REPORT TO THE SENATE COMMITTEE ON APPROPRIATIONS
REGARDING UNDERGROUND STORAGE TANK FINANCIAL
RESPONSIBILITY AND RELATED ISSUES
Prepared by:
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF UNDERGROUND STORAGE TANKS
APRIL 1992
-------
-------
TABLE OF CONTENTS
Chapter
Executive Summary
I Purpose of This Report l_-|
II Context of UST-Related Issues H_1
III Progress Toward Compliance With Financial Responsibility |||-1
IV The Cost of Regulatory Compliance '. IV-1
V Easing Financial Problems Faced by UST Owners V-1
VI Summary of Findings and Recommendations VI-1
Appendices
A Status of State Financial Assistance Programs
B Summary of State Financial Assurance Fund Programs
C Methodology for Estimating Financial Impacts of UST Requirements on the
Regulated Community
D Impact of Compliance Costs on Rural Motor Fuel Facilities
E Preventing Leaking Underground Storage Tanks: Using Government
. Assistance Programs to Finance Tank System Improvements
-------
LIST OF EXHIBITS
Exhibit
11-1 Characteristics of UST-Owing Firms
II-2 Status of State Financial Assurance Fund Programs
II-3 States with Financial Assistance Programs for Tank Owners
1V-1 Financial Responsibility Costs are a Small Portion of
Total Compliance Costs '.'
IV-2 Many Small UST Owners Face Financial Problems Over the
Next ten Years . .......... ...... .. • • • • •
IV-3 State Funds with $10,000 Deductibles Reduce Business
Failures Over the Next Ten years
IV-4 State Funds with $10,000 Deductibles Reduce Failures
More Than They Reduce Financial Distress ..'..'."
V-1 State Financial Assistance Programs
V-2 Characteristics of Financial Assistance Mechanisms
Paqe
II-5
II-7
II-8
IV-2
IV-4
IV-6
IV-7
V-3
V-4
-------
EXECUTIVE SUMMARY
In response to a request from the Senate Committee on Appropriations, this
report provides information to Congress concerning Federal regulations for
underground storage tank systems (USTs). As directed by the Senate Appropriations
Committee, EPA has specifically addressed three issues: (1) compliance with the
financial responsibility requirements, (2) impact on various industry sectors of meeting
compliance costs resulting from the Federal UST technical standards and financial
responsibility requirements, and (3) methods being used to reduce the impacts
imposed by the UST program on tank owners and operators. Based on the analyses
contained in this report, EPA has developed legislative and regulatory
recommendations for minimizing the burden imposed on the regulated community in
complying with Subtitle I.
Financial Responsibility Compliance
Industry surveys have found that more than 95 percent of UST owners
and operators currently required to be in compliance with the financial
responsibility requirements are estimated to be in compliance.
• Prospects for compliance with the financial responsibility requirements
are improving, primarily because of State assurance funds and State
financial assistance programs.
Costs and Impacts of UST Program
Compliance with the EPA technical standards and meeting State
corrective action requirements makes far greater demands on the
financial resources of UST owners than does compliance with financial
responsibility.
• Financial responsibility requirements accelerate compliance with the
technical standards so that these costs are imposed sooner.
• Although available data suggest that rural service stations are not
currently closing at a disproportionately higher rate than urban stations,
the eventual impact of closures on consumers may be higher in rural
areas because of the sparse distribution of service stations and the lack
of competition
ES-1
-------
Alternatives for Reducing Impacts
• State financial assurance funds can help keep owners and operators in
business by providing money for cleanup activities. Forty-three States
have developed State assurance funds.
State financial assistance programs (e.g., direct loan programs, loan
guarantee programs, grants) are alleviating some of the economic
burden imposed by the technical standards on small UST owners.
» *
Legislative and Regulatory Recommendations
The Senate Appropriations Committee asked for specific recommendations
regarding legislative and regulatory actions that could be taken to reduce the financial
and economic impacts of the UST regulations. After considering the intent of the UST
program, the way it is being implemented by the States, and the progress that owners
and operators have had to date in meeting the requirements, EPA does not believe
further changes to Federal legislation are necessary, other than the exemption of UST-
contaminated soils and debris from the hazardous waste management requirements.
The current impediments to compliance do not result from overly stringent Federal
statutes, but rather from the costs to recover from bad environmental practices
adopted in the past 40 years.
Although EPA does not believe that significant statutory changes are necessary,
EPA recognizes that regulatory and programmatic initiatives, possible within the
existing authority, are necessary to minimize the impacts of the UST program. As
discussed in this report, EPA believes that most of the financial hardships resulting
from the UST program arise from three sources: simple inability of some owners and
operators to meet the UST regulatory requirements within the current regulatory time
frame, excessively stringent interpretation of the Federal standards by some States,
and unnecessary caution on the part of potential lenders. To address the problems
facing UST owners and operators, EPA recommends the following actions:
Statutory Changes
• Congress should amend the Resource Conservation and Recovery Act
to provide a permanent exemption from hazardous waste management
requirements for UST-contaminated media and debris.
Regulatory and Programmatic Changes
• EPA should continue regulatory efforts to provide relief for the most
severely affected members of the regulated community.
• EPA should continue to support State efforts to develop programs to
help the regulated community.
ES-2
-------
-• EPA should emphasize the flexibility existing in its current regulations with
respect to controlling corrective action costs.
• EPA should clarify the liability of lenders to improve the availability of
funds for financing UST facilities.
The recommended approach will promote State efforts to provide financial
assistance and financial assurance to the most deserving members of the regulated
community, reduce barriers to more efficient, less costly cleanups, and increase the
availability of capital for UST owners and operators to upgrade their facilities. The
recommended statutory change will ensure that costs of cleaning up UST
contamination are not unnecessarily high. Finally, EPA is developing Federal criteria
to identify specific groups of UST owners and operators potentially needing additional
time to be able to demonstrate financial responsibility. These criteria will provide
States with the time to grant relief to the members of the regulated community that are
most in need of financial assistance,, such as small local governments using USTs to
• provide emergency services and small retail marketers serving isolated communities.
Overall, the UST regulations are being implemented successfully and with
sensitivity to their impact on the regulated community. EPA will continue to make
every effort to identify and encourage approaches, especially State financial assurance
funds and assistance programs, that can ease the burden of compliance costs on
small businesses. EPA does not believe that legislative changes at the Federal level to
provide either financial relief or reductions in the stringency of the UST standards is
warranted at this time. Each State is ideally positioned to target its most vulnerable
UST owners and operators and to develop appropriate financial assistance programs.
Seventeen States have developed financial assistance programs to provide monies to
tank owners and operators to upgrade and replace tanks, perform leak detection, and
conduct corrective action.
ES-3
-------
-------
CHAPTER I
PURPOSE OF THIS REPORT
In September 1990, the Senate Committee on Appropriations directed the U.S.
Environmental Protection Agency (EPA) to conduct a study of the progress being
made by owners and operators of petroleum underground storage tanks (USTs) in
meeting EPA's financial responsibility requirements. The Committee requested that
EPA summarize its findings and also discuss the actions that EPA and other Federal
and State agencies can take to assist petroleum UST owners and operators to
upgrade or replace their USTs, to detect releases, and to clean up releases from their
tanks in accordance with EPA requirements. In addition, the Committee asked that
EPA discuss the actions that Federal and State agencies, including EPA, can take to
assist tank owners and operators to obtain affordable tank insurance to meet the
financial responsibility requirements.
This report represents EPA's response to the Committee's request. Chapter II
establishes a context for understanding the UST-related issues raised in the
Committee's request by providing background on the regulated community and the
development and implementation of EPA's regulatory program for USTs. Chapter III
addresses one of the Committee's basic requests for information on the progress UST
owners and operators are making toward compliance with the financial responsibility
requirements. Chapter IV discusses the impact on the regulated community of
meeting compliance costs. Chapter V explores approaches and financial mechanisms
that could enable UST owners and operators to minimize compliance costs and avoid
the economic hardship that can result from meeting compliance costs. Chapter VI
presents a summary of the findings of this report, and provides EPA's
recommendations about necessary legislative and regulatory, efforts to minimize the
financial and economic impacts of the UST Program. Several appendices provide
economic analyses and other supporting material used in the preparation of this
report.
1-1
-------
-------
CHAPTER II
CONTEXT OF UST-RELATED ISSUES
This chapter establishes a background for understanding the development of
Federal regulations for underground storage tanks (USTs), the characteristics of the
regulated community, and the various State programs helping UST owners and
operators reach compliance. This chapter highlights three points:
• The regulatory challenge is formidable, considering the size of the
regulated community (nearly 1.7 million USTs) and the thousands of UST
releases that will require billions of dollars in cleanup costs.
• Many State financial assistance programs and assurance funds are either
in place or being developed to reduce the impact of compliance costs
for many UST owners and operators.
• Federal regulations are phased in over several years, and some
compliance deadlines have been extended in order to minimize the
economic impacts.
The UST Problem
About 1.7 million USTs in the United States contain petroleum. More than one
hundred thousand releases from the tanks, pipes, or fittings in these systems have
been reported, and many more releases are expected to be found in the future.
Although generally regarded as posing low risk to human health, leaking USTs can
cause fires or explosions that threaten human safety. In addition, leaking USTs can
contaminate ground water, which is used as a source for drinking water by nearly half
of America's citizens. The cost of cleaning up soil and ground water contaminated by
leaking USTs has ranged from several thousand dollars for small releases to more
than one million dollars for large releases. EPA's review of the available data suggests
that the average cleanup cost is about '$100,000 per site. Because there are a large
number of UST sites, the total cost of cleaning up releases from USTs could easily
reach into the tens of billions of dollars.
Congressional Mandates
Concerned by the environmental and health implications of these releases,
Congress added Subtitle I to the Resource Conservation and Recovery Act (RCRA) in
1984, requiring EPA to develop regulations to protect human health and the
environment from leaking USTs storing petroleum or hazardous substances. Under §
9003 of RCRA, Congress directed EPA to establish requirements for leak detection,
leak prevention, and corrective action for releases from USTs. Congress further
provided that the UST program, although initially established at the Federal level,
H-1
-------
could become a State program if a State develops programs that are no less stringent
than the Federal program and provides for adequate enforcement.
Subtitle I was amended by the 1986 Superfund Amendments and
Reauthorization Act (SARA). Through these amendments, Congress directed EPA to
establish financial responsibility requirements to ensure that owners and operators of
USTs could demonstrate that financial resources would be available to pay for costs
associated with cleaning up releases or compensating third parties for the effects of
UST releases. Recognizing the need to ensure that cleanup funds were available,
Congress also created a Federal Leaking Underground Storage Tank (LUST) Trust
Fund.
Regulatory Response
To respond to the statutory mandates under Subtitle I, EPA adopted a
decentralized, "franchise" approach in which States - the "franchisees" - implement
UST programs. EPA's role is primarily to establish national baseline regulations and to
build State implementation capabilities through funding, training, and other support
activities. This approach acknowledged that the enormous number of USTs and UST
releases required active State participation and resources to solve the problem. Using
this approach, EPA developed a flexible program that builds on State capabilities and
provides States the opportunity to tailor their regulations to meet their needs and the
characteristics of their UST-owning populations.
In addition, to make the program practical and less burdensome, EPA based its
regulations on performance standards, rather than on specific technologies. The
minimum standards for new tank construction and installation, for example, adopt
performance standards incorporated in industry consensus codes. Similarly, the
corrective action standards prescribe a streamlined cleanup process rather than
specific cleanup levels. However, as the program is designed to be run by the States,
some States have chosen to prescribe specific technologies and cleanup levels.
The Federal regulations were published in two parts. In September 1988, EPA
promulgated both the UST Technical Standards Rule and the State Program Approval
Rule. These were followed by the Financial Responsibility Rule, promulgated in
October 1988. A brief description of these regulations is presented below.
UST Technical Standards
The Federal UST technical standards require owners or operators of new UST
systems (those installed after December 1988) to comply with requirements in the
following regulatory areas: tank system design, construction, and installation; spill and
overfill prevention systems; corrosion protection; and leak detection. Owners or
operators of existing UST systems (those installed before December 1988) must
upgrade their tanks to meet the requirements for corrosion protection, spill and overfill
prevention, and leak detection. For existing USTs, leak detection requirements are
phased in over several years (depending on the age of the tank) and the
II-2
-------
requirements for corrosion protection and spill/overfill prevention have a deadline of
December 1998. Owners and operators of all UST systems must also meet
requirements for recordkeeping, reporting, corrective action, and temporary or
permanent closure.
State Program Approval
As discussed above, EPA has sought to encourage participation and control at
the State level to the greatest possible degree, The State program approval process
provides a mechanism for turning over full authority and implementation of tIST
regulatory programs to States while ensuring that the goals of the national program
are met. Under the State program approval regulations, 'States are permitted to
develop and run their own UST programs as long as the programs impose
requirements that are at least as stringent as the Federal regulations and provide for
adequate enforcement. Because EPA recognizes that different States may have
differing concerns about their USTs, State programs do not have to be identical to the
Federal program in order to be approved. Rather, EPA has established a review
process that compares the level of stringency of the State program in each of the
program areas to the level of stringency of the Federal program. As long as the State
program is no less stringent, the program will be approved. In accord with the
franchise approach, EPA attempts to promote development of State programs by
providing assistance to the States through a variety of outreach, development, and
improvement programs.
At present, almost all States and Territories have enabling UST legislation, and
about half have UST regulations. Most of the statutes incorporate Subtitle I, and some
States have codified the Federal UST regulations as part of their codes. In some
States, additional authority to manage USTs is provided to local authorities or to State
agencies other than those directly responsible for USTs. It should be noted that
several State programs set standards that exceed the Federal requirements.
As yet, few State programs have been submitted for formal review under the
State Program Approval process. Six States - Georgia, Mississippi, New Mexico, New
Hampshire, North Dakota, and Vermont - have received approval to administer the
Federal program. Maryland has received tentative approval with final approval
expected shortly. Instead, State regulators have been working with EPA Regional and
Headquarters personnel on an informal basis to ensure that the State programs, when
submitted, will meet with EPA approval. More than half of the States have developed
technical standards regulations that could be approved, and these States should soon
be submitting their applications for State Program Approval. In addition, 29 States
and Territories are believed to have financial responsibility regulations at least as
stringent as the Federal standards.
UST Financial Responsibility
The UST financial responsibility regulations require that either the owner or
operator of an UST containing petroleum demonstrate adequate financial resources to
-------
undertake corrective action and compensate third parties for liabilities arising out of an
UST release. Under § 9003(d)(5) of the statute, Congress directed EPA to set the
required amount of coverage at no less than $1,000,000 per occurrence for petroleum
marketers. Using the discretion permitted under the statute for setting the coverage
limits for non-marketers with low throughput, EPA established the required amount of
coverage for non-marketers to be at least $500,000 per occurrence. Owners and
operators of USTs must also have coverage for an annual aggregate amount that is
determined by the number of tanks under their control: a $1 million annual aggregate
for up to 100 tanks and a $2 million annual aggregate for more than 100 tanks.
Description of Regulated Community
The regulated community consists of approximately 1.7 million petroleum USTs:
1.5 million contain motor fuel and 0.2 million contain used oil. (This report focuses
only on motor fuel USTs.) Exhibit 11-1 provides information about three major groups
of UST owners and operators: retail motor fuel, general industry, and local
government. As the exhibit shows, about 90,000 retail motor fuel firms own about
800,000 USTs; about 137,000 general industry firms own about 630,000 USTs; and
about 29,000 local government entities own 62,000 USTs.
