condemnation) with respect to the project; have the right to act if the private party breeches its contract; and allocate between the private vendor and municipality the risk of any changes in law (environmental andor tax).

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Taxes

General Revenue and Sales Tax

Many smaller MSWMS are funded through general revenues. This can be from property taxes or from a sales tax. Frequently, individual users don’t pay any additional amount to receive solid waste management services, or those services are not separately identified on the tax statement. Consequently, the taxpayer is not aware of MSWM services costs and therefore thinks the services are “free”. This is the least favorable way to fund a MSWMS. As citizens become more and more sensitive to tax issues, this method of funding is becoming less popular. Tax funded systems don’t show citizens the true cost of MSWM. As costs increase citizens only see increases in their taxes, but it’s difficult to assign the cause of the increase. Another problem with this type of funding is it opens up the governmental entity to accusations of unfair competition with the private sector. Using tax dollars to support programs in direct competition with private sector enterprises is illegal in some states. Funding sources that tie the type and amount of funding directly to the type and amount of service provided are usually preferable.

Single Purpose Taxes

A single purpose tax is a tax levied to fund one activity. Some states have provisions for a special MSWM bill levy support to MSWM activities within the area. A special MSW sales tax can be initiated in many areas to support solid waste activities.

Single Item Taxes

Single item taxes or fees are taxes on individual items to help offset the cost of MSWM. Besides raising revenue, single item taxes are often an attempt to influence consumer purchasing and behavior and manipulate the marketplace. A special tax on virgin newsprint for example, may raise revenues for recycling programs and encourage the use of recycled newsprint. Often the revenues from these taxes are specifically earmarked for the management of waste resulting from the product. Sometimes the revenues are used for general MSWM activities. Items taxed may include:

Virgin newsprint Beverage containers Tires Canned goods Newspapers Milk containers Paperboard boxes Plastic pop bottles Disposable diapers

Cigarette packaging Soft drinks Glass containers Malt beverage containers Soaps and Detergents Petroleum products Cars Car batteries Appliances1o

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Single item taxes can be imposed at several levels in the marketplace. Basic products such as newsprint can be taxed at the manufacturing or production level. This may have an adverse effect since the tax is passed on to consumers outside of the tax area, forcing local industry to compete with companies that may not have the same tax burden on their product.

Single item taxes imposed at the retail level are paid by all consumers in the market place. All manufacturers' products, whether local or out-of-state are taxed the same. Local industries selling their products to consumers outside of the tax area are not penalized and can compete on a level playing field. This is an important distinction at a time when competition between communities for quality industrial bases is so fierce. Companies will avoid communities with tax structures that adversely affect their competitive position.

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Gross Sales Taxes

Gross sales taxes are taxes imposed on products, industries, or product lines and collected as a percentage of the gross sales. Gross sales taxes are similar to single item taxes in that they are used to discourage the use of certain products, as well as to raise revenue. These taxes are sometimes known as litter taxes. Examples of gross sales taxes are: Rhode Island's tax on carry-out fast food establishments ($125 per million dollars of gross revenue), and New Jersey's Clean Communities Tax (.0225% of retail sales, .03% of wholesalehanufactwe) includes beverages, cigarettes, food groceries, sundries, tires, newsprint, magazine stock, paper products and packages." By placing these taxes on in-state sales only, in-state business are not placed in a detrimental competitive position with out-of-state competitors.

Disposal Taxes

Disposal taxes are taxes collected at the point of waste disposal, either during collection, or at the disposal site. Disposal taxes are used in communities with private collection or MSW disposal facilities. Local government can use disposal tax revenues to support MSWM programs such as recycling, source reduction, and solid waste education programs. Regulatoq cost associated with MSW facilities are often funded through MSW disposal taxes. Disposal taxes can take several forms. There can be a per unit tax, such as a flat amount per cubic yard or ton of MSW. Disposal taxes can be a percentage of gross sales. Some disposal taxes take the form of licensing fees, inspection fees, or regulatory review fees.

Host Fees

Host fees are fees paid to the local government jurisdiction in return for "hosting" a private solid waste facility within their boundaries. Host fees are usually negotiated at the time the private company sites the facility. Host fees are contractual arrangements between the local government and the private firm. Most host fees are structured as a percentage of gross sales, although other forms are open to negotiation. Host fees are justified as revenues required to relieve impacts caused by the facility.

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User Fees

Flat Rate Fees

Flat rate fees are user fees charged to customer at a given rate, with no consideration to the volume of solid waste handled. Flat fees are easily administered since every customer is charged the same amount. Collection rates are often charged a flat rate per month. Some restrictions often apply to the amount of trash accepted, but it's usually well beyond the amount of trash normally generated.

Flat rate fees are less common at disposal sites, but are used with some frequency in rural areas. Some disposal sites sell annual disposal permits which allow the bearer unlimited access to the disposal site for twelve months. other sites have a single entrance or tipping fee, regardless of waste volume. This type of fee is paid each time the customer uses the disposal site. Flat rate fees give little incentive for citizens to reduce the amount of waste they generate. Quite the opposite, the more waste generated, the better the deal is for the consumer. The flat rate fee system has been criticized as doing little to control the generation of solid wastes."

