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City of Patterson v. Passaic County Board of Chosen Freeholders

June 22, 2000


The opinion of the court was delivered by: Stein, J.

Argued February 2, 2000

On certification to the Superior Court, Appellate Division, whose opinion is reported at 321 N.J. Super. 186 (1999).

This appeal fairly may be regarded as but the tip of an iceberg. It purports to present for resolution what is primarily a straightforward issue of statutory interpretation: whether section 22.1 of the Municipal and County Utilities Authorities Law, N.J.S.A. 40:14B-1 to -78, authorizes the Passaic County Utilities Authority (PCUA) to impose on municipalities and commercial waste generators that no longer use its facilities an Environmental Investment Charge (EIC) over the next ten years to raise funds sufficient to pay principal and interest obligations on approximately $80 million of bonded debt. Stated more simply, the narrow issue is the validity of the EIC imposed by the PCUA. A collateral issue concerns the validity of the 1997 Refunding Bond Deficiency Agreement (1997 Deficiency Agreement) pursuant to which Passaic County agreed to guarantee the payment of approximately $28 million in unsecured revenue bonds issued by the PCUA in 1991 to finance an incinerator construction project that subsequently was abandoned.

Realistically, however, the issues before us cannot be circumscribed so narrowly. We are informed that to date four other counties have adopted and imposed EICs, and that litigation challenging the validity of EIC's imposed in three of those counties is now pending in various courts. As of January 1999, nine of the State's solid waste management districts had submitted proposed plan amendments to the Department of Environmental Protection (DEP) proposing the assessment of an EIC. Christine LaRocca, New Jersey's Solid Waste Flow Control Regulations Have Been Trashed: Are Environmental Investment Charges the Answer? 17 Pace Envtl. L. Rev. 123, 136 (1999).

Moreover, the federal court litigation that precipitated the perceived need for New Jersey counties to adopt and impose EICs illuminates the issue before us and provides its context. In 1997 the Third Circuit Court of Appeals in Atlantic Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atlantic County, 112 F.3d 652 (1997), amended by 135 F.3d 891 (3d Cir. 1998), cert. denied sub nom. Essex County Utilities Authority v. Atlantic Coast Demolition & Recycling, Inc., 552 U.S. 966, 118 S. Ct. 412, 139 L. Ed. 2d 316 (1997)(Atlantic Coast II), held that New Jersey's comprehensive statutory and regulatory controls over the disposal of state-generated solid waste discriminated against out-of-state solid waste facilities and thereby violated the Commerce Clause of the United States Constitution. As the Third Circuit noted, in reliance on the regulatory scheme invalidated by Atlantic Coast II New Jersey counties and utilities authorities had incurred substantial debt to plan and construct waste disposal facilities designed to process a statutorily-guaranteed solid waste flow. That public debt as of December 31, 1994 aggregated approximately $1.65 billion dollars, a result of fifty-three separate bond issues by New Jersey counties and local authorities. Atlantic Coast II, supra, 112 F.3d at 658. The unanticipated invalidation of the State's solid waste regulatory scheme permitted waste generators to bypass the facilities operated by counties and local authorities in favor of cheaper out-of-state disposal facilities. The result was that the counties and authorities experienced a drastic reduction in revenue, threatening the default of millions of dollars in outstanding public debt. The authorization and imposition by the PCUA and other authorities of EICs on municipalities and solid waste generators that formerly used their facilities was a direct consequence of the unprecedented dismantling by the federal courts of New Jersey's solid waste regulatory system.

Informed by those events, we address the issues presented by this appeal. We conclude that the EIC imposed by the PCUA is not statutorily authorized because the statute neither expressly nor impliedly contemplates imposition of such unprecedented charges on non-users of the authority's facilities to liquidate debt previously incurred in reliance on a regulatory system declared unconstitutional by the federal courts. Because Passaic County entered into the 1997 Deficiency Agreement in express reliance on the validity of the EIC, we also invalidate that agreement.



The conduct and chronology of the federal court litigation invalidating New Jersey's solid waste regulatory system is highly pertinent to the issues before us. An appropriate starting point is a brief description of the challenged regulatory scheme, which we borrow from the Third Circuit's succinct summary:

In response to a waste disposal crisis, New Jersey enacted the Solid Waste Management Act ("SWMA"), N.J.S.A. §§ 13:1E-1 et seq., and the Solid Waste Utility Control Act ("SWUCA"), N.J.S.A. §§ 48:13A-1 et seq. in 1970 to provide a safe, comprehensive and effective means of solid waste disposal within the state. These statutes strictly control the collection, transportation and processing of solid waste generated within the state, thus earning the appellation "flow control laws." Under these laws, any waste disposal facility, regardless of its ownership or location, must clear two substantial hurdles before it disposes of solid waste generated within New Jersey. First, the facility must obtain a contract with one of New Jersey's twenty-two waste management districts. Unless a facility has been designated by a waste management district, that facility cannot dispose of locally generated waste. Second, even if the facility contracts with a district for service, the waste disposal facility must obtain the approval of the State's Department of Environmental Protection (hereinafter "the State" or NJDEP). Under this regime, out-of-state facilities have rarely been authorized to dispose of New Jersey's solid waste.

