Introduction

Purpose of the study

The objective of this study was to determine whether the Connecticut Resources Recovery Authority (CRRA) should be operated as a quasi-public agency (QPA), state agency, or eliminated with its role being assumed by the private sector. A secondary focus was to ascertain the extent to which the practices of the state's other quasi-public agencies raise concerns requiring legislative attention.

Methodology

The committee through its staff interviewed CRRA staff and reviewed the legislative record surrounding the creation of the authority. Committee staff also observed meetings of CRRA's new board of directors and toured its facilities. Data on the state's other quasi-public agencies were obtained from their annual reports and responses to a survey mailed to each QPA.

The committee's 1988 report on the state's quasi-public agencies provided a framework for the study. This was supplemented by an extensive review of the national literature on resource recovery facilities and quasi-public agencies.

A briefing report on CRRA was given to the committee by its staff on October 8, 2002. A public hearing was held November 14, 2002. The committee adopted the findings and recommendations contained in this report December 18, 2002.

Quasi-Public Agencies - Characteristics

Definition

For the purposes of this study, a quasi-public agency is an entity created by state statute as a government corporation:

• answering to an independent governing board appointed by state officials;
• providing a specific public benefit;
• generating and expending funds outside of the state's budgetary process; and
• operating independent of most state government administrative and financial controls.

Rationale

An entity is created as a quasi-public agency based on a belief the state's requirements and controls would prevent a rapid response to changes in the conditions and demands under which the entity must operate.

Controls imposed on state agencies

• Budget process
• Bonding process
• Personnel system
• Property acquisition process
• Contracting for technical and personal services
• Affirmative action plan and implementation
• Uniform Administrative Procedure Act
• Code of Ethics
• Freedom of Information
• Auditors of Public Accounts

The General Assembly in creating or reshaping quasi-public agencies has applied these controls selectively. In instances where the controls do not apply, each QPA's board is required to develop its own procedures, or in some cases, such as issuing bonds, an agency must follow special requirements included in its enabling statute.

Table I-1 shows the current application of the controls to specific quasi-public agencies.

(1) Under insurance mortgage program the State Bond Commission issues bonds, the proceeds of which are funneled through the Department of Economic and Community Development to CDA.

(2) The State Housing Authority -- formerly the Connecticut Housing Authority -- is a subsidiary of CHFA and has no staff.

(3) Currently the Department of Transportation provides staff to CPA, and its activities are funded through the Special Transportation Fund

Chapter Two

CRRA Overview

The Connecticut Resources Recovery Authority was established in 1973 as a quasi-public agency (P.A. 73-459).

The purpose of the authority is to develop and implement solid waste recycling, disposal, and recovery systems and facilities designed to serve municipalities, regions, and private entities.

To meet this purpose CRRA has been given the power to:

• employ staff;
• acquire property;
• enter into contracts to develop, operate, or manage facilities and systems; and
• issue bonds.

CRRA oversees the operation of four resources recovery facilities, three recycling facilities, six landfills, and 12 transfer stations.

The authority is comprised of four comprehensive solid waste disposal projects, a non-project ventures group, and an administrative pool. The projects are centered on the resources recovery facilities located in Bridgeport, Hartford (Mid-Connecticut), Wallingford, and Preston (Southeast). Vendors operate the facilities and provide services under agreements with CRRA. Each project has a unique legal, contractual, financial, and operational structure.

Table II-1. Selected Information by Project
Project	Towns Served	Tons of Waste Disposed (a)	Fees Charged Per Ton (b)	Main Facility Operator
Mid-Connecticut	70	880,000	$57	Metropolitan District Commission
Bridgeport	18	880,000	$69	Wheelabrator
Wallingford	5	153,300	$55	Covanta Energy
Southeast	13	195,000	$57	American Ref-Fuel
(a) Year ended June 30, 2001 (b) Fee for FY 03 Source of Data: Various CRRA reports

Board of Directors

CRRA's powers are vested in a 13-member board of directors. The governor appoints three members, the legislative leaders appoint eight, and there are two ex-officio members -- the secretary of the Office of Policy and Management (OPM) and the state treasurer.¹

Five of the 13 board members must be municipal officials, four must have extensive high level experience in corporate finance, business or industry, one must have extensive high level experience in the energy field, and one must have extensive high level experience in the environment field.

The governor, with the advice and consent of both houses of the General Assembly, designates one of the directors to serve as chairperson of the board.

The board has the power to act by a majority of the directors present during any meeting at which a quorum -- seven directors including at least two directors from municipal government and either the secretary of OPM or the state treasurer -- is in attendance.

Finances

The authority is required by statute to be self-sustaining. Its income is derived primarily from fees for the services it provides to municipalities and private entities and the sale of electricity.