Variable Rate Fees

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A Variable Rate Fee (VRF) is a service charge per unit of solid waste generated or disposed. Commonly charges are levied per ton or per cubic yard of solid waste. Special wastes are often charged a single rate, such as a set charge per tire or per appliance. VRF charges are the most popular form of user fee for disposal sites.

Many collection systems are switching from flat rates to VRF charges. "Pay-as-you-throw'' gives consumem an understanding of the costs for the MSWM service they receive; a financial incentive to generate less solid waste; and to look to altematives to disposal. This allows the fee to not only be a source of revenue, but a method of public education. A drawback to charging per unit during collection is the tracking of costs and assigning them back to the customer. Collection personnel must record the amount of trash left on the curb by each customer, resulting in a complicated accounts receivable systems and slower trash pick up. Cities have found creative ways around this problem. One Midwestem city only picks up trash in bags sold by the city. Bags are sold at a price that includes the cost of disposal and no other disposal fees are charged the customer. The fewer bags the customer uses, the less is paid for disposal costs. This same method can be used by selling disposal stickers to customers. Only trash in bags with the disposal stickers are picked up by collection personnel. As with the bags, the fewer stickers used, the lower the disposal costs.

Using VRFs to change consumer behavior is only effective if the consumer can influence their costs by their habits. VWs at the disposal site, but flat rate fees for collection won't change consumer behavior. Regardless of how much the disposal site raises its fees per unit of solid waste excepted, if collection is billed at a flat rate there is no incentive to change solid waste generation habits. Only by manipulating the fee paid directly by the customer can customer habits be changed.

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Revenues From the Sale of Resources

Revenues from the sale of resources, either recyclables or energy can help offset the cost of operation. Prices for recyclables are negotiated and subject to market fluctuations. Sale of energy can be negotiated on a longer term basis than the sale of secondary materials and is usually done under a contractual agreement with the purchaser of the energy. Sale of resources can supplement other revenues, such as tipping fees, but cannot support the full cost of solid waste management systems. As markets develop this may change, but revenues from these sources should be considered secondary sources of funding.

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Debt Financing

Debt financing for public projects is a complicated process to be done by financing specialists. RMSWM must have a working knowledge of debt financing, but l i e the doctor who treats himself, the R M S W M who single-handedly prepares his own financing has a fool for a client. It's important to develop a working relationship with a competent fmancial advisor experienced in municipal finance. This chapter is an overview of govemment debt financing, but restrictions and rules goveming local government debt financing vary from state to state.

Most government debt fmancing is done through the issuance of bonds. Bonds are loans to a governmental entity that are sold to individual investors for a specified rate of return. Bonds are usually sold in face value denominations of $1OOO. Bonds have a limited tem, often twenty years or more. Just like borrowing money from a bank, bonds cost money. Interest must be paid to investors so they will buy the bonds, loaning you the money. The interest rate required for a bond issue can make or break a project and is probably the single most important factor when putting together a bond issue. Many factors affect the interest rate of a bond. First the economic climate at the time of issue. Bonds must be competitive with other investments available at the time of issue. As risk increases, investors demand a higher return on their investment. Risk is determined by many factors: how the entity intends to pay off the bond, the technical risks of the project, the possible environmental risks of the project, the proposed economic returns of the project and the management experience of the entity. Bonds are rated by bond rating frms, such as Standard and Poors and Moody's, based on their relative risk. Lower rated bonds require a higher interest rate.

Yields on investments fluctuate constantly.

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Short Term Debt

Short term debt financing is used to cover cash flow shortfalls due to a lag in revenue flow. These are usually paid back within the same fiscal year.

Tax Anticipation Notes (TANS) Tax anticipation notes are used to cover a cash flow shortfall from a lag in tax collection. These are short term loans, often made with a local bank and secured by the future incoming tax revenues.

Revenue Anticipation Notes (RANs) Revenue anticipation notes are similar to TAN'S, however they are secured by anticipated future revenue. Revenue can be from intergovernmental sources, such as a federal grant, or from anticipated user fees.

Bond Anticipation Notes (BANS) Bond anticipation notes are used to provide quick start up cash, or to support a project while waiting for a more favorable interest rate on a bond issue. BANS are secured by the proceeds of the future bond sale.I3

Credit Enhancement

Credit enhancement can lower the cost of interest for a bond issue. The purpose of credit enhancers is to lower the risk for the investor. Credit enhancers are techniques to buy into a better credit rating. Credit enhancers include bond insurance, bank letter of credit, or efficacy insurance.