To assess the impact of UST compliance costs, this report groups petroleum
UST owners into three major categories based on financial strength, which can be
synonymous with total assets: large (those with more than $20 million in assets),
medium (those with $1 to $20 million in assets), and small (those with less than $1
million in assets). In addition, the report especially considers another category of
small firms - single service stations - those firms owning or operating only one UST
facility. Single service station owners are particularly important because they control
about 20 percent of all USTs and, among UST owners, they have the smallest assets
with which to meet compliance costs.
State Programs Are Reducing the Impact of Regulatory Costs
Since 1988, States have been active in developing programs related to
underground storage tanks. These programs include (1) State financial assistance
programs that help UST owners and operators meet compliance costs resulting from
the technical standards requirements, and (2) State financial assurance programs that
fund cleanups and allow UST owners and operators to demonstrate compliance with
the financial responsibility regulations. These State programs are briefly described
below.
State Financial Assistance Programs
Seventeen States have established some form of financial assistance program
to increase the ability of UST owners and operators to meet the costs of complying
with the technical standards. These State programs provide grants or loans to be
used by owners and operators to pay for site assessments, tank upgrades, tank
replacements, and/or corrective actions. In many cases, UST owners and operators
II-4
-------
EXHIBIT 11-1
CHARACTERISTICS OF UST-OWNING FIRMS
Category
Assets
($ thousands)
Typical
Number of
USTs Per
UST-owning
Entity
Estimated
Number of
USTs
Estimated
Number of
Facilities
Estimated
Number of
Entities
Retail Motor Fuel1
Single Station2
Small2
Medium
Large
0-1,000
0-1,000
1,000-20,000
20,000 or more
1
2-4
4-200
200 or more
329,200
33,600
211,600
216,900
80,300
8,200
51,600
52,900
80,300
3,700
5,700
60
General Industry1 , ^
Small
Medium
Large
0-1,000
1,000-20,000
20,000 or more
1
1
5-10
207,900
217,800
207,900
63,000
66,000
63,000
63,000
66,000
8,400
Local Government
Small
Medium
Large
200
5,500
270,000
1
1-5
20-50
3,800
47,800
10,400
N/A
N/A
N/A
3,600
25,000
400
1 Estimates of USTs, facilities, and firms were made before the rule was promulgated in 1988; actual numbers in
each category may now be slightly higher.
2 Further breakdown of the financial characteristics within this category is provided in Appendix D.
In addition, the State and Federal governments own approximately 85,000 USTs, and there are approximately
.45,000 regulated USTs on farms.
I-5
-------
are not eligible for either private insurance or State cleanup funds until they have
demonstrated either compliance with the technical standards or the absence of
existing releases. Because compliance with the technical standards can impose
substantial costs on smaller owners and operators, these financial assistance
programs can help to mitigate the overall economic impacts of the LIST regulatory
program, including the financial responsibility standards. (Chapter V presents a full
discussion of options for State financial.assistance programs and Appendix A
provides a summary of existing State financial assistance programs.)
State Financial Assurance Programs
Most States have been actively developing State financial assurance fund
programs. These programs provide funds to pay for corrective action and help
owners and operators comply with financial responsibility requirements by
supplementing, or in some cases substituting for, private insurance coverage.
As of March 1992, forty-three States have legislation authorizing the
development of assurance fund programs to assist owners and operators to
demonstrate financial responsibility. Exhibit ll-2-displays the status of State assurance
funds. Twenty-seven States have assurance fund programs approved by EPA and
nine States have submitted programs for EPA review. USTs in States whose
proposed programs are under EPA review have the same compliance status as those
in States with approved programs. In some cases, the remaining States have not
submitted their funds for review because they are still developing their LIST programs
and are focused on basic tasks, such as writing regulations.
State assurance funds vary in the amount and type of coverage they provide,
as displayed in Exhibit II-3. (See Appendix B for a summary of existing State financial
assurance fund programs.) Some State funds, for example, provide full coverage of
the liability of owners and operators, from the first dollar to the minimum limit of
coverage required by the statute of $1 million. Others provide only partial coverage.
Partial coverage can include requiring owners and operators to meet a deductible
amount, limiting the maximum amount paid by the State fund to an amount less than
the minimum requirements of the Federal standards, or limiting the coverage to only
corrective action costs but not third-party liability costs. Where only partial coverage is
provided, UST owners and operators must still demonstrate financial responsibility for
any amounts not covered by the State fund by using an additional financial
responsibility mechanism. The mechanisms most frequently used to demonstrate
financial responsibility for the amounts not covered by State funds include private
insurance and a financial test of self-insurance.
State assurance funds typically incorporate eligibility requirements, such as (1)
demonstration that facilities are in compliance with applicable technical requirements,
(2) evidence of satisfactory inventory control and recordkeeping practices, (3)
satisfaction of a financial test of self-insurance for the deductible amount, or (4)
completion of a site assessment or a tank tightness test. State assurance programs
II-6
-------
EXHIBIT 11-2
STATUS OF STATE FINANCIAL ASSURANCE FUND PROGRAMS
As of March 27,1992
Legend
Approved
Submitted
Not Submitted
No Program L__I
Notes
1) The Trust Territories of American Samoa, the Commonwealth of
Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin
Islands do not have assurance fund programs.
2) Washington has a Reinsurance Program
-------
EXHIBIT 11-3
STATES WITH FINANCIAL ASSISTANCE PROGRAMS FOR TANK OWNERS
As of March 27,1992
00
Legend
States with Programs
-------
also generally require the payment of fees assessed on a per-tank basis or on the
basis of capacity or sales volume.
Federal Regulations Minimize the Impact of Regulatory Costs
To reduce the impacts of the financial responsibility regulations,. EPA has used
all statutory options; The Federal regulations permit the use of all mechanisms
identified in the statute: insurance, guarantees, letters of credit, surety bonds, and
self-insurance. In addition, the regulations allow States to develop financial assurance
programs to be used to demonstrate compliance with the financial responsibility
requirements, as long as the level of assurance provided by the State programs is
comparable to the level of assurance of the mechanisms' allowed by the Federal
regulations.
Also, EPA recognized that most UST owners would not have the financial
capability either to demonstrate self-insurance or to obtain a letter of credit or surety
bond, but would instead depend on private insurance or State funds. Consequently,
EPA's regulations provide a compliance schedule that phases in deadlines for
demonstrating compliance with the financial responsibility regulations based on the
relative financial resources of four groups of UST owners and operators. Group I
comprises the financially strongest owners and operators (those owning 1,000 or
more USTs and non-marketers with more than $20 million tangible net worth).
Members of Group I were expected to be able to demonstrate compliance through
self-insurance and were required to demonstrate compliance by January 1989.
Members of Group II, petroleum marketers owning or operating 100 to 999 USTs,
were required to comply by October 1989. Members of this group were expected,
based on their relative financial strength, to be able to obtain insurance or to
demonstrate self-insurance.
Members of Group III, petroleum marketers owning 13 to 99 USTs, were
originally required to demonstrate compliance by April 1990. Recognizing that the
availability of State fund coverage and affordable insurance had not increased as
expected, EPA extended the deadline for Group III to April 1991. Similarly, members
of Group IV - petroleum marketers owning 12 or fewer USTs (or fewer than 100 USTs
at a single facility); non-marketers with less than $20 million tangible net worth; and
local governments - were originally required to demonstrate compliance by October
1990. EPA has since extended the deadline to December 1993 for members of this
group except for local governments.
The compliance deadline for local governments has been extended to one year
after EPA promulgates specific financial assurance mechanisms keyed to the legal and
financial characteristics of local governments. In June 1990, EPA proposed
amendments to the financial responsibility requirements that would allow local
governments to use additional mechanisms to demonstrate financial responsibility.
EPA expects that most local governments will be able to demonstrate financial
responsibility using these additional mechanisms. In its analysis of the 1990 proposal,
EPA estimated that the new alternatives would allow about 20,000 additional
II-9
-------
governments (of 29,000 total) to demonstrate financial responsibility, permit an
additional 40,000 USTs to remain in operation (of 62,000 total), and save local
governments almost $300 million in costs of demonstrating financial responsibility.
1 EPA, "Economic Impact Analysis of the Proposal for a Self-Insurance Test for Government
Entities to Demonstrate Financial Responsibility for Underground Storage Tanks," EPA Office of
Underground Storage Tanks, June 1990.
11-10
-------
CHAPTER ill
PROGRESS TOWARD COMPLIANCE WITH FINANCIAL RESPONSIBILITY
Congress has directed EPA to examine the progress being made by owners
and operators of underground petroleum tanks in meeting the financial responsibility
requirements. This chapter highlights three main points:
• A trade association representing petroleum marketers estimate that more
than 95 percent of owners and operators currently required to be in
compliance (those in Groups I, II, and III) are in compliance.
• Those currently in compliance are using a variety of assurance
mechanisms to demonstrate financial responsibility: 90 percent use
State Funds for full or partial coverage; 17 percent use private
insurance; and 18 percent use other mechanisms, including letters of
credit, surety bonds, guarantees, and self-insurance.
• Prospects for compliance with the financial responsibility requirements
are improving, primarily because of State assurance funds and State
financial assistance programs.
Compliance Rates for Groups I, II and III
As discussed in Chapter II, EPA divided the regulated community into four
groups for the purpose of phasing in the financial responsibility regulations.1 As of
March 1992 only the first three groups of USTs are required to be in compliance with
the financial responsibility regulations. EPA believes that almost all of the firms in
Group I are in compliance, because they generally have sufficient net worth to self-
insure. Compliance by firms in Groups II and III is less assured, because many do not
qualify for self-insurance and so must rely on private insurance, a State assurance
fund, or other mechanisms. However, a recent survey of gasoline marketers
conducted by one trade association found that virtually all marketers in Groups II and
III indicated that they are in compliance. Those currently in compliance are using a
variety of assurance mechanisms to demonstrate financial responsibility. Of those
able to demonstrate FR, about 90 percent have coverage under state funding, 17
percent have private pollution liability insurance, and 18 percent have other
mechanisms, such as letters of credit, surety bonds, guarantees, and self-insurance.
1 It should be noted that the phase-in schedule affects only the date on which owners and
operators must be able to demonstrate the financial resources to bear the costs of corrective actions
and third-party liabilities resulting from UST releases. Under Subtitle I, all owners and operators are
responsible for meeting the costs of corrective action and third-party liability, whether or not they have
previously demonstrated the ability.
111-1
-------
(The total percentage is more than 100 percent because many owners use
combinations of mechanisms to fully satisfy the financial responsibility requirements.)
Compliance Prospects for Group IV
Owners and operators in Group IV have not yet faced the compliance deadline.
Most of Group IV has an December 1993 deadline. The remainder of Group IV, local
governments, will not have a compliance deadline until one year after EPA
promulgates additional assurance mechanisms for their use. Several developments
have increased the likelihood that UST owners and operators in Group IV'-will be able
to comply with the financial responsibility requirements and remain in operation. First,
many States have developed State funds for use in demonstrating full or partial
compliance with financial responsibility regulations. Second, several States have
developed financial assistance programs to assist owners and operators of USTs to
upgrade their tanks and thus become eligible for private and State assurance. Finally,
EPA has begun development of additional mechanisms specifically for use by local
governments.
Remaining Compliance Problems
At this time, compliance problems are not directly related to the existence of
financial assurance mechanisms. Most States have at least some form of financial
assurance program; thirty-six State funds can be used by UST owners and operators
to comply with the financial responsibility requirements. Also, about a dozen private
insurers provide coverage that may enable UST owners and operators to comply with
the financial responsibility requirements. Instead, the compliance problems are
primarily related to the cost of private insurance premiums for those marketers not
eligible for State funds and to the cost of meeting insurance underwriting or State fund
coverage requirements (as discussed below).
High Cost of Private Insurance
Depending on the insurance provider, insurance premiums for private insurance
cost between $2,500 and $5,000 annually for a three-tank facility having upgraded
USTs and a clean site. (Recent industry survey data show that average insurance
premiums are about $1,300 per tank, or $3,900 for an average, three-tank facility.)
At sites with particularly old tanks, insurance costs (when insurance is available at all)
can be considerably higher. Many petroleum marketers claim that they are unable to
raise retail prices enough to compensate for insurance costs when their major
competitors, who are able to self-insure, do not incur the same insurance costs.
Other marketers claim that local economic conditions limit their ability to raise prices.
2 Petroleum Marketers Association of America, '1992 Underground Storage Tank Status Survey,"
March 3,1992.
3 Ibid.
III-2
-------
High Cost of Meeting Underwriting and Coverage Requirements
Insurers, and some State funds, do not cover pre-existing releases. At a
minimum, facilities must demonstrate that existing tanks are not leaking by conducting
tank tightness tests; some insurers and State programs require more extensive site
assessments to determine whether the site has been subject to earlier releases. Tank
tightness testing costs about $1,500 for an average petroleum marketer with a three- •
tank facility. Site assessments, which can include drilling for soil samples and
laboratory tests, can cost several thousand to tens of thousands of dollars. If a
release is found, the owner is required by the insurer to perform corrective-action
before obtaining insurance. Nationally, the average corrective action cost is currently
about $100,000, more if ground-water contamination requires treatment. However, the
average corrective action cost varies significantly from State to State depending on
each State's specific corrective action requirements.
In addition, some insurers require that insured tanks be fully upgraded to meet
the technical standards. EPA estimates that upgrading or replacing tank systems can
cost from about $30,000 to $100,000 for a three-tank facility, depending on whether
the tank can simply be upgraded or requires replacement with a new UST system.
Compliance costs of this magnitude, resulting from meeting the requirements of the
technical standards, pose a significant burden to many small UST owners and
operators (as discussed in Chapter IN/).
Hl-3
-------
-------
CHAPTER IV
THE COST OF REGULATORY COMPLIANCE
This chapter focuses on the impact of compliance costs on the regulated
community. This chapter highlights five points:
• Compliance with the technical standards makes greater demands on the
financial resources of UST owners than does compliance with the
financial responsibility requirements.
• The impact of compliance costs is greatest for smaller UST firms.
• State funds can reduce the economic hardship of complying with the
financial responsibility requirements.
• State financial assistance programs can reduce the economic hardship
of complying with the technical standards.
• Rural service stations are not currently closing at a disproportionately
higher rate than urban stations; however, the eventual impact of closures
on consumers may be higher in rural areas due to the sparse distribution
of service stations and the lack of competition.
Sources of Impacts
As discussed earlier, the impact of compliance costs for small UST owners and
operators comes from several sources. As Exhibit IV-1 reveals, the largest impact
comes from meeting costs associated with the technical standards: leak detection,
corrective action, and UST upgrades and replacements. In comparison, the
aggregated costs directly caused by the financial responsibility regulations are much
smaller in magnitude. Although some individual owners and operators may spend a
larger portion of direct costs meeting financial responsibility requirements in one year,
the aggregate of all UST owners and operators over an extended time will pay a
relatively small part for financial responsibility.
