NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following Oneida-Herkimer Solid Waste Management Authority, NY (the authority) bonds:
--$4.3 million solid waste system revenue bonds, series 2007, at 'A'.
The Rating Outlook is Stable.
Bonds are secured by net revenues of the authority and a cash funded debt service reserve fund. Additional security is provided by joint and several service agreements with the counties wherein the counties agree to pay quarterly in arrears any authority cash shortfalls so long as the authority maintains a solid waste management system.
KEY RATING DRIVERS
SOUND FINANCES AND OPERATIONS: System finances are sound, featuring historically self-sufficient operations and adequate reserves. The authority benefits from flow control requirements that mandate all private and municipal waste haulers to transfer any waste generated within its service area to authority facilities.
STRONG DEBT SERVICE COVERAGE: Debt service coverage has improved, mostly due to maturation of debt in 2014. Annual debt service coverage for 2015 is estimated at 2.4x. Capital needs are manageable and are projected to be cash funded.
WEAK LEGAL COVENANTS: A sum-sufficient rate covenant and additional bond test are considered weak by Fitch. This weakness is mitigated by the authority's good debt service coverage and a current lack of debt issuance plans.
BELOW AVERAGE ECONOMIC BASE: The service base consists of Oneida and Herkimer counties. Income levels for both generally rural counties are below state and national averages and population growth has been essentially flat since 2000. County unemployment levels are above average.
Shifts in Credit Fundamentals: The rating is sensitive to shifts in fundamental credit characteristics including the authority's solid financial management practices. The authority's history of maintaining adequate reserves and satisfactory debt service coverage levels while addressing operating and capital needs indicates continued rating stability.
The authority was formed in 1988 to provide regional solid waste services to Oneida (general obligation [GO] bonds rated 'A+' by Fitch) and Herkimer counties in New York. It has expanded to serve six other municipalities, including the City of Utica (GO bonds rated 'BBB' by Fitch), through operating agreements.
SOUND FINANCES AND OPERATIONS SUPPORT SATISFACTORY COVERAGE LEVELS
The authority has a long history of self-supporting operations leading to budget surpluses and maintenance of adequate reserves. This performance is expected to continue. Annual operating revenues have been about $25 million in recent years, reaching a peak of $25.3 million in 2010.
Annual debt service coverage from net operating revenues has ranged from 1.4x to 1.8x in recent years. Coverage grows to a projected 2.4x for 2015, reflecting the maturity of the authority's series 1998 bonds in 2014. Annual debt service after 2015 remains at about $3.6 million but increases to $5.8 million for 2026. However, there will be a release of debt service reserve fund moneys (about $3.3 million) in that year due to debt maturity.
The authority currently has no plans for additional debt issuance, apart from a potential refunding for debt service savings. Though the maturity of the 1998 bonds has led to improved debt service coverage, future coverage will also be determined by the performance of revenues, including the impact of any fee reductions. The authority has reduced fees annually since 2013, but is not currently contemplating additional reductions.
Tipping fees based on weight or item represent the bulk of operating revenue (65% in 2014) followed by recyclable sales revenues (10%). While general municipal solid waste tonnage can vary from year to year, more significant annual shifts in tonnage relate to larger one-time special projects, including demolition and soil remediation. Initial budgeted projections indicated a 2013 tonnage decline, but tonnage increased by 7.4% due to a major New York State Department of Transportation (DOT) demolition project. The 2014 tonnage decline (7.9%) largely reflected the prior year DOT project, with 2015 tonnage conservatively projected to decline again by 5.7%.
Savings from operation of the authority's regional landfill, which opened in late 2006, led to a reduction in the tipping fee at the time of contract renewal to $72.15 from $79 per ton for municipal solid waste as the authority eliminated major disposal and transportation costs. The tipping fee was reduced again in 2013 to $70, with further annual reductions down to $66 approved for 2015. The current fee is comparable to those of other area systems.
Operating revenues grew by 2.4% in 2013, due to increased tonnage and landfill gas to electricity operations expansion. A modest 1.5% revenue decline in 2014 reflected a combination of lower tonnage levels, a reduction in tipping fees, and decreases in recyclable sales revenue. These factors are expected to contribute to a projected 1.7% decline in 2015 operating revenues.
Following a 4.9% decline in 2012 related to savings from the new single stream recycling process, operating expenditures (excluding depreciation) have seen annual growth. Growth of about 1.8% in 2014 related to increases in contracted services, with projected 2015 growth (3.5%) due to continued growth in contracted services, salary increases and capital spending.
The authority's unrestricted cash and investments balances totalled $21.7 million in 2014, representing a solid 508 days of operations. Fitch expects balances to remain adequate as surplus revenue is used for capital needs going forward.
FLOW CONTROL ORDINANCES MANDATE WASTE TRANSFER TO AUTHORITY FACILITIES
The counties have adopted flow control ordinances which require all private and municipal waste haulers to transfer any waste generated in the county to authority facilities. The authority is responsible for the enforcement of flow control ordinances within the counties and requires haulers to procure a permit from the authority that requires all waste to be delivered to the authority facilities. The U.S. Supreme Court ruled in 2007 that the flow control ordinances were constitutional, legal and binding and such flow control ordinances are a key credit factor.
Authority operations include a recycling facility as well as three transfer stations owned and operated by the authority. The authority has entered into over 500 substantially identical contracts with private haulers of solid waste within the counties. The contract dates are staggered so only a few expire in any year. It is expected that the contracts will continue to be renewed or replaced with other haulers due to the flow control ordinances and lower tipping fees offered with a contract.
WEAK LEGAL COVENANTS
Bond security provisions are weak, with sum-sufficient operations required under the rate covenant and additional bonds test. Offsetting this weakness is the authority's solid debt service coverage and limited near term debt needs.
Operating flexibility is supplemented by the bond redemption and improvement fund, required under the trust indenture to hold at least 5% of current operating expenses. This fund is available for use in calculating the rate covenant and additional bonds test and is currently funded at $1.85 million, or about 9% of 2014 operating expenses.
COUNTY CONTRACTS PROVIDE BACK-UP, SUBJECT TO RENEWAL
The counties have entered into joint and several solid waste management contracts, pledged to bondholders. The contracts require the counties to pay to the authority a service fee, equal to the operating costs of the authority plus debt service costs, less amounts received by the authority from its operations. The counties have entered into separate joint and several Service Fee Allocation Agreements (SFAA) and have apportioned the service fee based on the respective populations of each county resulting in Oneida responsible for 75% and Herkimer 25% of any required service fees.
To date, no payments have been made by the counties or requested by the authority. The authority's enabling legislation only permits the authority to enter into 25 year contracts. The most recent contracts were scheduled to expire in 2014. Prior to the expiration date, both contracts were extended through 2039.
BELOW AVERAGE SERVICE AREA ECONOMIES
Oneida and Herkimer counties, located in upstate New York, are generally rural in nature and include the cities of Utica and Rome. Wealth levels are below state and national averages and population growth has been essentially flat since 2000. Unemployment rates for Oneida County (6.3%) and Herkimer County (8.3%) as of February 2015 are above national levels (5.8%), with Oneida County in line with the state rate of 6.4% for the same period, and Herkimer County exceeding the state rate.
Additional information is available at 'www.fitchratings.com.
In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, University Financial Associates,S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Solid Waste Revenue Bond Rating Criteria' (June 27, 2014);
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Solid Waste Revenue Bond Rating Criteria
Revenue-Supported Rating Criteria
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria