Economics: Finding Funds To Fuel Recycling

Marc J. Rogoff and John F. Williams

Collecting recyclables costs money. The capital investments and increased operating costs can be funded through an in-crease in tipping fees at solid waste facilities or in residential property assessments. Other alternatives in-clude bond financing, private loan placement or state grants.

It's difficult to compare recycling program costs. Often, communities don't identify who pays for the program, how long costs are incurred and how much time volunteers contribute. Also, few report the portion of the overall system costs that were avoided by recycling, or the market prices received for select recyclables.

Often the avoided disposal fees and revenues from the sale of recyclables do not offset the implementation and operational costs of a community recycling program. As a re- sult, recycling programs are often supported by state or local sources.

Curbside programs offer a convenient way for residents to recycle. When developing a curbside recycling program, estimate initial costs such as the vehicle type, fleet size, staffing and routing.

In the past, recycling collection ve-hicles ranged from old school buses to flat bed trucks; however, today's recycling collection vehicles are much more sophisticated. Compart-mentalized collection vehicles, de-signed for loading height, storage ca-pacity, stand-up driving and safety, have become popular features. Al-though their initial capital costs are high, overall benefits reportedly in-clude excellent productivity, collection efficiency and low operation and maintenance costs.

To determine the size of your fleet, analyze vehicle productivity, truck capacity and collection efficiency. Vehicle productivity is defined as the number of stops passed in one productive collection hour. A "stop" is an eligible housing structure.

Not all eligible housing structures will put recyclables out each collection day. Housing density, curb miles, traffic patterns, topography, the degree of sorting required, climate and weather conditions will affect productivity.

Truck capacity is helpful in determining route size. Estimate the average quantity of collected material in volume and weight per stop and collection period to calculate how many stops a truck can pass before it's filled.

To determine how many vehicles are needed, consider the truck's capacity as well as an estimate of non-productive time (travel time to the processing facility, unloading and break time), productivity rate and the number of houses served.

Finally, add the cost of labor to sort recyclables at curbside and to drive the vehicle.

Drop-off centers are an alternative to curbside collection. The costs of establishing and operating permanent drop-off centers depend on the level of processing, the amount of assistance provided, the types of ma-terials recycled and the collection and transportation furnished.

Collection and transportation usually are the major costs for drop-off centers. In general, drop-off centers are economical to operate. Materials can be collected by coordinating route planning and storage capacity at the drop-off centers, which allows a routine pick-up in combination with a direct trip to the buyer. Or, the materials can be collected from each site and stored at a central lo-cation until a enough is gathered to haul to the buyer.

Annual operational costs can be reduced by using free land, volunteer labor and unattended centers. Drop-off program costs vary due to the array of system designs. For ex-ample, some centers also serve as environmental education centers, while more simple sites feature only a few containers.

Recycling Yard Wastes Factors which affect yard waste re-cycling program costs include: yard waste separation, collection and processing techniques, administrative costs, participation rates, material storage and marketing requirements. Further, it's difficult to predict overall costs and participation and diversion rates based on other communities' data because of seasonal variations in yard waste generation and inconsistent participation.

For this reason, community directors should conduct pilot programs to predict costs. For example, with pilot programs, many operators have found debagging garbage cans or plastic bags at curbside to be inefficient. As a result, they debag yard wastes at a solid waste processing facility. However, increased labor costs to debag are offset by efficiencies gained by keeping collection costs steady during the peak season.

Composting costs include capital, operational and maintenance. Cap-ital costs include land, construction, buildings, equipment and project implementation. These are usually amortized or depreciated over the life of the project. Operations and maintenance include costs for labor, fuel, utilities, materials, supplies, overhead and environmental regulations compliance. These costs are often shared with other public agencies, making it difficult to compare overall costs between locations.

Most often, yard waste composting projects realize little to no revenue. Benefits include avoiding landfill costs, as long as the product is tak-en away by an end-user, and the a-voided cost of topsoil, if the product is used as landfill cover.

Material Recovery Facilities Over the past several years, the increase in curbside collection programs has led to a dramatic growth in facilities to sort and process recyclable materials. These material re-covery facilities (MRF) improve the marketability of the materials for sale and allow communities to accumulate more materials, which en-hances the prices paid.

A variety of processing equipment is required to make recyclables marketable. Smaller MRFs use a small tipping floor where materials are manually separated. Larger facilities, on the other hand, incorporate automated equipment which uses trommels, screens and magnets.

Regardless of their level of technology, all MRFs require some form of manual labor and have built-in costs. For example, the capital costs include buildings, processing equipment, rolling stock and safety and environmental protection equipment. Operating costs include labor, equipment maintenance, administration and material marketing.

An important factor to consider when determining the profitability of a facility is the avoided tipping fees at alternative disposal facilities.

Various means are used to fund initial capital and operational costs. In many jurisdictions, recycling programs are funded through user or u-niform tipping fees on wastes delivered to a landfill, transfer station or waste-to-energy facility. By this method, recycling programs are funded the same as the operations of a transfer station fleet, a provision for groundwater monitoring at a landfill or a household hazardous waste amnesty program. In the first case, only the users of a particular component of the system pay the cost of recycling programs while, in the second case, all users of the community's system pay these costs.