The indirect effect of the financial responsibility regulations, however, is to
require some UST owners and operators to incur regulatory costs earlier, rather than
delaying them until 1998 when all technical standards must be met. Nevertheless,
there may be economic benefits for UST owners who comply with the technical
standards sooner as an indirect effect of complying with financial responsibility: (1) by
having financial responsibility in place sooner, they can avoid being faced with cleanup
or liability costs if they have a release; and (2) by upgrading sooner, UST owners may
avoid having a release (and its associated cleanup and liability costs) that could
otherwise have occurred.
IV-1
-------
EXHIBIT IV-1
FINANCIAL RESPONSIBILITY COSTS ARE A
SMALL PORTION OF TOTAL COMPLIANCE COSTS
Upgrade & Replacement
24.0%
Corrective Action
63.0%
Leak Detection
9.0%
4.0% Financial
Responsibility
Breakdown of Compliance Costs
Financial Responsibility
Breakdown of total nationwide costs.
Breakdown for any individual owner/operator
could vary widely from that shown here.
Technical Requirements
IV-2
-------
Regulatory Cost Impacts Are Greatest for Smaller UST Owners
The 1987 and 1988 Regulatory Impact Analyses predicted that many smaller
UST owners would have difficulty complying with the proposed financial responsibility
and technical standards rules. These Regulatory Impact Analyses noted that smaller
establishments would suffer the most, and that the potential for many of them to close
existed. Large and medium size firms would be, it was projected, generally much less
affected. Recent analyses confirm these predictions, although the presence of State
assurance and assistance programs has reduced the severity of the problem.
Summary information from recent analyses is discussed in the following pages. See
Appendix C for the complete analyses.
It should be noted, however, that the regulated community has been in a
process of restructuring in recent years. The number of retail petroleum marketers
has shown a continuing decline that predates the UST regulations. For example, the
American Petroleum Institute noted in late 1989 that half of all traditional gas stations
had closed (or been converted to convenience stores) in the preceding ten years.1
Because the analyses that form this report have not accounted for industry trends,
such as this one, this report may somewhat exaggerate the impact of UST compliance
costs as a factor in creating financial distress for UST owners.
Many Small UST Owners Face Serious Financial Difficulties
Even though the State funds allow many UST owners to comply with the
financial responsibility regulations, they do not provide complete relief from all potential
impacts of the technical and financial responsibility regulations. Exhibit IV-2 shows the
percentage of each category of UST owner that is expected to experience severe
financial distress2 or business failure3 over the next ten years, assuming that all
State funds that either have been approved by EPA or are being reviewed by EPA are
in place and operational. Under this assumption, about 64 percent of small retail
motor fuel firms, 40 percent of single station owners, and 66 percent of small
government entities will experience at least temporary financial hardship (i.e., severe
financial distress). Furthermore, about 30 percent of single service stations and 25
percent of small retail motor fuel firms are expected to close or file for bankruptcy.
The results shown represent impacts from several causes: inability of owners and
•operators in States without funds to demonstrate financial responsibility, financial
difficulties faced by owners and operators in meeting the co-payment and deductible
1 American Petroleum Institute, Service Station Management. August 1989, p. 11.
2 Basically, severe financial distress is a situation in which, after imposition of regulatory costs, the
affected business is losing money. See Appendix C for a discussion of this term and its use in
various analyses.
3 Business failure is a situation in which a business is forced to close or enter bankruptcy
because it is unable to meet its debts (including debts associated with regulatory expenditures).
IV-3
-------
EXHIBIT IV-2
MANY SMALL UST OWNERS FACE FINANCIAL PROBLEMS
OVER THE NEXT TEN YEARS
100%
_ 80%
O
D)
0
05 60%
H—
O
•£ 40%
0
O
£ 20%
0%
Medium
Small Single Station Medium
Small
Medium
Small
Retail Motor Fuel General Industry
Categories of UST Owners
Government
Severe Financial Distress
Business Failure
See Appendix C for the assumptions used in this analysis.
Large UST owners and medium private UST owners are not expected to experiencesevere financial impacts.
-------
requirements of State funds, -and economic hardship associated with paying technical
compliance costs not covered by State funds. The submission of additional State
assurance funds would reduce the number of firms experiencing either severe financial
distress or business failure.
State Assurance Funds Can Reduce Business Failures
Currently, State assurance funds have either no deductible amount (they pay
from the first dollar) or deductibles that range from $5,000 to $150,000. Exhibit IV-3
shows the percentage of each category of UST owner that would experience severe
financial distress or business failure if ajl States had funds to pay for corrective actions
above a $10,000 deductible. As the exhibit reveals, potential business failures are
greatly reduced when such State funds are readily available. Potential business
failures drop from 31 percent to 14 percent of single service stations and from 24
percent to 8 percent for small service stations.
State Financial Assistance Programs Can Reduce Severe Financial Distress
The potential for owners and operators of single and small service stations to
experience severe financial distress due to the requirements of the UST program
remains great, despite the development of State funds. As Exhibit IV-4 reveals, severe
financial distress caused by the cost of meeting the technical standards requirements
will affect most small retail motor fuel firms at about the same level even if all States *
had assurance funds with $10,000 deductibles. The small change in number of firms
with severe financial distress is due to the large total program cost relative to the
financial condition of these sectors of the regulated community. Thus, even if a State
fund pays for a corrective action, the costs that these firms will incur to pay for other
technical standards requirements (such as leak detection and tank replacement or
upgrades) Still are substantial relative to their sales, profits, and assets. While State
assurance funds achieve the environmental objective of fostering cleanups and the
economic objective of avoiding more business failures, they do not significantly reduce
the economic strains imposed by compliance with the technical standards.
Thus, other mechanisms are necessary to provide financial assistance to UST
owners and operators to install leak detection, to upgrade or replace their tanks, and
to remove existing contamination from their sites. Several States have developed
State financial assistance programs that help UST owners and operators meet
compliance costs associated with the technical standards requirements. Chapter V
presents a full discussion of State financial assistance programs.
Business Failures in Rural Areas Pose Special Concerns
Concern has been expressed in a number of quarters that the UST regulations
will create more serious problems in rural areas than in urban areas. As a result, EPA
has studied the impact on rural UST facilities and a summary analysis appears below
(see also Appendix D).
IV-5
-------
EXHIBIT IV-3
STATE FUNDS WITH $10,000 DEDUCTIBLES
REDUCE BUSINESS FAILURES OVER THE NEXT TEN YEARS
o
CD
o
"B
0
O
100%
80%
60%
40%
20%
0%
Medium Small Single Station Medium Small
Medium
Small
Retail Motor Fuel General Industry
Categories of UST Owners
Government
Severe Financial Distress
Business Failure
See Appendix C for the assumptions used in this analysis.
Large UST owners and medium private UST owners are not expected to experience severe financial impacts.
-------
EXHIBIT IV-4
STATE FUNDS WITH $10,000 DEDUCTIBLES
REDUCE FAILURES MORE THAN THEY REDUCE FINANCIAL DISTRESS
BUSINESS FAILURE
100%
80%
o
CD
0>
co
O
60%
§ 40%
o
CD
CL
20%
0%
Medium Small Single Station
Retail Motor Fuel
SEVERE FINANCIAL DISTRESS
100%
80%
60%
40%
20% -
0%
Medium Small Single Station
Retail Motor Fuel
Percentages with current mix of State Funds
Percentages if all States had funds with $10,000 deductibles
-------
A somewhat disproportionate share of USTs are located in rural areas. Rural
areas contain 29 percent of service stations but only 24 percent of U.S. households.
As a result, sales and profits for rural stations may be less than for urban stations.
Also, fewer rural stations are associated with large corporations; thus, they could lack
access to the capital needed to upgrade or replace USTs, and most will be unable to
self-insure. Because the UST regulations impose costs that are more or less fixed on
a per-UST basis, compliance costs could be more burdensome for the smaller rural •
facilities.
Disproportionate impacts of the regulations on rural gas stations might grow
more common as the regulations take effect. EPA's analysis of the impacts of
regulatory costs showed that 40 percent of single service stations will experience
severe financial distress, and 25 percent will fail over the next ten years, assuming that
all State funds that either have been approved by EPA or are being reviewed by EPA
are in place and operational. Among service stations that are smaller than average,
as most rural stations are, the impacts are expected to be more than twice as great:
86 percent could experience severe financial distress, and 53 percent could fail. As
with other sectors of the UST population, the spread of State assurance funds with
low deductibles would significantly cut business failures, but would not relieve severe
financial distress.
EPA has reviewed data on UST closures and installations in five western States
with comparatively large rural populations: Colorado, Montana, North Dakota, South
Dakota, and Wyoming. Evidence from these western States does not at this time
show significant differences in net closure rates between rural and urban areas.
As one would expect, the density of gas stations is much lower in rural areas
(about one station for every 86 square miles in rural areas, as opposed to one for
every 3 square miles in urban areas). The low density of gas stations could present
two types of problems for rural consumers. First, even the nearest station may often
be miles away. Second, the lack of nearby competition could allow some isolated
stations to raise fuel prices. Both of these problems for consumers - limited
availability of service stations and lack of competition - would worsen if significant
numbers of rural stations disappeared. Thus, the impact of closures in rural areas
may be greater than the impact of urban closures even if the rate at which USTs close
is similar in urban and rural areas. In rural areas of Wyoming, for example, almost a
quarter of the towns with only one or two service stations have already lost a third or
more of their service station USTs. These closures threaten the availability of fuel and
the competition of marketers in small communities much more than would the closure
of a few stations in a large city.
IV-8
-------
CHAPTER V
EASING FINANCIAL PROBLEMS FACED BY UST OWNERS
This chapter focuses on options for helping UST owners and operators meet
compliance costs, this chapter highlights five main points:
• Statutory and regulatory changes that could provide economic relief
have significant limitations.
• The Federal LUST Trust Fund, as currently constituted, cannot be used
to address the overall compliance cost problems of individual UST
owners and operators.
• Current State assistance programs use a variety of financial mechanisms
tailored to their States' needs and the characteristics of their UST
populations.
• No single financial assistance mechanism can prove appropriate for
application in all States. States need to consider options and choose the
most appropriate mechanism suitable to their unique State-specific
characteristics.
Each State is ideally positioned to target its most vulnerable UST owners
and operators and to develop appropriate financial assistance programs.
The options for easing the financial strains caused by the UST regulations fall
into several categories: statutory relief, regulatory relief, potential use of the LUST
Trust Fund, and developing State financial assistance programs. These options are
discussed .below.
Limits of Statutory and Regulatory Relief
Statutory relief would include options such as reducing the scope and coverage
of the technical and financial responsibility requirements or eliminating financial
responsibility requirements for existing tanks. Regulatory relief would include options
such as extending compliance deadlines, issuing interpretive rulings, deferring financial
responsibility requirements, or changing the scope of the regulations to exempt firms
with the smallest assets from some or all requirements. Providing statutory and
regulatory relief may have the advantage of finding long-term solutions to the problem,
although this course of action also has some major drawbacks.
One change that has been suggested in public comments on the financial
responsibility regulations is to reduce the minimum amount of the financial
responsibility requirements for small petroleum marketers from the current statutory
V-1
-------
minimum of $1 million to a lesser amount. Although this suggestion appears to have
some appeal, EPA believes that the effect of such a change on the cost or availability
of insurance would be minimal. EPA has learned from the insurance industry that
insurers will set premiums based on the average or expected claim. With current
claims averaging $100,000 per claim, therefore, an insurance company will set its
premium with the expectation of paying $100,000 per •claim. The price differential for
premiums between a $100,000 UST pollution liability policy and a $1 million policy is '
small (less than 10 percent).
Promulgating major new requirements could take two to three years-, which may
be too late to help the smallest businesses. Minor changes, such as extending
compliance deadlines, can be made more quickly, and will temporarily delay the
impact of meeting compliance costs on UST owners and operators.
Most States have developed UST programs that are broader in scope and
more stringent than the Federal requirements. UST owners and operators in those
States are expected to comply with all applicable State and Federal regulations. It
should be noted that modifying Federal standards would not assist UST owners in
those States, unless States can be persuaded to lower their requirements.
LUST Trust Fund
Through a 0.1 cent per gallon gasoline tax, $500 million has been collected to
fund the Federal Leaking Underground Storage Tank (LUST) Trust Fund. In 1990, the
fund was reauthorized for another 5 years at the same rate. States use the LUST
Trust Fund primarily to oversee responsible-party cleanups and to cover the costs of
cleanup when the party responsible for a release is either bankrupt or cannot be
located (as in cases of abandoned USTs). The implementing agency must make
efforts to recover these costs, though no more than a moderate degree of success is
anticipated for these efforts. EPA currently estimates that about 2 percent of the
450,000 potential releases will be abandoned or will otherwise require Federal and
State funds to clean up. The balance of the LUST Trust Fund will be required to fund
the oversight of cleanups. The Fund does not provide financial assistance for leak
detection, tank upgrades, site assessments, or any expense other than cleanups.
Therefore, the Fund cannot be used to address the compliance cost problems of
individual UST owners and operators.
Five Financial Mechanisms for State Assistance Programs
Because regulatory and statutory relief is limited, many States have explored
the option of providing financial assistance to UST owners and operators. Many have
already established several types of loan, grant, and other financial assistance
programs to help UST owners and operators conduct corrective actions, upgrade
:neir tanks, or pay for other regulatory compliance costs, such as closure costs.
Exhibit V-1 provides a brief summary of existing State assistance programs. Although
programs in different States are structured differently, they all aim at reducing the
costs of leak detection, UST upgrading or replacement, closure, or corrective action to
V-2
-------
EXHIBIT V-1
STATE FINANCIAL ASSISTANCE PROGRAMS
State
Alaska
Arizona
California
Idaho
Iowa
Maine
Maryland
Michigan
New Jersey
North Carolina
Ohio
Oregon
Pennsylvania
Rhode Island
South Dakota
Vermont
Washington
Type of Program
Direct
Loan
X .
X
X
X
X
X
X
X
X
X
Loan
Guarantee/
Subsidy
X
X
X
X
X
X
Grants
X
•-
X
X
X
Eligible Costs
Upgrade/
Replacement
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Leak
Detection 1
X
X
Corrective
Action
X
X
X2
X
X
X
Status
Active .
X
X
X
X
X
X
X
X
X
X
X
X
X
Inactive
X
X
CO
1 Leak Detection includes site assessment and tank tightness testing
2 Minor soil remediaton only
-------
owners and "operators, making owners and operators more likely to undertake the
desired activities.
The following pages discuss five financial mechanisms that States can use to
provide financial assistance to LIST owners and operators: direct loans, loan
guarantees, interest subsidies, grants, and tax incentives. A brief description of each
financial mechanism-is provided along with its advantages and disadvantages,
incentive effects, the parties that are most likely to participate, and estimates of the
cost for using the mechanism.1 Exhibit V-2 summarizes the characteristics of the
different mechanisms discussed in this section.
EXHIBIT V-2 .
