Given all that we have seen this past year, planning for risk or uncertainty is an important function for solid waste agencies. More agencies need to ask the hard questions as part of master planning.
By Marc J. Rogoff and Bill Gaffigan
In February 2002, Donald Rumsfeld, the then U.S. Secretary of State for Defense, stated at a briefing, “There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.”
As a result, he was almost universally lampooned since many people initially thought the statement was nonsense. However, careful examination of the statement reveals that it does make sense—indeed, the concept of the unknown unknown existed long before Donald Rumsfeld gave it a new audience.
Given all that has transpired in 2020—a Global Pandemic, a national recession and far ranging financial impacts to local solid waste agency budgets through rising operating costs—long-term financial planning for these “known knowns” and “things we do not know we don’t know” are even more important. Our firm’s solid waste advisory practioners, experienced on more than 50 solid waste rate and financial studies and solid waste plans in recent years, offer the following lessons learned for public works and solid waste directors.
Full-cost accounting (FCA) or financial responsibility for solid waste management has been advocated by the U.S. EPA beginning with the promulgation of the landfill disposal regulations in the 1980s. FCA, unlike cash flow accounting, considers direct, indirect (overhead), upfront (past) and back-end (future financial liability) expenses. Solid waste agencies have substantial long-term obligations, which require long-term planning and have implications today for rate setting. As shown in Figure 1, landfill assets last for many years and exhibit all of these costs, which must be considered in effectively pricing a landfill’s long-term tipping fee.
One of the most significant long-term obligations many agencies have is the funding of closure and post closure costs. These obligations require cash funding of millions to tens of millions of dollars at an estimable point in the future. The Federal landfill regulations (Subtitle D 40 CFR 258) and implementing state regulations mandate specific standards for all owners/operators to follow when closing a landfill and setting up a
program of monitoring and maintenance during a 30-year post-closure care (PCC) period.
The owner/operator is r sponsible for maintaining the integrity of the final cover, monitoring ground water and methane gas, and continuing leachate management (see Figure 2). All landfills must also comply with the financial assurance criteria. The owner/operator must demonstrate financial responsibility for the costs of closure, post-closure care and corrective action for known releases. This requirement can be satisfied by the following mechanisms:
• Trust fund with a pay-in period
• Surety bond
• Letter of credit
• Financial or Means Test
• State assumption of responsibility
• Multiple mechanisms (a combination of those listed above)
Post-Closure Care Period
Existing Federal and State landfill regulations require that consistent monitoring procedures be followed each year during the PCC period. This essentially means that the operating entity of the landfill must continue to monitor the integrity of closure cap system, groundwater quality and LFG management in a similar fashion as during the pre-closure period.
We are now approaching the 30-year mark on the implementation of Subtitle D regulations (see Figure 2). Landfills which were closed in the mid to late 1990s under the then new regulations will be approaching the end of their prescribed regulatory post-close period.
The 30-year PCC period prescribed in the regulations can be decreased or extended by the Director of the implementing agency of an approved state if it is determined that a change is protective of human health and the environment. Unfortunately, there is little, if any, guidance provided by the EPA to make this affirmative decision, and if this decision is made, what ground rules can be established on the
frequency of monitoring that can be required.
Presently, there is significant uncertainty on the methodology that will be used by State regulators in evaluating whether or not any landfill at the end of its responsibility at the 30-year PCC period will need any additional annual monitoring. Some large agencies and private operators, as well as professional solid waste organizations, such as the Environmental Research and Education Foundation (EREF) and Solid Waste
Association of North America (SWANA), have developed research programs and advocate a performance-based approach to evaluating post closure requirements. For example, SWANA
issued two policy statements (T-9.3 and 9.4) as well as a report by the Association’s Research Foundation addressing this research topic.1
The vast majority of municipal landfill owners demonstrate financial responsibility with either the local government financial test (LOGO) or a surety bond:
1. 40 CFR 258.74(f): Local Government Financial Test (for landfills owned by cities/counties). The LOGO requires that the local government must meet two tests: 1) the ratio of its marketable securities to total expenditures must be greater than or equal to 0.05, and 2) its ratio of annual debt service to total expenditures must be less than or equal to 0.20.
2. 40 CFR 258.74(b): Surety Bond Guaranteeing Payment or Performance (for landfills owned by private corporations, like Waste Management or Republic Services).
Although these two financial assurance mechanisms are used for well over 90 percent of the landfill owners, any mechanism found in 40 CFR 258.74(a) through (j), including the use of multiple mechanisms (k), is allowed.
Costs must be included for a post-closure care period (generally 30 years) in accordance with state regulations and 40 CFR 258.72. These costs (as well as closure costs) must be adjusted annually for inflation in accordance with 40 CFR 258.72(a)(2). Typically, municipal solid waste agencies operating landfills employ the services of a consulting engineer to provide an annual cost estimate for closure and post-closure care for both County landfills.
