MEETING SUMMARY
RATE REVIEW COMMITTEE
Metro Regional Center – Room 370
April 20, 2005
Present:
Members Metro Guests
Michelle Poyourow Councilor Rod Park, Chair Tom Koecher, Waste Mgmt
Matt Korot Mike Hoglund, Director, Solid Waste & Recycling Dean Kampfer, Waste Mgmt
Ray Phelps Maria Roberts, Solid Waste & Recycling Easton Cross, Allied Waste
Mike Leichner Karen Feher, Finance & Admin. Services
Mike Miller Gina Cubbon, Administrative Secretary, SW&R
Paul Matthews
Members Absent:
-none-
Chair Rod Park opened the meeting, and asked the Committee for any changes to the minutes of April 5. There was one correction, a typographical error of “track” rather than “truck” on page 3. With that correction, the minutes were adopted. The summary for the meeting of April 12 was distributed for consideration at the next meeting.
Doug Anderson explained that Attachment 1 to the agenda was an informational piece showing the timeline for adoption of the rate. The hope is that the Rate Review Committee will finalize its recommendation at the meeting of April 26. The Solid Waste Advisory Committee (SWAC) meets two days later, on April 28. Councilor Park said that he’d like to bring SWAC up-to-speed on this Committee’s progress. “It helps inform potentially the DSP (Disposal Service Plan) and where we are in the RSWMP process, and the linkages there.” He invited Michelle Poyourow and Paul Matthews to attend and give their perspective at that meeting if they’d like (the other members are already part of the SWAC). Mr. Hoglund added it would be good to have a Rate Review Committee member make the actual recommendation to the SWAC.
Following the SWAC meeting, the week of May 2 would be used to review comments received there and draft the legislative package with the help of this group. When asked if another meeting would be scheduled, Mr. Anderson replied that they hoped to prepare the draft through e-mail. (Both Ray Phelps and Mike Leichner will be unavailable that week.). Once the legislative package is complete, it will be filed and adopted as noted on Attachment 1 of the agenda packet.
“Today,” Mr. Anderson announced, “the Department filed a technical amendment to our budget, based on a reevaluation of our fuel budget for next year, and where fuel prices are going. The budget amendment is just shy of a $550,000 increase. If the Council approves that amendment to the budget, that would be another increase of $1 on the disposal charge. That’s purely at the [Metro] transfer stations.” The total fuel budget if the amendment is accepted will be about $1.8 million.
Picking up where the Committee left off the previous week, Councilor Park introduced the last allocation needing a recommendation, “Rate Predictability: Managing the Impact of the Debt Service on Rates.” The Councilor explained that as Metro’s debt on the transfer stations is paid off, an eventual drop in rates of $2.85 will occur. This drop could happen all at once, when the debt is paid off in FY 2009-10, or happen gradually by using part of the reserves.
Using a dry-erase board, Mr. Anderson illustrated that Metro’s annual debt service payment is $2.34 million. The last payment is due July 1, 2009. During the course of the year, he said, “we collect from the Regional System Fee and the Disposal Charge, and then we actually [remit payment] every six months.” He drew a graph showing the current fiscal year through FY 2009-10 when the final payment is due. “If we do nothing else, and just let that [cost] drop out of the [rate], based on the way the debt service is currently allocated [between the Regional System Fee and the disposal charge], we would have a drop [in the tip fee] of $2.85 for fiscal year 2009-10.”
Would that be a good thing or a bad thing, Councilor Park asked the group. At first glance some members agreed it would be a good thing – or not a bad thing, at least. The Councilor, however, pointed out that past Rate Review Committees have recommended a smoother transition. Matt Korot asked what the implications of a quick rate drop would be to the recovery facilities. Mike Miller recalled that the past theory had been that if the tip fee dropped, there might be less of a tendency to recycle. Additionally, Mr. Anderson said, we have heard that if Metro’s tip fee dropped, other facilities would follow and that would be a hardship, especially on smaller facilities.
“Would ramping [the tip fee] down reduce the impact, or just spread the impact?” Ms. Poyourow asked. It would spread it, another member offered.
Mr. Miller asked how Metro could fund ramping the rate down. Mr. Anderson responded that one option is to use excess reserves. In the meantime, Mr. Leichner pointed out that in reality, the drop would work out to an extremely small amount to the customer. With all the other cost factors, it would likely be offset by other cost increase and virtually neutralize it. Dean Kampfer, a member of last year’s Committee, said that “$2.85 might not be a significant drop, but if we know it’s coming, we can plan for it – we have reserves, we can flatten it over a few more years.”