Service fees accounted for nearly two-thirds of CRRA's $157.5 million in operating revenues in FY 02. Operations consumed 82 percent of CRRA's $173 million expenditures in FY 02. Debt service payments accounted for 8 percent.

Source of Data: CRRA Annual Financial Report

Source of Data: CRRA Annual Financial Report

In terms of total revenues (revenue from operations, investment income, settlement income, and other) and expenses (operating expenses, debt service, and other) data for FY 02 show a change in CRRA's financial health. It represents the only deficit the authority experienced over the last five years.

Source of Data: CRRA Annual Financial Report

In the figure above, the large increase in net income shown for FY 01 is primarily attributable to $60 million in settlement money CRRA received from the Connecticut Light and Power Company (CL&P) in connection with the restructuring of the state's electric industry. The FY 02 deficit is due to a failed deal involving the Mid-Connecticut project and the Enron Corporation.

At the project level, the data show between FY 01 and FY 02, Mid-Connecticut went from an income surplus of $6.2 million to a $14.6 million deficit. Bridgeport's $705,000 deficit increased to $1.4 million. Wallingford's net income surplus increased from $4.7 million to $5.8 million. The Southeast project's deficit increased from $1.2 million to $2.3 million. Deficits are covered by reserves set aside for each project.

Source of Data: CRRA Annual Financial Reports

Bonding

CRRA is empowered to issue bonds to finance the design, development, and construction of resources recovery facilities and landfills.

The bonds issued by the authority are special obligation revenue bonds paid for by the money generated by the projects they support and other authority income.

Some of the bonds issued by the authority are backed by the state through what is known as the Special Capital Reserve Fund (SCRF). The amount of principal on the bonds outstanding as of June 30, 2002, was $239.0 million of which $204.6 million is covered by the SCRF.

Table II-2 shows the bond principal outstanding at the project level as of June 30, 2002. The Mid-Connecticut project accounts for 87 percent of the debt, compared to less than 4 percent attributable to the Wallingford project.

Table II-2. Outstanding Principal by Project as of 6/30/02 (in thousands)
Mid-CT	Bridgeport	Wallingford	Southeast	Total
$208,279	$12,245	$8,404	$10,051	$238.979
Source of Data: CRRA Annual Financial Report

CRRA's principal and interest payments will be roughly $28.3 million annually over the next 10 years.

Chapter Three

CRRA Problems

Enron

Background

In 1985, the Connecticut Light and Power Company and CRRA negotiated an energy purchase agreement, whereby CL&P would buy steam produced by the Mid-Connecticut project. The agreement set the price at the equivalent of $.085 per kilowatt hour. This was based on the rate CL&P charged municipal customers and was considerably above the market price. The contract ran through 2012, and provided CRRA with an annual revenue stream of nearly $40 million.

The electric restructuring act of 1998 encouraged CL&P to buy down its above-market power purchasing contracts. The act allowed the company to issue rate reduction bonds to raise the money it would need to accomplish this objective.

In 2001, in a complex arrangement involving CRRA, Enron Corporation, and CL&P, the latter bought its way out of the contract to purchase power from CRRA at an above-market rate. A summary of the key aspects of this wide-ranging three-party deal follows.

• CL&P financed the deal using $280 million from the sale of rate reduction bonds.
• CL&P made a lump sum payment of $220 million to Enron, which assumed CL&P's contract with CRRA to purchase steam produced by the Mid-Connecticut project.
• The 1985 CL&P-CRRA contract taken over by Enron was amended. The amended contract required CRRA to provide Enron an amount of steam sufficient to produce 250 million kilowatt hours of electricity per year. It called for Enron to pay CRRA a "capacity charge" equal to $2.2 million per month. The amended contract also required Enron to pay CRRA an additional $175,000 per month for the authority's unrestricted use.
• In a separate contract with CRRA, Enron agreed to pay CRRA to convert the steam into electricity at an initial rate of 3.1 cents per kilowatt hour (rising to 3.3 cents per kilowatt hour in 2004).
• Under another contract, Enron agreed to sell to CL&P 250 million kilowatt hours of electricity at the same price Enron paid CRRA for it.
• In a new contract with CRRA, CL&P agreed to buy any of the power produced by the Mid-Connecticut project above the 250 million kilowatt hours CL&P was already buying through Enron. Under the terms of this contract, CL&P would pay CRRA the same rate for the power as Enron was paying CRRA.
• In a related deal, CL&P paid CRRA $60 million, $10 million of which was immediately returned to pay for the purchase of CL&P's facilities and land located adjacent to the Mid-Connecticut site. Another $26 million went to purchase insurance for the environmental remediation of the site. The remaining money was put into a "Non-Project Ventures Fund" created by CRRA.

Essentially, Enron received money that CL&P owed CRRA under terms of the 1985 energy purchase agreement. Stripped of its complexity, the intent of the overall deal was to provide CRRA with enough money to offset the difference between what it would have received from CL&P under the original energy purchase agreement and what the authority would be paid under the reduced rate called for in the new agreement.