Capital Replacement Needs
When developing long term plans for solid waste systems, you also need to evaluate the capital replacement needs for different components of the system. For those with extensive collection programs, it is essential that planning for this uncertainty be conducted as part of a master plan effort.
Fleet Management Planning
A sound Fleet Replacement Plan is essential to the reliability and cost-effectiveness of a solid waste collection or disposal program. Further, equipment that is well-maintained and consistently reliable reduced accidents and downtimes, helps provide for higher customer satisfaction, and contributes to enhanced employee morale. Typically, most “best-in-class” sanitation collection systems are on a six to eight-year replacement cycle for automated side-loaders.
Many municipal sanitation departments have developed long-term fleet funding programs in lieu of annually cash expensing these vehicle purchases. These funding plans vary from a long-term, direct surcharge on their customers to transfers from the General Fund or use of local option sales tax programs. We recommend that a department implement a Fleet Replacement Plan into its system.
All solid waste equipment requires routine maintenance during its operation life. Key to the fleet manager’s mission is to increase the availability of this equipment so that their internal customer, the Superintendent or Operations Manager, has the right types and numbers of equipment to complete their routes.
The goal of a proactive preventive maintenance (PM) program is to minimize unscheduled repairs and equipment being down for long periods of time. Certainty is the key. A well-managed PM program maintains a constant awareness of the condition of the solid waste collection fleet before problems become serious problems. Effective PM programs have proven their value by helping agencies extend the life of their equipment, minimizing the high cost of expensive repairs and reduced productivity resulting from fleet downtime.
Aging or obsolete equipment require a greater level of maintenance and repair to prevent out-of-service conditions. Older equipment that has reached the end of its useful life will require expensive repairs beyond standard PM because as a vehicle ages, its critical systems become unreliable. In the case of solid waste vehicles, hydraulic systems, chassis drive trains including transmissions, and fundamental body wear require major and costly mid-life rebuilding. It is at this point in a vehicle’s life that a decision be made to either replace the unit or rebuild it.
Capital costs tend to decline over time, while operating and maintenance costs increase. The economic theory of vehicle and equipment replacement predicts that vehicles and equipment should ideally be replaced during the flat portion of the curve; that is, at the time, annual operating costs begin to outweigh capital costs. Deferring replacement purchases in order to accommodate short-term budget shortfalls can result in future increased replacement costs and, oftentimes, unmanageable fleet replacement backlogs. There is no single best approach to financing fleet replacement costs.
Financing Fleet Replacement
With the financial challenges facing local governments today in providing cost-effective and timely solid waste management services, evaluation of these various approaches should be made focusing on ways to minimize costs and providing value-added services to the public. Briefly, here is some of the most common ones to finance capital fleet replacement.
Guaranteed Buy-Back Programs
Buy-back programs are an alternative to an outright cash purchase of fleet equipment. A buy-back program allows an agency the right to sell, lease, trade or otherwise dispose of the vehicle. However, in the bid for equipment, the bidder guarantees that they will repurchase the vehicle from the agency at the end of a specified hourly usage or annual term from the date of delivery. Typically, many agencies use these provisions to keep maintenance costs to a minimum and to enable them to procure new equipment at a frequent rate.
In order to fund fleet replacements, many solid waste agencies have used a sinking or revolving fund to spread the costs of funding new vehicles or equipment over a longer period of time. Essentially, this type of financing approach requires that an agency make periodic payments into a fleet replacement fund, thereby, ensuring that there will be adequate funds available for the replacement vehicle or unit when it comes due for replacement.
In essence, a basic advantage to this approach is that it enables the agency to predict its annual funding needs over a long planning horizon. Notwithstanding, a major disadvantage of the sinking fund method of funding is that it is, oftentimes, prohibitively expensive for many agencies to establish if they already have a large backlog of fleet replacement needs. That is, a large amount of cash must be deposited initially to
create the working capital necessary to start replacing vehicles or equipment. Further, there is always the temptation on the part of municipal officials to raid such funds during lean budget years, thereby, undermining a well-designed fleet replacement program in a single year.
In comparison to cash or sinking fund financing programs, debt financing typically allows solid waste agencies an option to spread out the costs of fleet replacement. Rather than trying to accumulate cash reserves in a sinking fund, an agency can borrow funds from financial institutions, either as lines of credit or fixed-term bank loans or bonds. The agency repays the outstanding principal and interest on a periodic basis once the vehicles or equipment are placed in service. Similar to the sinking fund method of financing fleet replacement, debt financing enables the agency to eliminate the peaks and valleys in replacement funding requirements. Also, in some respects the predictable natures of the annual expenditures have tended to make replacement funding less subject to controversial budget decision making. Historically, however, many solid waste agencies have shied away from debt financing to fund their fleet replacements. Oftentimes, much of this is due to local or managerial preferences to avoid high interest charges for vehicles and equipment that have a short lifespan. In other cases, state or local laws prohibit the use of debt financing without voter approval.