Tax Exempt Bonds

Since 1913 interest on state and local debt has been exempt from federal income taxes. Interest income on municipal bonds is usually exempt in the state where issued, but taxable when received in other states. This tax exempt status greatly enhances the attractiveness of municipal bonds to investors. Even with a lower interest rate, the actual yield to the investor may be higher than taxable investments, depending on the tax savings to the investor. Tax exempt bonds are available for government owned and operated facilities, with some restrictions. Federal law will allow tax exempt status to a government owned facility with a private operator only if the contract is terminable by the governmental unit after three years. A maximum of 10% of the proceeds can be used for private party facilities (if at least 5% is related to the purpose of the facility). Privately owned and operated facilities can be financed with tax exempt private activity bonds (industrial activity bonds) if: a) the bonds are within the state volume cap, or b) if the facility is leased to the private party for 20 years or less with a purchase option at fair market value at time of exercise. l4

Types of Bonds

General Obligation Bonds

Both G.O. bonds and municipal service agreement bonds are ultimately secured by general fund revenues. A G.O. pledge is usually (although not always) stronger from a bond holder perspective than a municipal service agreement pledge. This is because even though both pledges

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may be secured by property taxes, a municipal service agreement bond is more likely to be tied to the success or failure of the project than a G.O. bond, and a municipal service agreement bond does not have the local government’s unlimited taxing power behind it.

The impact on the local government’s debt statement would be the same for both a G.O. bond and a municipal service agreement bond. In a municipal service agreement bond, the local government would not be the issuer of the debt, and the exact nature of the security would vary from case to case, but most credit analysts view a municipal service agreement as a long-term liability. That liability is, therefore, usually reflected in the local govemment’s overall net debt position. With a G.O. bond, the local govemment would be required to levee property taxes at whatever level is necessary to pay debt service on the bonds. This is known as a general obligation, unlimited tax pledge (G.O.,U.L.T.). A general obligation, limited tax (G.O.,L.T.) pledge may also be made.

Although all sources of general fund revenue may be used, the legal pledge will be property tax revenues. Therefore, if there are any revenue shortages, the difference will be made up from property taxes. Revenues for debt service are transferred from the general fund directly into a debt service fund to pay debt service on the bonds. As can be seen, the source of revenues to pay both debt service and operations is any general fund revenue, but ultimately property taxes for a G.O. bond. The flow of funds is fairly simple. G.O. bonds offer bond holders the broadest and, therefore, the strongest available security. This means that bonds issued with a G.O. pledge will generally have a higher credit rating than municipal service agreement or revenue bonds. With G.O. bonds, a bond holder is not reliant on the viability of a project in order to get paid. As a result, G.O. bonds have the advantage of selling at a relatively low cost to the issuer. The lower the risk, the lower the interest rate on the bonds. As an example, a G.O. bond may be rated one full rating category above the other options presented which, in today’s market, results in 25 to 30 (0.25 to 0.30 percent) basis points savings. A general obligation structure is often familiar to voters, and the obligations are clearer and more easily understood than with other more complex structures. Finally, the issuance of G.O. bonds is relatively uncomplicated in terms of legal documents. For example, a trust indenture, lease agreement, or feasibility study is unnecessary with G.O. bonds.

To summarize, G.O. bonds offer the following advantages:

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Strong bond holder security Relatively low interest rates, thus decreasing costs of issuance Familiar, easily understood obligations; and uncomplicated legal structure. However, there are several areas of concem when issuing G.O. debt. These include: (1) the potential negative impact on the local govemment’s bond rating; (2) the ability of the local government to comfortably service the debt (practical debt limitations); and (3) legal debt limitations. Another area of concem is the increased amount of legal risk which a local government may be assuming when issuing G.O. bonds. With a G.O. bond, the local government usually promises to pay the bond holders regardless of the status of the project. In other financing options, another party or the bond holder may assume a portion of that risk. In addition, often a local government will need to seek voter or state general assembly approval for the issuance of G.O. debt.

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To summarize, the disadvantages of issuing (3.0. debt are as follows:

Possible negative impact on the local government’s credit rating; Possible negative impact on financial operations; Strain on legal debt limitations; and Increased level of risk and responsibility.

Municipal Service Agreement Bonds

Bonds that are backed by municipal service agreement payments are probably the most common method of financing used for solid waste projects. The bonds are issued by an Authority or Commission rather than a county and secured by a pledge of county revenues as outlined in a lease and/or other contractual agreements. The pledge may be an annually renewable appropriation or a long-term commitment. The source and extent of county revenues pledged may vary, but is typically connected to a tip fee formula for a guaranteed minimum tonnage of solid waste. Because the counties guarantee to provide the solid waste, the establishment of legal flow control is an impoltant credit consideration. Without flow control, the county may find that haulers or residents dispose of garage elsewhere.

In some cases, the obligation to pay the tip fee represents a general obligation of the local government. The contracts and agreements between the issuing authority, the vendor/operator, and the local government will determine the tipping fee formula and which parties assume which risks (such as uncontrollable circumstances and labor strikes). Whether or not the local government is obligated to pay tipping fees despite interruption of service varies according to the contract and the cause of service interruption.

The obligations of a participating local government to the project would be contained in a service agreement. The local government would pay for the cost of the project in accordance with the service agreement, which would also define the waste disposal services to be provided to the local government. Because the service agreement is the mechanism for providing credit support for the bonds, it is very important that it be clearly authorized by state law. The enabling legislation typically contains special provisions authorizing counties to enter into multi-year contracts with those agencies.