Consequences

In December 2001, Enron declared bankruptcy and stopped making all payments to CRRA.

The loss of Enron's $2.2 million monthly payments -- designed to make up the difference between the old above-market rate CRRA received for steam (the equivalent of $.085 per kilowatt hour) and the new rate for electricity ($.031 per kilowatt hour) -- reduces anticipated annual revenues for the Mid-Connecticut project by approximately $26 million.

Source of data: CRRA Annual Financial Report

The attorney general is preparing multiple lawsuits to recover the $220 million CL&P sent to Enron. However, even if the lawsuits are successful, it will be a long time before CRRA receives any money.

The Mid-Connecticut project's budget troubles are exacerbated by the fact that in the years preceding the Enron problem operating expenses had been growing at a faster rate than operating revenues.

Source of Data: CRRA Annual Financial Reports

Other Issues

Reporting

C.G.S. Sec. 1-122. Compliance audit. CRRA is required to have an outside auditor determine if the authority has conformed to state statutes and its own procedures.

• CRRA was unable to provide compliance reports to the program review committee for fiscal years 1999 through 2001 meeting this requirement. A compliance statement was produced for 2002, but it was deficient in terms of the details required by the statute.

C.G.S. Sec. 1-123. Annual Report. CRRA is required to prepare and distribute a report that includes: a list of new bond issues; net proceeds; firms involved and how the bonds were placed; a list of individuals and firms receiving in excess of $5,000 from the authority; a financial balance sheet; the cumulative value of all bonds issued, outstanding, and the state's contingent liability; the authority's affirmative action policy, description of the workforce, and the authority's affirmative action efforts; and the authority's planned activities for the current fiscal year.

• The CRRA annual reports provided to the program review committee for fiscal years 1999 through 2001 addressed only some of the requirements. Missing from the reports were a list of outsiders paid more than $5,000, a discussion of the authority's affirmative action efforts, and a description of planned activities. These deficiencies were corrected in the 2002 report provided to the committee.

C.G.S. Sec. 22a-263. Reports to governor and legislature. CRRA must report quarterly to the governor and annually to the General Assembly: the number and type of contracts entered into during the quarter; a listing of outstanding notes and bonds and the payment status; and the distribution of any surplus revenues.

• CRRA provided no documents indicating quarterly reports meeting the requirements of C.G.S. Sec. 22a-263 were provided to the governor for fiscal years 2000 and 2001.
• The data CRRA provided or referenced indicated reports for the first three-quarters of fiscal year 1999 were filed, but they did not meet all of the statutory requirements, specifically data on the number and types of contracts were missing.
• There was no evidence indicating annual reports meeting the requirements of C.G.S. Sec. 22a-263 were filed with the General Assembly for fiscal years 1999 through 2002.
• A supplement to CRRA's 2002 annual report could be used to meet this requirement.

Plan of Operations

C.G.S. Sec. 22a-264. Activities and operations. The authority must prepare an annual plan of operations, which shall be reviewed by the DEP commissioner for consistency with the state's solid waste management plan and approved by two-thirds of the authority's board.

• During fiscal years 1999 through 2002 the authority did not produce a report meeting this requirement.

Budget Preparation

CRRA is responsible for preparing and adopting separate budgets for each project. The authority's central office costs are allocated to the projects based the amount of time devoted to each project.

• CRRA's Operations Division rather than the Finance Division prepared each project's budget for fiscal years 2002 and 2003. This approach removes a level of expertise and a significant independent check from the budget preparation process.
• CRRA's administrative budget is not prepared until after all project budgets are approved, forcing the use of estimates in allocating central office costs to projects.

Procedures and Practices

C.G.S. Sec. 22a-264. Written procedures. The board of directors must adopt written procedures governing the authority's operations.

• Despite changes in some of CRRA's operating procedures, since 1990 only the personnel (2002) and procurement policies (1994) were formally updated.²

C.G.S. Sec. 22a-268a(3) CRRA's board is required to approve all non-budgeted expenditures in excess of $5,000.

• CRRA's procedure calling for board approval of non-budgeted expenses in excess of $50,000 did not conform to the statutory provision³.

Personal Use of CRRA Resources

CRRA provided cell phones to 14 employees and vehicles and associated credit cards to at least 11 senior level staff.

• In response to an independent audit CRRA adopted new procedures on the personal use of the authority's resources in October 2001. However, the new policy did not discourage the personal use of these items nor did it specify the time period within which an employee must reimburse the authority.
• There were no formal controls or oversight mechanisms in place to enforce compliance with the filing deadline or reimbursement of the authority.

Problems Identified in State Auditor Report

In October 2001, the state auditors released a report on CRRA. The audit covered the fiscal years ending June 30, 1998, 1999, and 2000.

