from the pages of April 1996

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 Let Them Burn Garbage

By David Peterson

 

Municipal bond fund managers were feeling a little woozy. Having gorged on about $485 million worth of indigestible “junk” bonds in Illinois, no wonder.

In late January, 14 of them staggered up the stairs of the State House in Springfield, hoping to find Gov. Jim Edgar. They had come from such far-flung places as Lower Manhattan, Boston, Valley Forge PA, Minneapolis, Milwaukee, even the West Coast. Lucky for the Governor, he was out of town that day. So they settled for about 90 minutes with his staff.

During his State of the State address on January 10, Governor Edgar called on the state's legislators to “repeal the law that has provided taxpayer subsidies for those who construct and operate incinerators.” Passed by the General Assembly the very next day, House Bill 1523 would have done just that: repeal 1987s Retail Rate Law, a law whose potential subsidies to solid waste incinerators proved so generous, it threatened to turn Illinois into the “garbage burning capital of the nation,” the Chicago Sun-Times observed, while sticking taxpayers with a tab running billions of dollars. (As high as $10.4 billion, the Sierra Club estimates, depending on how many firms got to clean the taxpayers out.) From there the bill moved on to the Governor's desk, where it languished for weeks.

The Retail Rate Law was passed on the basis of two myths (lies, really), both of them whoppers. The first lie said that the United States was “running out of space” to bury its garbage, as the Reagan Administration's two-faced EPA later put it in The Solid Waste Dilemma, a widely discredited 1988 report that provided much of the theoretical outline for waste management this decade. The report called on state and local governments to adopt a voluntary recycling target of 25 percent for the 200 million-plus tons of municipal solid waste produced in this country every year -- a target we already may have reached, thanks to a waste-recovery infrastructure that has spread to more than 6,500 communities nationwide.

Disgracefully, this late Reagan-era report also trumpeted the claim that the country faced a chronic shortage of landfill capacity, giving incineration a more important role in any “integrated” solution than it deserved. The claim was untrue -- which is not to say that creating mountains of garbage is any way for an industrial society to behave. But current landfill capacity shouldn't be confused with total capacity per se. Besides, it's not like the number or volume of landfills can never be increased. With the amount of municipal solid waste that gets buried each year trending down toward 60 percent (from 67.3 percent six years ago), and with the amount that we're able to recover somewhere between 22 and 25 percent (up from 16.6 percent in 1990, and 9.6 percent in 1980), the only real sense in which we were “running out of space” was the sense in which the waste industry was running out of ways to make money off our luxuriant lifestyles. Enter The Solid Waste Dilemma, with its boost for recycling and incineration. The waste industry hasn't looked back since.

The second lie was cagier. It states that as the main alternative to burial or incineration (the dominant forms of disposal), source reduction and recycling can be “cost efficient” only up to a certain threshold, beyond which “market forces” kick in that will prevent all but the most marginal increase in the percentage of waste we're able to recover.

This one's an outrageous lie -- which in a weird sort of way helps explain why one of its most vocal espousers, J. Winston Porter of the Virginia-based Waste Policy Center, happens to be the same guy who served as the principal author of The Solid Waste Dilemma eight years earlier. Back then, the waste industry wanted to expand its revenue-base to encompass what at the time were very costly recycling and combustion operations. But it needed a push; the government gave it one. Now one suspects something else is afoot: that resource recovery has almost begun to work too well, reducing the need not just for waste disposal but for new products fashioned from new materials. The only “market forces” that could prevent us from raising the national recycling target to 40 percent or higher are the ones for which J. Winston Porter speaks -- the ones that know a better deal when they smell it. Porter even compares environmentally-conscious efforts to push the recycling envelope out beyond the 25 percent zone to a Don Quixote tilting at windmills.

From its inception, Illinois' Retail Rate Law had but one real purpose: to underwrite the development of solid waste incineration in the state, an unprofitable industry, even its members concede.

The law took its name from the so-called “retail” rate -- the going rate that customers pay for electricity (around 7.9 cents per kilowatt-hour in Commonwealth Edison's northern Illinois market, the state's most densely populated, worth $6.9 billion in revenues to ComEd last year).

Under the 1987 law, the state's electric utilities were to pay the “retail” rate for electricity generated by incinerators in the process of burning solid waste. (Municipal waste, old tires and wood, and the like.) The law then allowed the utilities to claim an annual credit on their state taxes for the estimated difference between what they paid for the electricity (the “retail” rate) and what the electricity would have cost them to generate it (the “wholesale” rate, roughly 2 cents per kilowatt-hour in northern Illinois). It wasn't until 20 years later that the law required the incinerator operators to begin repaying the state for the total amount of credits the utilities had claimed all those years. For their part, the incinerator operators were required to pay zero interest on the money they owed. Plus they retained the right to shut their burners down, once the price-support for their electricity came to an end, and they faced the future of an uncoddled life off of the dole. Thus what from the standpoint of a utility amounted to a tax break (or break-even), and from the standpoint of the average taxpayer amounted to a regressive tax increase (or cutbacks in state services to make up for the lost tax revenue), from the standpoint of an incinerator operator amounted to a taxpayer-backed subsidy -- a sneaky way of encouraging firms to set up shop within the otherwise unprofitable and dangerously litigious business of solid-waste incineration.