Under SWMA, New Jersey is divided into twenty-two solid waste management districts, which include the State's twenty-one counties and the Hackensack-Meadowlands District. N.J.S.A. § 13:1E-19. The districts have formulated long-term solid waste disposal plans in accordance with the State's laws and regulations. N.J.S.A. § 13:1E-20. These plans have had to meet NJDEP's approval. See N.J.S.A. § 13:1E-24. Management districts have chosen between delegating their waste disposal responsibilities to designated municipal authorities within the district or exercising direct control over waste disposal themselves. Municipal authorities and districts in turn have met the State's waste disposal obligations by contracting with or operating their own waste disposal and recycling facilities.

Pursuant to the flow control laws, several waste disposal authorities have assumed substantial debt obligations to build waste disposal facilities "to assure the safe and efficient disposal of solid waste generated in their districts." Atlantic Coast II, 931 F. Supp. at 347 ¶ 5. The district court found that "[t]he solid waste public debt outstanding in New Jersey as of December 31, 1994, was $1.65 billion, which is the total of 53 separate bonds issued by New Jersey local authorities or counties." Id., at 348 ¶ 12. Currently, the disposal facilities service their debt by charging "tipping fees" for disposing of waste. The fees charged by the designated facilities are significantly higher than the fees charged by their out-of-state counterparts. Id., at 349 ¶ 17.

Once an authority has chosen a particular private or public entity to service its waste disposal needs, that entity must seek approval from NJDEP (through registration and issuance of a permit) prior to commencing service. N.J.S.A. § 13:1E-5. A facility cannot obtain a permit unless it is designated by the municipal district or authority in its waste disposal plan. N.J.S.A. § 13:1E-4(b). Regional Recycling, Inc. v. State Dep't of Environmental Protection, 256 N.J. Super. 94, 606 A.2d 817 (App. Div. 1991). All waste generated within the state must be directed to the processing facility designated by the district or municipal authority. See N.J.S.A. § 48:13A- 4(c). The designation of the particular facility for waste disposal in each waste management district is codified in NJDEP regulations. N.J. Admin. Code tit. 7, § 7:26-6.5 (Supp. 1996).

Although a waste management district or authority may contract with an out-of-state facility for waste disposal, NJDEP's policy of attaining self-sufficiency has favored operators that have facilities within the state or that are willing to construct a facility there. See Atlantic Coast I, 48 F.3d at 707-708. Waste management districts desiring to enter into agreements with out-of-state facilities have had to certify to NJDEP that no other sites within the district meet the district's waste disposal needs. N.J.S.A. § 13:1E-21(b)(3). The certification provision on its face does not appear to prohibit out-of-state solid waste facility operators from competing for an agreement to process a district's waste. Nevertheless, the certified processors for each district, presently listed in N.J.A.C. § 7:26-6.5, have been chosen under the NJDEP policy of reducing dependence on facilities outside the state for waste disposal services. See Atlantic Coast I, 48 F.3d at 707 (discussing NJDEP's self-sufficiency policy). As the district court stated at the first Atlantic Coast trial: "Although it is not the subject of a clear legislative direction [sic], it is equally clear that [NJDEP] administers the law with the specific goal that all waste generated in New Jersey be disposed of within the borders of the state." Atlantic Coast I, 48 F.3d at 707 (quoting district court) ([sic] in original). The imposition of this self-sufficiency policy on the selection of waste disposal facilities has resulted in the discrimination against out-of-state processors which we found in Atlantic Coast I.

Under the present flow control system, those who violate New Jersey law by disposing of solid waste at facilities not designated in N.J.A.C. § 7:26-6.5 risk the imposition of significant penalties. Section 13:1E-9 of the SWMA authorizes NJDEP's commissioner to take various civil and administrative actions against those who violate any provision of P.L.1970, c. 39 (the SWMA), or any code, rule or regulation adopted pursuant to that law. In addition, Section 13:1E-9(e) authorizes civil penalties totaling as much as $50,000 for each violation of the solid waste laws "provided that each day during which the violation continues shall constitute an additional, separate and distinct offense." N.J.S.A. § 13:1E-9(e). The State has employed this provision to penalize undesignated waste disposal facilities and enjoin them from engaging in the unauthorized collection and disposal of solid waste generated within the state. See e.g. State, Dep't of Environmental Protection v. Interstate Recycling, Inc., 267 N.J. Super. 574, 632 A.2d 526 (App. Div. 1993) (NJDEP may pursue injunction against unlicensed waste disposal facility).