The audit identified nine problems, six of which involved administrative controls. The problems along with the perceived cause are summarized in the table below.

Problem	Contributing Cause
CRRA failed to produce an annual plan of operation	Unable to determine
No assurance all fines levied by enforcement staff are collected	Lack of administrative controls and oversight
Absence of proper notification for changes in written procedures	Lack of administrative controls and oversight
Board chair's assumption of role not in conformity with the law	Authority and governor's office unaware or misinterpreted law
Absence of minutes of board subcommittee meetings	Lack of administrative oversight
Required set-aside goals and reports not submitted to proper agencies or were late	Lack of administrative oversight
Absence of a procedure to monitor compliance with requirement to reduce spending on outside consultants if CRRA staff exceeds 45	Authority regarded requirement as outdated
No board approval of employee severance agreements	Authority regarded board approval as unnecessary since funds came from budgeted salaries
Absence of reporting to assure provisions of contracts are upheld	Lack of administrative controls and oversight
Source: Auditors of Public Accounts, October 2, 2001 Report on CRRA

Problems Identified in the Media

During the time period when CRRA's troubles with the Enron deal were being reported a number of other issues surfaced in the media. Three of these revelations are recounted below.

• CRRA hired outside lobbyists including one who billed the authority for out-of-state trips to political functions and meals for the governor's staff.
• CRRA spent more than a million dollars to renovate and move into a new headquarters in downtown Hartford.
• CRRA diverted $60 million in settlement money from the Mid-Connecticut project to a newly created Non Projects Venture Fund, which was to hold the assets purchased with the funds and develop new businesses.

Conclusions

Based on the problems detailed above the program review committee concluded:

• CRRA lacked the administrative controls and oversight mechanisms necessary to assure compliance with the authority's own policies and procedures; and
• CRRA operated under a management culture that ignored legislative policies and mandates and pursued its own interests in a somewhat ad hoc manner.

Chapter Four

CRRA's Response to Problems

New Legislation

In response to issues surrounding the CRRA-Enron-CL&P deal and the other revelations surfacing at about the same time, legislation was passed making a number of statutory changes in the structure and responsibilities of CRRA.

Public Act 02-46 replaced CRRA's old board with a new 13-member board effective June 1, 2002. The key changes included increasing from two to five the number of municipal representatives, adding the state treasurer, and specifying criteria for non-government appointees.

A steering committee was created consisting of three to five board members jointly appointed by the governor, the president pro tempore of the Senate, and the speaker of the House. Among other responsibilities the committee was charged with:

• reviewing all aspects of CRRA's finances and administration;
• determining the financial condition of the authority and providing for mitigation of the impact on municipalities of the CRRA-Enron-CL&P deal;
• establishing a financial restructuring plan for the authority, subject to the approval of the board of directors; and
• submitting a report to the board and the General Assembly on the steering committee's findings and recommendations not later than December 31, 2002.

Under the act the attorney general was given the authority to supervise all legal matters and claims related to the CRRA-Enron-CL&P transaction.

The act made several changes in what CRRA can and cannot do. CRRA is:

• prohibited -- under C.G.S. Section 1-124 -- from issuing any debt backed by the state without the state treasurer's approval;
• allowed to borrow up to $115 million from the state;
• allowed to become an electric supplier, if approved by the Department of Public Utility Control;
• allowed to offer performance incentive plans, if they are based on both the performance of the authority and the person, applicable to all employees, and approved by the board; and
• prohibited -- along with all other quasi-public agencies -- from retaining lobbyists.

Actions taken by the new CRRA board

The new CRRA board held its first meeting on June 13, 2002. It immediately undertook several actions designed to deal with problems at CRRA.

• A mission statement was adopted that focuses the authority on its statutory responsibilities and emphasizes the importance of municipalities. As adopted, the authority's mission is:

to work for - and in - the best interests of the municipalities of the state of Connecticut in developing and implementing environmentally sound solutions and best practices for solid waste disposal and recycling management on behalf of municipalities.

• Policies and procedures were reviewed and rewritten by subcommittees of the board and adopted by the full board in November 2002. Among the changes are:

assignment of vehicles to individual employees was ended and the use of vehicles was restricted to business matters as was the use of cell phones;

assignment of credit cards was changed from individuals to vehicles and personal use of the cards was prohibited; and

procurement practices were changed in a manner that puts greater emphasis on board oversight.

• The board hired a new president and chief financial officer.
• The board has cooperated with the attorney general to aggressively seek recovery of the money lost in the Enron deal.
• The board has engaged a consultant to explore the feasibility of consolidating its headquarters on one floor and subleasing the other floor.
• The legal firm that represented CRRA throughout its existence has been replaced.
• Contracts for professional services such as an insurance brokerage firm, financial auditor, and bond counsel have been put out to bid.
• Money in the Non-Project Ventures fund was designated for return to the Mid-Connecticut project.