The primary advantages of a service agreement structure is that the debt will not be included as part of the county’s legal debt limit, even though the debt may be included as part of the local govemment’s overall net tax supported debt position. This is because the rating agencies define debt very broadly. Numerous obligations which are not legally considered to be debt are

Investors Services has become more conservative in its treatment of resource recovery debt and is including it as part of overall net tax supported debt in virtually all cases. Standard and Poors has a somewhat less conservative position, and the inclusion of the debt depends on the exact nature of the legal security for the bonds. In addition, depending on the structure of the service agreement, a portion of the risk of project nonperformance may be assumed by a vendodoperator rather than the local government. By not assuming a project completion risk, the debt may have a less severe impact on the local government’s credit rating. This is because the rating agencies will closely examine the degree of risk in assigning the rating. The credit structure of a

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municipal service agreement may be somewhat weaker from a bond holder’s perspective and, therefore, interest costs may be higher than under a (3.0. pledge. At the same time, financial analysts would include these bonds in a local government’s net tax supported debt position.

The contractual arrangements necessary under a leaselrental financing are fairly complex and the local governments may have less control of the facility being fianced, although not necessarily depending on the contracts. Documents which may be required for this type of financing include (1) a trust indenture; (2) lease agreement; (3) sublease agreement; (4) loan agreement; ( 5 ) mortgage agreement; (6) feasibility study; (7) service agreements; and (8) energy contracts.

Revenue Bonds

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Under this financing scenario, bond holder security is provided by revenues from the project being financed. Because this is relatively risky for a start-up project, revenue bond financing sometimes involve a broader, system-wide pledge of revenues. For example, tipping fees from existing landfill operations with an established history of collection may be pledged in addition to expected revenues from the project beiig financed. In a revenue bond financing, it is even more important to the bond holders that the counties have flow control of solid waste than in a municipal service agreement financing. This means that the local governments can legally require all solid waste within their boundaries to be delivered to a specified location and enforcement provisions are available in cases of noncompliance. Flow control is an important credit consideration because a lack of garbage will cause a revenue shortage, and ultimately, a default on the bonds. Many local governments have historically relied on economic flow control. Legal enforcement mechanisms have not been necessary because the local government’s landfill is the cheapest available waste disposal site. Tipping fees often increase dramatically after the building of a modern solid waste facility. Even though the facility may be the least expensive long-term solution to waste disposal, there may be an interim period in which other disposal sites are less costly. Therefore, legal flow control should be in place before the building of the facility. The source of revenues in the case of a modern solid waste facility is usually from tipping fees at the facility. Should the facility cease operating for any reason, a backup revenue source (such as landfill tipping fees) is important.

There are two types of tax-exempt revenue bonds: (1) Government Purpose Bonds (GPBs); and (2) Private Activity Bonds (PABs). GPBs may be used to finance publicly owned projects that meet certain structural criteria including (i) the project is publicly owned; (ii) the project’s energy output (in the case of waste-to-energy) is sold to a publicly owned utility; and (iii) the term of a service contract with a private operator is five years or less.

PABs are subject to certain restrictions under the Act, but allow a municipality to sell energy (in - the case of waste-to-energy) to a private utility, and to enter into a long-term service agreement with a vendor. PABs are the only tax-exempt fmancing alternative for privately owned projects, and state bond cap allocation must be available in order to finance a privately owned project with PABs. If sufficient bond cap allocation is not available, taxable debt may have to be used instead of tax-exempt debt.

In general, publicly owned projects financed with either GPBs or PABs are not subject to state bond cap allocations under most instances (GPBs are never subject to bond cap allocation

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requirements). Revenue bonds are also typically issued by an Authority or Commission. In order to be considered a pure revenue bond financing by the rating agencies, the bond issuing agency should be assigned flow control power by the local government and should levee the tipping fee charges directly to haulers or residents. If the tip fees are a pass-through charge from the participating municipalities to the Authority under a contractual arrangement, the rating agencies usually categorize the debt as a leadrental obligation rather than a revenue bond. A primary difference between a revenue bond financing and a municipal service agreement bond financing is in a revenue bond, customers usually only pay for services rendered. If there is a cessation of services, there is usually also a stoppage of revenues. In a leasdrental bond financing, one of the other parties usually agrees to cover most revenue shortfalls.

The difference between the flow of funds under a municipal service agreement and a revenue bond is primarily the source of revenues. Under a municipal service agreement, the source of revenues is county payments. Under a revenue bond, the source of revenues is a pledge of tipping fees and, in the case of resource recovery, energy revenues. The latter is a more narrow pledge of funds. If tipping fees and energy revenues are insufficient, the only backup source of funds is the debt service reserve fund. A bond holder may not look to other local government revenues (such as tax revenues). A pure revenue bond financing will be deducted as self- supporting from the local government’s debt statements. This is because a revenue bond has no claim on tax revenues or the general fund. If user fees are insufficient, the issuer may draw on a debt service reserve fund, and if the insufficiency continues, the issuer is considered to be in default under its trust indenture. The advantage to the issuer is that any revenue bond debt issuances will not negatively impact capital budgets or result in any negative impact on the credit rating of the county. There is little risk to the local government financially should something go wrong. From a practical standpoint, however, the risk is somewhat s i d a r to a general fund obligation since garbage removal is an essential service which must continue to be provided. Revenue bonds issuance is a relatively risky structure for bond holders, depending on the breadth of the system-wide pledge. It may, therefore, be difficult to obtain a satisfactory credit rating on the revenue bonds. It also represents a relatively inflexible structure from the local government’s point of view, in that project revenues must always be sufficient to cover project expenditures, plus allow for a certain margin of safety. This could cause a severe rate shock on customers who have been accustomed to garbage services being supported through the general fund.

