Net Service Fees $32 million and counting Ulster County s Stake in Resource Recovery

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1 Ulster County OFFICE OF THE COUNTY COMPTROLLER Net Service Fees $32 million and counting Ulster County s Stake in Resource Recovery Issued: August 26, Elliott Auerbach County Comptroller The mission of the Ulster County Comptroller s Office is to serve as an independent agency of the people and to protect the public by monitoring County government and to assess and report on the degree to which its operation is economical, efficient and its financial condition sound.

2 I COUNTY OF ULSTER PO BOX 1800 KINGSTON, NEW YORK Office of the Comptroller (845) (845) Fax Elliott Auerbach Comptroller August 26, 2010 Dear Chairman Wadnola and Executive Hein: The following report is an initial review of the relationship between Ulster County and the Ulster County Resource Recovery Agency (UCRRA) and was prompted by the multi-million dollar obligation the County has assumed. The Net Service Fees paid to the UCRRA, pursuant to a 1992 agreement, not only impacts the budget and the tax rate, but directly places an annual burden on my constituents, the people of Ulster County. I appreciate the role UCRRA has played in addressing the environmental issues resulting in landfill closures, its efforts in recycling and its overall effort in the solid waste management field. I also understand that since its inception, the UCRRA has faced challenges from the United States Supreme Court overturning flow control laws, such as Ulster County s Local Law #8 of 1991 to a marketplace that is dynamic within an industry that has evolved as the UCRRA has grown. This report does not address those issues. Rather, it reviews financial statements in the context of the terms and conditions of the UCRRA s relationship with Ulster County. One of my primary priorities is to identify areas where County departments and agencies can improve their operations and services, then present those findings in a manner that will not only assist County officials in making needed improvements but serve as a resource for other departments in their quest to ensure effective internal controls. The following is our report on the Net Service Fees. The report evaluates conditions identified against established standards and makes recommendations for improvement. Respectfully, Elliott Auerbach 2

3 Introduction Ulster County is located in the heart of the Hudson Valley region of New York State approximately 90 miles north of New York City and 50 miles south of the State Capitol, Albany. The County covers approximately 1,140 square miles and it has a population of nearly 180,000. There are 24 municipalities in the County. In the mid-1980s in response to new environmental laws enacted by the NYS Legislature and regulations promulgated by the NYS Department of Environmental Conservation many Ulster County municipalities found it beyond their financial and managerial capability to continue to dispose of waste in accordance with the new requirements. As a result, the Ulster County Legislature requested that the NYS Legislature enact legislation creating a public benefit corporation for the purpose of developing, financing and implementing a comprehensive County-wide solid waste management program. In 1986, the NYS Legislature enacted Chapter 936 of the Public Authorities Law which created the Ulster County Resource Recovery Agency. The Agency s organizational structure consists of a five-member board of directors, and executive director, agency counsel, and management, administrative and operation staff. A legal Agreement between the County of Ulster and the Ulster County Resource Recovery Agency (UCRRA) was entered into in 1992 wherein the Agency furnishes to the County the service of accepting and processing, and/or disposing of all Solid Waste and accepting, processing and marketing of Regulated Recyclable Materials within the County in consideration for the payment by the County to the Agency for such service of Net Service Fees, if and to the extent required pursuant to the terms 1 of the Agreement. 1 Solid Waste Service Agreement between the County of Ulster and Ulster County Resource Recovery Agency, dated as of January 1, page 1. 3

4 Purpose: The obligation of the County of Ulster to pay to UCRRA annual Net Service Fees in the millions of dollars gives rise to this evaluation of the Net Service Fee (NSF), its historical context and implications for future allocation requirements. Scope and Methodology This review of the Net Service Fees paid to UCRRA by Ulster County, and related financial considerations, spans the time frame from the UCRRA s first financial statement audits in 1993 through The data and information analyzed include: New York State law; Ulster County local laws; the contract between the UCRRA and the County of Ulster; annual financial reports of both Ulster County and the UCRRA; minutes to meetings of the UCRRA board of directors, County Legislature, and legislative committees; and interviews with individuals involved with the UCRRA at its inception including two former legislative chairmen and the first executive director of the UCRRA. Background The UCCRA, a public benefit corporation, was created on December 31, 1986 by State Legislation (Chapter 936, Laws of New York), which amended the Public Authorities Law to include Title 13-G Ulster County Resource Recovery Agency. The County entered into an agreement on January 26, 1988 with UCRRA to develop a plan and manage solid waste and recovery systems within the County. The County approved a solid waste management plan on December 30, 1991, which was subsequently approved by the NYS Department of Environmental Conservation in April On January 1, 1992 a Solid Waste Service Agreement between the County of Ulster and UCRRA became effective. The Agreement recognizes that the County-wide solid waste management strategy is to use an aggressive reduce, reuse and recycle program, landfill disposal, municipal organic solid waste composting, sewage sludge management, a household hazardous waste