Other provisions enforcing the requirement that waste disposal facilities be designated under N.J.A.C. § 7:26-6.5 include Section 13:1E-9.4 of SWMA, which authorizes civil forfeiture of all conveyances used or intended for use in the transport or unlawful disposal of solid waste. N.J.S.A. § 13:1E- 9.4(d). In addition, persons who collect, dispose of or transport solid waste to undesignated sites subject themselves individually to civil fines of up to $10,000 for each day of violation. N.J.S.A. § 13:1E-9.4. Finally, an individual who engages in the unauthorized collection, transport or disposal of solid waste is guilty of a crime in the fourth degree, which carries with it the penalty of up to 18 months in prison. N.J.S.A. § 48:13A-12(a).

Taken as a whole, the waste disposal laws present substantial barriers to out- of-state firms wishing to collect, transport and process any of the waste generated within New Jersey. The State is able to enforce this regulatory system through its impressive array of rules, regulations, fines and other penalties. [Id. at 657-59 (footnotes omitted).]

Following the United States Supreme Court's decision in C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 114 S. Ct. 1677, 128 L. Ed. 2d 399 (1994), in which the Court invalidated as violative of the dormant Commerce Clause a local waste flow control ordinance of the Town of Clarkstown, New York, the Third Circuit concluded that New Jersey's waste-flow control statutes and regulations discriminated against interstate commerce by obstructing the shipment of solid waste from New Jersey and disfavoring the disposal of such waste at out-of-state facilities. Atlantic Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atlantic County, 48 F.3d 701, 712-13 (1995) (Atlantic Coast I). The Court of Appeals then remanded the matter to the district court to ascertain whether New Jersey could satisfy the Commerce Clause's heightened scrutiny standard by demonstrating that it did not possess alternative means of achieving a safe and effective solid waste disposal system. Id. at 718.

Concluding that New Jersey had not satisfied that demanding burden of proof, the district court found New Jersey's waste control laws unconstitutional and enjoined the enforcement of those laws, but stayed its injunction for two years except with respect to processors of construction and demolition waste. Atlantic Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atlantic County, 931 F. Supp. 341, 359 (D.N.J. 1996). Responding to the State's contention before it that no alternative waste disposal regulatory scheme adequately could protect the fiscal integrity of the public entities that had issued bonds in reliance on the existing system of regulation, the district court observed:

The above-market tipping fees that constitute the heart of New Jersey's flow control system are more or less a hidden tax paid by New Jersey residents. The tipping fees are used to cover not only the debt service of the bonds issued to fund facilities under flow control, but also to cover the fixed costs of operating waste disposal facilities, financing recycling programs and other environmentally friendly recovery projects, and developing long-term disposal plans. Those activities could be financed through up-front taxes, user fees or other charges which do not discriminate against interstate commerce. Even if there are significant costs to implementing the necessary revisions to the current flow control system, nothing in the record suggests that these would be exorbitant or beyond the capabilities of reasonable fundraising alternatives. And, in any case, the threat of some increase in costs cannot negate the constitutional mandate of the dormant Commerce Clause. [Id. at 353-54.]

On appeal to the Third Circuit, the DEP disputed the district court's conclusion that plausible alternative methods of financing were available to the State. Addressing the plaintiffs' contention that pursuant to N.J.S.A. 40A:5A-19 the State's Local Finance Board (LFB) would be obligated to order adoption of a financial recovery plan if an authority were in fiscal difficulty, the DEP asserted in its brief that that statute "does not itself provide the solution but only the procedural mechanism for addressing the problem. In fact, it has hardly ever been triggered since the Great Depression . . . and its use on the scale and magnitude at stake herein is unprecedented and unproven." Responding to the contention that the counties could assume the authorities' outstanding debt, the DEP argued that [a] number of counties would be drastically affected by any obligation to refund the local solid waste authority debt because the size of that obligation in relation to their current total outstanding debt would bring them close to or over the debt limit, making it virtually impossible for them to raise capital for other essential services.

Moreover, the DEP observed that county tax revenue increases would be an unsatisfactory source of funding because "the current bonds are not formally secured by that type of revenue stream and because reliance on property taxes is an inherently inequitable mechanism for a use-based service." Similarly, the DEP rejected the assertion that the authorities' debt could be serviced out of county or state general revenues on a year-to-year basis, noting that "[that] revenue source cannot be assured from year to year and from legislature to legislature."

