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In re Passaic County Utilities Authority

May 13, 1999

IN THE MATTER OF PASSAIC COUNTY UTILITIES AUTHORITY PETITION REQUESTING DETERMINATION OF FINANCIAL DIFFICULTY AND APPLICATION FOR REFINANCING APPROVAL CITY OF PATERSON AND MARTIN G. BARNES, PLAINTIFFS-APPELLANTS,
v.
PASSAIC COUNTY BOARD OF CHOSEN FREEHOLDERS AND PASSAIC COUNTY UTILITIES AUTHORITY, DEFENDANTS-RESPONDENTS, AND TOWNSHIP OF WAYNE, BOROUGH OF TOTOWA, BOROUGH OF WEST PATERSON, CITY OF CLIFTON, BOROUGH OF WANAQUE, BOROUGH OF BLOOMINGDALE, BOROUGH OF HAWTHORNE, BOROUGH OF RINGWOOD, BOROUGH OF POMPTON LAKES, AND TOWNSHIP OF WEST MILFORD, DEFENDANTS/INTERVENORS-RESPONDENTS. CITY OF PATERSON AND MARTIN G. BARNES, PLAINTIFFS-APPELLANTS,
v.
PASSAIC COUNTY BOARD OF CHOSEN FREEHOLDERS AND PASSAIC COUNTY UTILITIES AUTHORITY, DEFENDANTS-RESPONDENTS, AND TOWNSHIP OF WAYNE, BOROUGH OF TOTOWA, BOROUGH OF WEST PATERSON, CITY OF CLIFTON, BOROUGH OF WANAQUE, BOROUGH OF BLOOMINGDALE, BOROUGH OF HAWTHORNE, BOROUGH OF RINGWOOD, BOROUGH OF POMPTON LAKES, AND TOWNSHIP OF WEST MILFORD, DEFENDANTS/INTERVENORS-RESPONDENTS.



Before Judges Petrella, D'Annunzio and Cuff.

The opinion of the court was delivered by: Cuff, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: October 26, 1998

On appeal from the Department of Community Affairs, Division of Local Government Services, Local Finance Board, and the Superior Court of New Jersey, Law Division, Passaic County.

These consolidated appeals address the coordinated actions of the Passaic County Board of Chosen Freeholders (Passaic County) and the Passaic County Utilities Authority (PCUA) to assure repayment of debt issued by the PCUA. The ability of the PCUA to meet its debt obligations has been jeopardized by the invalidation of the State-imposed solid waste management plan and the consequent precipitous drop in revenue to the PCUA. We must determine whether the Environmental Investment Charge (EIC) *fn1 , an essential element of the PCUA's financial remediation plan approved by the Local Finance Board (LFB), and the 1997 Refunding Bond Deficiency Agreement (Deficiency Agreement) between Passaic County and the PCUA is authorized by the Municipal and County Utilities Authorities Law, N.J.S.A. 40:14B-1 to -69. We must also decide whether the Deficiency Agreement by which Passaic County agreed to guarantee the payment of unsecured revenue bonds issued by the PCUA in 1991 is an unconstitutional use of public funds for a private purpose. We commence with a Discussion of the solid waste management plan in existence at the time the revenue bonds and project notes were issued by the PCUA, the rulings which invalidated key elements of the State solid waste management plan, the effect of this ruling on the PCUA, and the remedy fashioned by Passaic County and the PCUA to address the financial impact of these rulings.

In 1991, two statutes were enacted, the Solid Waste Management Act, N.J.S.A. 13:1E-1 to -207, and the Solid Waste Utility Control Act, N.J.S.A. 48:13A-1 to -13, in response to the growing disenchantment with the use of landfills to dispose of solid waste and the resultant need to develop and establish a coherent, efficient and environmentally suitable means of solid waste disposal. At the risk of oversimplification, these related statutory schemes established a rigid "flow control" scheme which controlled the collection, transportation and processing of solid waste generated in the State. The controls were administered by waste control districts. Each county and the Hackensack Meadowlands district are waste control districts. Each district was authorized to contract with a waste control facility to dispose of locally generated solid waste.