5 program, and transfer stations. The Agreement further identifies that the Agency should issues revenue bonds to finance its facilities, not general County debt. In exchange, UCRRA is given the autonomy to maintain, construct, and operate its systems. It is through this Agreement that the County is obliged to pay to UCRRA a Net Service Fee (NSF), if and to the extent required pursuant to the terms of the agreement. Our review of minutes to the meetings of the: (1) County Legislature, (2) Committees of the Legislature (Environmental and Ways and Means), and (3) the UCRRA Board of Directors as well as our interviews provided no insight into the rationale or deliberation regarding the basis for establishing the NSF. We know, based on language in the 1992 Agreement if and to the extent required, the NSF was not intended to become an annual payment from the County. From 1993 through 1996, no NSF payments were made to the UCRRA. Since 1998 payments have been made every year and, as of 2009, total nearly $32 million. In August 2010 New York State Comptroller Thomas DiNapoli issued a report entitled New York s Public Authorities by the Numbers in which it notes that public authorities are a massive and largely unrecognized influence on public policy and the use of public resources. In particular, is the off-budget spending that makes it difficult to track public authority spending and assess if authorities are operating efficiently and in the public s interest. This report reviews the financial statements of the UCRRA with emphasis on the Net Service Fee (NSF). We assess compliance with contractual obligations related to the NSF and how it impacts Ulster County s requirements to pay the NSF. Net Service Fees Background, Data and Trends The County s obligation to pay NSF to the UCRRA is the result of the referenced 1992 Agreement i. The formula for calculating the NSF is (BDS + BRF + AE) 5

6 minus (TF + RMR + OR). Explained in detail in the end notes, the formula reads (Bond Debt Service + Bond Reserve Funds + Agency Expenses) minus (Total Per Ton Fees Collected + Regulated Recyclable Materials Revenues + Other Revenues). The UCRRA s obligations relative to the NSF are to: establish per ton fees for disposal of solid waste at rates reasonably calculated to result in revenues being not less than expenses; fund and maintain for the term of the Agreement an operating reserve account to be used in the first instance to fund any shortterm operating deficit; notify the County of any draw on the operating reserve account; and if Agency fails to receive sufficient revenues or maintain sufficient operating reserves, requiring the County to pay NSF that the Agency exercise its best effort to reimburse the County NSF amounts paid this obligation to reimburse is continuing. Accumulated Net Service Fees total nearly $32 million as reported in the UCRRA s financial statements. Ulster began paying NSFs in Year NSF paid to UCRRA 1998 $ 1,608, $ 3,788, $ 3,385, $ 3,604, $ 3,998, $ 2,775, $ 3,412, $ 2,397, $ 2,392, $ 1,887, $ 1,249, $ 1,398, Total $ 31,899, Chart 1 County 6

7 $35,000, $30,000, $25,000, $20,000, $15,000, $10,000, $5,000, Chart 2 $- Total Accumulated NSF These funds have been paid out each year based on a letter from the UCRRA to the County, typically sent in the October/November timeframe. The letter informing the County of the UCRRA s NSF requirement (Attachment 1) states if the County waives the obligation of the Agency to fully fund the Operating reserve, the Net Service Fee amount needed would be [number]. Further, it is the intent of the Agency to use the Net Service Fee to pay Debt Service. Each letter has a calculation sheet and payment schedule attached. Interestingly, the 2009 letter identifies an NSF requirement of $2,369,813 but seeks a payment of $1,398,254. The attached calculation sheet notes Calculation without Adjustments. These requests for NSF do not include: calculation of per ton fees for solid waste disposal and explanation of why such fees cannot be calibrated to cover expenses; amendment to the Agreement waiving the requirement to maintain an operating reserve account to be used for short-term deficits; documentation of prior notification of draws on operating reserves; nor acknowledgement of the Agency s continuing obligation to use best efforts to repay NSF to the County. 7

