O Risk, Where Art Thou?
I’m intrigued by the ongoing back-and-forth on the C&D landfill as a demonstration on how complex issues get framed and how the ensuing debate unfolds.
The key assertion in the debate is that the C&D landfill will without doubt generate positive revenue with absolutely zero risk to the city tax payers. So each and every argument in favor restates this assertion as if it were true. It simply is not.
The missing piece in this discussion is a look at the financial risks of this deal. Briefly the financial risks include:
1) Revenue risk — The projections in revenues rely upon assumptions on tonnage and dollars per tonnage. What happens to revenues and profitability if tonnage drops and prices drop? Just as a salient reminder, you should look at the MOSA projections and outcomes before you dismiss this question as irrelevant.
2) Liability Risk — The structure of the deal places ownership of the site at the feet of the City with an outside entity, an LLC (Limited Liability Company), running the operations. Interestingly the LLC is solely compensated on quantity of tonnage received and processed thereby removing themselves from ownership of the landfill. From a liability perspective, the bulk of liability falls upon the city for post-operations of the site. Most importantly the city and the LLC share different incentives — while both the city and LLC gain from increased tonnage, only the city bears liability in case of a future event or litigation.
3) Revenue Risk Again — the LLC makes fixed amount of dollars per tonnage while the city revenues and hence profits are variable based upon pricing. Again a disconnect in shared risks as the LLC is insulated from revenue and expense risk as they achieve revenue at a fixed price regardless of what happens to market price and expenses.
4) Expense Risk — I have yet to see any disclosure on the startup costs to the city for equipment, training, operations, et al. Where are the startup costs?
5) Bond Risk — As I understand it, the city will be required to bond to establish the facility. As a result, the repayment of the bond will fall upon revenues from the landfill. If the landfill proves not viable, then the city must still repay its bond. Again, the lessons from MOSA and the lessons from the failed sludge treatment plant remain relevant. How do you protect tax payers footing the bond. It’s important to note that a default, should it occur, will impact borrowing costs across all future bonds.
6) Two Business Plans –if the city is to enter such a deal, the city must develop its own business plan as the LLC business plan differs markedly from the city’s along the lines of revenue, expense and bond risk. To accept the LLC plan as THE plan is suicidal as the risks, incentives and returns differ markedly between the parties.
7) Shared Risk — The risk in this endeavor is not equally shared by all in the community. If you live near the dump, you will not see positive financial gains likely due to reduced property values and diminished quality of life. If you don’t live near the dump, you do not face this risk directly but loss of aggregate property values do matter in the equation. I do not see how you can argue that everyone faces zero risk. You don’t need to believe me on this: ask a realtor about property values to adjacent property should this occur for your answer.
I am surprised, though I should not be, that the issue gets framed as a choice between millions in revenue to the city versus imminent financial collapse when the past should inform us that it is these deals — MOSA and the sludge treatment plant — that hasten us along to the precipice.
In the end, I have yet to see a business plan that addresses any of the issues above. And no, the Final EIS Statement in no way addresses any of the issues above as it is an environmental impact statement, not a business plan so the “read the final report” is a wholly inadequate response.