Mr. Anderson illustrated the ramping-down concept for the group. “We have a number of reserves that are required by bond covenant, statute, or just good business practice.” A couple of years ago, Mr. Anderson explained, Metro ran afoul of its bond covenant. “We had built up reserves due to tonnage windfalls during the 1990s, and so we used reserves to pay operating expenses one year, which violated our coverage ratio.” The coverage ratio states that rates have to be set to raise 110% of the debt service each year. “The Council has been very clear to the Department that we will not violate our bond covenants again” he stressed, because it resulted in a rating reduction by Moody’s (bond rating agency). Because 110% of costs have to be raised, reserves are naturally going to grow, he continued. Reserves are high enough at the present that some could be used to help phase in the rate drop rather than have it drop when the debt service is completed. (Reserves, Mr. Anderson noted, are allowed to be used for capital expenditures, debt service, of the St. Johns Landfill closure, as long as the bond covenant is covered as well.) Mr. Anderson illustrated a scenario using reserves that would reduce the tip fee by $0.71 per ton each year for the next four years. Inflationary demands will affect the actual numbers on the graph, he pointed out.
“It’s a conceptually simple concept,” Mr. Anderson said, “and just comes from the fact that we have the opportunity of the reserves in excess of needs right now.” He noted that an earlier Rate Review Committee had recommended that “when [Metro has] foreseeable and known changes in the rate, we should at least consider managing that step-function.”
Ms. Poyourow asked if using this option would mean not collecting $0.71 (per ton per year). Yes, Mr. Anderson replied, if the Committee chose to use this method, “$0.71 would be lopped off the Regional System Fee and the disposal charge [proportionately].” The group discussed how this might work, and some of the historical background, including the economics of the move, given that Metro re-financed the debt a couple of years ago at a much better interest rate.
Mr. Leichner asked if the debt service has always been allocated to the RSF. “The debt service was in the disposal charge,” Mr. Anderson responded, “until 1997, when it went to the Regional System Fee . Last year, we moved about $1 million into the disposal charge as a result of [the Committee’s] recommendation.”
Councilor Park commented that Mr. Leichner’s question brought up an interesting point. “The last time the Council went through this particular exercise, the big build-up in the reserves was created primarily from Metro transfer stations. But as tonnage continued to move away from Metro stations, from having the whole market practically, to the ratios – I think we were 60-40 at that time – the rate payers at local stations, even though they hadn’t participated in the first part, were beneficiaries of the second part.”
Following some further discussion, Ms. Poyourow said she was still unsure of the need for ramping the rate down. “Is it just to avoid a jolt to the MRFs?”
“To them, and to others,” Councilor Park said. Mr. Leichner added that local jurisdictions and haulers, as well, really prefer to not have rates going up, then drop, up, and then drop, etc. They want consistency, he said.
“Now I’m sold,” Ms. Poyourow stated. “Is there a down side to doing things this way?” Mr. Anderson said the only down side is the opportunity cost of using the extra reserves.
Councilor Park mentioned that the reserves could be used to defease the bonds early, “And then the Council would be free to make a choice to keep – or not keep – the transfer stations. In this particular scenario [using reserves to ramp-down rate], I believe we’re stuck going all the way out to the end [of the debt service].” He asked Mr. Anderson if it might be possible to defease the bonds early. Legally, yes, Mr. Anderson said, but would it make economic sense? In response to a question, he said, “The bonds are not callable. We can’t just write a check and get rid of them. Defeasance means that we have to put money with irrevocable escrow instructions in an escrow account, let a third party handle it; that third party will continue to pay on the original schedule. We’re legally released then from the obligations of the bonds.”
Mr. Hoglund mentioned that the idea of ramping-down the rate would also help offset the fuel cost amendment to the Budget that was spoken of earlier.
“Is there enough money in the reserves to defease the bonds?” Ms. Poyourow asked. Mr. Anderson responded that “the short answer is we think so.” Ms. Poyourow then clarified that if it may be possible to defease the bonds early, holding on to the reserves might be a good strategic decision. Councilor Park answered affirmatively, but mentioned that Mr. Matthews had another scenario that he and Mr. Anderson discussed after a previous Rate Review Meeting.
Mr. Miller asked if there were any constraints on the reserves that would remain either after defeasance or after paying off the debt service in FY 2009-10. Councilor Park said that by law, the money must be used for solid waste programs. “If Metro is here for the long haul, and we do not take the [ramping down] scenario and just drop @ $2.85/ton in 2009, then we will have – we can project $7 million in reserves for which some logical uses might be program costs.” After the bonds are gone, he explained, there would be no restrictions on use of reserves for operating expenses. Particular programs such as household hazardous waste could be funded, some could be transferred into the St. Johns Landfill closure reserve, et cetera. Councilor Park said, however, that he doesn’t foresee Metro simply taking the $2.85 drop; rather, all the options would be looked at, such as when it would be feasible to defease, etc.
