COUNTY OF SAN MATEO

Inter-Departmental Correspondence

Department of Public Works

 

DATE:

February 11, 2009

BOARD MEETING DATE:

March 3, 2009

SPECIAL NOTICE/HEARING:

None

VOTE REQUIRED:

Majority

 

TO:

Honorable Board of Supervisors

FROM:

James C. Porter, Director of Public Works

SUBJECT:

IN THE CAPACITY AS A MEMBER AGENCY OF THE SOUTH BAYSIDE WASTE MANAGEMENT AUTHORITY (SBWMA), APPROVE THE SALE OF BONDS BY THE SBWMA TO FINANCE RECONSTRUCTION OF THE SHOREWAY FACILITY, AND APPROVE THE REFUND OF THE BONDS ISSUED IN 2000

 

RECOMMENDATION:

Adopt a resolution:

 

1.

Approving the issuance and sale of bonds by the South Bayside Waste Management Authority (SBWMA), in a principal amount not to exceed $65,455,000;

 

2.

Approving the refund by the SBWMA of its Series 2000 Bonds;

 

3.

Agreeing that the County shall not rescind this approval unless it is withdrawing from the Joint Powers Authority (JPA) Agreement, and pays its proportionate share of all existing debts of the Authority including the Obligations, any Refunding Obligations and the 2000 Bonds as required by the JPA Agreement; and

 

4.

Authorizing and directing County officers and staff, to execute and deliver any and all documents necessary to effectuate the purposes of this Resolution, and ratifying any and all such actions previously taken by such Authorized Officers or staff members.

 

VISION ALIGNMENT:

Commitment: Responsive, effective and collaborative government.

Goal 22: County and local governments effectively communicate, collaborate and develop strategic approaches to issues affecting the entire County.

 

This action endorses the progress of the improvements of a major regional solid waste management facility in the County in order to provide the most cost effective service to the ratepayers, while maximizing the amount of material that is diverted from landfills through recycling and other programs.

 

BACKGROUND:

In 1982 the County became a member of the South Bayside Waste Management Authority (SBWMA). The SBWMA is comprised of 12 jurisdictions: Atherton, Belmont, Burlingame, East Palo Alto, Foster City, Hillsborough, Menlo Park, Redwood City, San Carlos, the City of San Mateo, the County of San Mateo, and the West Bay Sanitary District. The SBWMA owns and contracts for the operation of the San Carlos Transfer Station and Recyclery (the “Shoreway Facility”) that serves the areas of the member agencies. The SBWMA also manages the debt service related to the Shoreway Facility.

 

In 2000 your Board approved the bond issued by the SBWMA for the purchase of the Shoreway Facility from Allied Waste (formerly Browning Ferries Industries).

 

DISCUSSION:

Master Plan - In April 2007 the SBWMA Board approved a Shoreway Master Plan detailing transfer station building retrofits, the construction of a new materials recovery facility (MRF) building, purchase of new MRF single stream processing equipment, and traffic and other miscellaneous environmental improvements; the SBWMA Board approved a preferred master plan option which became the starting point for designing the project. Exhibit A is a summary of key master plan milestones.

 

Operating Agreement Restriction - The transfer station operating agreement, that was approved in 2000, is set to expire at the end of 2010. Because the 2000 bonds were sold on a tax-exempt basis as essential purpose governmental bonds, the formula for determining compensation to a private enterprise operator of the facility is restricted by federal tax rules, and in particular, may not be based on net operating profit. This limitation does not provide adequate incentives to the contractor for superior performance (e.g., increasing the quantity of materials recovered, reducing MRF residuals, increasing the quality of the recyclable materials, increasing the revenue per ton received for commodities, etc.) and in effect caps the operator’s profit. Such a “profit-cap” is unusual in these types of operating contracts.

 

On June 28, 2007 the SBWMA Board approved the 2011-2020 facility operations Request for Proposals (RFP) and associated Operating Agreement with a compensation structure to reflect a more standard industry compensation arrangement based on net operating profit. At the time, it was thought that this change in the operating agreement would require that the Authority’s tax-exempt 2000 bonds either be replaced by January 2011 with taxable bonds when the new operating agreement becomes effective or be redeemed with available cash reserves. Debt sold to fund new construction may be tax-exempt after January 2011, although it will be characterized as “exempt facility” debt and be subject to the payment of alternative minimum taxes (AMT). Because more than 25% of the acquisition cost of the transfer station in 2000 was for land, the 2000 bonds do not qualify for refunding with tax-exempt AMT bonds.

