LOS ANGELES - Grapping with regional trash disposal problems, local governments in San Diego County, Calif., are debating whether to create an intergovernmental agency empowered to issue solid-waste debt obligations.

Propelling the discussions is a newly opened municipal trash sorting plant, known as a materials recovery facility, in San Marcos. The plant cost $134 million to build and was financed with tax-exempt bonds.

The plant, one of the largest in the nation, opened earlier this year and is projected to cost $27 million annually to operate. But a storm of controversy erupted when analysts said it will only generate about $5 million annually in revenues from recycling.

Nonetheless, San Diego County officials are depending the plant, noting that the need for recycling is derived from the California Integrated Waste Management Act of 1989, which requires local governments to decrease their reliance on landfills.

The state's local governments are supposed to divert 25% of their waste stream from landfills by next year, and 50% by 2000. Noncompliance fines are $10,000 a day, but are waived if the locality is making a good faith effort to comply.

With frustration mounting over the San Marcos recycling plant, cities in San Diego County want to form in San Diego Solid Waste Management Authority, which they said would expand their control over the county's solid waste stream. Approval to create such an authority requires a majority vote of the five-member county board of supervisors and the support of only one of the county's 18 cities.

The cities are expected to make their decisions known by month's end, said Lin Wurbs, program coordinator for the county's year-old interim solid waste commission, yesterday. County supervisors are voting on the matter Tuesday.

The county's most populous city, San Diego, has announced its decision not to participate because it owns a landfill and operates a separate trash program.

The 17 other cities historically have sent their trash to five county-run landfills, and some cities reportedly are miffed that the county's $43-a-ton charge to accept trash - known as a tipping fee - is higher than fees quoted by private waste haulers.

By joining the intergovernmental agency, cities believe they would have more clout in managing the solid waste system, and possibly curb rising tipping fees.

Sharing management of the solid waste program could provide advantages to the counties, market sources said. For example, cities participating in the authority could make a long-term commitment to direct their trash flow to county landfills. A dedicated waste stream creates revenues that could back investment-grade long-term debt issues for capital projects.

Defining the discussion surrounding the need for the joint powers agency is the North County Materials Recycling and Waste Reduction Center, which began operating in January next to a county landfill.

According to the original plan in the 1980s, the facility, which at that time included a proposed incinerator, was to generate energy and recover recyclables. The functions were seen as a way to extend the remaining life of the landfill and generate income.

To fund the projects, $185 million of adjustable-rate revenue bonds were sold by the California Pollution Control Financing Authority in December 1985. The bonds were issued before the Tax Reform Act of 1986 made comprehensive changes in municipal borrowing practices.

However, proceeds of the bonds were earmarked for a "transitional rule project," a designation that allowed planning to continue under the old, more liberal rules for tax-exempt financings that provided investment tax credits and accelerated depreciation.

But the project's groundbreaking was placed on hold because of the threat of litigation over air emission concerns provoked by the proposed incinerator.

Rather than throw up their hands and kill that project, county officials kept pursuing it because they wanted to take advantage of the special tax credits grandfathered into the original financing, said Ted Rici, a managing director for Public Financial Management Inc.

To keep the project alive, they rolled over the original 1985 financing in a series of supplemental issues, reinvesting the proceeds and interest. Finally, in December 1991, a new issue totaling $134.17 million of solid waste revenue bonds was issued by the state financing authority. This issue called for the construction of a scaled-back recycling plant, without the incinerator.

But even the downsized facility has drawn considerable controversy, county officials said.

While the plant's operator, Thermo Electron Corp. of Waltham, Mass., had agreed to receive and process 550,368 tons per year of trash, the plant will only receive 450,000 tons this year, said Bill Kelly, the assistant auditor and controller for San Diego Count. The problem, Kelly said, is that "we contracted to give [Thermo Electron] 550,000 tons and pay them for processing 550,000 tons - whether we deliver it or not."

The $13 million of annual debt service payments on the bonds is supported by the countywide solid-waste management fund, not just revenues from the Thermo Electron-operated facility. The fund receives revenues from five county landfills.

This week, county officials began negotiating with thermo Eletron to make a $15 million to $20 million equity contribution to allow the county to "retire some of the bonds, and reduce the debt service," Kelly said.

Bondholders need not to worry about a possible default, Kelly said. The bonds are back by a letter of credit from a consortium of three banks led by Union Bank Switzerland. The bonds are rated AAA by Standard & Poor's Corp. and Aaa by Moody's Investors Service, based on the credit enhancement.

The banks' consortium - which must sign off on the intergovernmental agreement - is monitoring the situation closely, although it have not stated whether it would object to the authority formation, Kelly said.

While Kathleen Morris, a vice president in the project finance department of Union Bank of Switzerland, said "three is really no comment" she could give on the proposal, she offered that it has "fascinating" public policy ramifications.

The letter of credit provides comfort level to the rating agencies and the trustees, U.S. Trust Co. of New York, no matter what local political decisions are made regarding the plant.

"As long as the LOC is in place, we feel pretty safe and satisfied," said Steven Vaccarello, an administrator for U.S Trust.

"We certainly expect that the bank will honor their obligations as per the contract," said Mark Ryan, a director for Standard & Poor's.

Meanwhile, one of the top priorities of the joint powers authority might be to renegotiate the contract with Thermo Electron, market sources said. There is talk of paying Thermo Electron $10 million to buy out their contract.

If formed, the authority "may restructure the operating agreement with Thermo Electron," Jim Bowersox, city manager for Poway, Calif., said. Poway one of the cities considering whether to participate in the authority, and its council members will vote on the questions at their May 24 meeting.

"Another option is to shut the plant down," Bowersox said. But, "under any scenario, the authority has made allowance for continuing to make debt service payments. They are not going to walk," he said.

"Closing down the trash plant is an option," said John Weil, chief of staff for county supervisor Pat Slater, who heads the interim solid waste commission. "Operating the transplant without the involvement of Thermo Electro also is an option."

If Thermo Electron's contract were purchased, "the hope would be that the plant could be operated more cost-effectively without a third party involvement," Weil said.

"We would feel unhappy" if the plant were closed "because of all the sweat" that went into its construction, said Jerry P. Davis, a vice president of Thermo Eletron.

From Thermo Electron's perspective, the company is "sort of neutral" on the prospect of the formation of a joints power authority. "We are standing on the sidelines, watching."

But, he said, the plant, which opened earlier this year, "is running beautifully."

Ricci of Public Financial Management said because of the need for recycling, and other regulatory burdens, localities will increasingly find that "solutions to problems lie in a regional approach."

He said if the cities and county "agree to act together by committing their waste stream, then they could issue debt, take those proceeds, and do various things such as fund new facilities and refund old debt."

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