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The most commonly used financing option for major solid waste projects is a municipal service agreement structure. The primary function of the variety of legal documents created under this scenario is to provide adequate legal protection to all concerned parties. Risk is therefore more evenly distributed among the local governments, bond holders, and vendors/operators. Debt issued under this option will be included on the local government’s debt statements, but the impact on the rating may not be as severe as for G.O. debt, depending on the details of the security structure. In addition, the local governments can avoid the possible rate shock involved with issuing revenue bonds by subsidizing costs from the general fund over a period of transition. The issuance of municipal service agreement debt does not preclude the local governments from structuring the debt to become self-supporting. After a proven operating history, the debt could be deducted from the local government’s overall net tax supported debt position.

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Private Activity Bonak

Private activity bonds are bonds issued in the name of a local government but which finance the acquisition of an industrial or commercial facility for lease to private enterprise. These carry a lower interest rate than corporate bonds, and can be tax exempt. Private activity bonds or industrial activity bonds allow a local government to help a private business get financing at a lower cost. The purpose of private activity bonds is to promote local economic development. Private activity bonds are often retired with the revenue generated from the facility. These are known as industrial revenue bonds.

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Corporate Bonds

Private companies can issue bonds through the securities market without any involvement from local government. These bonds must be registered with the Securities and Exchange Commission and are backed by the individual company. Private financing may be preferable in communities utilizing private sector waste services and where the company issuing the bond is eligible for a higher bond rating than the local government.

Tax Exempt Versus Taxable Bonds

It is advantageous for a local government to issue as much of its debt as possible on a tax- exempt basis. In today's market, tax-exempt debt would save at least 200 basis points (100 basis points = 1 percent) over taxable debt. One possible reason why taxable debt may be used is thatvolume cap allocation might not be available. In that instance, it would be recommend that the local government opt for a publicly owned facility. When issuing tax-exempt bonds, however, a portion of the cost of the project cannot be included in the tax-exempt financing; it must be fmanced either through a taxable bond issue or a cash equity contribution. The tax code requires that at least 95 percent of the net proceeds of all issues of private activity bonds be used for the tax-exempt portion of the borrowing.

For solid waste disposal bonds, this includes the processing of solid waste into heat or another usable form, but not into other products such as electricity. Thus, any costs associated with electricity production, such as the cost of turbines and interconnections on a waste-to-energy facility, are non-qualified or "bad money" costs. Cost of issuance are also considered bad money costs. However, whereas the total bad money costs that can be financed with tax-exempt bond proceeds is 5 percent, costs of issuance which are included in the 5 percent limit are limited to 2 percent. Typically, the total cost of the project that cannot be fmanced with tax-exempt bonds totals between 10 and 15 percent of the tax-exempt proceeds. In a privately owned project, the equity contribution can be used to cover the bad money costs. In a publicly owned project, the bad money costs would have to be covered either by a cash contribution by the participants or by taxable debt.

Variable Rate Versus Fixed Rate Bonds

The interest rate on fEed rate bonds is established at the time of issuance. Interest rates on later maturities for fmed rate bonds will be higher than the interest rates on earlier maturities in order to compensate the investor for assuming long-term market risk. The interest rate for variable rate

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bonds is adjusted periodically (daily, weekly, monthly, semiannually, or annually) to conform with current market rates. Variable rate debt is therefore considered to be a short-term obligation and, as such, typically has a lower interest rate than fixed rate bonds. At each interest rate reset date, bond holders have the option to put their bonds back to the issuer. The issuer must therefore pay for a bank liquidity facility to handle the puts and re-market the bonds. The cost of the liquidity facility will somewhat offset the interest rate savings achieved with variable rate debt. In issuing variable rate debt, the issuer assumes the market risk of increasing interest rates rather than the bond holder. Because of this risk, it is often recommended to use fixed rate debt over variable rate debt. Today’s market is particularly conducive to the issuance of fixed rate debt since long-term interest rates are relatively low right now and the yield curve is relatively flat (meaning that there is only a small differential between long-term and short-term interest rates).

