LOS ANGELES -- A U.S. Supreme Court ruling in May on waste flow control has halted solid waste issuances in many pans of the country, but not in California, where five solid waste-related issues have been sold since the high court ruling.
The latest California deal, a $17.9 million issue of certificates of participation by Kern County, closed last Thursday. The sixth transaction will occur later this month when Burbank issues solid waste obligations.
The force pushing these issuers to market is a 1989 California law requiring municipalities to divert the amount of solid waste now being sent to landfills by 25% by 1995 and by 50% by the year 2000, according to Brad Driver, an associate director for Standard & Poor's Corp.
To meet the mandate, counties are issuing long-term obligations to finance transfer stations -- warehouses located near communities where the trash is collected. The materials are transferred to long-haul trucks, which deliver them to landfills.
Besides Kern County, other California issuers that have gone to market with solid waste financings since May are Placer County, Sonoma County, San Joaquin County, and Kings County, Driver said.
Outside California, the Supreme Court's 6-to-3 decision in C&A Carbone v. Clarkstown, N.Y., has curbed the frequency of solid-waste issues, Malachy Fallon, a Standard & Poor's director, said Friday.
The high court ruled that local governments cannot enact ordinances that direct solid waste generated within certain boundaries to designated facilities. Such ordinances have been the typical method to ensure a steady stream of waste, and in turn revenues that go to repay debt service on bonds issued for solid waste facilities.
While there are billions of dollars of solid waste obligations outstanding, the court ruling has not prompted significant numbers of rating changes, Fallon said.
"We did an extensive review of issues on which we have ratings outstanding, and, thus far, we have only downgraded one issue," Fallon said.
Lancaster County, Pa., Solid Waste Management Authority was downgraded to BBB from A in July. Camden County, N.J., Pollution Control Financing Authority was placed on CreditWatch with negative implications in June.
However, most solid waste issuers have not been affected by the high court ruling, Fallon said. They "don't solely rely on flow control [ordinances] to get their waste," he said. Many of the issuers have alternative sources of revenue available to them, "not just tipping fees charged to commercial haulers," he said.
In Kern County, Calif., for example, residents pay $57 per year in land use fees. The fees are placed on their semiannual property tax bill. About 60% of the county's waste is generated by homeowners.
Residents "are allowed to dispose garbage at the landfills without any additional charges," said Roland Burkert, a special projects manager for Kern County. He calls this system "economic flow control" -- meaning it is not in the residents' financial best interest to dispose of their materials elsewhere.
Credit for the land use fee "should go to the board of supervisors who took the heat in 1989 for imposing" it, Burkert said. The fee "allows us to have economic flow control, and gives us a stable revenue source," he said.
For nonresidential waste, the county collects a gate fee, or tipping fee, of $29 per ton, which Burkert said is "very low compared to surrounding jurisdictions ."
Kern County, located in the southern portion of the San Joaquin Valley, is the center of California's oil and natural gas industry. The county owns and operates 11 landfills, and has no competition from any private or city-operated landfills in the county.
In last week's solid waste financing, Kern County issued $17.9 million of insured obligations to fund four landfill-related improvements. Two landfills that are no longer active will be capped with clay. Two other landfills will be expanded with liners to allow for additional waste.
In a pre-emptive strike against investor anxieties stemming from the high court ruling, the deal was prequalified for credit enhancement, said Jeff Frapwell, Kern County's assistant director of budget and finance.
Qualifying for insurance from MBIA Corp. "was quite a coup because insurers aren't anxious to get out there and insure solid waste deals," Frapwell said.
Dinah Bellis, a vice president and manager for MBIA Corp., said Friday that such deals "are difficult to get done" in the current climate. She said Kern County is the first California solid waste issue the company has insured since the high court decision.
In the transaction, Kern County used a so-called selective bidding process structured by the county's financial adviser, Leifer Capital Inc., in which bids were solicited from a list of pre-selected underwriters.
The process -- sometimes called semi-competitive or limited competitive bidding -- is a hybrid of competitive and negotiated sales. On behalf of Kern County, Leifer Capital invited about a dozen underwriters to submit sealed bids for its certificates of participation, which received an A underlying rating from Standard & Poor's.
Frapwell said the underwriters were told they had a choice: to bid "based on the solid single-A rating," or to bid with insurance costs factored into their decision.
Kern County received five bids for the obligations, with PaineWebber Inc. submitting the lowest bid, with a true interest cost of 5.84%. The COPs had serial maturities beginning in 1995 and every year thereafter through 2009.
The cover bid was submitted by Smith Barney Inc., whose TIC was one basis point higher than PaineWebber's, Frapwell said. The remaining bids were submitted by Bear, Stearns & Co., Stone & Youngberg, and Grigsby Brandford & Co.
"PaineWebber decided they could do best by insuring the whole thing," Frapwell said, so the certificates were sold to investors with insurance-backed triple-A ratings.
The five bids were separated by only 12 basis points, a reflection that the market -- despite the high court ruling -- is willing to buy solid waste obligations under the right circumstances, said David Persselin, an associate with Leifer Capital, the Santa Monica, Calif.based independent financial advisory firm.
"Despite all the uncertainty in the market, issuers who have essentially a good operation going can achieve good rates in the market," Persselin said.
The financing was structured as an installment purchase agreement, as opposed to lease-back financings which contain abatement provisions that carry more risk, Persselin said.
Installment purchase agreements are "a much more secure type of financing," he said. "If those assets get sucked up in an earthquake, the issuer is still committed to making the payments."
In Kern County's transaction, the obligation is a revenue-backed installment purchase agreement, Persselin said. "Even if something were to happen to one of the landfills in the system, you have the rest of the land fills available to continue to generate revenues," he said.
Kern County's 10-year capital plan for solid waste programs calls for $70 million of projects, of which about $38 million will be financed through long-term obligations.
