Raising Revenue To Support Waste Services

Timothy J. Bratton

Communities can fight back against the rising costs of solid waste management services.

Conditions in the industry have been wreaking havoc on many communities, especially those that rely exclusively on tipping fees or user charges assessed at the point of disposal or processing. The problem has been exacerbated by the recession, which has blunted waste generation by as much as 15 to 25 percent, and by leakage of waste to lower-cost alternatives.

Recent court rulings have hindered reliance on flow control ordinances to prevent waste from being diverted into other systems and ensure the revenue from tipping fees.

Of course, many needs compete for revenue, including new and replacement facilities; disposal site closure; techniques, programs and services to divert a substantial portion of the waste stream from disposal; and sophisticated administrative and financial management structures.

Alternative Methods In the face of revenue shortfalls, many have gone beyond dependence on tipping fees only by applying alternative, more predictable methods of raising revenues including:

* Residential and commercial assessments or improved lot assessments as a special charge on the tax bill;

* Fees charged directly to certain classes of generators based on waste generation;

* Special solid waste fees or surcharges added to utility bills;

* Solid waste development impact fees assessed to new residential and commercial construction, usually at the time of building permit application;

* Fees charged for special identifying stickers, permitting a community resident to use certain disposal or processing facilities; and

* Other charges that vary by location. Most of these fees and charges are subject to certain legal constraints, depending on state laws and municipal codes and ordinances.

Increasingly, municipalities are exploring some form of variable rate or volume- or weight-based fees. Such fees, generally considered to be the least regressive form of special fees and assessments, are founded on the concept that the one who generates the most waste pays the highest fees.

When preparing for a new or modified fee system, communities should evaluate their current and projected costs, anticipated growth, capital improvements and schedule and any sources of revenue.

If possible, they should set assessments and fees at levels that will not require adjustment within the first few years. It is important to determine a fee's longevity in order to assure its political acceptability. Determining the time between fee increases will depend upon accurate cost data and sound revenue projections.

The goal is to establish a system of charges that is both equitable and predictable, considering the various classes of generators. Just as communities have modified their solid waste systems to address the evolution of laws, technology and public perception over the past few years, they must also address the way revenues are raised to support the costs of modern solid waste systems.

Several types of fees and charges can be used to generate revenues.

Tipping Fees Tipping fees are unit charges that are typically assessed per ton or per cubic yard of waste at the point(s) of disposal and/or processing. Tipping fees can be set and adjusted based on revenue needs, waste quantity and system cost projections, and each waste hauler pays strictly for the weighed or measured quantity delivered.

But revenues can be somewhat unpredictable. If waste shortfalls occur, which lead to revenue shortfalls, money to support the system is insufficient and tipping fees must be increased. Unless there is a sound basis of legal flow control or contracted waste supply, the increase in tipping fees could be counterproductive, leading to additional waste migration and further revenue shortfalls.

Private waste haulers often criticize tipping fees because they subsidize residential waste generators. This can occur when a substantial share of the waste brought to a facility comes from commercial and institutional sources, and when the municipality collects the residential waste and owns the disposal or processing facilities and recovers a portion of its costs through tax revenues or household assessments. In these situations, the public sector may set tipping fees, usually paid by commercial haulers, to avoid tax increases or higher residential assessments. Once tipping fees are established, they are rarely reduced.

Improved Lot Assessments Improved lot assessments are typically charged to the owner of an improved residential or commercial lot. They are usually applied as a flat fee in a special assessment on the annual property tax bill or as a special charge on a municipal utility bill, such as one for water or sewer service.

These assessments provide a predictable source of revenue, and can be applied in addition to or in lieu of a tipping fee. Predictability is important during periods of economic downturn and when increased tipping fees would be non-competitive in the region and promote waste leakage from the system to lower cost alternatives. Flat fee improved lot assessments are reasonably easy to administer.

However, the flat fee is not equitable, since each improved lot owner pays the same fee regardless of the quantity or handling difficulty of waste generated at that improved lot.

Generator Assessments Some communities have implemented generator assessments at the residential and/or commercial level based on the class of generator. Residential generators may be classified as single-family homes, multi-family homes or others, and commercial generators may be assigned to broad classes such as restaurants, supermarkets, department stores, insurance and banking offices, warehouses, etc.

Generation rates are determined for each class based on local surveys or from an analysis of relevant studies and literature. The fees are tied to measured or estimated generation factors.

For example, a restaurant operating seven days per week normally could be expected to have a higher rate of waste generation than a typical single-family home and, accordingly, the fee to manage the waste would be higher.

Implementing this form of assessment may be more difficult. The front-end planning and analysis required to determine appropriate generation factors requires time and money. And while there may be some consistency within broad generator classes, there can be significant waste generation difference within a class due to sales volume, square footage, number of employees, location, etc. Some commercial waste generation factors are based on these variables or on the volume of waste storage capacity and collection frequency reported by the generator.

A community considering assessments based on waste generation rates, without a detailed, location-specific survey or valid hauler data for individual customers, should be careful with generation factors. In many cases, the factors will not match certain generators and will substantially over- or underestimate actual generation rates. But, if properly applied, this form of fee can bring increased equity to the fee system.

Sticker Fees Many local governments have implemented sticker fees, particularly those with citizen drop-off areas at disposal and processing facilities or convenience centers. Here, the user buys a vehicle sticker that allows the user to enter the facility. The stickers are usually valid for one year.

In some cases, the jurisdiction may limit the amount of waste a resident may bring to the facility and charge an additional fee (for example, a per-bag fee) for excess waste.

The sticker fees are usually added to other fees, charges or taxes that support the system, and may be set to cover the costs of establishing and maintaining the drop-off or convenience-center.

Sticker fees help to allocate the cost of certain solid waste system components to the users who benefit from the component. Usually, the generator avoids the cost of waste collection and benefits from hauling small vehicle loads without paying a tipping fee for each load delivered.

Impact Fees To finance infrastructure in high-growth areas, some communities are using development impact fees - scheduled charges applied to new residential and commercial development. These fees provide revenue for the construction or expansion of facilities.

Although use of these fees to finance solid waste facilities has been limited, they are being considered more frequently as a way to raise money, particularly in rapidly growing communities.

Development impact fees may be assessed at the building permit stage, to pay for a portion of landfill expansions, collection equipment, recyclables processing, transfer stations and other capital improvements.

Impact fees typically do not cover the major share of capital cost for new or expanded facilities. In some states, they must be authorized by the state legislature. The courts have held invalid impact fees that were found to be unreasonable and unrelated to the benefits received by those who pay the fees.

These fees are typically assessed on a per-unit or square-footage basis. When considering development impact fees as a source of revenue, ensure that the fees are properly computed and include credits to the new development on which they are assessed where the fees benefit existing development.

Shifting from a tipping-fee and property tax-supported revenue structure to one incorporating a mix of different fees and charges can dramatically impact a community. Table 1 (see page 51) shows the existing structure (Scenario One) and two scenarios of fees and assessments that might be applied in a hypothetical community. In this community, all solid waste revenues are derived from tipping fees at disposal or processing facilities and property tax revenues in the general fund, with the substantial portion coming from tipping fees. Under this arrangement, as system costs increase, tipping fees, property taxes or both must also be increased to fund the expenses.

In Scenario Two, the implementation of improved lot assessments, a form of generator charges and sticker fees assessed to residents using convenience centers - along with a removal of revenues from property taxes - reduces the amount of tipping fee revenue required and the actual tipping fee level. In practice, however, tipping fees may not be reduced, or at least not to the value shown, to extend the period before further fee increases would be needed.

In Scenario Three, impact fees are added to the community's system of fees and charges, to be applied against capital charges within the solid waste system budget to further reduce the amount of revenue required from tipping fees.

This oversimplified example of possible fee arrangements illustrates how a mix of fees and charges could be applied to make it less dependent on tipping fees or tax revenues. When considering a new system of fees, a community should plan for the cost to establish and administer the system. In the example presented in Table 1, that cost is not reflected.

There are many variations of these three scenarios. For example, differential assessments based on generator classes could be applied in place of improved lot assessments, and variable rate or volume-based fees could be implemented in lieu of sticker fees at convenience centers. Each community will have a different set of conditions that will determine the best system of fees and charges.

Table 2 (see page 54) outlines some of the important criteria that a community should evaluate when planning a new or modified system of fees and charges. The community should aim for a structure that incorporates incentives to reduce and recycle while, at the same time, providing for ease of administration and enforcement, revenue predictability and equity across the classes of generators.

Despite the rising costs of modern solid waste management projects in most communities, a sound system of fees and charges can help manage costs.