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Other Types of Financing

Solid Waste Disposal Enterprise Funds

Enterprise funds are growing nationally in the solid waste management industry. It is generally recommended that solid waste local governments establish a solid waste disposal enterprise fund. This does not necessary mean that solid waste operations have to be entirely supported from solid waste fees. The general fund could continue to partially or even completely subsidize solid waste operations. The primary purpose of establishing the fund is to isolate all solid waste revenues and expenditures for purposes of accountability. The advantage of establishing a solid waste enterprise fund is that it enables each local government to accurately account for all solid waste revenues and expenditures. Without a separate fund for solid waste, it may be difficult to ascertain exactly how much solid waste operations actually cost. If the local government wishes solid waste operations to be self-supporting, a separate solid waste fund is a virtual necessity. If solid waste operations are funded from a user charge rather than property tax revenues, establishing a separate solid waste enterprise fund will also increase the likelihood of any debt issued for solid waste being deducted from the county’s debt statement as self-supporting debt.

Setting up a solid waste enterprise fund is primarily an accounting procedure. If the local government has landfill tipping fee revenues, they would naturally be deposited directly into a solid waste account. In addition to the tipping fees, most local governments need to transfer monies from the general fund to subsidize certain solid waste expenditures. Both operating and capital expenses should be paid from the solid waste fund. If solid waste bonds were issued as part of a larger G.O. bond issue, the amount of debt service necessary to pay the solid waste portion should be transferred to the necessary debt service account to cover the cost. A fund balance should be accumulated in the solid waste fund to mitigate the need for future tipping fee increases and to finance pay-as-you-go solid waste needs. A solid waste enterprise fund would essentially be the same as a water-and-sewer enterprise fund.

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- Equity Contribution

Equity contribution is a public/private partnership where a private company puts money into the project for a guaranteed return. This can be done by having a private contractor build and operate a solid waste facility for a specified term. Over the term of the contract, the contractor

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receives repayment with interest on his contribution, usually from facility revenues. At the end of the contract term the facility ownership reverts to the local govemment and the contract can be renewed, renegotiated or terminated.

Tax Increment Financing

As raw property is developed for industrial uses, its value increases. Since property taxes are based on the value of a property, new industrial development increases the tax revenue to local govemment. Tax increment financing is a technique used to encourage private development. The local govemment agrees not to increase property taxes on the development for a given period of time. The developer uses this tax savings to pay off the debt incurred during development. After the debt is paid off the tax rate is increased to its proper level, based on the improved value of the property.

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Soliciting Financing Options

There is no one best way to finance a solid waste system. Every community has different needs and a different culture. Most communities find a combination of financing methods to fit the special circumstances of their integrated solid waste system. This takes time. Proper financing can mean the difference between success and failure, and it is imperative that the solid waste manager carefully weigh all the available options.

VI. CONCLUSION

Implementing and maintaining a municipal solid waste management system can be one of the most expensive endeavors facing a rural community. A fundamental understanding of the prevailing factors affecting the management of financial resources is essential for the RMSWM. The intention of this Guidebook was to provide an overview of the complexities involved in managing financial resources in the solid waste sector. The overview provides the R M S W M with the necessary tools to guide in decision making processes that impact the MSWMS. Sound management of financial resources will benefit the rural community by maximizing the efficiency and effectiveness of the program, thereby providing guidance to unique economic problems afflicting many rural communities.

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REFERENCES

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Skouslen, K. Fred, Lagenderfer, Harold Q. & Albrecht, W. Steve. "Accounting and its environment". Financial Accounring. New York Worth Publishers, Inc. 1986. Page 15.

Municipal Finance Officers Association of the United States and Canada. Basic Accounting In Introductorv Governmental Accounting--Conceuts and systems. Chicago, It MFOA Career Development Center. 1982. Pages 4-6. -

Moore, Carl L., Lane K. Anderson, Jaedicke and Robert K., "Budgeting for Operations," Managerial Accounting. Cincinnati: South-Western. 1988. Page 377.

Moore, Carl L., Lane K. Anderson & Jaedicke, Robert K., "Financial Budget and Other Budgeting Approaches," Managerial Accounting. Cincinnati: South-Western Publishing Co. 1988. Page 455.

Moore, Carl L., Anderson, Lane K. & Jaedicke, Robert K. "Financial Budget and Other Budgeting Approaches." Managerial Accounting. Cincinnati: South-Western Publishing Co. 1988. Pages 453-454.

Ouchi, William G., "The Z Organization" Theorv 2. New York Avon Books. 1981. Page 79.

Commission on Government Productivity. Imurovinn Productivitv in Colorado State Government. Denver, CO: Office of the Governor. 1989. Page 5.

Ibid. Page 25.

bid. Page 35.

Montavon, Matthew & Shinn, Paul L., Taxing the Solid Waste Stream. Government Finance Research Center Government Finance Officers Association Washington, D.C.: GFOA. 1990. Page 39.

Ibid. Page 34.

Lifset, Reid & Chertow, Marian. Pav-as-vou-throw is the Solution to the Waste Management crisis. Governing. 1990.

Clark, Terry Nichols, DeSeve, G. Edward & Johnson, J. Chester. Financial handbook for mayors and citv managers. Van Nostrand Reinhold New York. 1985. Page 66.