Chapter Five

Solid Waste Management Models

Components of a Basic System

Governing Body -- Entity with the responsibility and authority to set policy and manage the solid waste disposal system. This can be an agency of state or local government, a quasi-public agency set up by a state or local government, or a private company.

Waste collection -- Generally, municipalities make arrangements to have waste including recyclables picked up. In some cases they may use their own department of public works, in others they may contract with private haulers or approve private haulers with whom the public may contract for waste removal.

Resource Recovery Facility -- Place where burnable waste is deposited and incinerated to heat water and change it into steam, which in turn powers turbines that generate electricity.

Landfill -- Place where waste that cannot be burned and ash residue resulting from the combustion cycles in waste-to-energy plants are deposited.

Recycling Center(s) -- Place where materials such as glass, newspaper, and various metals that can be reprocessed into useful articles are deposited and depending on the market either sold or given away.

Models

Government Agency

Under the government agency model a unit of municipal, county, or state government has responsibility for the disposal of solid waste. The entity could be a separate agency or division of a larger agency. It operates in the same manner as other public agencies and is subject to such controls as the governmental budget process, personnel system, and procurement procedures. Two examples of this model were found in Florida -- City of Tampa and Pinellas County.

Components	Tampa	Pinellas
Governing Body	City Government	Board of County Commissioners
Governing Body Staff	City employees including haulers	County employees
Owner of Waste to Energy Facility	City	County
Operator of Waste to Energy Facility	Private Company (Wheelabrator)	Private Company (Wheelabrator)
Financing	Government Bonds	Government Bonds
Operating Budget	$45 million	$31 million
Tipping Fees	Set by city budget on a fee for service basis, not tonnage	Set by Board of Commissioners $37.50 (ton)
Annual Capacity (tons)	320,000	970,000

Quasi-Public Agency

Under the QPA model an agency is created as a political subdivision by one or more municipalities, a county, or state for the specific purpose of managing a district's solid waste disposal system. The agency functions as a private entity free of most controls imposed on government agencies, although the agency is subject to all the regulations that apply to a private company engaged in the same activities. The entity's powers are spelled out in its enabling statute. Responsibility for exercising those powers resides with a board of directors whose members are appointed by elected officials.

The quasi-public agency model is the most prevalent arrangement for managing solid waste disposal systems found in the nation. CRRA and the waste to energy system centered in Bristol are prime examples of state and municipal QPAs. These two approaches are compared in the table below.

Components	CRRA	Bristol
Governing Body	Board appointed by state officials	Board appointed by officials of the 14 towns served
Governing Body Staff	55 (estimate)	5
Owner of Waste to Energy Facility	CRRA	Private Company
Operator of Waste to Energy Facility	Private Companies	Private Company
Financing	Government Bonds	Government Bonds
Operating Budget	$180 million	$21 million
Tipping Fees	$55 - $69 per ton includes recycling	$61 per ton solid waste plus $33 per ton recycling
Annual Capacity (tons)	153,000 - 880,000	180,000

Private Sector

Under the private sector approach a private company designs, constructs, owns, and operates the resources recovery facility. The burden is on the company to find and sign contracts with municipalities and other customers to provide waste. The tipping fees are set by the contracts, most of which are long term or the spot market. The fees generally vary based on market conditions at the time the contract is signed. Beyond environmental regulation there is little governmental involvement in the operation of the system. It is up to the private company to keep the facility operating. Municipalities under this model typically handle recycling separately.

Examples of privately operated systems were found in Massachusetts. All of the instances involved a single company, Waste Management.

Components	Massachusetts (Composite)
Governing Body	Private Company
Governing Body Staff	Unknown
Owner of Waste to Energy Facility	Private Company
Operator of Waste to Energy Facility	Private Company
Financing	Private (Possible to use government bonds if tied to a public purpose economic development project.)
Operating Budget	Unknown
Tipping Fees	$50 - $67 per ton
Annual Capacity (tons)	74,000 - 835,000

Chapter Six

Comparison of Models

Creation of CRRA

Public Hearings

At the time of CRRA's creation in 1973, it was viewed as an experimental approach to dealing with the state's solid waste crisis. However, the proposal did not come without reservations. These can be summarized as:

• lack of citizen input;
• insufficient municipal representation on the authority's board of directors;
• lack of legislative control over the authority particularly in the use of bonds that would be backed by the state;
• potential for misuse of eminent domain powers by the authority;
• possibility of no-bid contracts;
• possibility for profits made by the authority not being returned to the state or taxpayers; and
• possibility of municipalities being forced into joining the authority.

Legislative Debate

In the House, debate centered on using state controls to tie the solid waste management authority closer to state government. Similar concerns were debated in the Senate, which considered but rejected an amendment requiring employees of the new authority to have the same rights and responsibilities as state employees.

