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FINANCING SOLID WASTE MANAGEMENT
IN SMALL COMMUNITIES
This report (SW-57ts) was written by
ERIC R. ZAUSNER
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Solid Waste Management Programs
1971
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For sale by the Superintendent of Documents, U.S. Oovcrnment Printing Office
Washington, D.C. 20402 - Price 25 cents
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FJNANCING SOLID WASTE MANAGEMENT
IN SMALL COMMUNITIES
Eric R. Zausner*
The solid waste management problems of our urban areas are becoming
recognized, and considerable effort is being made to design and implement
better methods of waste management there. Their large size and many
sources of funds facilitate the use of internally available managerial
talent or outside consultants to aid in planning and decision making.
In some respects, however, the problems of the small community
are even more pressing. In addition to technical problems, there are
i
financial difficulties related to the acquisition of funds to construct
and operate"!" facilities.
There are many reasons why small communities are having financial
problems. Public demand for better service and more stringent legislation
has greatly increased the need for more sophisticated and expensive waste
handling facilities. This coupled with the competition for funds by
numerous other sources (schools, police organizations, etc.) has resulted
in an acute lack of funds to finance solid waste collection and disposal
facilities. There are many financial techniques available, but their
"Formerly Chief, Management Sciences Section, Operational Analysis
Branch, Division of Technical Operations, Bureau of Solid Waste Manage-
ment.
^The financial aspects of actual disposal operations are discussed
in An Accounting System for Sol-id Waste Management in Smalt Communit-ies 3
Public Health Service Publication No. 2035-
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specific advantages or disadvantages to small communities must be made
clear. Failure to do this can result in excessive costs or perhaps worse--
failure to acquire the funds needed.
This paper will discuss the three major financing techniques (pay-
as-you-go, leasing, and long-term borrowing) as they apply to small
communities. More indirect methods, such as private contracting or
grants utilization, may also partially solve problems but are not con-
sidered within the scope of this report.
Pay-As-You-Go
Since this is one of the most widely used and understood techniques
available, only a brief discussion of its most salient features and
limitations vis-a-vis small communities will be undertaken.
Although commonly labeled "pay-as-you-go," this technique is in
reality "pay before you go." The funds required to finance new facilities
must be accumulated before the installations are constructed. Regardless
of whether a user charge or a general fund contribution is employed, the
money must be accumulated from past operations. Herein lies one of this
method's major drawbacks for the small community. To a large degree,
the problems of financing a solid waste management system have developed
rather suddenly, and accumulated funds for present and future needs may
be nonexistent. Unfortunately, "pay-as-you-go" usually cannot be started
today to buy needed facilities tomorrow. Herein lies the problem for
many large cities. In many small communities, however, waste collection
and disposal facilities are not really capital intensive. Sanitary
landfill can be used rather than incineration. Similarly, large numbers
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of packer and/or transfer trucks are not usually required. Therefore
the capital requirements may not be large; and a readjustment or
initiation of user charges to accumulate future replacement funds, in
conjunction with an immediate influx of money from the general fund
(to purchase equipment needed now) can succeed in making "pay-as-you-go"
a viable technique. To keep the method self-supporting, however, several
measures must be taken.
1. User charges must be periodically updated to offset increasing
expenses and equipment needs.
2. The planning required to maintain the user charge system should
be handled at the overall municipal management level, where adequate
talent can be afforded. As an alternative, a consultant can be re-
tained to perform the preliminary work and to effect periodic updatings.
3. If the administration of the user charge proves burdensome and
expensive, the problem can be solved by having the fee appear on utility
bills.
A. A strong and well documented public information campaign must
precede any upward adjustments in user charge rates or general fund
contributions. If this is not done, funds may be diverted to other
municipal operations at the expense of solid waste management. By their
nature, fire trucks or police cars are more attractive than garbage
vehicles.
In small communities experiencing rapid increases in population
or industrial growth (and consequently higher waste generation rates),
the "pay-as-you-go" method may not prove practical. It forces present
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citizenry to pay for facilities designed for future demands. If the
waste generation surges, straight user charge financing may place a
severe burden on the population. The people must then not only pay for
their own operating costs but also quickly accumulate the funds needed
for the construction of large and possibly expensive facilities. Under
these circumstances, user charges may become too high, and other methods
of financing would be more effective. In this case, general fund
contributions or another form of financing can be used to pay for all
or most of the initial costs. Future user charges can then support
annual operating expenses and debt amortization.