Johnson, Mike, Attorney with Davis, Graham and Stubbs. "Selected legal issues regarding solid

options". Governor's Task Force on Integrated Solid Waste Management. Denver, CO. 1990. waste disposal in Colorado Presented to the sub-committee on access to solid waste disposal -

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APPENDIX A

Associations and Oreanizations

Air and Waste Management Association P.O. Box 2861 Pittsburgh, PA 15230 (412) 232-3444 (412) 232-3450 FAX (technical information exchange of air, waste and water management)

Aluminum Association 900 19th St. NW, Suite 300 Washington, D.C. 20006 (202) 862-5100 (202) 862-5164 FAX (educational, public and technical information on aluminum)

American Forest and Paper Association 11 11 19th St., NW, Suite 700 Washington, D.C. 20036 (202) 463-2700 (202) 463-2785 FAX (serves the forest industries and provides information on paper and wood products and paper recycling)

American Iron and Steel Institute 1101 17th St., NW, Suite 1300 Washington, D.C. 20036-4700 (202) 452-7100 (202) 463-6573 FAX

American Plastics Council 1275 K St. NW, Suite 400 Washington, D.C. 20005 (202) 371-5319 or (800) 243-5790

(serves public and private sectors- informational on disposal and recycling of plastics)

(202) 371-5679 FAX

Aseptic Packaging Council 1225 I St., NW, Suite 500 Washington, D.C. 20005 (202) 333-5900 or (800) 277-8088

(information on recycling aseptic boxes)

Association of Municipal Recycling Coordinators 147 Wyndham St. N, Suite 405 Guelph, ON NlH 4E9

(information on waste reduction, recycling, composting, household hazardous waste and public education)

Association of State and Territorial Solid Waste Management Officials 444 N. Capitol St. NW, Suite 388 Washington, D.C. 20001

(202) 333-5987 FAX

(519) 823-1990

(202) 624-5828 (202) 624-7875 FAX (represents state solid waste officials)

Battery Council International 401 North Michigan Ave. Chicago, IL 60611-4267 (312) 644-6610 (3 12) 644-6869 FAX (information on battery disposal)

Center for Plastics Recycling Research Rutgers University-Building 4109 New Brunswick, NJ 08903 (908) 445-3683 or (908) 445-4402

(plastics recycling) (908) 445-5636

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Center for Waste Reduction Technologies 345 East 47th St. New York City, NY 10017-2395 (212) 705-7462 (212) 838-8274 FAX (information on waste reduction, recycling and other alternative solid waste options)

Composting Council 114 S. Pitt St. Alexandria, VA 22314-3112 (703) 739-2401 (703) 739-2407 FAX (composting information provided for public and government)

Council on Packaging in the Environment(C0PE) 1255 23rd Street NW, Suite 850 Washington, D.C. 20037-1 174 (202) 331-0099 (202) 833-3636 FAX (technical and public information on packaging and related issues)

Council for Textile Recycling 7910 Woodmont Ave., Suite 1212 Bethesda, MD 20814 (301) 718-0671 (301) 656-1079 FAX (pre-consumer, post-consumer and producer textiles information, educational materials)

Energy Efficiency and Renewable Energy Clearinghouse (EREC) US Department of Energy P.O. Box 3408 Merrifield, VA 22116 (800) 428-2525 (703) 893-0400 FAX (information on waste-to-energy and waste reduction)

Environmental Defense Fund Recycling Campaign Coordinator 257 Park Ave. South New York City, NY 10010 (212) 505-2100 or (800) 225-5333

(solid waste management, recycling and educationaVpublic information)

Environmental Education Association, Inc. 1211 Connecticut Ave. NW, Suite 812 Washington, D.C. 20036

(212) 505-2375 FAX

(202) 296-4572 (202) 452-9370 FAX (recycling and waste alternatives education materials

Fibre Box Association 2850 Golf Rd. RoKig Meadows, IL 60008 (708) 364-9600 (708) 364-9639 FAX (serves mainly corrugated industries-provides technical and public information on paperboard and cardboard recycling)

Flexible Packaging Association 1090 Vermont Ave. NW, Suite 500 Washington, D.C. 20005 (800) 331-5652 (202) 842-3841 FAX (serves manufacturershuppliers of flexible packaging-bags, pouches, labels and wraps, such as paper, plastic film and aluminum foil-provides public information)

Glass Packaging Institute 1627 K St. NW, Suite 800 Washington, D.C. 20006 (202) 887-4850 (202) 785-5377 FAX __ (serves glass industries and provides public information on glass recycling, technical advances and legislation)

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Environmental Technology Council 915 15th St. NW 5th Floor Washington, D.C. 20005 (202) 783-0870 (202) 737-2038 FAX (serves hazardous waste treatment facilities and assists the state level on hazardous waste issues)

Institute for Local Self-Reliance 2425 18th St. NW Washington, D.C. 20009 (202) 232-4108 (202) 332-0463 FAX (helps cities and community developers make new products from recycled materials)

Institute of Scrap Recycling Industries 1325 G St., NW, Suite 1000 Washington, D.C. 20005 (202) 737-1770 (202) 626-0900 FAX (public information on scrap recycling-metal, rubber, glass and textiles)