After passage of the Retail Rate Law, the deluge of firms wanting to build “waste-to-energy” burners began. (So called because any firm hoping to reap the windfall that the subsidy provided was required to convert waste into energy in the process.) By the end of 1995, as many as 23 incinerators had been proposed in Illinois, making it the only state to buck a national trend that had seen burner construction fall to just 4 new facilities in 1994, after peaking at 23 back in 1988. Not surprisingly, the partnerships that kept springing up like dandelions in the cracks of the pavement sank their roots into some of the state's most economically depressed areas, where burning waste that releases dangerous heavy metals, dioxin, and other pleasantries can be the one source of new jobs and “development” the local residents have a prayer of attracting. No less than six burners were proposed in the south and near-western suburbs of Chicago alone (but none in the more affluent suburbs north and northwest of the city), lured to the region by the concentration of vulnerable host communities and their appetite for the kind of guaranteed cash flow that can only be satisfied by feeding at the public trough.

Each of the developers of the three projects at different stages of construction in Ford Heights and Robbins (both desperately poor black communities south of the city), and Fulton (a deeply impoverished Mississippi River town due west of Chicago -- unlike its two counterparts, Fulton is almost 100 percent white) have admitted at one time or another that they never would have come to Illinois, without the taxpayer-subsidy the law provides. Take away their subsidy, and you've taken away their reason for being here. Had Gov. Edgar gone ahead and signed a “clean” (unamended) version of HB 1523, rather than stalling, he would have done exactly that -- and put them at risk of default on the combined $485 million in tax-exempt bonds they had issued over the past two years to finance their projects. That was the crux of the conflict. Why so many municipal bond managers' heads were spinning.

Municipal bond managers who purchased the debt were quick to respond: first by demanding the meeting with the Governor's staff; then by refusing to bid on a $52 million, sterling triple A-rated debt offering by the State at the end of January, forcing its cancellation amid charges of “collusive conduct” against the fund managers. Though fully insured, the canceled offering was comprised of certificates of participation, not the general obligation bonds that carry the “full faith and credit” of the State because backed by its taxing authority. Debt service on the certificates would have required an annual appropriation by the General Assembly. Who knows? Maybe when that moment finally arrived, legislators would be out to lunch. Hence the outward similarity between the State's sterling triple-A certificates and the high-yielding, unrated, and uninsured “junk” bonds previously issued by the incinerator operators. For a gang of militant muni-bond managers, the similarity was perfectly obvious.

“We thought they were trying to bring leverage on us to force me to do something on that bill,” the Governor recognized. “I'm not going to let Wall Street dictate to me what I might do on that bill.” He was right: They were. “Mutual Funds Boycott Some Illinois Debt,” an article in the Wall Street Journal announced. “Wall Street last week declared war on Illinois,” was how Crain's Chicago Business` smugly titled “Bond barons smack guv” opened. In the early weeks of February, “investor unhappiness [began] spreading to the secondary market for Illinois debt and to some Illinois agency paper,” the Bond Buyer reported. The “big brokerage houses” clearly “wanted to pressure Gov. Edgar into using his amendatory veto to `grandfather' the three outstanding bond issues,” the Chicago Tribune chimed in -- and “that's exactly what the governor should do.” The business press argued that the Governor had little choice but to act quickly to restore “investor confidence” in Illinois. To capitulate to the fund managers' threats, more accurately, and to make good on their bad investments. Either he must veto the legislature's repeal of the Retail Rate Law. Or “grandfather” exemptions for the three projects having issued their bonds. But the big players in the municipal bond market won the war. Whichever option he chose.

Wall Street wasn't alone in trying to nudge the Republican Governor to see things its way. In the November 1994 elections, the Governor's party gained control of both houses of the Springfield General Assembly for the first time since 1983. Now 13 years later, the new Republican majority feared that its fate might be tied to the incinerator issue. South suburban Chicago contains a number of potential swing districts that the Republicans picked up in 1994. House Speaker Lee Daniels believes that the solidity of his recently-won Republican majority rests on a repeal of the Retail Rate Law. He fears that if Edgar “grandfathers” the three incinerators presently under construction, several south suburban districts could turn against the Republicans next November, endangering their majority. This explains why Edgar couldn't just take out his amendatory pen and rewrite HB 1523 to provide retroactive exemptions for the Ford Heights, Robbins, and Fulton incinerators, like the muni-bond managers wanted. For their own reasons, House Republican leaders favored a “clean” repeal of the law. And Edgar? He probably wished he had never opened his mouth.

What the municipal bond managers were telling anyone who'd listen was that no matter how risky and radioactive the “junk” bonds they bought from the incinerator developers may have been, they were confident they could count on the Governor to bypass the state's General Assembly, and use him to force the state's taxpayers to come to their rescue -- again.