CHARACTERISTICS OF FINANCIAL ASSISTANCE MECHANISMS
Currently used by
State UST programs
Provides direct
access to capital
Level of
administrative
;, difficulty
Level of private
sector involvement
Relative start-up
costs
Ability to aid
weakest firms
Direct
Loans
•
HIGH
LOW
HIGH
HIGH
Loan
Guarantees
•
LOW
HIGH
LOW
LOW
Interest
Subsidies
•
LOW
HIGH
LOW
LOW
Grants
•
LOW
LOW
HIGH
HIGH
Tax
Incentives
•
LOW
LOW
LOW
LOW
Direct Loans
With direct loans, States issue loans to eligible tank owners or operators. The
funds come from a revolving loan fund. States generally review the credit risk of the
tank owner or operator before providing the loan. Alternatively, some States contract
with a private lender or other institution to conduct credit analyses and otherwise
administer the program. Through a direct loan program, States are able to provide
loans that commercial lenders generally decline (e.g., too small or financially risky
owners or operators, or in small amounts). State loans are provided at the market
1 A study prepared for EPA by the Northeast-Midwest Institute to examine financial assistance
programs for UST owners and operators is contained in Appendix E.
V-4
-------
interest rate for private borrowers, at the same interest rate at which States can
borrow money (usually below the prevailing market interest rates for private
borrowers), at a lower interest rate, or without interest. In addition, owners and
operators are often allowed to repay the loans over a longer time period than would
normally be by private lenders.
Direct State loans have several advantages and disadvantages:
• This type of program would address owners' and operators' lack of
access to long-term credit due to one of several reasons, including small
loan amount, long repayment period, small size of the firm, or inadequate,
credit record.
• Bypassing the participation of private lending institutions leaves lending
decisions solely to the State, allowing for greater administrative flexibility
and increasing the likelihood that targeted owners and operators will
obtain assistance.
• Administrative costs for a direct loan program are likely to be high if a
State conducts credit analyses before issuing loans. Although a State
could contract with a private firm, such as a bank, to conduct credit
analyses, banks are presently reluctant to become involved in State loan
programs because the programs are too small or because the banks
fear potential liabilities.
Because State loan programs provide loans to owners and operators
who are unable to get loans from private lenders, loan programs may
face a high default rate and, therefore, be costly to run.
The capital needed for a loan program will depend on the number of firms to
be given assistance, the average size of the loans, the time frame of the program, and
the repayment terms. For example, a State may decide to help any retail petroleum
facility that would be forced into severe financial distress by the cost of tank upgrading
requirements, which are estimated to average about $10,000 per tank. EPA's analysis
shows that about four percent of all USTs fall into this category. Thus, the State might
consider offering loans of about $10,000 each to about four percent of its total UST
population. In a State with 30,000 USTs, four percent would equal 1,200; at $10,000
per UST, the total amount loaned would be $12,000,000.
The $12,000,000 total would not necessarily be needed immediately. The
program may be spread over a number of years, lowering the initial capitalization
requirement. For example, if the program is spread over a five year period, only
about $2,400,000 would be needed for the first year. The requirement for new capital
would decline in later years as the recipients of the first loans began to repay them. In
a simple program in which recipients repaid a fifth of any loan annually for five years,
the new capital required for the loan program would decline by a fifth in each
V-5
-------
successive year. The need for new capital would be greater for longer term loans or if
there were a significant number of defaults.
Loan Guarantees
A loan guarantee is a commitment to a lender by a guarantor that if a borrower
fails to repay a loan,-then the guarantor will repay a percentage (up to 100 percent) of
the loan to the lender. A loan guarantee reduces the risk of default faced by a lender.
A loan guarantee program would make commercial lenders more likely to offer loans
to small and other financially risky tank owners or operators. States have to establish
a reserve fund to pay for loans in the event that an owner or operator defaults.
Although the reserve fund size should be only a fraction "of the total amount of loans
guaranteed under the program, it should be a conservative percentage of total loans
outstanding, perhaps 10 to 20 percent. The major advantages and disadvantages of
loan guarantees are as follows:
This type of program could be targeted to firms encountering financing
barriers.
Because the participating bank risks losing a portion of the total loan
amount, it may carefully assess the probability of the owner or operator
defaulting. States can rely to a large extent on the credit analysis skills
of private lenders, thus reducing administrative costs.
A loan guarantee program may also lengthen the loan repayment terms
normally provided by commercial lenders. Typically, commercial lenders
do not extend a non-real estate loan beyond five years. With a
guarantee, lenders may be willing to extend the term of loans beyond
five years.
Unlike a direct loan program, States may limit their financial risk or
exposure by reducing the percentage of the loan that is guaranteed. A
75 percent loan guarantee, for example, reduces potential liabilities by 25
percent.
•: • Because commercial lenders accept some of the risk, they may be more
conservative in granting loans than in a direct loan program; therefore,
those who need loans most may still be unable to obtain them.
• Although commercial lenders would be likely to extend loans backed by
a 90 percent guarantee, lender participation would decline as the
percentage guaranteed is reduced.
The capital required for a loan guarantee program will depend not only on the
number and size of the loans but on the fraction of each loan that is guaranteed and
the anticipated default rate. The numerical example of a direct loan program can
serve as a point of departure for an example of a guarantee program. If 240 loans of
V-6
-------
$10,000 each are to be made in the first year of a guarantee program, the State need
have only a fraction of the full $2,400,000 to be loaned. For example, suppose the
program guarantees 90 percent of the value of the loans, and a 20 percent reserve
fund is considered necessary (that is, the State expects defaults to be as high as 20
percent of the amount lent). Under these assumptions, to cover the first year of the
program the State would have to have available a total of $432,000: 20 percent of 90
percent of $2,400,000. In later years, if defaults turn out to be lower than anticipated,
the reserve fund could be reduced in size.
Interest Subsidies ••
An interest subsidy entails payments by the States that reduce the cost of
borrowing through either commercial loans or corporate bonds. Interest subsidies
could be structured in several ways, including the following:
• OPTION 1 - The State pays a fixed number of points of the interest rate
being charged to the owner or operator (e.g., the State pays only two
percent interest on the loan, and the owner or operator pays the
remainder, regardless of the terms of the loan).
• OPTION 2 - The State pays any interest payments in excess of a
specified interest rate (e.g., the owner or operator pays five percent and
the State pays the remainder).
• OPTION 3 - The State pays a fixed proportion of the total interest
payments (e.g., 25 percent of all interest payments) and the owner or
operator pays the remainder.
Each of these options allocates the impact of changes in interest rates differently
between owners and operators and the State. Under Option 1, a State will know in
advance what its costs will be; yet, as market rates change, the actual interest rate
faced by tank owners and operators may fluctuate. Under the second option, a State
will guarantee that the rate charged to owners and operators remains unchanged but
the State runs the risk of significantly increased costs if market rates rise substantially.
Under the third option, both the State and the borrower bear some risk from
fluctuations in the market rate.
The major advantages and disadvantages of an interest subsidy program are
as follows:
• An interest subsidy program would be easier to administer than a loan
program because it could rely on private lenders to conduct credit
analyses and to make loans.
• If a significant problem for UST owners and operators is the cost and not
the availability of loans, compliance with State and Federal regulations
could improve.
V-7
-------
• ' Private lending institutions must be willing to provide loans for this
program to be effective. If lenders are unwilling to make loans
regardless of the interest rate, tank owners and operators will not be
assisted through an interest subsidy program.
If the interest subsidy offered is not high enough, it will not provide an
effective incentive for owners and operators to participate in the
program.
An interest subsidy program that provides a two percentage point subsidy for a
total of $12,000,000 in loans will cost less than $240,000 (i.e., two percent of
$12,000,000) per year, depending on the number of years over which the loans are
made and repaid. For instance, if $2,400,000 in five-year loans are made each year
for five years, the total outstanding loan amount will reach a maximum of $7,200,000 in
the fifth year (assuming for simplicity that the loans are repaid in five equal payments).
In that year, the two percentage point subsidy will cost two percent of $7,200,000 or
$144,000. In subsequent years the cost would decline as more and more of the
outstanding balances of the loans are repaid. Costs for other types of subsidy
programs will depend on their structure and on the behavior of market interest rates.
Grants
Grants would involve direct payments from a State to tank owners and
operators or other tank management professionals. Grants are more appropriate for
low, carefully targeted costs (e.g., tank tightness tests, release detection, cathodic
protection, and spill/overfill prevention) where potential benefits are high. Rather than
fully fund these activities, States may wish to offer partial funding in the form of
matching grants. The administrative ease of a grant program would depend on the
program goals and the length of the application process. If priority sites could be
chosen without extensive information, the administrative burden is likely to be light.
The need for due process protection (e.g., ensuring fairness in grant awards) would
increase the costs of administering a grant program. The major advantages and
disadvantages of a grant program are as follows:
• Owners and operators are selected to receive assistance without regard
to credit worthiness as judged by commercial lenders. A grant program
thus allows broad flexibility in targeting recipients (for example, gasoline
stations in rural, isolated areas).
• Because the total cost of a grant program is under the direct control of a
State, the size of the grant can be varied based on evolving program
priorities.
• A grant program would be more costly than either a direct loan or loan
guarantee program because grants are not repaid.
V-8
-------
-• Fewer tank owners or operators could be assisted with a fund of a finite
size.
The costs and capital needs of a grant program can be determined either by
the need to be addressed or by the funding available. A State choosing to provide
grants for upgrading the USTs of each of the service stations in severe financial
distress could spend (with the same assumptions used in the other examples) a total
of $12,000,000. This expenditure could be spread over as many years as desired or
necessary: over five years, the annual cost would be $2,400,000. This cost would not
decline over the years, as it would in a loan program, due to the nature of-grants. The
costs of the program could be cut by requiring matching payments; with a 50 percent
contribution from the recipients, the annual cost of five year program could be
reduced to $1,200,000.
Tax Incentives
Two primary types of State tax incentives - tax credits and tax deductions -
could be used to provide financial incentives for installing leak detection, upgrading or
replacing tanks, or conducting corrective actions. Because regulatory compliance
costs and corrective action costs are ordinary business expenses that are currently
deductible, tax incentives must increase deduction amounts above current limits under
State tax laws.
A tax credit usually takes the form of a direct reduction in the tax liability of the
firm. Tax credits are generally applied to income tax liabilities. A tax deduction
reduces a firm's taxable income by an amount equal to the expense that is being
deducted. The actual benefit to the firm depends on its tax rate and the decrease in
income tax liability associated with the deduction. Because a deduction is subtracted
from income before taxes, while a tax credit is subtracted directly from the tax liability
of a firm, a deduction provides less of an incentive than a tax credit of an equal
amount.
Tax incentives could be structured in several ways. One is to allow accelerated
depreciation of UST improvement expenses. Another is to give tax credits for some
portion of cleanup or closure costs. Providing tax incentives has the following
advantages and disadvantages:
• Because tax incentives reduce the after-tax cost of leak detection, tank
upgrading, replacement, closure, and corrective action, more owners
and operators will choose to comply voluntarily with State and Federal
regulations.
• Tax incentive programs are easy to administer because the owner or
operator takes responsibility for conducting the upgrade, closure, or
corrective action, and then reflects the costs along with deductions or
credits on his/her tax forms.
V-9
-------
• "Tax deductions might be effective if they allow acceleration of the rate at
which the costs of a new tank can be depreciated and deducted from
taxable income.
• Tax incentives do not assist owners and operators who need money up-
front to begin an upgrade, closure, or corrective action. Thus the
smallest marginal owners may not be assisted.
• It would be difficult to control the costs of a tax incentive program
because it is self-implementing by tank owners and operators-with little
government involvement.
• Income tax revenue would decrease.
• It is difficult to target recipients of this incentive because of limited State
involvement beyond the statutory design.
As an example of the costs of a tax abatement program, a jurisdiction might
decide to offer a tax rebate of $2,000 per year for ten years for single gas station firms
in severe distress if they upgrade their USTs. Assuming as in previous examples that
a total of 1,200 firms would enter the program, the total cost of the program would be
$2,400,000 per year for ten years.
Types of Costs Covered
In addition to considering the types of financial assistance programs that are
best suited to their needs, States must also consider the types of costs that the
program will cover based on the goafs of the State. A financial assistance program
can emphasize preventive activities by covering tank upgrades and replacements,
closures, or other regulatory compliance costs such as the costs of leak detection
equipment. Alternatively, a financial assistance program could emphasize corrective
activities by assisting tank owners and operators in cleaning up existing releases.
Covering costs of UST upgrade and replacement involves lower costs and risks
than covering the costs of corrective action or closure (required closure activities
include a site assessment aimed at detecting any releases and contamination that may
have been undetected when the tank was in service). Because tank upgrade,
replacement, and closure costs are lower than corrective action costs, a fund of a
given size could assist more owners and operators if it covered only upgrades,
replacements, and closures than tf it covered corrective actions.
In addition, the risks associated with a loan program covering corrective action
are different from those covering UST upgrade and replacement. Loans for tank
upgrade and replacement usually involve investment in tangible assets (for example,
installation of a new tank system) that may then serve to provide both collateral for the
loan and the cash flow the borrower needs for loan repayment. Loans for corrective
V-10
-------
action, in contrast, may result- in a lender assuming liability for a contaminated site in
the event that an owner or operator defaults.
State Programs Can Effectively Target Vulnerable Groups
The types of businesses that own USTs are diverse, ranging from multi-billion
dollar corporations to rural "Mom & Pop" general stores that sell gasoline. The kinds
of problems that these businesses face as they try to comply with the UST regulations
are varied and complex. Therefore, there may not be one solution that will address
the different needs of these diverse tank owners.
Several States have acknowledged the multi-faceted nature of this problem by
creating State financial assistance programs that have defined State-specific needs
and identified who will benefit from these programs. Each State financial assistance
program is structured differently (for example, direct loan program, loan guarantee
program, interest subsidy program) and covers different types of costs (such as tank
closure, tank replacement, or tank upgrading costs). Therefore, these State-specific
programs indicate that individual States are best suited to looking at their particular
concerns and developing their own solutions.
V-11
-------
-------
CHAPTER VI
SUMMARY OF FINDINGS AND RECOMMENDATIONS
This report summarizes the effects of the Underground Storage Tank program,
with a specific emphasis on the impacts of the financial responsibility requirements
imposed by Subtitle I. As directed by the Senate Appropriations Committee, EPA has
specifically addressed three issues: (1) compliance with the financial responsibility
requirements, (2) impact on various industry sectors of meeting compliance costs
resulting from the Federal UST technical standards and financial responsibility
requirements, and (3) methods being used to reduce the impacts imposed by the
UST program on tank owners and operators. Based on the analyses contained in this,
report, EPA has developed legislative and regulatory recommendations for minimizing
the burden imposed on the regulated community in complying with Subtitle I.
Financial Responsibility Compliance
• Industry surveys have found that more than 95 percent of UST
owners and operators currently required to be in compliance with
the financial responsibility requirements are estimated to be in
compliance. This high rate of compliance suggests that, at present, the
financial responsibility regulations are not imposing excessive hardships
on owners and operators.
• Prospects for compliance with the financial responsibility
requirements are improving, primarily because of State assurance
funds and State financial assistance programs. Industry surveys have
found that up to 90 percent of owners and operators able to
demonstrate financial responsibility rely at least in part on State financial
assurance funds. At present, UST owners in 36 States may demonstrate
financial responsibility using State funds, and an additional 7 States are
in the process of developing funds for submission to EPA.
Costs and Impacts of UST Program
• Compliance with the EPA technical standards and meeting State
corrective action requirements makes far greater demands on the
financial resources of UST owners than does compliance with
financial responsibility. EPA estimates that upgrading facilities to meet
the new tank standards may cost $30,000 to $100,000, and that cleaning
up an UST release may cost an additional $100,000 or more. Where
, available, premiums for commercial UST liability insurance average
around $3,900 per facility per year; State funds may charge tank fees of
$100 to $200 per year.