 

Operating Agreement RFP Issued - Between July and October 2007 all 12-member agencies approved the facility operations RFP documents. The final RFP and Operating Agreement were publicly released to potential proposers on November 1, 2007 and December 1, 2007, respectively.

 

On March 4, 2008 the SBWMA received seven proposals in response to its facility operations RFP. Proposals were received from the following companies:

 
 

Allied Waste Services of San Mateo County

 

Bayside Environmental Services & Transfer (joint venture of Peninsula Sanitary Group, South San Francisco Scavenger Company, Green Waste Recovery and Zanker Road Resource Management)

 

Greenstar, LLC

 

Hudson Baylor Corp with Waste Solutions Group

 

Norcal Waste Systems of San Mateo County

 

Republic Services, Inc.

 

South Bay Recycling, LLC (joint venture of Community Recycling & Resource Recovery and Potential Industries)

 

On July 24, 2008 the SBWMA Board unanimously approved the selection committee recommendation to shortlist Hudson Baylor Corp. and South Bay Recycling for further negotiations. The SBWMA Board will ultimately select one of these two companies as the facility operator. The final contract to be negotiated with the selected operator will be subject to approval of two-thirds of the member agencies; this item is expected to be brought to member agencies in the spring 2009.

 

Plan of Finance Approved by SBWMA Board - Shoreway project cost estimates based on 40% engineering plans were presented to the SBWMA Board in June 2008. The SBWMA Board adopted a resolution recommending that its member agencies authorize the issuance of taxable debt obligations to fund new construction improvements and to refund the SBWMA’s 2000 bonds. The SBWMA Board also requested member agencies to take action to approve the issuance and sale of such debt obligations. The SBWMA’s financing team has since determined that using available cash to redeem the 2000 bonds and issuing only tax-exempt AMT bonds is feasible and is a more cost-effective approach than refunding the 2000 bonds with taxable bonds.

 

In January 2009 SBWMA staff presented an update to the bond proforma and financing plan and recommended no change to the requested authorization amount of $65.455 million. This recommendation was based on the following key factors:

 
 

While there appears to be two viable alternatives for financing the Shoreway improvements, there remains too much volatility in the credit markets to commit to a lower bond issuance amount.

 
 

SBWMA’s available reserve balances have been impacted due to the substantial recent decline in commodity revenues. The current bond proforma assumes use of $16.9 million in cash reserves vs. $18.9 million previously assumed. Higher tipping fees have also been projected to partially compensate for $14.1 million in lower commodity revenues over the next four years (2008-2012).

 
 

The updated project cost estimates, based on 100% complete engineering plans, are not appreciably lower than the June 2008 cost estimates. This is due in part to higher than expected engineering fees.

 
 

An overall project contingency of 10% ($5.38 million) is still assumed; this can be reevaluated in April 2009 when construction bids are received for the MRF and Transfer Station construction work.

 

Project Cost Based on 100% Engineering Plans - The revised cost estimate for the Shoreway master plan improvements, including a new MRF building with single stream recycling equipment, is $59.152 million (see Exhibit B). This figure includes a 10% contingency on top of the estimated project costs. The updated cost estimates for site work, transfer station building retrofit and MRF building are based on 100% complete engineering plans. The June 2008 estimates were based on 40% complete engineering plans. Overall, the January 2009 total project cost estimate is about $206,000 less than the June 2008 estimate.

 

Plan of Finance

The SBWMA financial advisors are currently considering two plans of finance: Variable Rate Demand Bonds (VRDB) and Bond Anticipation Notes (BAN) followed by Long Term Bonds. Exhibit C a summary of the project funding scenarios. Both of these types of securities are in high demand and both carry interest rates that are lower than the current long-term bond cost estimate of 8.5%

 

The previous plan of finance, first developed in May 2008, recommended that the SBWMA sell long-term, fixed rate bonds to take advantage of the then relatively low estimated interest cost of approximately 5.75% for tax-exempt bonds subject to the AMT. Since then credit markets have become completely dysfunctional. The current interest cost estimate for AMT bonds is approximately 8.5% and so other plans of finance are preferred. The plan anticipates the sale of debt in May 2009.