“With respect to the transfer stations, I cannot envision Metro doing anything – to me, it’s two or three years out,” Mr. Phelps said, “whatever the decision’s going to be, your action point is at least three years from now.” Mr. Phelps continued, “It seems to me that if we support the suggestion that we begin to absorb some of that reserve in this manner, I don’t believe there’s any lost opportunity at some point in the future if you decide on some of these other alternatives. But in the meanwhile, you’ve begun to use the reserves, which I think is a good idea.”
Councilor Park asked Mr. Matthews to present another scenario not including reserves that he and Mr. Anderson had discussed, but Mr. Matthews responded, “I don’t remember the scenario. I really don’t... Maybe it’s brilliant; I don’t know yet,” he smiled. He asked Mr. Anderson to present it in his place.
Mr. Anderson modified the graph on the dry erase board to illustrate a scenario that gradually shifts the debt service allocation from the disposal charge (on Metro stations’ tonnage only) back into the RSF. The rate effect is smaller because it’s spread over more tons (all regional tons, including Metro stations). “There’s no use of reserves in this scenario, it’s just shifting the debt service from a lower tonnage base to a higher tonnage base to reduce the rate impact.” This scenario, he said, would lead to approximately $0.30 per ton/per year drop until the debt service is paid, and a $0.51 drop when debt service is complete.
“It’s a flavor on [the other scenario] that doesn’t use reserves, it just takes advantage of the ability to allocate between low tonnage bases to high tonnage bases to water down costs,” Mr. Anderson said.
“I don’t like government having a whole lot of extra money lying around with no place to go,” Mr. Phelps said. He likes the idea of using reserves, and said that the issue could still be revisited yearly. He and Ms. Poyourow discussed the idea, and Mr. Anderson added that while a full analysis has not been done, he believes that “by the end of this fiscal year, we’ll have enough excess reserves to start this process and not give up the opportunity [to defease early]. Every time you use some of the reserves, you’re actually reducing your debt, so you’re not eliminating any of your ability to defease the remainder of the debt service.”
Mr. Kampfer asked how much would be left in reserves after the bond covenant is paid if the ramping-down scenario was used. Mr. Anderson asked for confirmation from staff member Maria Roberts (in the audience); he believes that it would be somewhere around $30 million. “So, then in 2009,” Mr. Kampfer ventured further, “we’ll have $30 million in this fund, but really no purpose?” No, Mr. Anderson said, that’s not true. Metro has a number of reserves, he said, such as the St. Johns Landfill closure reserve. “Most of these reserves are restricted.
Mr. Matthews commented that because the tonnage will change every year, “We’re constantly going to have to revisit [any use-of-reserves] to recalibrate it. You don’t have to get that close to figure it out.”
“I need to say,” Councilor Park stressed, “we – the Metro Council – take this very seriously.” He reiterated that the bond covenant cannot be violated again, and that’s why staff is proceeding very cautiously. Ms. Poyourow clarified with the Councilor again that even if some reserves were used to ramp down the rate for a year, if the Council then decided to defease the bond, there would be enough money to do so. Councilor Park added that, “In full disclosure, one of the companies under Allied, which [Mr. Phelps] represents, is BFI, who has a three-year contract at the [Metro] stations. So they would like to go to the full extent [end of the debt service]. That’s what I’m hearing Ray say – he hasn’t said it exactly that way, but I’m hearing that he’d rather have the bird in the hand than two in the bush.” Mr. Anderson then explained that yes, there would be enough money to defease the bond if Council so chooses even a year after initial ramping-down of the rate, because that would also be that much less that needed to be defeased. “Then I’m happy with it,” Ms. Poyourow said. “How does everyone else feel about it?”
Mr. Miller responded that while he agrees, “I always having something in the bank, but then what Ray says does make sense. You don’t necessarily want government having a pot of money they don’t have anything to do with.” There will still be significant reserves, Mr. Hoglund and Mr. Anderson assured the Committee. The target reserves, Mr. Anderson said, are $24 – 28 million, and there is currently more than that.
Mr. Miller said he hoped there could be some solid waste programs funded [with reserves after debt service or defeasance], “that may help us to do some things we wouldn’t be able to do otherwise. If we do this, those funds may not be there, so I’m weighing that.” Mr. Anderson explained that Metro would be in violation of its bond covenant if reserve monies were used to pay an operating account such as a grant or program. “The use of these reserves,” he reiterated, “is really limited to paying off debt, buying capital, or paying for St. Johns Landfill closure operations.”
When the bond is finally paid off, Mr. Anderson clarified, then “the shackles are off,” though even then, the money can only be spent within the solid waste system. “So even if we do this,” Mr. Miller asked, “there’ll be something left?” “That’s correct,” Mr. Anderson stated.