8 Our review found no reports or actions of the Legislature relative to any of the above mentioned obligations. None of the four amendments to the Agreement have altered these obligations. Furthermore, the UCRRA s annual financial statements do not acknowledge the accumulated NSF paid to the Agency nor its continuing obligation to make its best effort to repay NSFs to the County. Likewise, there is no recognition in Ulster County s financial statements of accumulated NSF paid to the UCRRA with an expectation of possible repayment. County Role in Agency Budget and NSF Article IV, Section 4.01 (c) Agency Budget; Modifications of the Agreement grants to the County Legislature leverage regarding the UCRRA budget and its resultant NSF. In summary: the UCRRA is to have its budget to the Legislature by July 15 of each year, the County Legislature has the right, no later than August 15, to request modifications, modifications are to be accepted by the UCRRA, unless The UCRRA board of directors may, by a vote of two-thirds vote of its entire membership, adopt a resolution requesting such modifications not be made or be further modified. In the event of such resolution, the County Legislature has 21 days after receipt of the resolution to notify the UCRRA if it agrees to their request, in whole or in part. The determination by the County Legislature, if it acts timely, is final and binding with the caveat that the decision of the Legislature results in a budget that meets requirements detailed in the Agreement. 8

9 We found no evidence in official records that the Legislature has ever leveraged its authority to oversee or control the UCRRA budget which regularly results in significant NSF payments. Instead, once the UCRRA board of directors approves its budget, the Agency submits its letter of need for NSF to the County in mid-to-late autumn. The UCRRA financial statements from December 31, 1993 through December 31, 2009 identify in the Summary of Significant Accounting Policies the UCCRA s budgetary policies. They portray their budget policy in this way, Agency administration compiles a proposed budget for approval by the Board of Directors by August of each year for the ensuing year. The budget is then submitted to the County Legislature for review. This is followed by a public hearing process. Finally, the budget is adopted in October of each year by the Board of Directors. 2 The Accounting Principles Board Opinion No. 22 provides guidance governing Statements of Significant Accounting Policies (SSAP) in financial reporting. The SSAP recognizes a policy to be reported as any unusual or innovative applications of generally accepted accounting principles (and, as applicable, of principles and methods peculiar to the industry in which the reporting entity operates). The contractual standards for budget development for the UCRRA should be accurately reported in the SSAP of the UCRRA s financial statements. In accordance with the Agreement 3, the UCRRA must submit monthly written reports to the County with respect to the operation and maintenance of the Solid Waste Management System and the administration of the Agreement. These required reports must, at a minimum, include: UCRRA Financial Statement, page Section

10 Estimated and projected Net Service Fees; The number of gross tons of Solid Waste or Regulated Recyclable Materials delivered to the system; The quantity of Solid Waste disposed of and Regulated Recyclable Materials processed and sold; The types and quantity of wastes which are refused for acceptance for disposal or processing; and The amount and price of Regulated Recyclable Materials sold and other revenues. With the exception of the NSFs, all of the above data is to be certified in the monthly reports. Such data is indispensible to the County s ability to exercise its contractual rights and obligations relative to the NSF. Audit of NSF Calculation and Weight Tickets Additional obligations ii of the UCRRA to the County for the NSF include annual audits by independent public accountants of the Agency s: record related to the computation of the Net Service Fee, and all weight tickets. Records related to revenue are audited, however our review of the audited Annual Financial Statements of the UCRRA from 1987 to 2009 include no audit of weight tickets, nor of the NSF calculation. Between 1998 and 2009 the statements recognize NSF but do not audit its calculation. Without an audit of the NSF calculation and the weight tickets we are unable to ascertain the validity of the calculations or the value of the weight tickets or the need for any adjustments or annual settlements of the NSF. 10