Passaic County adopted the Passaic County Solid Waste System in 1987. It has been administered by the PCUA since its inception. The County System provided for the disposal of solid waste generated within the county through the transhipment of waste at three transfer stations owned and operated by Pen Pac Inc, long-haul solid waste transportation services provided by Grinnell Solid Waste Haulers, Inc. and Spectrasen, Inc., and landfill disposal services furnished by Empire Sanitary Landfill, Inc. The County System is supported by a franchise granted to the PCUA by the Board of Public Utilities (BPU) and the New Jersey Department of Environmental Protection (DEP) by which the PCUA maintains the exclusive right by statute to control and provide for the disposal of solid waste generated within the County. The County System also contemplated the construction and operation of a resource recovery plant (an incinerator). Due to considerable controversy engendered by the decision to utilize an incinerator to dispose of solid waste, the incinerator was never built. Nevertheless, the PCUA issued temporary project notes and long term revenue bonds to fund the planning of the facility and other activities undertaken by the PCUA.

In 1987, the PCUA issued $57,998,886 in revenue bonds. This 1987 series was guaranteed by Passaic County. In 1992, a $30,930,000 bond issue refunded $29,595,000 of the 1987 series. In 1996, another bond issue refunded the remaining 1987 bonds. In 1991, the PCUA issued another series of revenue bonds. Payment of principal and interest of this $36,495,000 issue is limited to revenues generated by the activities of the PCUA; Passaic County did not guarantee the 1991 bond issue.

Relying on C & A Carbone, Inc. v. Town of Clarkstown, New York, 511 U.S. 383, 114 S. Ct. 1677, 128 L. Ed. 2d 399 (1994), the Court of Appeals for the Third Circuit in Atlantic Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atl. County, 112 F.3d 652 (3d Cir. 1997), amended by 135 F.3d 891 (3d Cir. 1998), cert. denied sub nom. Essex County Utils. Auth. v. Atlantic Coast Demolition & Recycling, Inc., ___ U.S. ___, 118 S. Ct. 412, 139 L. Ed. 2d 316 (1997), held that New Jersey's flow control statutes, rules and regulations governing the disposal of in-state solid waste violated the Commerce Clause of the United States Constitution insofar as they discriminate against out-of-state solid waste facilities. Once the State's solid waste flow control scheme was declared unconstitutional, waste generators were no longer required to use facilities operated by counties or county utilities authorities, and many waste generators by-passed the county facilities. The invalidation of this State's solid waste flow control scheme has left many counties and county utilities authorities, such as the PCUA, with what has become known as "stranded debt." Stranded debt is outstanding public debt issued to fund activities which, due to the invalidation of a regulatory scheme, prevents the use of the facility or activity funded by the debt. The cessation or diminution of revenue from the facility or activity renders the debt underfunded or unfunded or "stranded." Here, the debt is underfunded due to the invalidation of the State's solid waste flow control system.

Stranded debt bears some similarity to "stranded costs." The concept of stranded costs has been encountered in the deregulation of utilities, primarily electric, gas and telecommunications. Under former regulatory schemes in which basic utility services were provided through a single provider whose level of service and rate schedule were approved by a central rate-making board, regulated utilities incurred certain costs. Some of these costs were incurred to build infrastructure required to deliver the service or to assure universal access to the service. The advent of competition in the industry impedes and in certain circumstances prevents the recovery of these costs. Thus, these unrecoverable costs are termed "stranded." See Massachusetts Inst. of Tech. v. Department of Pub. Utils., 684 N.E. 2d 585, 587 n.4 (Mass. 1997). Considerable attention has been devoted to whether a mechanism should or must be constructed to allow recovery of some or all of these costs and, if so, the most appropriate response. See e.g. J. Gregory Sidak and Daniel F. Spulber, Deregulatory Takings and Breach of the Regulatory Contract, 71 N.Y.U. L. Rev. 851 (1996); William J. Baumol and J. Gregory Sidak, Stranded Costs, 18 Harv. J.L. & Pub. Pol'y 835 (1995); Leigh Martin, Note, Deregulatory Takings: Stranded Investments and the Regulatory Compact in a Deregulated Electric Utility Industry, 31 Ga. L. Rev. 1183 (1997).