Mr. Anderson offered to “crunch the numbers” and show how it would affect the rate for next year, and do an estimate of the impact beyond that. The Committee agreed they would like to see those numbers, and then Mr. Phelps moved to accept the scenario of ramping-down the rate by using excess reserves. Ms. Poyourow seconded the motion, and the Committee voted in agreement of the motion unanimously.
Moving on, Councilor Park referenced Attachment 3 to the agenda packet, “Rate-Setting Criteria.” Mr. Hoglund commented that those who were on the Committee last year had seen the list before, “These are general criteria for setting the rate. The question would be, did they still make sense this year? I think you confirmed them last year. If they do make sense, have any of those criteria been violated [in the work thus far]?” Councilor Park also asked for any additional criteria the members might suggest. The Councilor read down the list.
On #8, “Authority to Implement,” the Councilor paused, and asked Mr. Korot “Is there anything you want to change or add from the local governments’ perspective on this particular one?” Mr. Korot replied “It depends on how much you go into what this means.” Thinking about it further, he said that strictly speaking, the criteria is accurate (Metro should ensure that it has the legal ability to implement the rate structure; or, if such authority is not already held, evaluate the relative difficulty of obtaining the authority). “What it means in practice,” Mr. Korot continued, “is where it gets into somewhat less solid territory.” Councilor Park suggested he talk to other local governments for their input.
“The question was raised,” Councilor Park said, “[that] the scenario potentially is that Metro sets rates now and because of this, prices follow Metro. If Metro’s not in the system (potentially) in the future, what is the system? What do you do then?” Mr. Korot said that in that case, “it comes into #1 (Consistency), which is ruling how [#8] relates to what system-wide planning is. That’s a big issue.”
Councilor Park said that he understands the Committee’s wish is to move towards a cost-of-service model. “I assume,” he said, “that the cost-of-service model applies to public as well as private. If Metro’s not in the system, hypothetically, then it is all on the private side, and what do you set in place? I’m not looking for the answer tonight.” Mr. Korot agreed it would need to be addressed if Metro were to leave the system, but said that the list of criteria before the Committee just pertains to Metro’s rate-setting. “It comes into needing to put real meat on what #1 [Consistency] means. It has to be more closely integrated with future system planning,” Mr. Korot concluded.
Mr. Matthews commented that, “I usually like to delete things, but I propose that we add one [criterion]: Simplicity and transparency... Anything that can be simpler, that we can understand and it’s transparent, we can explain it to the public, I think is going to be better. That doesn’t mean that you’re always going to get the most simple and transparent, because other criteria might outweigh it, but it should be something that we consider in setting rates.” Heads nodded in agreement, but Mr. Korot pointed out that “We don’t have a simple system, which I think speaks to some of that consistency issue again.”
Mr. Matthews understood Mr. Korot’s concern, and noted that the previous model (Public Goods) was actually simpler than what is in place now. Simplicity is just one factor to consider when moving forward; other aspects might outweigh it. “[The former model] defined simplicity, but violated some of the other principles. You want to balance them.”
There was brief discussion about the disposal system planning (DSP) options being considered, and if the same rate-setting criteria would be applicable. “I’m just trying to not foreclose potential options,” Councilor Park said. “We may stay in the system, and actually, we may get to the point that we can’t figure out how to do it [get out of the system and make it work], so that would be the reason why you’d want Metro staying in the system. I’m just laying out both sides, there’s various opinions [on the Council].”
The Chair finished the list, and the group agreed to recommend “Simple and transparent” to the Council as an addition to the list. Mr. Phelps came back to #3, “Equity,” saying “I’m not taking exception to what’s being said here, I am, however, asking that there be a discussion through you, Councilor, with regards to equity. We have evidence – and for a reason, but nevertheless – evidence that there’s not truly equity, given some of the folks are regulated but don’t pay the fees, and there’s a reason for that. I’d like to revisit those...” He added that he is still opposed to the cost of Metro stations’ extra hours being shared throughout the region. Mr. Matthews, who had not been present for that discussion last week, voiced concern about “subsidizing self-haul.”
The group briefly revisited this issue.
Wrapping up, Mr. Anderson said he and staff would “crunch some numbers to let you know the results of the decisions for recommendations you’ve made over the last two meetings.” He went back to the dry-erase board and illustrated a possible chart layout for those figures, “itemized, showing the differences from status quo to the new recommendations” and some parallel information, as well as the impact on residential rates and private facilities (both wet and dry waste).
The Committee approved the chart format; Councilor Park thanked everyone for attending. Mr. Leichner mentioned that he’ll be unable to attend the meeting of April 26, 2005.
The meeting adjourned at 7:10 p.m.
Next meeting: Wednesday, April 26, 2005
NOTE ROOM CHANGE! 6:00 p.m. Room 501
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