 

VRDBs are long-term bonds that are priced as extremely short-term debt. The interest rate changes weekly and investors have the opportunity to sell their bonds back to the issuer at par. An essential security feature is a bank letter of credit (LOC). A remarketing agent re-sells bonds as needed. Current interest rates on VRDBs are under 1%, although rates have averaged closer to 3% since 1990. Total annual costs include the LOC (approximately 1.50%), the remarketing agent (approximately .125%) and variable interest costs (3.06% average since 1990). SBWMA has used a 5% total cost in our financing assumptions.

 

VRDBs are considered a long-term funding mechanism, although they do carry certain risks. In exchange for lower interest rates, issuers must accept interest rate fluctuation risk, credit provider downgrade risk, and tax risk. To partially mitigate interest rate risk, SBWMA’s financial consultants recommended that SBWMA’s rate stabilization fund be more fully endowed and used as needed for this purpose.

 

BANs are short-term funding obligations issued prior to permanent, long-term debt. They generally pay interest only, with their full principal amount coming due upon their maturity. Because their term is short (usually 1 to 3 years), they bear a lower rate of interest than long-term bonds. They must be either re-issued (“rolled”) or refunded with another type of debt, usually permanent, long-term funding, upon maturity to avoid default. For issuers with long-term ratings in the “A” category or higher, fixed rate BANs may be issued without a supporting letter of credit.

 

While a one-year term carries the lowest interest cost (approximately 2% in the present market), it also carries greater risk that credit markets will not have returned to normalcy and the note will have to be rolled for another year or two before it can be refunded into a long-term bond issue. This would entail an extra set of issuance costs (legal, financial, ratings, underwriting, etc.). Unless the note has to be rolled because long-term funding is not available, it is expected that the note would be refunded with long-term bonds upon its maturity in two years. The expectation is fairly high that a BAN sale could be implemented, even in the present very difficult market.

 

If a letter of credit can be obtained on reasonable terms, a VRDB has the prospect of providing long-term funding at a lower cost than would a BAN followed by long-term bonds, and is therefore recommended by SBWMA’s financial team as the first alternative. Furthermore, it is estimated to require less debt than would a two-step bond sale, due principally to the issuance cost savings. Sale of a two-year BAN followed by a long-term bond refunding is the second recommended alternative, and would be implemented if a letter of credit to support VRDBs could not be obtained on satisfactory terms. Exhibit D is the full analysis of plan of finance options.

 

Alternatives

The County may elect not to approve the resolution approving and authorizing the sale of debt by the SBWMA. If 5 of the 12 SBWMA member agencies vote not to approve the issuance of the bonds, the SBWMA will not have sufficient funding to proceed with the Shoreway Master Plan as currently proposed. Depending on how the master plan might be revised, this will either delay or prevent the implementation in 2011 of weekly residential collection of single stream recyclables, weekly residential collection of organics (plant materials and food scraps), and rollout of single stream collection for commercial businesses. At the time that this report was prepared, Five (5) member agencies have already approved resolutions for SBWMA to proceed with the bond sale. They include the Cities of East Palo Alto, Foster City, Redwood City, San Carlos, and San Mateo.

 

Although the SBWMA selection committee did recommend a facility operator for the Materials Recycling Facility, the recommendation was conditioned on the resolution of several issues. It may be premature to commit to financing an entirely new facility until those issues are satisfactorily resolved and the facility operator has been selected. Your Board may want to consider continuing this item until the March 31, 2009 Board of Supervisors meeting, as SBWMA is expected to consider the selection of a Facility operations contractor at the March 26, 2009 meeting of the SBWMA Board.