Leasing
For the purposes of this paper, leasing and leasing with an option
to buy will be considered together, even though they may differ with
regard to contractual agreements, equity, contract life, and many other
features (legal as well as practical).
Leasing is an external financing technique that can make the "pay-
as-you-go" method workable. In effect, a facility is acquired now by
a private firm, but municipal payments are postponed until after con-
struction and are spread over an extended period. This technique is,
therefore, particularly useful in financing expensive facilities when
they are intended for use by future citizenry; they are too expensive
to acquire outright; lack of time prohibits the accumulation of the
funds requi red.
In addition to being a simple way of postponing and spreading cash
requirements, leasing has other advantages for the small community.
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The legal work involved is far less than that required to effect a
bond issue, and voter approval is not usually needed prior to entering
into a lease agreement. On the other hand, leasing is generally more
expensive than long-term bond financing. This does not mean its use
should not be considered--especial ly if municipal credit is poor or
bonds are difficult or impossible to issue. Since annual costs are
reduced if long-term leases are entered into, these should be sought
if allowed by local or State statutes.
Leasing may also become more economical as private industry
shows more interest and as competition increases. Many companies now
lease their mobile equipment, and interested municipalities might
investigate using this technique. In fact, the purchasing economies
available through a large corporation might make the leasing of
collection trucks more economical than purchase for a small municipality,
In addition, new financing techniques may soon make economical leasing
available for complex and expensive facilities as well. At least
one company is currently offering municipalities this alternative.
If leasing is arranged with another nonprofit municipal agency,
decreased borrowing costs and increased buying power may result. For
instance, a central garage agency could finance the purchase of police
cars, fire trucks, road maintenance equipment, and waste collection
vehicles and lease them to the municipal operating agencies. The
revenues from the leases could be used to meet interest and principal
repayment for a revenue bond issue (as discussed below). Although
not widely used, this financing technique can have application in
certain situations that small communities may face.
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Long-Term-Bocrowing
Long-term borrowing is the final and most widely used method of
financing capital outlays. More than 50 percent of all capital
expenditures made by State and local governments in the last 10 years
were financed through long-term borrowing. The two bond instruments
currently in use are general obligation bonds and revenue bonds. Each
has its advantages and disadvantages for small communities.
General obligation bonds are the most commonly used instrument.
Because the full faith and credit of the issuing community are behind
them, their resulting low risk makes interest costs less than for
revenue bonds. A revenue bond pledges only that the income from
specific operations will be used to meet interest and principal
repayments. The possibility of default is, therefore, greater, and
the interest rates are higher. General obligation bonds may occasionally
be more expensive than comparable revenue bonds, but this situation is
unlikely to occur in small communities for several reasons. First,
the investing public knows very little about the facilities used in
processing solid wastes, and they have not been financed with revenue
bonds very often. This makes it difficult for the investor to
determine the risk characteristics involved. This uncertainty can
cause such bonds to carry high interest rates and face a poor market.
Also, the feasibility study and other data required to issue a revenue
bond tend to be difficult and expensive for a small community to
obtain. The cost of obtaining this specialized information is largely
independent of the size of the bond issue and is usually prohibitive
for small communities with small revenue bond issues.
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Conversely, the data required to issue a general obligation bond
for solid waste facilities have probably been compiled to support general
bond issues for schools, sewage treatment plants, etc. This informa-
tion is usable virtually unchanged. Separate and detailed engineering
analyses, which have high fixed costs, are not required to document a
general obligation bond issue. For a small community going it alone,
its fund requirements would, therefore, rarely be large enough to make
revenue bond financing economical. If, however, practical or legal
constraints prohibit the use of general obligation bonds, revenue
bonds or perhaps leasing would have to be considered.
Several participating communities that form an authority to handle
waste collection and disposal may be of sufficient size to utilize
revenue bonds effectively. User charges paid by the participating
communities would generate the income needed to meet revenue bond re-
quirements. Or, as mentioned previously, a central garage or other
combination of activities in one small municipality might be large
enough to allow revenue bond financing.
Regardless of the bond instrument used, the interest rates of
small communities exceed those of larger ones (Table 1). For example,
depending on the bond rating, interest costs for communities of under
10,000 people in 1965 varied from 3.169 to 3.659 percent; in contrast,
communities with between 10,000 and 250,000 residents incurred interest
costs (depending on the bond rating) that varied between 3-093 and
3-501.