While there seemed to be many arguments for creating a stronger tether between the authority and the state, there was never an overwhelming argument for using the private industry approach to deal with Connecticut's solid waste management crisis.

Alternative Models

Alternative models for operating waste management systems can be placed on a continuum based on the amount of control exerted by elected officials.

While in theory a number of models can exist on this continuum, only the three alternatives listed below are reviewed in this report.

1. State agency managed and privately operated solid waste disposal system.

2. Quasi-public agency managed and privately operated solid waste disposal system.

3. Privately managed and operated solid waste disposal system.

Criteria for Comparing Models

The five categories described below can be used to facilitate a comparison of the three models. The comparisons shown in the tables that follow represent a homogenization of the literature and the opinion of the program review committee and its staff.

• Accountability -- holding entities responsible for their performance;
• Management flexibility -- nature of constraints on personnel and financial matters;
• Access to capital -- degree of difficulty in raising the money in the financial markets;
• Price setting -- process for setting tipping fees; and
• Innovation -- nature of the incentives to seek and adopt new technologies and processes.

Accountability

Management Flexibility

Access to Capital

Price setting

Innovation

Advantages and Disadvantages

The data provided in the above categorical comparisons can be used to identify the advantages and disadvantages of each model. The major benefits and drawbacks of each are summarized below.

State Agency Model

Advantages

• All assets are under public control.
• Control over what is essentially a citizen service including planning, operating, setting prices, and regulating is centralized in state government.
• Focus on fairness and equity in matters relating to personnel and procurement is maximized.
• Accountability for performance is centralized in the political system.

Disadvantages

• Demands on state resources are maximized.
• State liabilities are maximized.
• Ability to respond quickly to changing market conditions is constrained by the state bureaucracy and risk averse approach.
• Incentive to innovate is minimal.

Quasi-Public Agency Model

Advantages

• Most governmental rules impacting the agency's operation are eliminated allowing it to be run like a business.
• Demand on state resources reduced.
• Innovation and risk taking is possible.
• Accountability remains loosely under political control through the agency's statutory charter and the system for appointing members of the board of directors.

Disadvantages

• State maintains a high level of responsibility without corresponding level of authority.
• Incentives to hold costs in check are weak since tipping fees -- within in reasonable limits -- can be set to cover any gap between costs and revenues.
• Although reduced, state liabilities remain significant.

Private Company Model

Advantages

• State liabilities are minimized.
• Responsiveness to changes in market conditions are maximized, assuming a competitive market exists.
• Incentives to innovate and take risks to reduce costs are maximized.
• Taxes are paid on property, income, and sales.

Disadvantages

• State regulatory responsibilities are increased.
• State maintains limited expertise.
• Loss of control by political system over what has traditionally been a government responsibility.

Issues related to changing models

The advantages and disadvantages listed above are useful within the context of implementing a management model where none exists. When the question is whether to change from the current quasi-public agency model to either of the other models a major problem arises.

The problem is related to CRRA's organizational structure, which involves four separate projects each with a unique legal, financial, and operational structure. The issue is rooted in the fact controlling the operation of each project are agreements between the authority and the participating municipalities, vendors, and bondholders.

As shown in the figure below the termination dates for these agreements vary among the projects from 2008 to 2015. As a result of these factors the committee finds:

• changing the state's management model for solid waste disposal from a quasi-public agency to either a state agency or private sector model would have to be done on a project-by-project basis; and
• changing the state's management model for solid waste disposal from a quasi-public agency to either a state agency or private sector model prior to 2015 would require renegotiating existing agreements with municipalities, vendors, and bondholders.

Effect of project agreements

The program review committee concludes changing CRRA from a quasi-public to a state agency prior to the scheduled termination of the type of agreements identified above would, at the very least, require the consent of the parties to the agreements or their representatives. Specifically, the committee finds:

• in the case of a conversion to a state agency, each project's municipal service agreements, although allowing for a change in the authority's structure, would require the consent of the project's municipalities;
• vendor contracts scheduled to be in effect beyond the date of a change to a state agency would have to be renegotiated; and
• trustees for the various outstanding bond obligations would need to be assured the change to state agency status would not jeopardize the rights of bondholders.

Similarly, the committee concludes if CRRA was eliminated and its function taken over by the private sector prior to the scheduled termination of the agreements, approval of the parties to key project agreements would be needed. Specifically, the committee finds:

• turning CRRA's function over to the private sector prior to the scheduled termination of existing municipal service agreements would require negotiations with the municipalities to end such agreements;
• turning CRRA's function over to the private sector prior to the scheduled termination of existing vendor agreements would require negotiations with vendors to end such agreements; and
• turning CRRA's function over to the private sector would require all outstanding bond issues to be defeased.

Recommendations pertaining directly to CRRA

Based on the analysis and findings cited above the program review committee makes the following recommendations.