Integrated Waste Services Association 1133 21st St. NW, Suite 205 Washington, D.C. 20036 (202) 467-6240 (202) 467-6225 FAX (provides information on all aspects of solid waste management-serves mainly waste-to-energy industries)

Keep America Beautiful Mill River Plaza 9 West Broad St. Stamford, CT 06092 (203) 323-8987 (203) 325-9199 FAX (litter and recycling information)

Mid-Continent Recycling Association 1200 Missouri Ave. Bismarck, ND 58506 (701) 328-5150 (701) 328-5200 FAX (recycling information)

Municipal Waste Management Association 1620 I St. NW 4th Floor Washington, D.C. 20006 (202) 293-7330 (202) 429-0422 FAX (serves solid waste municipal level in all aread

National Association for Plastic Container Recovery(NAPC0R) 100 N. Tryon, Suite 3770 Charlotte, NC 28202 (704) 358-8882

(trade association for PET plastic recyclers- provides public and technical assistance on PET plastics and recycling

(704) 358-8769 FAX

programs)

National Container Recycling Institute 1400 16th St., NW, Suite 250 Washington, D.C. 20036-2217 (202) 797-6839 (202) 797-541 1 FAX (recycling information and programs)

National Oil Recyclers Association 330 Madison Ave. New York City, NY 10017 (212) 292-3700 (212) 972-6569 FAX (serves oil recyclers and facilities)

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National Recycling Coalition 1101 30th St. NW, Suite 305 Washington, D.C. 20007 (202) 625-6406 (202) 625-6409 FAX (public and educational materials on recycling-plastics)

National Restaurant Association 1200 17th St. NW 8th Floor Washington, D.C. 20036 (202) 331-5900 (202) 331-2429 FAX (technical information on solid waste disposal for food service facilities- publications also available)

National Solid Waste Institute 11 1 E. Bulard Parkway, Suite 204 Temple Terrace, FL. 33617 (813) 985-3208 (813) 985-4192 FAX

Environmental Industries Association(E1A) National Solid Waste Management Association 4301 Connecticut Ave. NW, Suite 300 Washington, D.C. 20008 (202) 659-4613 (202) 775-5917 FAX (serves only private sector-publications also available)

Paper Board Packaging Council 888 17th St., NW, Suite 900 washington, D.C. 20006 (202) 289-4100 (202) 289-4243 FAX (information on paper board recycling and generation)

Plastic Bag Association 355 Lexington Ave. New York City, NY 10017 (212) 661-4261 (212) 370-9047 FAX (plastic bag recycling)

Plastics Recycling Foundation P.O. Box 189 Kennet Square, PA 19348

(plastics recycling information and technologies)

Polystyrene Packaging Council, Inc. 1275 K St., NW, Suite 800 Washington, D.C. 20005

(215) 444-0659

(202) 822-6424 (202) 371-1284 FAX (polystyrene recycling and packaging information)

Renew America 1400 16th St. NW, Suite 710 Washington, D.C. 20005 (202) 232-2252 (202) 232-2617 FAX @ublic/educational information on recycling, composting, landfills, waste-to energy and source reduction)

Scrap Tire Management Council 1400 K St. NW, Suite 900 Washington, D.C. 20005 (202) 408-7781 (202) 682-4854 FAX (information on tire management and recycling-publications available)

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Source Separated Composting and Organics Recycling Association(SC0R) 4218 Southwest Donovan Seattle, WA 98136 (206) 932-4621 (206) 932-0427 FAX (municipal and backyard composting)

Steel Recycling Institute Foster Plaza-Bldg. 10 680 Anderson Drive Pittsburgh, PA 15220-2700 (412) 922-2772 or (800) 876-7274 (412) 922-3213 (800) 876-7274 (technical and public information on steel recycling)

Solid Waste Association of North America (SWANA) P.O. Box 7219 Silver Spring, MD 20907-7219 (301) 585-2898 or (800) 677-9424 (technical library)

(municipal solid waste issues-policies, technical assistance and public information)

Technical Association of Pulp and Paper Industries(TAPP1) 15 Technology Parkway (Norcross) P.O. Box 105113 Atlanta, GA 30348

(301) 589-7068 FAX

(404) 446- 1400 (404) 446-6947 FAX (serves pulp and paper industries-resource center provides information and publications on pulp and paper technologies, generation and recycling)

Waste Management Institute Come11 University Resource Center 8 Business and Technology Park Ithaca, NY 14850 ~

(607) 255-1187 (607) 255-8207 FAX (provides technical and educational -

information on all aspects of waste management)

Hotlines and Information Services

EPA Small Business Ombudsman

(small businesses and waste issues)

Pollution Prevention Information Clearinghouse(PP1C)

1-800-368-5888

(202) 260-1023

RCRA Superfund Hotline

(publications and information of hazardous and solid waste regulations)

Solid Waste Assistance Program (SWAP)

(technical assistance and information on solid waste management and disposal- operated by SWANA with funding from US

(800) 424-9346

(800) 677-9424

DOE-NREL)

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