In response to the Atlantic Coast decision, DEP responded in August 1997 by issuing a document titled "Guidance Document in Response to the May 1, 1997 Court Decision on Solid Waste Flow Control" (hereafter "guidance document"). The guidance document includes the following questions and answers in the beginning of the section labeled "EIC Questions":

"Question: What is the legal authority to impose an EIC?"

"Answer: The legal authority to impose an EIC derives from each authority's enabling statutes. See, N.J.S.A. 40:14B-1 et seq. (County Improvement Authority Law). In addition, the Local Finance Board has broad authority to order the imposition of fees and/or charges necessary for local government entities in financial difficulty to assure satisfaction of outstanding obligations (N.J.S.A. 40A:5A-18 & 19), and the DEP has broad authority over solid waste utility rates to ensure adequate and proper service, N.J.S.A. 48:13A-1 et seq."

"Question: Will the EIC charge be approved by the DEP or the Local Finance Board or both agencies?"

"Answer: The EIC will be reviewed by the DEP to assure that it is consistent with the local government entity's obligation to assess just and reasonable charges. The Local Finance Board will review the EIC to ensure that it is sufficient for the local government entity to meet its financial obligations. A single county plan amendment can be prepared for submission to DEP for its review."

"Question: What eligible charges may be contained within an EIC?"

"Answer: The most certain component of an EIC is debt service. Other potentially acceptable components of an EIC charge include host community benefits, state taxes (Solid Waste Services Tax and Landfill Closure and Contingency Fund Taxes), system-wide rate components, and standby operating costs (minimal operating costs required to keep a facility open)."

Shortly after issuing the August 1997 guidance document, the DEP adopted emergency regulations to address the Atlantic Coast decision. 29 N.J.R. 4170(a) (Sept. 15, 1997). The regulations call for solid waste districts to adopt solid waste management plan amendments setting forth "[t]he method of financing solid waste management in the district, including any mechanism to be instituted by the district for ensuring the payment of outstanding debt and other financial obligations." N.J.A.C. 7:26-6.10(b)(6). In its published comments during the comment period, the DEP emphasized that the EIC would be an acceptable mechanism to satisfy this obligation. 29 N.J.R. 5084(a), 5087 (Dec. 1, 1997).

Since the denial of certiorari in Atlantic Coast on November 10, 1997, the PCUA has been unable to require the municipalities within the County of Passaic to use the in-county private transfer stations that were part of its former waste flow system. None of the municipalities in the County of Passaic now use the PCUA's system because they have all found cheaper providers. However, unlike some other county utilities authorities, the PCUA owns no solid waste facilities. Thus, it has few assets which may be sold to satisfy its debt. *fn2

Acting in concert, the PCUA and Passaic County devised a plan to assure repayment of the debt incurred to effectuate the invalidated State solid waste management plan. The focal point of this plan is the issuance of refunding bonds not to exceed $50,000,000 which will refund $21,400,000 of the approximate $27,000,000 balance from the 1991 revenue bond series, and other bond issues which were backed by the County of Passaic when issued. The newly issued bonds will be repaid from the EIC which will be levied on all prior users of PCUA services in accordance with 1993 municipal tonnage figures. Any shortfall will be covered by the County of Passaic pursuant to the terms of a Deficiency Agreement.

On November 12, 1997, Passaic County approved the Deficiency Agreement which provides that the PCUA will provide solid waste services to the County of Passaic and, in return for those services, the County will pay to the PCUA an amount equal to any shortfall in revenue which the PCUA may experience. On December 17, 1997, the County approved an amendment to the 1997 Deficiency Agreement, whereby the County agreed to secure the balance of the 1991 bonds that are not refunded with the proceeds of the refunding bonds.

