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2.5 Topic k: Financing

Traditionally, funding for community solid waste systems in North America comes from a general fund whose primary source of revenue is a property tax. A growing trend toward tax reform in recent years, coupled with falling revenues due to economic problems in some areas, as well as desires for incentive-based fees in other regions, has led many communities to seek alternative funding sources. For example, some jurisdictions fund solid waste programs through sales taxes, a municipal utility tax, or special tax levies for specific facilities or programs. Another approach, user fees, can be equitable and efficient if properly administered. Fees are often assessed on the basis of actual costs of collection and disposal, and can be either uniform or variable-rate depending on the amount and kind of service provided. A straight user charge allocates an equal share to all users within a service-level group.

Volume-based rates

Volume-based rates charge residents directly for the amount of garbage they produce. This rate system provides an economic incentive for waste reduction and recycling. Local governments or haulers can charge residents using either an average or marginal cost rate structure. The average cost structure is a flat rate for each volume disposed (e.g., per container). The marginal cost structure has a fixed cost for the first trash can, then a sliding amount for each additional can that in some cases is based on the actual cost of transportation and disposal. Interest in volume-based rates is growing. During the mid-1980s, solid waste management costs began to escalate. Since then volume-based rates have become increasingly popular throughout the US in cities and towns of all sizes. Over 1,000 communities in the US now use a variable-rate structure for MSW collection. In Canada, the number is much lower, although interest in this financing option is increasing. The first user fee program was implemented in Ontario in 1991. Since then, 36 municipalities have adopted this approach. While the US experience does not indicate that the size of the municipality is a factor contributing to the effectiveness of a user fee program, the Canadian experience to date suggests that size may be a factor, perhaps due to the political acceptability of user fees. No large Canadian municipality has to date taken this approach.

Volume-based rates are administered by one or more of the following means: charging the resident for the disposal of a predetermined number of cans each week; selling specially marked bags that residents must use for garbage disposal; selling tags or stickers which residents must place on each container of waste to be disposed of; or weighing each resident's garbage before depositing it in the truck. This last method is currently being studied.

Volume-based rates have led to significant increases in the amount of material recycled and quantity of yard wastes diverted out of the waste stream and into compost piles. In theory they can lead to changes in consumer purchasing behavior, though there are few data on this subject. Measuring changes in waste generation rates can be complicated if residents increase the use of garbage compactors. (Some communities set weight limits to guard against overstuffed cans.) Another phenomenon is the tendency for people to store more items in the home when confronted with disposal restrictions. Illegal dumping is another potential problem.

There are also a number of problems which arise in trying to determine the effectiveness of a user pay program. It is difficult to determine which diversion initiatives may be contributing to a reduction in waste generation. New or expanded recycling opportunities, backyard composting programs and public education/awareness programs can all influence the amount of waste being produced. This is further complicated by a lack of historical data to use for accurate comparisons to be made. While user pay programs appear to be effective in encouraging a reduction in the quantity of waste being generated, such findings should be viewed with some caution.

Revenue sources

Disposal site fees or "tipping fees" are also normally charged at landfills and WTE incinerators in North America, and more recently at materials recovery facilities. Tipping fees are usually charged on a per-ton basis and may depend on the type of refuse received; for example, stumps, tires, and demolition debris are more difficult to compact and cover. Tipping fees often are set below true operating costs, especially if the costs of environmental controls, closure, post-closure maintenance, and liability are considered. Tipping fees can also be set above true operating costs, as happened in southern Ontario in the late 1980s and early 1990s, as an economic instrument to encourage waste diversion. Private haulers took advantage of lower disposal costs at US landfills, exporting almost one million tons per year. Rather than reducing the amount of waste being generated, the increased tipping fee merely redirected the waste.

Revenues can also be generated from recycled materials, energy produced by incinerators, methane gas recovered at landfills, or in rarer cases by composting programs.

Three basic types of capital financing are used in North America: current revenues, borrowed funds, and private financing. The most common method of obtaining capital equipment has been to purchase it as necessary using current revenue. Current revenue financing has been used mainly for purchasing collection vehicles and for selected land disposal systems. On the other hand, extensive system upgrades or capital-intensive solutions to waste problems can necessitate the raising of capital through borrowing or contracting with a private firm.

Borrowing through issuance of general obligation bonds is the most flexible and least costly method used. The issuing locality guarantees the bond with its "full faith and credit," based on its ability to levy property taxes. Municipal revenue bonds are sometimes used because they generally do not require voter approval and do not affect a community's legal debt limits. A revenue bond is issued to finance a particular project with associated revenue-producing services. Because revenue bonds do not carry the full faith and credit of the community, but rather pledge the net revenue generated by the project, they are considered more risky and thus carry a higher interest rate.

Bank loans are sometimes used for short-run, small-scale capital requirements, but are not a viable alternative to long-run bond financing. Lease agreements are often used for land or equipment, where a private lessor owns the land or equipment and leases it to the municipality. Equipment leases are typically for under five years, while land leases are often longer.

Private financing methods involve contracting with a private firm for waste management services and transferring to it the burden of raising capital. The range of options open to the private firm vary in terms of the procurement, management, and degree of ownership and control of the facilities. Industrial revenue bonds or pollution control revenue bonds, for example, can be issued by a municipality for a private enterprise. In this case the municipality technically owns the facility and leases it to the private firm; this technique saves on borrowing costs.

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