VI-1
-------
• ' Financial responsibility requirements accelerate compliance with the
technical standards so that these costs are imposed sooner. The
financial responsibility regulations often appear to cause economic
hardship because many insurers require that facilities be upgraded and
past contamination cleaned up before they will offer insurance.
Eliminating the financial responsibility requirements would not, ultimately,
offer significant relief to the owners and operators. In the absence of the
financial responsibility requirements, owners and operators would face
the same costs, but on a delayed schedule.
-.
Although available data suggest that rural service stations are not
currently closing at a disproportionately higher rate than urban
stations, the eventual impact of closures on consumers may be
higher in rural areas because of the sparse distribution of service
stations and the lack of competition. Concerns have been expressed
that the UST regulations are leading to a reduced availability of fuel in
rural areas. EPA's analysis of the available data suggest that the UST
regulations have not yet lead to disproportionately high closure rates of
service stations in rural areas. EPA recognizes, however, that the
eventual impact of closures may be higher in rural areas: rural stations
may have less ability to meet the regulatory requirements as they are
phased in, and consumers in rural areas have fewer alternative sources
of supply, so that closure of rural stations imposes a greater potential
burden.
Alternatives for Reducing Impacts
State financial assurance funds can help keep owners and operators
in business by providing money for cleanup activities. Forty-three
States have developed State assurance funds. States have been very
active in developing funds to allow owners and operators to demonstrate
financial responsibility. Most State funds have relatively liberal criteria for
covering releases, and thus provide money for owners and operators to
clean up releases that are not generally covered by commercial UST
insurance and that owners and operators do not have the resources to
pay for. Therefore, State assurance funds allow more small businesses
to remain in business. Also, State assurance funds significantly reduce
the economic hardship of complying with the financial responsibility
requirements.
State financial assistance programs (e.g., direct loan programs, loan
guarantee programs, grants) are alleviating some of the economic
burden imposed by the technical standards on small UST owners.
Many States are adopting programs to improve the ability of UST owners
(and especially smaller UST owner) to meet the costs of complying with
the UST regulations. Financial assistance programs vary substantially
from State to State, reflecting different State priorities about the types of
VI-2
-------
owners and operators and types of compliance costs that are of most
concern.
Recommendations
The Senate Appropriations Committee asked for specific recommendations
regarding legislative and regulatory actions that could be taken to reduce the financial
and economic impacts of the LIST regulations. After considering the intent of the UST
program, the way it is being implemented by the States, and the progress that owners
and operators have had to date in meeting the requirements, EPA does not believe
further changes to Federal legislation are necessary, other than the exemption of UST-
contaminated soils and debris from the hazardous waste management requirements.
The current impediments to compliance do not result from overly stringent Federal
statutes, but rather from the costs to recover from bad environmental practices
adopted in the past 40 years.
Although EPA does not believe that significant statutory changes are necessary,
EPA recognizes that regulatory and programmatic initiatives, possible within the
existing authority, are necessary to minimize the impacts of the UST program. As
discussed in this report, EPA believes that most of the financial hardships resulting
from the UST program arise from three sources: simple inability of some owners and
operators to meet the UST regulatory requirements within the current regulatory time
frame, excessively stringent interpretation of the Federal standards by some States,
and unnecessary caution on the part of potential lenders. To address the problems
facing UST owners and operators, EPA recommends the following actions:
Statutory Changes
• Congress should amend the Resource Conservation and Recovery
Act to provide a permanent exemption from hazardous waste
management requirements for UST-contaminated media and debris.
The single largest cost component of the UST program is the cost of
cleaning up releases from USTs. At present, UST-contaminated soils
and debris have a regulatory deferral from the treatment standards under
Subtitle C of the RCRA. The deferral is limited and has been challenged
in court. Consequently, there is a great deal of uncertainty among State
regulators, landfill operators, and the regulated community regarding the
status of soil and debris from UST sites. That uncertainty has led, in
many cases, to UST-deferred wastes being treated as hazardous waste,
resulting in higher costs for UST corrective actions. If this exemption is
lost, the increased cost to dispose of contaminated soils and media has
the potential to double the average cost of corrective action at UST sites,
leading to potential increases in the cost of insurance, shortfalls in state
financial assurance funds, and continued reluctance by lenders to
provide money needed to upgrade facilities to meet the technical
standards.
VI-3
-------
Regulatory and Programmatic Changes
EPA should continue regulatory efforts to provide relief for the most
severely affected members of the regulated community. Because of
continuing concern about the ability of the least capable members of the
regulated community to comply, EPA has extended the final compliance
date for demonstrating the financial responsibility requirements to
December 31, 1993. This deadline applies to petroleum marketers
owning multiple facilities (with fewer than 13 USTs) or only a single facility
(with up to 100 USTs), and non-marketers with net worth of less than
$20 million. The extension will allow additional time for States to develop
(1) financial assurance programs so that tank owners and operators can
demonstrate financial responsibility and (2) financial assistance programs
so that tank owners and operators can upgrade their facilities to meet
underwriting requirements imposed by commercial insurance companies.
EPA recognizes, however, that some owners and operators may
continue to be unable to demonstrate financial responsibility.
Consequently EPA has initiated additional regulatory efforts to identify
Federal criteria that States may use to offer additional extensions of the
compliance deadline to specific groups of owners and operators. The
analysis is focusing on USTs located in remote or rural areas and USTs
owned by local governments.
EPA should continue to support State efforts to develop programs to
help the regulated community. In addition to regulatory relief for some
owners and operators, EPA recommends continuing its support for
States in their efforts to provide relief to owners and operators. States
are in the best position to determine which members of the regulated
community are most in need of assistance, and to balance the
sometimes conflicting public concerns of aggressively protecting the
environment and fostering business development.
EPA should emphasize the flexibility existing in its current
regulations with respect to controlling corrective action costs. The
Federal UST regulations establish a process that allows States to set
cleanup standards on a site-by-site basis and to implement low-cost,
innovative cleanup strategies. Many States, however, have adopted
policies and procedures that are less flexible and more complex than
required by federal law or regulations, significantly increasing the costs
of UST corrective actions at some sites. For example, many States
require costly site assessment plans that can be eliminated, specific -
technologies that are outdated or ineffective, or extensive cleanups at
sites that pose minimal threats to human health or the environment. EPA
has initiated the development of a policy directive that will clarify the
flexibility that already exists in the Federal corrective action regulations
and that will promote the use of cost-cutting opportunities.
VI-4
-------
In addition, the Agency will continue its use of EPA-funded projects to
help individual States and local programs to "streamline" their cleanup
procedures. These efforts will cut costs and red tape while speeding up
necessary cleanup efforts.
• EPA should clarify the liability of lenders to improve the availability
of funds for financing UST facilities. Concerns about the potential
liabilities associated with lending to UST facilities have been cited as a
major reason that owners and operators of UST facilities have been
unable to obtain funds to upgrade facilities. EPA has initiated regulatory
efforts to provide additional clarification about the circumstances that
would lead to lender liability for UST-related cleanup expenses. EPA
anticipates that the clarification will reduce lender uncertainty and
increase the availability of capital to UST owners and operators.
The recommended approach will promote State efforts to provide financial
assistance and financial assurance to the most deserving members of the regulated
community, reduce barriers to more efficient, less costly cleanups, and increase the
availability of capital for UST owners and operators to upgrade their facilities. The
recommended statutory change will ensure that costs of cleaning up UST
contamination are not unnecessarily high. Finally, EPA is developing Federal criteria
to identify specific groups of UST owners and operators potentially needing'additional
time to be able to demonstrate financial responsibility. These criteria will provide
States with the time to grant relief to the members of the regulated community that are
most in need of financial assistance, such as small local governments using USTs to
provide emergency services and small retail marketers serving isolated communities.
VI-5
-------
-------
APPENDIX A
STATUS OF STATE FINANCIAL ASSISTANCE PROGRAMS
-------
-------
APPENDIX A
STATUS OF STATE FINANCIAL ASSISTANCE PROGRAMS
At this time, 17 states have developed or proposed programs to provide
financial assistance that can help owners and operators of USTs to comply with the
technical standards regulations, which include tank installation, upgrading, and
replacement. This Appendix provides brief descriptions of existing state financial
assistance programs.
• Alaska has two active financial assistance programs for LIST owners and
operators. One program provides a combination of grants and loans to
cover a maximum of $1 million in cleanup costs per site and per
applicant. Grants are available to compensate ninety percent of future
estimated cleanup costs or costs already incurred. The remaining 10
percent of costs are covered by a state loan not to exceed $25,000. The
other program provides grants to reimburse 60 percent of tank upgrade
costs up to $60,000 per site and $200,000 per applicant. This program
will provide reimbursement for all or a portion of costs to remove a tank,
replace a tank, and upgrade a tank system to meet federal and state
requirements.
To be eligible for coverage under the program, an applicant must have
registered the tank system registration includes payment of a fee.
Another eligibility requirement is compliance with federal and State
regulations, although the applicant can use the financial assistance
program to come into compliance. The program is financed through
state legislative appropriations and is administered by the Alaska
Department of Environmental Conservation, Division of Spill Prevention
and Response.
• Arizona is currently in the process of developing a loan program. The
Arizona LIST Act created a loan account where a portion of the fee
collected from UST owners and operators is deposited. The account
may be used to make loans between $5,000 and $100,000 for any
activity necessary to meet state performance standards, including tank
upgrade and replacement. Loans may also be used to pay for
corrective action required to clean up contamination discovered while
upgrading or replacing a tank. In addition, loans can be made for the
costs of corrective action below the lower coverage limit of the state
assurance fund.
Although rules outlining eligibility criteria are not yet complete, the Act
requires that an owner or operator must have been rejected by at least
one lending institution to be eligible to receive a state loan. The Act also
A-1
-------
' requires that loans be issued only if it is possible to do so on a
commercially sound basis with provisions for adequate security of loan
repayment.
California offers a direct loan for the replacement of existing tanks.
Loans are available for $30,000 to $50,000 per tank, up to a maximum of
$350,000 per applicant. The amount loaned may not exceed 90 percent
of costs necessary to achieve compliance. The loan program was
instituted to help small businesses comply with technical requirements.
The program is administered by the Department of Commerce and is
currently funded through a tax collected on wholesale sales of petroleum.
Idaho's guaranteed loan program is administered jointly by the Idaho
Department of Commerce (DOC) and the U.S. Small Business
Administration (SBA). Banks participating in this assistance program can
borrow DOC money at low interest rates (currently 4 percent) to make
loans to LIST owners and operators for UST improvements. SBA will
guarantee up to 90 percent or a maximum of $750,000 of eligible bank
loan amounts. Coverage is restricted to UST improvements to meet
federal and state requirements but a limited amount of coverage will be
provided for state approved cleanup of minor contamination.
UST operations must be a for-profit business, demonstrate ability to pay
back the loan from business earnings, and have insurance through the
State Insurance Fund to be eligible for this program. Applicants must
also pay SBA a service fee equal to 2 percent of the loan amount. Idaho
legislators are in the process of redefining procedures for State Treasury
money disbursements to this program although the program is active.
Iowa has a program to guarantee 90 percent of loans for upgrade or
corrective action costs. The program is available to independent owners
and operators that own at least one, but no more than twelve tanks at no
more than two sites. The owner or operator must have a net worth of
$400,000 or less and have been turned down for a loan by two financial
institutions.
Loans may be used to pay (1) tank improvement needed to meet federal
and state standards, or (2) corrective action costs. Loans may be used
to pay for leak detection equipment is an allowable cost. To receive a
loan, an owner or operator must complete an application including
current and historical financial information, cash flow projections, and a
copy of the contractor's cost estimate for the work to be done. In
addition, there is a $150 application fee. Although there is no maximum
loan amount, the program administrator may only approve applications
for loans under $75,000. For larger loans, approval by the UST Board is
required.
A-2
-------
Maine provides no- or low-interest direct loans for the replacement of
commercial USTs and grants for residential USTs. Commercial
businesses that have one facility, a net worth of less than $500,000, and
meet a debt service earning ratio cutoff, are eligible for the loans.
Homeowners earning less than $24,000 are eligible for grants. The
maximum loan amount is $200,000 per owner or operator. The initial
funding source for the program was a bond to make $500,000 available"
for loans to retailers, $1 million to commercial owners, and $2 million to
homeowners with tanks. A supplemental funding source is a fee on
petroleum products brought into the State.
Maryland has a direct loan program to assist UST owners and operators
with upgrading and replacing tanks to comply with federal and state
requirements. Eligibility for the program is based on the several
characteristics: payment of State annual tank fees, applicant's financial
status, geographical location and community importance of tank site,
essentiality of the tanks for use by public services, and previous effort to
maintain compliance. The program provides loans for a maximum of
$50,000 for each upgrade and a maximum of $150,000 per applicant, per
year. The Maryland Department of the Environment supervises this
program.
Michigan offers an interest subsidy program to pay for replacing old
USTs with new USTs that meet the new tank standards. To be eligible
for the program, owners and operators must have registered their tanks,
be in compliance with all record-keeping and reporting requirements,
and not have defaulted on a previous loans subsidized through the
program. The amount of the interest subsidy paid by the state is the
difference between the rate at which the loan was obtained from a
private lender and the current interest rate on a 6-month Treasury Bill.
The program is funded by a petroleum products tax.
New Jersey has approved a direct loan program to pay for upgrading
USTs. The minimum loan amount is $5,000 and the maximum loan
amount is $100,000 per owner or operator. Only small businesses
(those with an independent owner or operator employing fewer than 100
people) are eligible for the loan. The program is funded by a one-time
appropriation by the State.
North Carolina's program provides direct loans to UST owners and
operators to cover the costs of tank upgrade and replacement to comply
with Federal and State requirements. Coverage will be available for a
maximum $100,000 of costs per site and a maximum $500,000 of costs
per applicant. Applicants will be charged a loan application fee at a
minimum $750 and equal to one percent of the loan amount, and a
yearly loan servicing fee at a minimum $650 and equal to one percent of
the loan amount. The program is financed by gas tax revenues.
A-3
-------
Owners and operators must have paid their State tank fees to qualify for
these loans. Major contamination on the applicant's site will disqualify
the applicant from this program. The State is in the process of drafting
the program rules. The program should be active by September, 1992.
Ohio offers a linked deposit interest subsidy program for replacement or
upgrading costs. The fund was established to help small businesses
without funds to improve their tank systems. To be eligible for the
programs owners or operators must own six or fewer tanks. The
program is funded through tank fees.
Oregon provides reimbursement grants for site assessment and tank
tightness testing costs as well as an 80 percent loan guarantee for minor
soil remediation, tank upgrade, and tank replacement. A subsidized
interest rate of 7.5 percent may be available to some loan guarantee
applicants. Grants are available for 50 percent of the costs and are not
to exceed $3,000 per facility. The State will guarantee 80 percent of the
loan, but the guaranteed amount is not to exceed $64,000. The program
has four funding sources: a transferral fee (not to exceed $10) for each
import into State or withdrawal of petroleum products from bulk storage
facilities, (2) a backup fee of 5 cents per quart of oil, (3) a fee of 25
cents per pound of grease, and (4) a $50 surcharge on each LIST.