11 Follow the Money What NSF Tells Us Using data mined from the audited financial statements of the UCRRA, we evaluate the NSF relative to its compliance with the Agreement and its impact on the County. First, we evaluate the effect of NSF on the operations of the Agency. Revenues vs. Expenses With and Without NSF Chart-3a graphs revenues with NSF. With the exception of 1998, revenues with NSF exceeded or met expenses. Over the last five years revenues and expenses have been closely correlated. Revenues vs. Expenses with Interest with NSF $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 Revenues Expenses with Interest $6,000,000 $4,000,000 $2,000,000 $ Chart 3a Chart 3b graphs revenues without NSF. It demonstrates there are very few years in which revenues exceed expenses without County NSF contributions. 11

12 Revenues vs. Expenses with Interest (No NSF) $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 Revenues Expenses with Interest $6,000,000 $4,000,000 $2,000,000 $ Chart-3b One tool we can use to project future trends of revenues and expenditures is modeling. In Chart-3ba we use logarithmic and polynomial trend lines to predict the future of revenues, without NSF, and expenses based on prior history. Revenues vs. Expenses with Interest (No NSF) $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 Revenues Expenses with Interest Poly. (Expenses with Interest) Poly. (Revenues) Log. (Expenses with Interest) Log. (Revenues) $2,000,000 $ Chart-3ba The Logarithmic trend lines indicate cause for concern. The slope of the revenue curve is far below that of the expense curve, projecting future expenses will be greater than revenues. The Polynomial curves come closer and closer together 12

13 as time goes on indicating that as years pass there will be less revenue over expenses and, if the status quo remains, less opportunity to maximize revenues and minimize expenses. This data further indicates that expenses are increasing at a faster rate than revenues. Each year the revenues of the UCRRA increase at an average of 3.55% and their expenses increase at an average of 10.3%. If this trend continues the ability of the UCRRA to be able to meet their expenses, including debt payments, is challenged. Both trend lines indicate a need to closely watch revenues and expenses and to plan either for new approaches to maximizing revenues and minimizing expenses or to plan for continued and increasing NSF contributions to the UCRRA from the County of Ulster. Reserves, Operating Expenses, and NSF Payments Operating Expenses include interest and principal owed on debt. Recall that NSF payments did not start until Operating Expenses To NSF Payments $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000, $ Operating Expenses NSF Payments Chart-4a If all NSFs are applied to operating expenses, since 1998 the County has been giving UCRRA between 10% and 50% of its operating expenses. 13

14 Ratio of NSF Payments to Operating Expenses 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Chart-4b The UCRRA is required to have an operating reserve according to their Agreement with the County 4. They failed to do so for four consecutive years beginning in 1997 and ending in Operating Reserve Compared To NSF Payment $20,000, $18,000, $16,000, $14,000, $12,000, $10,000, $8,000, $6,000, $4,000, $2,000, Chart-5 $ Operating Reserve NSF Payment Revenue From 2003 forward, the operating reserves reported in the financial statements exactly equal the NSF. Every year UCRRA is dependent on their operating reserve (ie. the County) to fill the gap between their expenses and revenues. 4 Article IV section B 14

15 Conclusions Net Service Fees have become an annual obligation of the County and now total nearly $32 million. The UCRRA has many unfulfilled contractual obligations to the County relative to the NSF, not the least of which is to repay NSFs. The County has not employed its contractual powers to monitor and control factors contributing to the NSF nor has it practiced due diligence to ensure the UCRRA complies with its contractual obligations. Annual financial statements of the UCRRA do not accurately portray the unusual budget policies that exist between the UCRRA and the County. Annual audits of the NSF calculation and weight tickets have not occurred. Analysis of historic data and future trends demonstrate an expectation that the UCRRA will not be able to meet its obligations in the future without continued annual NSF from the County. Recommendations We recommend compliance by both the County and the UCRRA with the 1992 Agreement until and unless a new agreement is created. We recommend the County Legislature protect its rights under the contract and not allow de facto changes to the legal Agreement and always require amendments to the Agreement be approved by a majority of its members. 15

16 We recommend the UCRRA insure their audits include the calculation of the NSF and of weight tickets. The NSF calculation is sufficiently complex to warrant certification of its validity. We recommend the UCRRA accurately portray in their financial statements the budget policies that exist between the UCRRA and the County. We recommend the County closely monitor, as allowed for in the Agreement, the operational and business conditions of the UCRRA that result in NSF requirements by the County. 16