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TABLE 1
AVERAGE ANNUAL INTEREST RATES ON BONDS IN SMALL-
AMD MEDIUM-SIZE MUNICIPALITIES IN 1965
Bond type
A
B*
Unrated
Average matur
Under 10,000
population
3.169
3.376
3.434
i ty 1-9 yrs
10,000-250,000
population
3.093
3.184
3.289
Average matur i
Under 10,000
population
3-335
3.503
3.659
ty 10-19 yrs
10,000-250,000
popu lat ion
3-233
3.386
3-501
"Bonds rated Aaa, Aa, A, Baa, Ba,and B by Investment Bankers Association
of America.
There are several reasons why small communities consistently face
higher borrowing costs. Because they usually issue a small dollar volume
of bonds at infrequent intervals, the relatively fixed overhead costs
associated with preparing and marketing the issue result in higher costs
per dollar issued. This is true for both bond instruments, but more
pronounced with regard to revenue bonds. In addition, these small
issues are unattractive to large investors because they are not easily
traded and are usually not rated by major investment advisory services.
Moody's Investor Service and Standard and Poor's do not rate issues if
the size of the issuing community is below a certain level. Furthermore,
Moody's does not rate bonds of a government subdivision unless its total
debt outstanding exceeds $600,000; Standard and Poor's does not do so
unless the figure is at least $1 million. The issues of many small
communities are, therefore, never rated, regardless of their quality,
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and this results in higher interest rates. The number of "A" and "B"
rated and of unrated bonds issued by small- and medium-size communities
between 1961 and 1965 clearly indicates that, on an average, over 50
percent of all issues offered by small municipalities were unrated, while
only about 10 percent of those from medium size communities were not
rated (Table 2).
TABLE 2
NUMBER OF ISSUES FOR SMALL AND LARGE COMMUNITIES (1961-1965)"
Under 10,000 population
Year
1961
1962
1963
1964
1965
Bond type
A
B
Unrated
A
B
Unrated
A
B
Unrated
A
B
Unrated
A
B
Unrated
Number of
issues
186
141
322
127
125
361
134
145
481
178
144
448
115
125
440
Percent of
total
29
22
49
21
21
58
18
19
63
23
19
58
17
18
65
10,000-250,000 population
Number of
i ssues
1086
1137
153
912
889
146
1018
1135
144
946
918
197
945
959
225
Percent of
total
46
47
7
46
45
9
44
49
7
46
44
10
44
45
11
"Source: Investment Bankers Association of America.
In addition to the factors mentioned, small communities usually do
not have, and can rarely afford to hire, the talent needed to supply
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detailed financial and legal advice. Many also fail to recognize the
importance of hiring experienced consultants who know the intricacies
of the bond market. This increases the chances of poor decisions and
costly mistakes being made and results in higher borrowing costs.
With nowhere else to go, a small community may be forced to market
its issue locally. This can be expensive for several reasons. There
may be only a limited number of individuals whose income tax bracket
is high enough to take advantage of the issue's tax exempt status. The
yield must, therefore, be increased to make the issue more competitive
with non-tax exempt issues which are attractive to less tax conscious
investors. The supply of local funds may also vary widely and differ
substantially from the national market. Poor timing can be very
expensive when floating an issue in the local market.
Recommendations for Bond Issues
Long-term borrowing has its problems and resultant costs for small
communities, but the technique will continue to be used. The following
list of guides is presented, therefore, to help minimize excessive
interest costs, obtain the best terms, and successfully market the issue.
1. Accurate financial, demographic, and economic data must be
available to potential investors. The information should be routinely
collected and clearly tabulated. The longer the period covered, the
more readily an investor can ascertain the risks involved. It is usually
a lack of information, not undesirable or poor data, that raises an
investor's risk assessment. If no data are available, they should be
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reconstructed from existing records and steps taken to assure that similar
information \s routinely collected.
2. A long-range financial plan should be formulated for the whole
community as well as its solid-waste-related activities. Borrowing should
be coordinated--fewer but larger issues can save money. Refinancing can
also be cheaper if it is combined with a new issue, because fixed overhead
costs will drop. In addition, a financial plan will allow adequate time
to prepare issues for sale and to wait until market conditions are
favorable.
3. The costs of marketing during unfavorable periods will be borne
for the life of the issue. If the bond is tendered locally, the market
there should be carefully compared to the national market. Large differences
may warrant offering the issue elsewhere.