Pennsylvania has proposed a direct loan program for taking corrective
action. Owners and operators owning 20 or fewer tanks would be
eligible to receive funds. The proposed maximum loan amount is
$15,000, with an interest rate of 2 percent or less. The program would
be funded by a contribution of appropriations and 2 percent of collected
registration fees. A notice from the Department of Environmental
Regulation (DER) that the site is in need of corrective action must
accompany an application.
Rhode Island has a direct loan program for the replacement of leaking
USTs. All tank owners and operators in the State are eligible for the
program, but priority is given to applicants whose tanks pose the
greatest threat to public health. There is no minimum or maximum loan
amount as long as bids are reasonable. The program is funded by a
bond issue.
South Dakota has a 90 percent loan guarantee program. Money may be
used for tank replacement or other costs incurred to comply with UST
regulations, including clean-up costs below the deductible amount of the
state fund. The guarantee is offered under the Small Business
Administration Section 7(a) program; to be eligible, owners or operators
must qualify for an SBA loan guarantee. The purpose of this program is
to encourage or speed upgrades to reduce the demand on the state
fund. The program will have no more than $2 million of the money
A-4
-------
collected for the- state fund. The State also has an interest rate subsidy
program for large businesses ineligible for SBA loans.
Vermont offers a direct loan, program to pay for replacing USTs. The
loans are available to small retailers selling less than 20,000 gallons per
month and municipalities with populations under 2,500. Applicants
receive a priority ranking based on environmental considerations. The
maximum loan amount is $40,000 per location. The program is funded
with up to one half of the money collected for the state fund.
-.
Washington's Pollution Liability Insurance Agency administers a grant
program to assist upgrade and corrective action at rural and remote
gasoline service stations. To qualify for grants service stations must
display several characteristics: location at least five miles from another
service station; twelve or fewer tanks on site; serious financial hardship;
registration with the State Department of Ecology; and regularly provide
services to government vehicles. A maximum grant of $150,000 per site
is available to qualified applicants. Up to $75,000 of the grant can be
used to pay for corrective action. Currently, there is $50 million in the
fund supporting this program, which was financed by taxes on wholesale
petroleum products. Preference is given to applicants who can provide
their own money to pay for part of the costs of either upgrade or
corrective action on their site.
A-5
-------
-------
APPENDIX B
SUMMARY OF STATE FINANCIAL ASSURANCE FUND PROGRAMS
-------
-------
APPENDIX B
SUMMARY OF STATE FINANCIAL ASSURANCE FUND PROGRAMS
This Appendix presents summary descriptions of state financial assurance fund
programs for 43 states. Of these 43 state fund programs, 29 fund programs have
EPA approval, and 7 fund programs have been submitted for EPA approval. Although
the District of Columbia, Massachusetts, Rhode Island, and Hawaii have written
legislation to develop financial assurance fund programs, descriptions of the status of
these states' programs are not included in this Appendix because they do not have
programs.
• Alabama. Alabama's Trust Fund has been in effect since October 1,
1988, and has received EPA approval. Participation in the Trust Fund is
mandatory for all tank owners and operators. The Fund program
provides up to $1 million coverage for both cleanup costs and third party
liability costs. The tank owner or operator must be able to pay a $5,000
deductible on cleanup costs and a separate $5,000 deductible on third-
party liability costs before coverage will be provided through the Trust
Fund. The Trust Fund is financed by annual tank fees which will vary
from $10 to $150 depending on the Fund balance. The size of the Fund
is capped at $10 million.
Alaska. Alaska's Fund became be effective September 5, 1991. The
Fund program will provide up to $1 million coverage for the costs of
cleanup only. Tank owners and operators are responsible for a co-
payment equal to 10 percent of the first $250,000 of cleanup costs. All
tank owners and operators must participate in the Fund program.
Participating tank owners and operators must pay an annual tank fee of
$50 per tank on fully upgraded tanks. If the tank is not fully upgraded,
then the annual fees are based on tank volume: $150 for tanks with
capacities less than 1,000 gallons, $300 for tanks with capacities of 1,000
to 5,000 gallons, and $500 for tanks with capacities greater than 5,000
gallons. Annual tanks fees are currently the sole source of monies for
the Fund. No fund size or limit has been established.
Arizona. Arizona's Fund has been in effect since July 1, 1990. Through
1991, the Fund provided coverage for cleanup costs up to $150,000 or
$250,000, depending on the amount of deductible. After 1991 the
coverage will be up to $135,000 or $225,000 depending on the amount
of deductible. The deductible on cleanup costs is $5,000 or $25,000. All
tanks owners and operators must participate in the Fund program. The
Fund is financed by an annual fee of $100 per tank and a fee of one
cent per gallon on regulated substances stored in tanks. No fund size
or limit has been established.
B-1
-------
Arkansas. The-Arkansas Fund has been in effect since February 22,
1989 and has been approved by EPA. The Fund program provides $1
million coverage for cleanup costs and separate coverage of up to $1
million for third-party liability costs. There are separate $25,000
deductibles for cleanup and third-party liability costs. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by two sources: annual fees of $35 per tank and, a fee of 0.2
cent per gallon on motor fuels, which is assessed only when the Fund
drops below $12 million. The Fund has a cap of $15 million.
California. California's Fund program has been in effect since January 1,
1988 and has been submitted for EPA approval. The Fund program
provides separate coverage of up to $1 million for cleanup costs and
third-party liability costs. The tank owner and operator must pay
separate deductibles of $10,000 on cleanup costs and third-party liability
costs Participation in the Fund program is mandatory for all tank
owners and operators. A 0.6 cent per gallon fee levied on all petroleum
products generates revenues for the Fund. No fund size or limit has
been established. .
Colorado Colorado's Fund has been in effect since July 1, 1989, and
has been submitted to EPA for approval. The Fund program provides
up to a total of $1 million coverage for both cleanup and third-party
liability costs. Coverage is limited to an annual aggregate of $1 million
for facilities with less than 100 tanks and $2 million for facilities with 100
or more tanks. There is a $10,000 deductible on cleanup costs, and a
$25,000 deductible on third-party liability costs. All tank owners and
operators must participate in the Fund program. The Fund is financed
by a $25 to $50 variable surcharge on each tanker load of gasoline. The
Fund size is estimated at $4 million.
Connecticut. Connecticut's Fund has been in effect since July 5, 1989,
and has been approved by EPA. Coverage of up to $1 million is
provided through the Fund program for both cleanup and third-party
liability costs. There is a $10,000 deductible on cleanup and third-party
liability costs. Participation in the Fund program is mandatory for tank
owners and operators. One percent of gross earnings at the first point
of sale of petroleum products in State is collected by the state to finance
the Fund. The Fund size is capped at $15 million.
Delaware. Delaware's Fund has been in effect since January 16, 1989.
The Fund program provides separate coverage of up to $1 million for
cleanup costs and third-party liability costs. There is a $100,000
deductible on cleanup costs and a $300,000 deductible on third-party
liability costs. Participation in the Fund program is voluntary. Delaware's
Fund is financed by annual appropriations of State revenues. No fund
size or limit has been established.
B-2
-------
Florida. Florida's Fund has been in effect since July 1, 1986, and has
been submitted to EPA for approval. The Fund provides $1 million
coverage for cleanup costs only. That coverage is limited to an annual
aggregate of $2 million. Tank owners and operators contribute a co-
payment of up to $25,000 of cleanup costs. (In 1990 there was a $500
deductible on cleanup costs). The Fund is financed by four sources: a
$50 tank registration fee, an annual $25 tank fee, a $25 tank replacement
fee, and a 10-20 cent per barrel production and import tax on petroleum.
All tank owners and operators must pay the tank fees. The program
also provides liability insurance and restoration services which are
optional. The Fund size is set at $50 million a year.
Georgia. Georgia's Fund has been in effect since July 1, 1988, and has
received EPA approval. Coverage is provided for both cleanup and
third-party liability costs, but the amount of coverage is dependent on
the number of tanks at the facility: up to $1 million coverage is provided
for facilities having one to 13 tanks, and up to $2 million coverage is
provided for facilities having 14 or more tanks. There is a $10,000
deductible for cleanup and third-party liability costs. The Fund is
financed by a 0.1 cent per gallon fee on petroleum products stored in
USTs. The Fund size is capped at $20 million.
Idaho. The Idaho Fund has been in effect since approximately July 2,
1990, and has received EPA approval. The Fund program provides up
to $1 million coverage for cleanup costs and up to $500,000 coverage
for third-party liability costs. There are separate annual aggregate limits
of coverage for cleanup costs and third-party liability costs: $1 million for
facilities having above-ground storage tanks (ASTs) or one to 100 USTs,
and $2 million for facilities having 101 or more USTs. There are separate
$10,000 deductibles on cleanup costs and third-party liability costs.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by annual tank registration fees that
vary from $5 to $25, and a 1 cent per gallon fee on petroleum
transported into Idaho. The Fund size is capped at $20 million.
Illinois. The Fund has been in effect since July 28, 1989, and has
received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. There are
separate $10,000 deductibles on cleanup costs and third-party liability
costs. The Fund covers only registered tanks where the owner had no
knowledge of release at the time of registration. All tank owners and
operators must participate in the Fund program. The Fund is financed
by revenues generated by a 0.3 cent per gallon tax on motor fuel. No
fund size or limit has been established.
Indiana. Indiana has not set a date on which to activate its Fund. The
Fund is designed to provide up to $1 million coverage for both cleanup
B-3
-------
'•and third-party-liability costs. Depending on the tank upgrade status, the
tank owner and operator will have to pay a deductible of $25,000,
$30,000, or $35,000 of the cost of cleanup and third-party liabilities.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by an annual tank fee of $290. The
Fund size is capped at $10 million.
Iowa. Iowa's Fund has been in effect since May 5, 1989, and has
received EPA approval. The Fund program provides coverage of 75
percent of cleanup costs up to a maximum of $1 million. Tank owners
and operators must make a co-payment of $5,000 or 25 percent of total
cleanup costs, whichever amount is greater. The Fund program also
offers insurance coverage for cleanup costs. Participation in the Fund
program is mandatory for tank owners and operators. The Fund is
financed by an annual $65 tank fee, a 0.7 cent per gallon charge on
petroleum products, and a bond issue. The Fund size is $6 million.
Kansas. Kansas's Fund has been in effect since December 22, 1988,
and has received EPA approval. The Fund program provides up to $1
million coverage for cleanup costs. Facilities having less than 100 tanks
are limited to an annual aggregate of $1 million coverage for cleanup
costs. Facilities having 100 or more tanks are limited to an annual
aggregate of $2 million coverage. The deductible varies depending on
the business and size of facility: non-marketers having one to four tanks
pay a deductible of $5,000; non-marketers having five to 12 tanks and
marketers having one to 12 tanks pay a deductible of $10,000; tank
owners and operators having 13 to 99 tanks pay a deductible of
$20,000; and tank owners and operators having more than 99 tanks pay
a deductible of $60,000. Participation in the Fund program is mandatory
for tank owners and operators. Revenue is generated for the Fund
through the levy of a 1 cent per gallon fee on petroleum products
distributed, manufactured or imported in State. The Fund size is $5
million.
Kentucky. Kentucky's Fund program is not yet in effect, but has been
submitted for EPA approval. The Fund program provides up to $1
million coverage for both cleanup and third-party liability costs. Tank
owners with less than six tanks must pay a $10,000 deductible on
cleanup costs and on third-party liability costs. Tank owners with six or
more tanks must pay a $25,000 deductible on cleanup costs and on
third-party liability costs. All tank owners and operators must participate
in the Fund program. The Fund is financed by a 0.4 cent per gallon fee
on gasoline and special fuels received in Kentucky. The Fund size is
capped at $10 million.
Louisiana. Louisiana's Fund has been in effect since July 15, 1988, and
has received EPA approval. Up to $1 million of cleanup and third-party
B-4
-------
liability costs are covered through the Fund program. There are
separate $15,000 deductibles on cleanup costs and third-party liability
costs. Participation in the Fund program is mandatory for tank owners
and operators. A fee of $13.50 per 9,000 gallons of motor fuel loaded at
a bulk plant is charged to finance the Fund. The Fund size is capped at
$6 million. : .
Maine. Maine's Fund has been in effect since April 1, 1990, and has
been approved by EPA. The Fund program provides $1 million
coverage for both cleanup and third-party liability costs. Coverage is
limited to an annual aggregate of $2 million with a limit of $200,000 per
claimant for third-party liability costs. The deductible amount is
dependent on the number of facilities: owners and operators having one
facility must pay $2,500; two to five facilities, $5,000 payment; six to 10
facilities, $10,000 payment; 11 to 30 facilities, $50,000 payment; more
than 30 facilities, $100,000. Participation in the Fund program is
mandatory for all tank owners and operators. The Fund is financed by
four sources: a 44 cent per barrel fee on gasoline, a 25 cent per barrel
fee on other refined petroleum products imported into Maine, an annual
$35 tank registration fee, and annual $130 fees on non-conforming tanks.
No fund size or limit has been established.
Michigan. Michigan's Fund has been in effect since July 18, 1989, and
has received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. The deductible
on cleanup and third-party liability costs is $10,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by a 0.875 cent per gallon fee on refined petroleum products
consumed in the state. No fund size or limit has been established.
Minnesota. Minnesota's Fund has been in effect since June 4, 1987, and
has received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. Tank owners
and operators must meet a co-payment of 10 percent of cleanup and
third-party liabilities costs, not to exceed $100,000. Participation in the
Fund program is voluntary. A one cent per gallon fee on gasoline is
charged to generate revenue for the Fund. The Fund size is capped at
$5 million. •
Mississippi. Mississippi's Fund has been in effect since May 18, 1988,
and has been approved by EPA. The Fund provides separate coverage
of up to $1 million for cleanup costs and third-party liability costs. Until
June 30, 1992, there is no deductible on the coverage of cleanup and
third-party liability costs. After June 30, 1992, the deductible for cleanup
costs will be $5,000 and the deductible for third-party liability costs will
be $10,000. Participation in the Fund program is mandatory for tank
B-5
-------
• owners and operators. A 0.2 cent per gallon fee is charged, on motor
fuels to finance the Fund. The Fund size is capped at $6 million.
Missouri. Missouri's Insurance Fund has been in effect since August 28,
1989 The Fund program provides up to $1 million coverage for both
cleanup and costs of property damage to third parties. There is a
deductible of $25,000 and co-payments that equal 50 percent of the next
$25 000 in costs and 25 percent of an additional $50,000 in costs for
coverage of both cleanup and third party liability costs. The total
Deductible and the co-payments can add up to $50,000. Participation in
the Fund program is voluntary. The Fund is financed through the
premiums paid by the participants and one-time $100 tank fees. The
Fund size is capped at $6 million.
Montana. Montana's Fund program has been in effect since April 13,
Tiii^d has been approved by EPA. The Fund provides coverage for
up to $1 million of both cleanup and third-party liability costs. There is a
required co-payment equal to 50 percent of the first $35,000 in cleanup
and third-party liability costs. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by fees
of one cent per gallon of gasoline distributed from July 1 1989 to June
30, 1991, and 0.75 cent per gallon of gasoline distributed after June 30,
1991. The Fund size is capped at $8 million.
Nebraska. Nebraska's Fund has been in effect since July 17, 1986 and
has been submitted to EPA for approval. The Fund program provides
coverage for up to $1 million of the cost of cleanup only. Tank owners
and operators must pay the first $10,000 and 25 percent of the next
$60 000 in cleanup costs. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by
annual $25 tank fees, fees of 0.3 cent per gallon on motor fuels, and fees
of 0.1 cent per gallon on other petroleum products. The Fund size is
capped at $5 million.