17 Endnotes i Relevant Statutory, Legal and Policy Affecting NSF NYS Public Authorities Law, Title 13-6 Ulster County Resource Recovery Agency Act 13-G (New York State) creates UCRRA as a public benefit corporation and sets forth the powers, duties and limitations of the county, municipalities and UCRRA with regard to the UCRRA s public purposes. Sections of the law relevant to this report include: 2050-c.5..the county legislature from time to time may appropriate by resolution sums of money to defray project costs or any other costs and expenses of the agency. Subject to the rights of bondholders, the county legislature may determine if the moneys so appropriated shall be subject to repayment by the agency to the county and, in such event, the manner and time or times for such repayment j. State, county and municipalities are not liable on agency bonds. Neither the state, the county nor any other municipality or public corporation shall be liable on the bonds of the agency and such bonds shall not be a debt of the state, the county or any other municipality or public corporation and such bonds shall contain on the face thereof, a statement to such effect. (emphasis added) 2050-t. Pledge by county; contracts with municipalities; powers of municipalities. 2. Any contract to which the agency and the county are parties may include provisions (a) or (b) requiring the county to pay, within appropriations available therefore, such amounts as shall be necessary to assure the continued operation and solvency of the agency, such payments to be determined and paid in such manner and at such times as may be provided in such contract u. Solid waste facility reserve fund. The county legislature may establish a special fund, to be known as solid waste facility reserve fund of the county. Moneys in such reserve fund shall be deposited and may be appropriated only for the purpose of paying amount due from the county under the terms of any contract entered into pursuant to this title The Solid Waste Service Agreement between the County of Ulster and Ulster County Resource Recovery Agency dated January 1, 1992 sets forth the terms and conditions under which the UCRRA will implement the county-wide solid waste management strategy. Section 3.01 General Operating and Maintenance Responsibilities. The Agency shall operate and maintain the System with the object of maximizing the revenues generated by the System and minimizing the costs of operation and maintenance Section 4.01 Net Service Fees. (A) commencing on the Effective Date the Agency shall have the right to charge the County and the County shall have the obligation to pay to the Agency Net Service Fees when due, calculated according to the following formula: (BDS + BRF + AE) minus (TF + RMR + OR) i Section 4.01 Net Service Fees. (B) The Agency further covenants to fund and maintain throughout the term of this Agreement an operating reserve account which shall be used in the first instance to fund any short-term operating deficit If the Agency (UCRRA) fails to receive sufficient revenues in any calculation period to pay (BDS +BRF + AE) for such calculation period, or fails to maintain a sufficient operating reserve account, and Net Service Fees are paid by the 17

18 County pursuant to this Article IV, the agency (UCRRA) shall thereafter exercise its best efforts in consolation with the county to reimburse the County of Ulster amounts paid by the County of Ulster for net service fees as a result of such failure. The obligation to reimburse the County of Ulster for net service fees paid by the County of Ulster shall be continuing. (emphasis added) The Agreement has been amended four times. #1 on March 11, 1993 amends Section 7.01 Contingency with regard to the UCRRA s ability to represent at least 66% of the total amount of solid waste generated in the County. The Resolution authorizing the amendment identifies the financial impact as favorable. Allows reimbursement of County payments to the Resource Recovery Agency and permits the Agency to issue debt in a favorable market. #2 on March 12, 1998 Allows the UCRRA to refinance debt and thereby lower future net service fees payable under the Agreement. It extends the Agreement to 2028 and limits the County, during the extension period, to paying NSF only for post-closure monitoring and maintenance. It also redefines bonds to include, among other uses of the bond proceeds the ability to finance reimbursement of monies advance by the County #3 of March 14, 2002 and #4 of December 2002 relate to bonding needs of the UCRRA and reference that NSF will be reduced as a result. ii Article IV Payment of Net Service Fees To The Agency, Section 4.03 Annual Settlement Statement of the 1991 Agreement states: The Agency shall cause all records related to the computation of the Net Service Fee and all weight tickets to be audited by a firm of independent public accountants The Agency shall deliver a certified copy of the audit report to the County and any adjustment required thereby shall take place within 60 days of delivery of the audit report, and any such adjustment shall constitute a final settlement of the account between the parties for such year. 18

19 ATTACHMENT 1 NSF Letter from the UCRRA to the County 19

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