Leasing or lease-purchase options are other commonly used methods by solid waste agencies for financing fleet replacements. Usually, these financing programs are offered directly from the manufacturer or third-party distributor. In comparison to the other financing methods discussed in the previous sections, leasing enables the agency to pay a fee (installment purchases) for a vehicle or equipment and then essentially ‘walk away” from it after a specified period.
New municipal lease programs now being offered on the market allow agencies to have new trucks every two years with full factory warranties on the vehicle chassis and body. A variant of leasing is a lease-purchase where an agency can own the equipment. Overall, there is no hard and fast rule in lease financing since the terms may differ from manufacturer to manufacturer. In most cases, their obligation terminates if the department fails to appropriate funds to make the renewal year’s lease payments. Because of this provision, neither the lease nor the lease payments are considered debt. Payments can be structured monthly, quarterly, semi-annually or annually based on the cash flow of the agency.
Key among the lessons learned by many solid waste agencies is the implementation of a reserve fund for operations, emergency events, weather events, etc. The reserve fund(s) provides a short- to medium-term financial backstop for unforeseen events in solid waste management operations that cannot be predicted, otherwise known as the “unknown unknowns”.
For short- and medium-term planning, we have oftentimes proposed that our clients establish a 90-day operating reserve for their solid waste operations, which would provide financial assurance for the following events:
• Unforeseen Acts-of-God such as hurricanes or pandemics that could result in a major, temporary increase in operating cost or loss of revenue.
• Tropical storm impacts that cause significant erosion or other damage that requires repair.
• Business interruption events due to Acts of God or ransomware attacks that result in temporary loss of billing systems or prevent the collection of fees.
• Downturns in the national, state and local economies or associated fiscal emergencies.
Pro Forma Modelling
Our firm has prepared long-term business plans and solid waste plans in recent years. To ascertain the uncertainly over a 30 year planning period, we have developed Pro Forma Models (Model) specifically for these business cases to provide preliminary, planning-level cost estimates, which can be used to evaluate things like agency tipping fees and customer rates and the impact of long-term financial liabilities.
Typically, these models are spreadsheet programs that project annual revenues and costs to operate, administer, and maintain the solid waste system and provides a means for comparing alternative operational, institutional and facility scenarios. These models also address major capital and operational costs to operate the system, as described in more detail in the following paragraphs.
For example, various assumptions are made regarding yearly solid waste quantities, demographic information, escalation factors for waste growth and costs, administration, personnel and utility costs, transport, and processing costs (Figure 3). The costs of various programs and disposal options were estimated using published information on the municipal system, our firm’s experience on other similar projects, input from the private solid waste industry, other published information and planning-level cost estimates we prepared.
As shown in Table 1, for a recent rate study, five different model scenarios for FY 2019 to 2023 were developed for analysis of possible customer rate impacts and revenue/expense shortfalls) over the five-year planning horizon:
1. Scenario 1: Discontinuing Annual 3 percent Customer Rate Adjustment
2. Scenario 2: Continuing Annual 3 percent Customer Rate Adjustment
3. Scenario 3: Fund Needed Fleet Replacement Reserve with No Annual Customer Rate Adjustment
4. Scenario 4: Fund Needed Fleet Replacement Reserve with Annual 3 Percent Customer Rate Adjustment
5. Scenario 5: Fund Needed Fleet Replacement Reserve with Annual 4 Percent Customer Rate Adjustment
Asking the Hard Questions
This article presents a wide range of tools and approaches to help solid waste agency decision-makers to quantify the “known knowns” and the “unknown knowns”. All of these guidelines we discuss help in crafting useful solid waste master plans, capital and fleet replacement plans. As practioners in the solid waste industry for well over 35 years, we have developed useful “go-bys” that will provide valuable lessons learned. Given all that we have seen this past year, planning for risk or uncertainty is an important function for solid waste agencies. More agencies need to be asking these hard questions. | WA
Dr. Marc Rogoff is a Senior Consultant with Geosyntec Consultant’s Solid Waste Advisory Practice (Tampa, FL). He can be reached at (813) 810-5547 or e-mail firstname.lastname@example.org.
Bill Gaffigan is a Principal with Geosyntec’s Solid Waste Advisory Practice in Atlanta, GA. He can be reached at (678) 718-4732 or e-mail email@example.com.
1. SWANA, The Long-Term Management of Closed MSW Landfills Following the Post Closure Care Period, January 2021.