Nevada Nevada's Fund has been in effect since October 1, 1989, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs Coverage is limited to an annual aggregate of $2 million. There
are separate $25,000 deductibles on cleanup costs and third-party
liability costs. Participation in the Fund program is mandatory for tank
owners and operators. The Fund is financed by annual $50 tank
registration fees, and fees of 0.6 cent per gallon of gasoline and diesel
fuel. The Fund size is capped at $7.5 million.
New Hampshire. New Hampshire's Fund has been in effect since July 1,
1988 and has received EPA approval. The Fund program provides up
to $V million coverage per facility for both cleanup and third party costs.
B-6
-------
There are separate deductibles for cleanup and third-party liability costs
coverage that vary with the number of facilities owned by the claimant: a
tank owner having one facility pays $5,000; two to 19 facilities, $20,000;
and 20 or more facilities, $30,000. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by
revenues from a 0.6 cent per gallon loading fee charged on gasoline and
special fuels sold or produced and sold in State. The Fund size is
capped at $10 million.
New Mexico. New Mexico's Fund has been in effect since July 1, 1990,
and has received EPA approval. The Fund provides coverage for
cleanup costs only. No limit on the amount of coverage or deductible for
coverage has been established. Participation in the Fund program is
mandatory for tank owners and operators. The Fund is financed by a
loading fees of $80 per 8,000 gallons of gasoline and special fuels sold
or produced and sold in the state. The Fund size is capped at $25
million.
North Carolina. North Carolina's Fund program has been in effect since
June 30, 1988, and has been approved by EPA. The Fund provides up
to $1 million coverage for both cleanup and third-party liability costs.
There are separate deductible amounts of $50,000 per tank for cleanup
costs and $100,000 for third-party liability costs. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by annual tank fees of $45 on tanks having capacities 3,500
gallons or less, and $75 on tanks having capacities greater than 3,500
gallons. The Fund size is capped at $15 million.
North Dakota. North Dakota's Fund program has been in effect since
June 30, 1988, and has been approved by EPA. The Fund program
provides coverage for up to $100,000 of cleanup costs only. There is a
co-payment of $7,500 plus 10 percent of the next $92,500 of cleanup
costs. All tank owners and operators must participate in the Fund
program. The Fund is financed by annual fees of $25 per UST and $10
per AST, and fees of 0.22 cent per gallon on petroleum products sold.
The Fund size is capped at $3 million.
Ohio. Ohio's Fund has been in effect since July 11, 1989, and has been
approved by EPA. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs. Tank owners
with six tanks or less must pay a $10,000 deductible on cleanup and
third-party liability costs. Tank owners with seven or more tanks must
pay a $50,000 deductible on cleanup and third-party liability costs. All
tank owners and operators must participate in the Fund program. The
Fund is financed by an annual $150 tank fee. The Fund size is capped
at $30 million.
B-7
-------
Oklahoma. Oklahoma's Fund has been in effect since December 23,
1988, and has been approved by EPA. The Fund program provides
separate coverage for both cleanup and third-party liability costs. The
Fund program provides up to $1 million coverage for marketing facilities
or operations with monthly throughput of 10,000 or more gallons of
product. Operations with monthly throughput of less than 10,000 gallons
are provided up to $500,000 coverage through the Fund program.
There are separate $5,000 deductibles for cleanup and third-party liability
costs. Participation in the Fund program is mandatory for tank owners
and operators. The Fund is financed by revenues generated-by a one
cent per gallon fee on motor and diesel fuels and blending materials sold
at the wholesale level. The Fund size is capped at $10 million.
Pennsylvania. Pennsylvania's Fund has been in effect since
approximately January 1991. The Fund program provides separate
coverage of up to $1 million for cleanup and third-party liability costs.
There is a $75,000 deductible for cleanup costs and a $150,000
deductible for third-party liability costs. Participation in the Fund
program is mandatory for tank owners and operators. The Fund will
financed by fees but they have not been determined yet. No fund size
or limit has been established.
South Carolina. South Carolina's Fund has been in effect since October
1,1988, and has been approved by EPA. The Fund program provides
up to $1 million coverage for both cleanup costs and third party liability
costs. The tank owner or operator must pay separate $25,000
deductibles for cleanup costs and for third-party liability costs.
Participation in the Trust Fund is mandatory for all tank owners and
operators. The Fund is financed by annual tank fees of $100 and a 0.5
cent per gallon environmental fee. The size of the Fund is capped at
$15, million.
South Dakota. South Dakota's Fund has been in effect since April 1,
1990, and has received EPA approval. The Fund program provides up
to $1 million coverage for both cleanup and third-party liability costs
(although third-party liability cost coverage is not yet in effect). The
deductible for both cleanup and third-party liability costs is $10,000.
Participation in the Fund program is mandatory for tank owners and
operators. The Fund is financed by a one-time inspection fee of one
cent per gallon on stored gasoline and diesel fuel. The Fund size has
been set at $5 million.
Tennessee. The Tennessee Fund has been in effect since July 1,1988,
and has been approved by EPA. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There are separate deductibles for cleanup costs of $10,000 for
tank owners and operators having one to 12 tanks, $20,000 for tank
B-8
-------
owners and operators having 13 to 999 tanks, and $50,000 for tank
owners and operators having 1,000 or more tanks. The deductible for
third-party liability costs are $10,000 with one to 12 tanks, $25,000 to
$50,000 with 13 to 999 tanks, and $50,000 with 1000 or more tanks.
Participation in the Fund program is mandatory for all tank owners and
operators. The Fund is financed by annual tank fees of $125 and
environmental assurance, fees of 0.4 cent per gallon of petroleum. The •
size of the Fund is capped at $50 million.
Texas. Texas' Fund has been in effect since September 1, 1-989, and
has received EPA approval. The Fund program provides coverage for
up to $1 million of the cost of cleanup only. Tank owners and operators
must pay a deductible of $10,000 for cleanup costs. Participation in the
Fund program is mandatory for tartk owners and operators. The Fund is
financed by loading fees for gasoline and diesel fuel that vary from
$12.50 to $50 depending on tank size. The Fund size is set at $125
million.
Utah. Utah's Fund has been in effect since July 1, 1990, and has
received EPA approval. The Fund program provides up to $1 million
coverage for both cleanup and third-party liability costs with a $300,000
limit on coverage of third-party liability costs. The deductible for both
cleanup and third-party liability costs is $25,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund is
financed by an annual tank fee of $250 which will decrease to $150 on
August 1,1993, (fees may even be less for some non-marketers) and a
0.5 cent per gallon surcharge on all petroleum sold, used or received for
use or sale in Utah. The Fund size is $17.5 million.
Vermont. Vermont's Fund has been in effect since January 1, 1987, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There is a $10,000 deductible on cleanup costs and no
deductible or co-payment for third-party liability costs. Participation in
the Fund program is mandatory unless the tank owner or operator, can
self-insure. The Fund is financed by revenues raised by fees of one cent
per gallon of gasoline and diesel fuel and annual tank fees that vary
depending on tank size. No fund size or limit has been established.
Virginia. Virginia's Fund has been in effect since December 22, 1989,
and has been submitted for EPA approval. The Fund program provides
up to $1 million coverage for both cleanup and third-party liability costs.
The deductible for coverage for cleanup costs is $50,000. The
deductible on coverage for third-party liability costs is $150,000. There
are separate limits for aggregate deductible payments of $200,000.
Participation in the Fund program is mandatory for tank owners and
B-9
-------
"operators. The-Fund is financed by taxes of 0.2 cent per gallon of motor
fuels. The Fund size has been capped at $20 million.
Washington. Washington's Reinsurance Fund has been in effect since
November 1, 1990. The state reinsures private insurers of tank owners
and operators up to $1 million for both cleanup and third-party liability
costs. - There is a annual limit on aggregate coverage of $2 million. The
deductible is specified in the contract that the insurer has with the Fund
program. All tank owners and operators must participate in the Fund
program. The Fund is financed by premiums paid by the insurers and a
0.5 percent tax on petroleum products produced or transported in State.
The Fund size is $15 million.
West Virginia. West Virginia's Fund is not in effect. No coverage
amounts have been established but tank owners and operators will have
to pay separate deductibles of $5,000, $15,000 or $25,000 for cleanup
costs and costs of third-party liability. Participation will be mandatory for
the first year that the Fund is effective but voluntary in the following
years. The Fund will be financed by annual premiums based on the age
of the tank and deductibles. No fund size has been established.
Wisconsin. Wisconsin's Fund has been in effect since August 1, 1987,
and has been submitted for EPA approval. The Fund program provides
up to $1 million coverage of both cleanup and third-party liability costs
for those owners and operators with 100 to 999 tanks. There is a $2
million annual limit on aggregate coverage. All other tank owners are
provided with $200,000 coverage per site for both cleanup and third-
party liability costs. Tank owners and operators must pay a $5,000
deductible for both cleanup and third-party liability costs through July
1993. Afterwards, the deductible will rise to $10,000. Participation in the
Fund program is mandatory for tank owners and operators. The Fund
size is $25 million.
Wyoming. Wyoming's Fund has been in effect since July 1, 1989, and
has received EPA approval. The Fund program provides separate
coverage of up to $1 million for cleanup costs and third-party liability
costs. There is a $30,000 deductible for third-party liability costs. There
is no co-payment or deductible on cleanup costs if the tank is registered
and in compliance with State and Federal requirements. Although using
Fund coverage is optional, all tank owners and operators must pay fees
into the Fund. The Fund is financed by two sources: annual fees of
$200 per tank (self-insured owners pay $150 per tank) and a tax of 0.1
cent per gallon on gasoline. The Fund has a cap of $10 million.
B-10
-------
I
'i
APPENDIX C
METHODOLOGY FOR ESTIMATING FINANCIAL IMPACTS OF UST REQUIREMENTS
ON THE REGULATED COMMUNITY
-------
-------
APPENDIX C
METHODOLOGY FOR ESTIMATING FINANCIAL
IMPACTS OF UST REQUIREMENTS ON THE REGULATED COMMUNITY
In this report, EPA estimated the- potential impacts on firms in the retail motor
fuel, general industry, and local government sectors of a variety of UST regulatory
requirements and State fund scenarios. Wherever possible, EPA relied or\the data
and methodologies that had been developed in the 1988 regulatory impact analyses
(RIAs) that accompanied the promulgation of the UST technical standards and
financial responsibility requirements. The model used to develop the present report is
described in both RIAs, and complete documentation for it appears in an appendix to
the RIAs entitled Documentation of the Affordabilitv Model.
To develop this report, it was necessary for EPA to analyze additional data and
use the model in ways that were somewhat different from the approach used in the
RIAs; this appendix documents these differences. To evaluate impacts on firms in
general industry and local government sectors that were not analyzed in the original
RIAs, additional data were collected. In addition, to provide more measures of impact
and to cover a broader variety of regulatory requirements and State fund scenarios
than were included in the RIAs, the model was used differently. The first section of
this appendix documents the data used in this analysis and emphasizes differences
between the data used in this analysis and the data in the RIAs. The second section
discusses differences in assumptions, measures of impact, and methods of using the
model. Finally, the third section presents the results of this analysis for all sectors,
regulatory requirements, and State fund scenarios.
Data Used in the Analysis
Three sets of data are needed to determine the impacts of the UST financial
responsibility rules on the regulated community: (1) the probability that a firm will
incur costs as a result of a regulatory requirement, (2) the costs imposed by these
regulatory requirements, and (3) the financial variables pertaining to the firms that will
incur these costs. The probability that a firm will incur these costs and the magnitude
of the costs associated with various regulatory requirements are the same as those
used in the RIAs. Exhibit C-1 shows the probabilities associated with various
regulatory events, and Exhibit C-2 shows the costs of these events.
The types of retail petroleum outlet owners in the analysis are refiners (such as
Exxon and Amoco), "jobbers" (which sell petroleum at the wholesale level as well as at
retail outlets), convenience stores (such as 7-11), independent chains of gas stations,
"open dealers" (which are single independent gas stations), and stations that are
leased rather than owned by their operators. Within some ownership types,
distinctions are made according to size (measured in terms of assets) and profitability.
C-1
-------
EXHIBIT C-1
PROBABILITIES OF UST-RELATED EVENTS
Event
Annual Leak Detection
Tank Repair
Tank Replacement
Closure
Tank Upgrading
Small Corrective Action
Large corrective Action
Premiums1
Payments of Tank Fees2
Accelerated Tank Replacement3
Third Party Liability
Probability in Years
1 to 5
1.0
0.0408
0.0272
.. 0.0272
0.0
0.058
0.011
1.0
1.0
0.375
0.000224
Probability in Years
6 to 10
1.0
0.02145
•- 0.01155
0.01155
0.15
0.03
0.002
1.0
1.0
0.0
0.00004
1
2
3
For those groups expected to be in compliance by given years.
For those tanks in states with tank fee programs.
Replacement is assumed to take place over 2 years rather than 5 years.
Exhibit C-3 presents the key characteristics of firms in the retail petroleum sector.
EPA initially intended to update the financial data for the retail motor fuel
marketing sector. After reviewing the available data sources for this sector, however,
EPA found that many of them no longer provided the detail required to perform such
an analysis. Based on a comparison of currently available data for this sector and
data from earlier studies, however, EPA is confident that changes in the retail motor
fuel marketing sector have not been large enough to.substantially alter the results
reported for this sector in the RIAs.
The RIAs developed a distribution of general industry firms by asset size but
did not model impacts on firms in this sector. For this report, EPA used this asset-
size distribution data to develop model firms that could be used with the affordability
model. Exhibit C-4 shows the characteristics of the model firms used in the general
industry sector analysis. To summarize the results of this analysis, this sector was
aggregated into three segments: small firms (defined as those with less than
1 the breakdown of the retail motor fuel industry by ownership type is presented in the RIA for the
Financial Responsibility Regulations in Exhibit 3-2.
C-2
-------
EXHIBIT C-2
COSTS OF UST-RELATED EVENTS
Events
Annual Leak Detection
Tank Repair " .
Tank Replacement
Closure
Tank Upgrading
Small Corrective Action
Large corrective Action
Premiums
Payments of Tank Fees
Accelerated Tank Replacement3
Third Party Liability
Affected UST or Entity cost
$520 per LIST
$6,660 per LIST
$30,500 per UST
$12,500 per Closed Tank
$9,950 per UST
$27,000 per UST1
$167,000 per Site2
$3,000 per Entity
$50 per UST
$9,950 per UST
$1,1 00,000 per Site
"[ Cost declines to $14,000 in years 6 to 10.
- Cost declines to $11 5,000 in years 6 to 10.
Replacement is assumed to take place over 2 years rather than 5 years.
