WASHINGTON -- Questions about the legality of municipal laws requiring disposal of solid waste only at designated facilities have sparked fears about the viability of bond-financed solid waste projects.
The concerns have come to a head now that the U.S. Supreme Court has agreed to review the constitutionality of the laws, known as flow-control ordinances.
But in a recent report, Moody's Investors Service Inc. said that even if the laws are struck down by the court, bond ratings will not necessarily suffer.
"We're really looking at this on a case-by-case basis," said Linda H. Lipnick, a Moody's vice president and supervisor. Lipnick wrote the report, "Perspective on Solid Waste, Solid Waste Flow Control Ordinances."
Moody's stressed in the report that flow control laws are just one of many factors considered when bonds for waste facilities are issued. "The existence of legal flow control never sets a bond rating, but it has been viewed as a positive factor," Lipnick said in an interview.
The court is scheduled to hear arguments in C&A Carbone Inc. v. Clarkstown, N.Y., on Dec. 7. The case involves a trash hauler's claims that flow control laws unconstitutionally impede interstate commerce, thus preventing waste haulers from capitalizing on lower disposal fees at facilities outside municipal service area boundaries. The laws in effect create an artificial monopoly, the trash hauler says, and allow the facilities to charge a higher fee than they ordinarily could under free market conditions.
Flow control laws, allowed in 26 states, are popular with investors because they help ensure that local waste facilities receive sufficient fees both to pay operating costs and to repay debt service on bonds issued to construct the facilities.
But in its report, Moody's said flow control alone should not be viewed as sufficient to provide investor comfort.
"In evaluating credit risk, Moody's has always recognized that although legal flow control is a credit strength, it cannot compensate for the inherent weaknesses of a costly, inefficient solid waste system," Moody's said.
Moody's outlined for key factors that could weaken credit quality in the event that the court strikes down flow control laws: narrow revenue streams; costly solid waste system relative to the competition; lack of long-term contracts with haulers or municipalities; and political opposition to current disposal practices unrelated to flow control.
"Many solid waste bond issues exhibit one or more of these credit weaknesses which must be monitored," Moody's said in the report. "Adding to the complexity of the situation, even a case-by-case analysis exploring each of these factors may not satisfactorily predict bondholder risk, because it is difficult to project accurately which credit characteristics may significantly weaken if the Supreme Court effectively bans flow control."
For example, a municipality might have a contract with an issuer pledging a broad-based revenue stream, such as from a general obligation, unlimited tax pledge. But if flow control laws are struck down, the municipalities might challenge the pledge on the grounds that they assumed they would meet their obligation through use of flow control.
Moody's said that a number of local governments have developed measures that, in addition to flow control, help support their ability to pay off solid waste bonds.
Some, for example, have secured bonds with general fund or taxing guarantees, along with system revenues. "These financing structures not only provide issuers with competitive pricing flexibility but also enhance bondholder security by greatly increasing the potential sources of pledged revenues," Moody's said in the report.
Another credit strength is the ability to levy fees to capture additional revenues for the waste system. In Florida, county-wide special assessments may be levied and then pledged as revenue streams for solid waste revenue bonds. In counties where the levies have been used, waste systems have been able to reduce their fees to a more competitive level, lessening the risk that haulers will take waste to other facilities.
Lipnick, the Moody's vice president, said that Moody's on Tuesday upgraded its rating on an Orange County, Fla., landfill system to A1 from A. The upgrade was based in part on the system's competitive pricing, which is subsidized through a special assessment on taxpayers' property tax bills.
Moody's noted that the use of "alternative revenue streams need not change the intent of using project revenue as the primary source for debt repayment. Rather, the deep pocket provided by the local government assures investors that the bonds will be repaid and gives the issuer flexibility in pricing its waste disposal services."