CRRA should be continued as a quasi-public agency through at least 2008.

At least three full years prior to the scheduled termination of the municipal service agreements governing a project, the CRRA board should form a special committee consisting of representatives of the authority and all municipalities involved in the project to develop options for disposing of solid waste at the conclusion of the existing agreement.

The options analyzed by each special committee should include turning the function over to the private sector.

Discussion

In the view of the program review committee, renegotiating existing agreements would be a difficult task to accomplish in the near-term. Time would be needed to assure all parties involved they would, at the very least, not be any worse off after a change.

While a state takeover would provide stability, it raises concern about how responsive a bureaucracy, with its own set of objectives and accountable to the state, would be to the needs of municipalities.

Turning over the operation to the private sector could be even more unsettling to municipalities and require considerable time and effort to assure their interests would not be harmed. The key would be the amount of money received from the sale of CRRA's assets and how the cash was distributed. Though time consuming, negotiations probably would succeed if the money raised by the asset sale was sufficient to defease the bonds and provide funds for municipalities to ease the transition to a competitive private sector market.

Studying options prior to the termination of the agreements surrounding projects is not a new idea. CRRA has already contracted for such studies of the Bridgeport and Wallingford projects, which are scheduled to end in 2008. In addition, CRRA has agreed to support an independent study of the Bridgeport project that will take place under the direction of the project's participating municipalities.

Chapter Seven

Quasi-Public Agencies other than CRRA

Agencies designated as quasi-public by the state are identified in C.G.S. Section 1-120. They include the Connecticut Development Authority (CDA), Connecticut Innovations Incorporated (CII), Connecticut Health and Educational Facilities Authority (CHEFA), Connecticut Higher Education Supplemental Loan Authority (CHESLA), Connecticut Housing Finance Authority (CHFA), State Housing Authority (SHA), Connecticut Resources Recovery Authority, Connecticut Hazardous Waste Management Service (CHWMS), Connecticut Port Authority (CPA), Capital City Economic Development Authority (CCEDA), and Connecticut Lottery Corporation (CLC).

The Connecticut Port Authority and State Housing Authority -- formerly the Connecticut Housing Authority and now a subsidiary of CHFA -- have been excluded from this stage of the review because they do not function as traditional quasi-public agencies. Their staff needs are met by other agencies and neither authority currently issues bonds.

Other Quasi-public agencies compared to CRRA

Media stories surrounding CRRA concerning employee bonuses, severance agreements, and personal use of the authority's resources raised questions about the state's other quasi-public agencies. As a result, an analysis of selected practices of their operations was included in the committee's scope of study.

A survey of QPAs by the Office of Legislative Research (OLR) conducted in the spring of 2002, provided information on executive pay, personal use of vehicles, bonuses, and employee severance agreements. The results were contained in a report issued June 10, 2002 (2002-R-0518).

An analysis by the program review committee of the data made available by OLR found the following.

• CRRA topped the list for compensation (salary and bonuses) for authority heads, paying its chief executive $193,000 in FY 01. This was $33,000 more than the next highest paid chief executive and $65,500 above the average for chief executives of the other QPAs.
• Seven of the nine QPAs paid employee bonuses in FY 01. As a percentage of operating expenses the bonuses ranged from one-tenth of 1 percent to 1.8 percent. Five of the agencies, including CRRA, were clustered around one-tenth of 1 percent.
• Two of the four former QPA employees reported to have received additional benefits in their severance agreements were from CRRA.
• One of the two non-disparagement agreements in effect involved a former CRRA employee.

Based on these results, the committee finds:

• CRRA operated at the edge of the curve for the other quasi-public agencies in awarding executive compensation and negotiating severance agreements.

The program review committee conducted its own survey in the fall of 2002 on the practices of QPAs regarding personal use of vehicles, cell phones, and credit cards. The results are summarized in the table below.

	Are the following items provided to employees for round-the-clock use?			Are there written policies addressing reimbursement for personal use?
Quasi-Public Agency	Vehicles	Cell phones	Credit Cards	Vehicles	Cell Phones	Credit Cards
CRRA (a)	Yes - 11	Yes - 14	Yes -11	No (b)	No (b)	No (b)
CDA	Yes - 2	Yes - 4	Yes - 3	Yes	Yes	Yes
CII	No	Yes - 17	Yes - 8	N/A	Yes	No (c)
CHEFA	No	Yes - 1	Yes - 9	N/A	No	Yes
CHESLA	No	No	Yes - 2	N/A	N/A	No (c)
CHFA	Yes - 1	Yes - 6	Yes - 2	Yes (d)	Yes	Yes
CHWMS (e)	No	No	No	N/A	N/A	N/A
CCEDA	No	Yes - 5	No	N/A	Yes	N/A
CLC	Yes - 41	Yes - 53	Yes - 8	No (c)	No (c)	No (c)
(a) Data reflect conditions prior to policy changes instituted in the fall of 2002. Written policies are now in place for use of cell phones, credit cards, and vehicles, with the latter two no longer assigned to individual employees. (b) Policy did not specify time period for reimbursement (c) Policy prohibits personal use. (d) Personal use reported as income at a rate of 34.5 cents per mile. (e) Functioning in a limited capacity.