The main advantage of user fee systems is that they are self-supporting. The full-cost accounting re-quirements in many states has contributed to the popularity of this ap- proach. Over the past few years, many communities have used volume-based, variable rate or weight-based systems to fund recycling programs and to provide an incentive for waste reduction. These programs include pre-paid bag, tag or sticker systems, or variable rate can systems. These programs require customers to select a subscription level based on their individual needs or the number of containers that the household will use each week.

Turning To Taxes Property taxes continue to provide the basis of funding in many communities, although many use an en-terprise-based accounting program. A community's general revenue ac-counts usually include funding for solid waste collection, transportation, waste reduction and recycling. Since a separate billing or collection system is not required, it is easier to administer. Many prefer this funding method since local property taxes can be deducted on federal and many state tax returns.

The method has several disadvantages. For example, since many re-lated municipal services such as fleet maintenance, insurance and legal accounting commonly are un-accounted, this method doesn't ac-curately account for the "true" or "full" cost of services. As a result, many residents and businesses consider these programs to be "free," which hinders the development of ef-fective recycling programs.

Some argue that recycling will not have a real chance of surviving until residents and commercial businesses are charged for the real costs of solid waste services. Furthermore, local property tax caps restrict recycling programs since these programs must compete with other public services for limited funds.

Sales taxes can fund recycling programs, especially in areas with large populations or significant tourism. Some states, like Florida and Georgia, allow communities to levy local option sales taxes and ap-ply these revenues to the construction and/or operation of solid waste facilities. Generally, these levies are often inadequate for larger projects.

Many states also allow local communities, primarily municipalities, to levy taxes on utility services such as telephone, electricity, cable TV, gas and water. These funds can be used for any purpose, but are often spent on essential public services.

Assessment Systems Many states allow local governments to fund solid waste system operations through special assessments. Typically, these flat-fee as-sessments are placed on the non-ad valorem portion of the property tax bill or a municipal service benefit unit. This combined tax bill reportedly costs less than sending a separate bill for refuse service.

In many local governments, failure to pay annual assessments is treated the same as failing to pay property taxes. In some cases, a lien is placed on the property and must be paid when the property is sold, or the lien is sold as a tax lien by the government to a third party. This tactic is used infrequently because citizens may be forced out of their homes for not paying these non-ad valorem assessments. A few communities exempt homeowners from paying these assessments by allowing senior citizen low-income discounts.

Assessment systems also have certain disadvantages. Commonly, a separate tax roll must be prepared which will include all properties within the benefit unit. It can be costly to prepare this tax roll, especially if there's little cooperation be-tween the government and the agency issuing the tax bill. Also, assess- ment fee systems are unpopular.

Since most communities don't have the available capital or tax base to "pay as you go" during construction or procurement, alternate fi-nancing mechanisms must be used.

The primary financing expenses include the interest rate on bonds; the expected internal rate of return for private funds; and the cost of capitalized interest. The amount of capitalized interest is usually 35 to 40 percent of the bond size, which varies according to interest rates and the length of construction. The interest rate or rate of return is influenced by the bond market at the time of sale and whether the bonds bear interest at fixed or variable rates; whether the interest is tax ex-empt, and to what extent; and the security structure of the bond and credit quality of the obligations.

Since project revenues serve as the security for revenue bonds, the bond interest rate will reflect how project risks are handled and the bond buyer's exposure to project risks. The bond holder's risk exposure is typically judged by bond rating agencies such as Standard & Poor's or Moody's.

Private Funds And Leasing In addition to revenue bonds, communities can consider privately financing 100 percent of the recycling projects. Under this option, the private firm would raise the capital, design the recycling project, buy the equipment and/or construct the system and operate the program. This financing method includes options for procurement, operations and de-gree of ownership.

Equipment leasing is prevalent in the solid waste industry, particularly with collection vehicles. Most often, an equipment manufacturer secures a leasing company's purchases and holds the equipment title for a specified period of time, commonly the usual length of depreciation of the asset (five to seven years).

During this term, the community or private operator pays the leasing company for use of this equipment. At the end, the leasee can purchase the equipment at a value specified in the agreement. This type of lease arrangement defers the long-term capital funding of expensive, but depreciable, equipment.

Since many local governments don't have available capital out of their general fund to "pay as you go" for equipment or to build recycling facilities, bank loans often are used to finance short-term projects (rol-ling stock, site purchases and vehicles). Bank loans are used until long-term bond debt can be issued under more favorable market conditions. These bond or tax anticipation notes help communities stabilize their cash flow. In some areas of the country, interest rates on loans can compare favorably with municipal bond rates, particularly since bond issuance costs are saved or deferred until a bond issue refunds the loan at a later date as the notes expire.

In recent years, many states have funded community recycling programs through grants. These funds have been used by communities to plan recycling programs or to pay for equipment. Many states use ad-vanced disposal fees for tires, motor oil and white goods to fund grant programs.

Fortunately, several methods of funding are available to help communities establish costly, yet critical, recycling programs.