On November 19, 1997, the PCUA filed an application with the LFB of the Department of Community Affairs pursuant to section 6 of the Local Authorities Fiscal Control Law, N.J.S.A. 40A:5A-6, for approval of its refinancing proposal to issue up to $40,165,000 in refunding bonds using the EIC and the Deficiency Agreement to secure the debt service. On the same date, the PCUA filed a petition with the LFB, pursuant to N.J.S.A. 40A:5A-18 and -19, requesting a determination of financial difficulty and an order requiring implementation of the proposed EIC to alleviate the financial difficulty.

In its resolution approving the financing, the LFB found that the PCUA is experiencing and will continue to experience financial difficulties which jeopardize the payment of debt service on issued obligations and that these difficulties will likely impair the credit of the PCUA and the County of Passaic. To remedy this situation, the LFB approved the financial plan submitted by the PCUA. This plan includes the assessment of an EIC over a ten-year period.

The EIC submitted by the PCUA and approved by the LFB is an allocation of the PCUA's total debt (including $28 million in unsecured debt) which, along with an administrative fee, is being imposed on a per ton basis on all municipalities in the County of Passaic based on their 1996 municipal waste generation, and on all commercial and industrial generators based on their average flows from 1993 through 1996. It is imposed on an annual basis with different amounts due.

On January 6, 1998, the City of Paterson and Martin G. Barnes, a City resident and taxpayer, filed a six count action in lieu of prerogative writ in the Law Division in which they sought various relief, including an order declaring Passaic County's Deficiency Agreement with the PCUA unconstitutional, null and void, and preliminary and permanent injunctive relief restraining Passaic County from acting in accordance with the Deficiency Agreement by guaranteeing payment of the previously issued bonds and the refunding bonds. In addition, on January 7, 1998, plaintiffs filed a Notice of Appeal from the December 16, 1997 action of the LFB. When the LFB granted the PCUA's supplemental application to increase the amount of refunding bonds to enable refunding of an additional $6,500,000 of the 1991 revenue bonds, plaintiffs filed an amended Notice of Appeal. In addition, on January 16, 1998, plaintiffs filed a four count action in lieu of prerogative writ against Passaic County and the PCUA challenging Passaic County's adoption of an amendment of its District Solid Waste Management Plan. The amendment reflected the refunding authorized by the LFB, including the assessment of the EIC.

In 1998, the City of Paterson received a notice of EIC obligation. The 1998 EIC rate is $29.64 per ton. Its ten year EIC obligation is $20,704,613. Its 1998 EIC obligation is $2,500,122, payable quarterly. Upon receipt of its EIC bill, plaintiffs amended their initial complaint to directly challenge the authority of the PCUA to impose an EIC.

Judge Reisner entered an order dated February 20, 1998, to permit intervention by the following municipalities: Township of Wayne, Borough of Totowa, Borough of West Paterson, City of Clifton, Borough of Wanaque, Borough of Bloomingdale, Borough of Hawthorne, Borough of Ringwood, Borough of Pompton Lakes, and Township of West Milford. *fn3 On March 4, 1998, Judge Reisner consolidated both prerogative writ actions. In a separate order, she transferred the consolidated action to this court. *fn4 Plaintiffs filed a Notice of Appeal of the transfer order.

On appeal, plaintiffs assert: (1) the PCUA's EIC is ultra vires and an unauthorized and unconstitutional county tax, thereby unenforce-able as a matter of law; (2) the 1997 Deficiency Agreement is unconstitutional, an unauthorized and arbitrary county guarantee of the PCUA's unsecured debt, and contrary to public policy, and, therefore, void and unenforceable; (3) the LFB resolution on the EIC is, insofar as it purports to authorize the PCUA to make such an assessment, ultra vires, and, thus, unenforceable as a matter of law; (4) the LFB resolutions on the PCUA's refinancing applications have no legal force and effect with respect to the 1997 Deficiency Agreement; and (5) the Judge erred as a matter of law in transferring plaintiffs' suit against Passaic County regarding its decision to enter into the 1997 Deficiency Agreement to the Appellate Division. Initially, we will discuss whether Judge Reisner erred by transferring the consolidated prerogative writ actions to this court.

I.

Judge Reisner transferred the consolidated prerogative writ cases pursuant to R. ...


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