The data in the above table show, with the exception of CLC and CII -- which have large field operations -- the use of vehicles, cell phones, and credit cards is not as extensive as it was at CRRA prior to recent changes there. In addition, policies covering reimbursement for the personal use of such items appear to be in place in nearly all instances. Based on this analysis the program review committee finds:

• the reimbursement policies now in effect at quasi-public agencies governing the personal use of vehicles, cell phones, and credit cards preclude the need for legislature action.

The reimbursement policies noted in the table above were set by an authority's board in some instances and by its executive staff in others. While this does not constitute a major problem, the committee believes it would be prudent for the board of directors of each QPA to adopt written policies governing the use of these items. Therefore, the committee recommends:

the board of directors of each quasi-public agency identified in C.G.S. Section 1-120, if it has not already done so, should adopt written policies governing the use of vehicles, cell phones, credit cards, and such other items as the board deems necessary.

Quasi-public agency reporting requirements

C.G.S. Section 1-122 (Annual Compliance Audit) and Section 1-123 (Annual Report) detail public reporting requirements for quasi-public agencies. The reports are intended to provide government officials and the public important information on the activities and practices of quasi-public agencies.

The committee reviewed the most recent annual and compliance reports of each QPA. It found the annual reports and supplemental information provided by QPAs to designated recipients generally meet the requirements of C.G.S. Section 1-123.

However, the same cannot be stated about the compliance reports. Intended to be an independent review of whether a QPA complied with its own procedures and state laws, the reports, in the opinion of the committee, were completely inadequate to meet this purpose.

In all instances, the agency's financial auditor issued a letter containing a paragraph similar to the example below taken from CRRA's report.

"As part of providing reasonable assurance about whether [CRRA's] financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, grants, and [C.G.S.] Section 1-122, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of the audit, and accordingly, we do not express such an opinion. However, our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards."

The General Assembly does not have a formal procedure in place for tracking and assessing reports required of quasi-public agencies. On an informal basis, the legislative library staff logs in the reports and follows up on those not submitted. However, the library lacks the mandate and resources necessary to evaluate whether the reports meet all of the statutory requirements.

Based on its review of the reports and the mechanisms in place to assure they are submitted to the appropriate officials and meet requirements of the statutes, the committee finds:

• the state's quasi-public agencies are not in compliance with the spirit of C.G.S Section 1-122, or in selected instances the requirements of C.G.S. Section 1-123, governing the reporting of information to the General Assembly and public; and
• noncompliance with reporting requirements by quasi-public agencies is made possible by the General Assembly's lack of a formal system to track and assess reports required of quasi-public agencies.

To address these findings, the committee recommends the following:

The reports required by C.G.S. Section 1-122 and Section 1-123 should be submitted to the Legislative Program Review and Investigations Committee for an assessment as to whether the reports meet the statutory requirements. Within 30 days of receiving a report, the program review committee should notify those designated to receive the report of its availability and the committee's assessment of the report's compliance with legislative intent.

A related issue is the independence of a quasi-public agency's compliance and financial auditors. In the view of the program review committee:

• critical data on the financial activities and operational practices of quasi-public agencies is not developed by sources independent of the agencies.

While the current arrangements are perfectly acceptable in the private sector, the agencies in question are quasi-public not quasi-private. As such, the public needs to have confidence the financial and operational practices of quasi-public agencies are being audited and reported precisely and unambiguously.

In the opinion of the committee, the best way to accomplish this is to ensure the independence of the auditors. Therefore, the program review committee recommends the following:

The State Auditors of Public Accounts shall be responsible for performing or contracting for the performance of all compliance and financial audits of the quasi-public agencies identified in C.G.S. Section 1-120. Each quasi-public agency shall annually pay the state auditors for the cost of the audits, whether performed by in-house audit staff or through a contract with an outside audit firm.

The cost of the financial and compliance audits reported to the program review in the survey of QPAs ranged from $5,000 to $48,000 and totaled nearly $240,000. However, the audit costs would likely be higher in order to pay for the type of compliance report required by C.G.S. 1-122 and not now being produced.

APPENDICES

¹ The Governor with the advice and consent of the General Assembly shall upon request of a municipality served by a project appoint an ad hoc member (up to two per project) who shall vote only on matters concerning such project.

² In November 2002 the CRRA's new board of directors adopted a complete set of new policies and procedures.

³ Revised procurement policies and procedures adopted November 21, 2002 conform to the statutory requirement.