4. Favorable features of the community issuing the bond should be
well publicized to offset adverse factors such as municipal size or the
lack of a rating by bond services.
5. Experienced consultants should be employed. Financial and legal
counsel can more than pay for itself in improved legal contracts, terms,
rate setting, and marketing. If a revenue bond is to be issued, a really
competent consulting engineer should be retained to make the feasibility
study,because its acceptance by investors will be directly related to the
consultant's stature in the field.
6. Utilize fully any free technical assistance available at State
and Federal levels. The amount of technical assistance available in
analyzing, selecting, and preparing bond issues varies from State to
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State and should be determined in each instance. In some cases, a State
review is required. Federal assistance has been available chiefly through
the public facilities loan program, as amended in 1961. This program author-
izes the establishment of a technical advisory service to assist in financial
evaluations. The Office of Solid Waste Management Programs can also provide
assistance in evaluating financing techniques and related problems.
7. Credit assistance programs should also be reviewed for their
applicability. Under the facility loan program, the Department of Housing
and Urban Development is authorized to purchase the securities and ob-
ligations of or make loans to cities, towns, and counties with less than
50,000 residents if they cannot secure credit at "reasonable terms and
conditions" from private lending organizations. These loans can be made
for up to 100 percent of the project's cost and up to ^0 years duration.
Loans can be made for a variety of public work projects, including water
and sewer systems and possibly solid waste systems. The Farmers Home
Administration (FHA) makes loans to public agencies and nonprofit corpora-
tions primarily serving rural areas to develop waste treatment systems.
The FHA also offers assistance in assessing economic feasibility and
financing techniques. In addition, the Economic Development Administra-
tion, Department of Commerce, is offering or will soon offer technical
assistance in strengthening the bond issues of smaller communities.
Summary and Conclusions
Financing a solid waste management program in small communities is
possible with one or more of the techniques discussed. Operating costs
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are most easily met through general fund contributions or a direct user
charge. The latter allows some freedom in setting rates and independence
from other municipal operating requirements.
Selecting the financing technique most suited to capital expenditures
Is not as clear cut but is certainly the most critical part of the problem.
The decision probably depends on the types of facilities required and the
urgency and magnitude of the purchase. The small community does not need
a large number of collection vehicles or much landfill equipment so it
can probably accumulate money from user charges or the general fund.
If this is not possible, leasing is a usable but possibly more expensive
alternative.
On the other hand, when the facilities required are complex and
relatively expensive, revenues from user charges or the general fund may
not be adequate. This could be particularly true if there is insufficient
time to plan for the accumulation of funds or if the facilities are to
be large enough to meet future demands. In these cases, long-term
borrowing may be the only practical alternative.
When long-term borrowing is necessary, the general obligation bond
instrument is probably the easiest to prepare and market and the cheapest
in terms of interest. The revenue bond has some advantages, but a small
community rarely requires facilities large enough to make such financing
economical. If a solid waste authority comprising several municipalities
is utilized, revenue bond financing can be attractive.
There are other considerations which usually enter into the selection
of a financing technique. Political as well as legal constraints may force
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municipal officials to select certain methods over apparently more economical
or desirable ones. For instance, a widespread dislike of user charges might
force them to use general funds to operate solid waste collection and
disposal facilities. In another instance, statutory limits on bond
indebtedness might restrict the use of general obligation bonds. In
fact, legal limits on interest rates might preclude bond financing entirely.
Nonetheless, if long-term financing is anticipated, experienced consultants,
technical assistance, and possibly credit assistance should all be fully
uti1i zed.
In conclusion, financing techniques are available and if flexibility
is maintained and all options are objectively and professionally evaluated,
a practical and economical financial plan can be designed and implemented.
As a result, the funds needed to construct and operate good solid waste
collection and disposal facilities can be obtained.
BIBLIOGRAPHY
Clark, R. M., and R. 0. Toftner. Financing municipal solid waste
management systems. Journal of the Sanitary Engineering Division,
Proc. ASCE, 96(SA4) :885-892, Aug. 1970.
National Association of Counties Research Foundation. Solid waste
management--financing. Guide No. 6. Washington, [1969.] [18 p.]
State and local public facility needs and financing; study prepared for
the Subcommittee on Economic Progress of the Joint Economic Committee,
Congress of the United States, v. 1 and 2. Washington, U.S. Govern-
ment Printing Office, Dec. 1966. [1146 p.]
yo362
U.S. GOVERNMENT PRINTING OFFICE 1971 O—427-416
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