 

FISCAL IMPACT:

The sale of bonds will increase debt service obligations of the SBWMA. All debt issued by the SBWMA will be secured solely by the net revenues of the SBWMA (total revenues less operating expenses exclusive of debt service and depreciation). Annual debt service for the SBWMA will increase after 2010 by an estimated $3.235 million (VRDB - see Exhibit E). Tipping fees will have to increase by an amount sufficient to produce net system revenues that are at least 1.75 times interest-only debt service during construction and 2.0 times maximum annual debt service by the first full year of stabilized operations, FY2011-12. The current bond proforma produces debt coverage of 2.03 in 2011, 2.41 in 2012 and 2.61 in 2013.

 

The estimated one-time collection rate impact from the new debt service using AMT bonds was previously estimated at 4.89% based on the revenue projections in 2008. The impact has now been recalculated based on projected revenues in 2009. The new rate is estimated to range from 4.54% to 4.89%, depending on which bond option is selected (AMT, VRDB or BAN). This projected rate impact is only related to the new debt service.

 

As part of completing the updated bond proforma a collection rate impact was also calculated taking into consideration the projected annual tipping fee increases at Shoreway and the new debt service.

 

Projected Total Collection Rate Impact:

 

2009

2010

2011

2012

2013

% Increase from Tip Fees & New Debt

4.34%

4.39%

3.91%

3.02%

1.67%

% Increase from collection operations

4.50%

4.50%

9.96%*

3.50%

3.50%

Total:

8.84%

8.89%

13.87%

6.52%

5.17%

*Estimated rate impact from rollout of new collection services by Norcal Waste.

 

Under the terms of the existing JPA Agreement, a member agency may not withdraw from the JPA without paying off its respective share of any outstanding SBWMA debt. Each member’s pro rata share of the SBWMA’s outstanding debt will increase once the 2009 bonds are issued. Exhibit F is a breakout of the debt obligations by member agencies. SBWMA debt is not a general fund obligation of Member Agencies.

 

The County’s pro rata share for the County Service Area 8 (North Fair Oaks) is approximately 3.6%. If the County withdraws from the JPA now, the County share of the 2000 bond balance is approximately $520,000. If the County withdraws from the JPA after the new bond is sold and other unincorporated areas within the SBWMA service areas are added to the new franchise in 2011, the County pro rata share will increase to approximately 6.2% or approximately $3,320,000. The additional amount of liability is due to almost doubling the number of customers served and the higher bond amount sold.

 

There was a study session held by the City Council of the City of Burlingame contemplating possible withdrawal from the JPA. No decision has been made at the time that this report was written. The City’s current tonnage represents approximately 13.1% of the total tonnage processed through the JPA. If the City decided to withdraw from the JPA prior to the bond sale, the County pro rata share for the debt service would increase from 6.2% to 7.1%.

 

There was a concern raised that the proposed facility improvement project is costing too much money. The SBWMA’s consultant has evaluated the options of preserving existing buildings and constructing new buildings with a number of factors, including structural safety, operational safety, operation efficiency, sustainability and environmental awareness, and costs. This analysis was completed as part of the initial review of master plan options in March and April 2007. The benefit and flexibility of constructing new buildings will be significant. The SBWMA Board of Directors had considered all these factors before adopting the current master plan.

 

At its October 23, 2008 meeting, the SBWMA Board considered eliminating certain components that may be deferred to a future date. One major component is the expansion of the transfer station. If it were eliminated, it would save approximately $8.5 Million in construction related cost. On the other hand, it would impact the transfer station operations, especially services to the self-haul customers and potentially reduce their waste diversion. The MRF improvement has higher priority than the transfer station because the MRF improvement will provide a much higher diversion rate for the service area and at a lower long-term cost than retrofitting the existing MRF building.

 

There may be other components that could be eliminated but the cost impact would be much less than eliminating the transfer station expansion. Value engineering was done on the Phase 1 project (for the traffic improvement) and the low bid came in at $2,195,000 below the budget of $2,253,000. SBWMA has completed additional value engineering during the final design of the facility. SBWMA decided to bid the transfer station expansion as a deductible item together with the MRF. When the actual bids come in the SBWMA Board and member agencies will then decide whether or not to award the portion related to the transfer station improvement.

 

County Counsel has reviewed and approved the Resolution as to form.

 

Attachments:

Exhibits A, B, C, D, E and F