Finally, the DEP contended that the district court "overlooked" significant legal and factual impediments to the imposition of a "systems benefit surcharge" (such as an EIC), expressly questioning both the legality and constitutionality of such a surcharge:

One of the unanswered legal questions is whether such a subsidy of revenues from non-users of the system is authorized under the current rate covenants or the statutes governing these county authorities. See, e.g., N.J.S.A. 40:14B-22.1.

Another serious and unresolved "cloud" hanging over this financing alternative is the question whether the industry parties will successfully challenge this solution as equally unconstitutional - a position they steadfastly refused to reveal. [Emphasis added.]

Thus, the DEP in its briefs to the Third Circuit in Atlantic Coast II expressed doubt about the legality and constitutionality of an EIC. We note that the Third Circuit's partial response to DEP's arguments concerning the illegality of user charges was to observe that "the legality of the proposed alternative under state law is irrelevant to a court's heightened scrutiny inquiry because the legislature can re-write its statutes if it has the desire or the need to do so." Atlantic Coast II, supra, 112 F.3d at 667 (second emphasis added).

Consistent with the Third Circuit's observation, and apparently in anticipation of the final judgment in Atlantic Coast II, Assembly Bill No. 50 (A-50) was introduced in the New Jersey Assembly in late 1996 to address the problem of the county authorities' outstanding debt. A-50, as amended, authorized the imposition of an Environmental Investment Charge. The bill was voted out of the Assembly Agriculture and Waste Management Committee in mid-1997. The Committee Statement impliedly acknowledged the need to revise the solid waste management statutes and provide a mechanism for the recovery of the environmental investment costs incurred by public authorities and counties . . . The bill authorizes every public authority and county to establish and implement a system to calculate, charge and collect environmental investment charges (EIC's) as may be necessary to recover the environmental investment costs incurred by the public authority or county.

[Assembly Agriculture and Waste Management Committee Statement to A-50, June 12, 1997.]

A-50 was not posted for vote in the Assembly and was not enacted into law.

In August 1997, approximately three months after the Third Circuit's decision in Atlantic Coast II, the DEP issued a report entitled "Guidance Document In Response to the May 1, 1997 Court Decision on Solid Waste Flow Control." That document addressed a wide range of issues relating to solid waste regulation and disposal, and included the following series of questions and answers in a section of the document entitled "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. (Municipal and County Utilities Authorit[ies] Law); N.J.S.A. 40:37A-1 et seq. (County Improvement Authorit[ies] 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).

As noted by the Appellate Division opinion, In re Passaic County Utilities Authority Petition, 321 N.J. Super. 186, 195 (1999), the DEP adopted emergency regulations in September 1997 pursuant to which solid waste management districts were urged to amend their plans and set 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 the DEP stated that imposition of an EIC would constitute an acceptable funding mechanism to deal with outstanding debt. 29 N.J.R. 5084, 5087 (Dec. 1, 1997).



In November 1997 the PCUA, pursuant to section 6 of the Local Authorities Fiscal Control Law, N.J.S.A. 40A:5A-1 to -27, applied to the Local Finance Board of the Department of Community Affairs for approval of a refinancing proposal involving the issuance of refunding bonds in an amount not to exceed $40,165,000, the use of part of the proceeds of the refunding bonds to retire $21.4 million of the approximately $27 million balance of a 1991 revenue bond issue, the imposition of an EIC for ten years on all prior users of the PCUA's waste disposal facilities in an amount sufficient to pay the debt service on all of the PCUA's outstanding debt (including the proposed refunding bond issue), and execution of the 1997 Deficiency Agreement with Passaic County pursuant to which, in return for solid waste services, the County agreed to pay to PCUA any amounts necessary to enable PCUA to pay the debt service on its outstanding obligations if its revenues are inadequate. In executing the 1997 Deficiency Agreement, the County anticipated, consistent with the PCUA's representations to the LFB, that the PCUA's revenues from the EIC would be sufficient to maintain all debt service payments.

When the PCUA submitted its application to the LFB, its outstanding indebtedness was approximately $76.9 million, almost all of which was attributable either to costs incurred in connection with land acquisition and planning for construction of an incinerator, a project ultimately abandoned by the PCUA, or to cost incurred in connection with the purchase of waste disposal rights in Pennsylvania landfills. The PCUA's outstanding debt as of December 1, 1997 consisted of the following items:


Project Notes

Solid Waste System Taxable Project Notes,

Series, 1997, Due August 4, 1998, 5.95% $2,546,000

Solid Waste System Taxable Project Notes,

Series 1997A, Due August 4, 1998, ...

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