EXHIBIT C-3
KEY CHARACTERISTICS OF FIRMS IN RETAIL MOTOR FUEL CATEGORIES
Category
Assets Below $200K
Assets $200K-400K
Assets $400K-600K
Assets $600K-1M
Assets $1M-$10M
Assets $10M-$100M
Assets $100M-$1B
Assets Above $1B
No. of
USTs
123,467
150,491
88,904
58,499
117,760
39,245
10,504
202,421
No. of
Firms
30,114
33,410
20,478
3,567
2,063
76
4
27
Per-firm
Profits
($OOOs)
10
15
21
44
97
1,329
11,575
912,909
Per-firm
Assets
($OOOs)
130
218
499
746
3,613
29,283
364,838
18,438,826
Per-firm
Revenues
($OOOs)
591
764
835
5,646
22,081
172,167
1,004,828
22,107,151
Based on Exhibit A-3 of Regulatory Impact Analysis for Financial Responsibility Requirements for Petroleum
Underground Storage Tanks.
$1 million in assets), medium firms (those with between $1 million and $20 million in
assets), and large firms (those with more than $20 million in assets).
C-3
-------
EXHIBIT C-4
KEY CHARACTERISTICS OF FIRMS IN GENERAL INDUSTRY CATEGORIES
Category
Assets $200K-400K
Assets $400K-600K
Assets $600-1 M
Assets $1M-$2M
Assets $2M-$5M
Assets $5M-$20M
Assets Above $20M
No. of USTs
64,000
64,000
80,000
52,000
38,000
128,000
207,900
No. Of
Firms
12
20
32
60
140
500
4,000
Profits
(OOOs)
600
1,000
1,600
3,000
7,000
25,000
200,000
Assets
(OOOs)
300
500
800
1,500
3,500
12,500
100,000
Revenues
(OOOs)
600
1,000
1,600
3,000
7,000
25,000
200,000
EPA obtained data about the finances of governments from the "Economic
Impact Analysis of the Proposal for a Self-Insurance Test for Government Entities to
Demonstrate Financial Responsibility for Underground Storage Tanks" (EIA). This
report, prepared in the spring of 1990, includes information about all types of
government entities (special districts, municipal governments, local governments, state
governments, etc.) that own USTs. Key data about these government entities,
including their number, typical revenues, and the number of USTs they own, are
shown in Exhibit C-5. The definitions of small, medium, and large firms are taken from
the EIA.
Use of the Model
For this report, two measures of impact were used: severe financial distress
and business failure. For both measures, the time horizon is the next 10 years.
Severe financial distress is defined, for private-sector firms, as a situation in
which the costs imposed by regulatory requirements depress a firm's return on assets
to less than negative 4 percent at any time in the 10 years analyzed. This cutoff is
based on research showing that firms with returns on assets at or below -4 percent
show signs of distress (e.g., closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments).
For government entities, severe financial distress is said to occur at any time
that the regulatory costs imposed on the government entity exceed 4 percent of the
government's revenue in any given year.
Business failure is defined as a firm closure or bankruptcy. (Since governments
rarely fail or enter bankruptcy, this measure is not used for entities in the local
government sector.)
C-4
-------
EXHIBIT C-5
KEY CHARACTERISTICS OF GOVERNMENT ENTITIES
Category
No. of USTs
No. of Entities
Revenues (OOOs)
General Purpose ,
GP Small 1
GP Small II
GP Medium 1
GP Medium 11
GP Medium III
GP Medium IV
GP Medium V
GP Medium VI
GP Medium VII
GP Large 1
GP Large 1
1,721
1,165
2,595
2,660
3,692
5,915
3,742
2,866
3,232
2,702
1,310
1,645
1,058
2,079
1,747
1,845
1,855
693
306
179
66
26
140
380
1,200
2,900
6,100
14,000
31,000
64,000
152,000
451,000
593,000
. Special Districts
SD Small 1
SD Small II
SD Small III
SD Small IV
SD Small V
SD Small VI
SD Medium 1
SD Medium II
SD Medium III
SD Medium IV
SD Medium V
SD Large 1
SD Large II
SD Large III
10
4
25
91
251
517
1,630
3,915
8,253
7,374
5,170
1,929
1,026
203
10
4
25
92 •
245
487
1,413
2,835
4,016
1,855
545
87
19
2
0.5
2
6.5
20
65
200
650
2,000
6,500
20,000
65,000
2300,000
650,000
1,500,000
Source: U.S. Environmental Protection Agency, "Economic Impact Analysis of the Proposal for a Self-Insurance
Test for Government Entities to Demonstrate financial Responsibility for Underground Storage Tanks" June
1990.
C-5
-------
Each of these measures has particular applications. For example, severe
financial distress is useful to capture the maximum potential impact of a regulatory
requirement. In contrast to firms in failure, most firms in severe financial -distress do
not fail or close their facilities but continue on in serious difficulty. Business failure, on
the other hand, is a measure that is designed to identify those firms that will be hit
hardest by the regulatory requirements.
For private firms, both severe financial distress and business failure were
determined by using the affordability model. Model runs were conducted with given
regulatory requirements or groups of requirements and various State fund scenarios.
Each model run provided estimates of the number of firms that would fail and the
number that would be placed in severe financial distress in a single year. To
determine the number of firms that would incur severe financial distress at least once
in the 10-year period or that would fail within a given time period, EPA assumed that
regulatory events were random and statistically independent of each other. Using this
assumption, the probability that an event will occur at least once in given time period
T, assuming that it occurs with probability P in any given year, is:
This approach does not take account of those firms who would leave the industry
even if no regulatory requirements were imposed; thus, a portion of the firms
predicted to become severely financially distressed or to fail are financially weak firms
that might well close even in the absence of regulatory requirements.
The affordability model was designed to analyze private-sector financial
situations and cannot therefore be applied in the case of governments. To analyze
the incidence of severe financial distress among governments, EPA assumed that a
government would experience severe financial distress if the regulatory costs incurred
exceeded 4 percent of its revenue in any given year. If an UST-related cost was
determined to exceed 4 percent of annual revenues, the probability that the
government would become severely financially distressed was calculated using the
formula presented above.
Results
Exhibit C-6 provides an overview of the number of firms projected to be placed
in severe financial distress or to enter business failure under each State fund scenario.
Four State fund scenarios were considered:
No State Fund: This scenario assumes that no State funds are in place.
This is not a realistic scenario because many State funds are already in
place and operational; however, this scenario is included for comparative
purposes, i.e., to enable the reader to examine the difference that State
funds make.
C-6
-------
EXHIBIT C-6
OVERVIEW OF IMPACTS UNDER VARIOUS STATE FUND SCENARIOS
Industry Sector/
Size Segment
Number
of Units
Current Mix
SFD BF
No State Fund
SFD BF
State
SFD
Fund-SDK
BF
State
SFD
Fund-lOK
BF
RETAIL MOTOR FUEL
Large
Medium
Small
Single
Station
GENERAL
Large
Medium
Small
USTs
Facilities
Firms
USTs
Facilities
Firms
USTs
Facilities
Firms
USTs
Facilities
Firms
INDUSTRY
USTs
Facilities
Firms
USTs
Facilities
Firms
USTs
Facilities
Firms
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8400
217,800
66,000
66,000
207,900
63,000
63,000
0
0
0
14,800
3600
400
21,700
5300
2400
132,400
32,300
32,300
0
. 0
0
3000
900
900
50,160
15,200
15,200
0
0
0
5700
1400
200
7800
1900
900
100,900
24,600
24,600
0
0
0
1300
400
400
12,900
3900
3900
0
0
0
24,200
5900
700
22,100
5400
2400
146,000
35,600
35,600
0
0
0
5000
1500
1500
56,430
17,100
17,100
0
0
0
9000
2200
200
11,100
2700
1200
131,200
32,000
32,000
0
0
0
2600
800
800
17,800
5400
5400
0
0
0
8200
2000
200
20,900
5100
2300
126,300
30,800
30,800
0
0
0
0
0 .
0
50,820
15,400
15,400
0
0
0
4900
1200
100
4900
1200
500
108,200
26,400
26,400
0
0
0
0
0
0
6900
2100
2100
0
0
: 0
0
0
0
20,900
5100
2300
110,700
27,000
27,000
0
0
0
0
0
0
38,940
11,800
11,800
0
0
0
0
0
0
2900
700
300
46,700
11,400
11,400
0 •
0
0
0
0
0
6600
2000
2000
GOVERNMENTS
Large
Medium
Small
USTs
Facilities
Governments
USTs
Facilities
Governments
USTs
Facilities
Governments
10,400
3500
400
47,800
25,000
25,000
3700
3600
3600
0
0
0
1100
800
800
2400
2400
2400
NA
NA
NA
NA
NA
NA
NA
NA
NA
0
0
0
1100
800
800
2400
2400
. 2400
NA
NA
NA
NA
NA
NA
NA
NA
NA
0
0
0
1100
800
800
2400
2400
2400
NA
NA
,. NA
NA
NA
NA
NA
NA
NA
0
0
0
1100
800
800
2400
' 2400
2400
NA
NA
NA
NA
NA
NA
NA
NA
NA
SFD = Severe Financial Distress
BF = Business Failure.
-------
" Current Mix: This scenario assumes that all State funds that have been
approved by EPA or that have applied to EPA for approval are in place
and operational. State funds are classified according to the deductible
they provide: $10,000 or $50,000. EPA assumed that State funds would
apply to all firms and government entities within a given State.
State Fund with $50K Deductible: This scenario assumes that all firms
and governments are covered by a State fund with a $50,000 deductible
that must be met by the UST owner/ operator.
#f
State Fund with $1 OK Deductible: This scenario assumes that all firms
and governments are covered by a State ftind with a $10,000 deductible
that must be met by the UST owner/ operator.
For each scenario, EPA assumes that 22 percent of all medium and small retail
motor fuel marketing firms have insurance but that no other firms or government
entities have insurance. In states with State funds, EPA assumes that firms will use
their insurance to cover their deductibles.
Exhibits C-7 to C-14 provide additional details on the impacts of specific
regulatory requirements and combinations of requirements.
C-8
-------
EXHIBIT C-7
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL DISTRESS-
CURRENT MIX OF STATE FUNDS
TYPES OF COSTS (Unit Costs)
Industry
Sector
RETAIL MOTOR FUEL
USTs
Q Large Facilities
CO Flrras
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
. No. of
Units
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8400
217,800
' 66,000
66,000
207,900
63,000
63,000
Leak
Detec;-
tion
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
All
Tech-
nical
Require-
ments Correc-
Except tive
Correc- Action
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
0
0
0
0
0
• o
14,300
3500
1600
101,300
24,700
24,700
0
0
0
0
0
0
20,100
. 6100
6100
Closure
($12,500)b
0
0
0
0
0
0
0
0
0
34,000
8300
8300
0
0
0
0
0
0
0
0
0
Tank Up-
grading
($9950)°
0
0
0
0
0
0
0
0
0
68,500
16,700
16,700
0
0
0
0
0
0
0
0
0
tive
Action
(N/A)
0
0
0
7000
1700
200
20,900
5100
2300
106,200
25,900
25,900
0
0
0
0
0
0
38,900
11,800
11,800
($28,000
to
$250,000)b'e
0
0
0
2500
600
100
9000
2200
1000
84,300
20,600
20,600
0
0
0
0
0
0
25,700
7800
7800
All Tech-
nical Re-
quirements
N/A)e
0
0
0
14,800
3600
400
21,700
5300
2400
132,400
32,300
32,300
0
0
Q
3000
900
900
50,160
13,200
13,200
Insur-
ance
Premiums
($750)a
0
0
0
0
0
0
0
0
0
0
0
0
d
0
0
' 0
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d
0
0
0
2500
600
100
14,800
3600
1600
47,100
11,500
11,500
0
0
0
0
0
0
0
0
0
State
Fees
($20-30)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-------
EXHIBIT C-7 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL DISTRESS-
CURRENT MIX OF STATE FUNDS
TYPES OF COSTS (Unit Costs)
Industry
Sector
Leak
Detec.-
Ho. of -tion
Units ($520)a
Tank
Repair
($5500)b
Tank
Re-
placement
($30,500)b
Tank Up-
Closure grading
($12,500)b ($9950)°
All
Tech-
nical
Require-
ments
Except
Correc-
tive
Action
(N/A)
Correc-
tive
Action
($28,000
to
$250,000)b'«
All Tech-
nical Re-
quirements
H/A)e
Insur-
ance
Premiums
($750)a
Accel-
erated
Tank
Re-
place-
ment
($9950)d
•State
Fees
($20-30)°
GOVERNMENTS
Large
Medium
Small
USTs
Facilities
Governments
USTs
Facilities
Governments
USTs
Facilities
Governments
10,100
3SOO
400
47,800
25,000
25,000
3700
3600
3600
0
0
0
0
0
0
400
400
400
0
0
0
200
200
200
400
400
400
0
0
0
0
0
0
300
300
300
0
0
0
0
0
0
1300
1300
1300
0
0
0
400
400
400
2300
2300
2300
0
0
0
1100
800
800
1300
1300
1300
0
0
0
1100
800
800
2400
2400
2400
0
0
0
0
0
0
400
400
400
0
0
0
0
0
0
1100
1100
1100
Explanatory Notes:
General:
The table uses data and methodologies from the RIAs; where possible, the data have been updated.
A problem is assumed to exist if a firm or government is predicted to be in severe financial distress in at least one of the next ten years. Severe financial distress for a
private firm is defined as a situation in which baseline net income minus cash expenditures is less than minus 4 percent of assets. The minus .04 threshold is based on
prior research showing that firms in this financial position are likely to show signs of severe financial distress, such as closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments. Most firms in severe financial distress continue to operate, albeit with reduced size, poor credit prospects, or both.
A government entity is considered to be in severe financial distress if regulatory cost exceed 4 percent of its revenues.
The analysis assumes no price increase.
-------
EXHIBIT C-7 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL DISTRESS-
CURRENT MIX OF STATE FUNDS
• • In the general industry and government sectors, it is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of severe financial distress as an indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs In causing financial problems. However, these are the kinds of costs that are relatively
easily passed on to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In particular, almost half the profits of small retail
motor fuel outlets and many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If insurance premiums rose to
$1500 to $2000 per UST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general industry firms would have similar
problems with premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tank's that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than, replaced.
(d) Firms not having arty current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If insurers
•require tank replacement rather than retrofitting, the costs are much larger.)
(e) Corrective action costs are calculated taking account of existing state funds and insurance policies. It is assumed that firms not covered by any form of financial
assurance will have to meet corrective action costs from their own resources. It is also assumed that corrective action costs of less than the deductible for Insurance or the state
fund will be met from the resources of the owner.
* One State fund, covering 0.7 percent of all USTs, was incorrectly assumed to have been submitted for EPA approval. The estimated impacts shown here will be accurate
once that State's plan is submitted; currently, the impacts of corrective action costs are underestimated to an insignificant extent.
-------
EXHIBIT C-8
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-NO STATE FUNDS
-
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300"
207,900
63,000
8,400
217,800
66,000
66,000
207,900 '
63,000
63,000
Leak
Detec-
tion
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
TYPES
OF COSTS (Unit Costs)
All
Tech-
nical
Require-
ments Correc-
Except tive
'Correc- Action
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
•
0
0
0
0
0
0
14,300
3500
1600
101,300
24,700
24,700
0
0
0
0
0
0
20,100
6100
6100
Closure
($12,500)
0
0
0
0
0
0
0
0
0
34,000
8300
8300
0
0
0
0
0
0
0
0
0
Tank Up-
grading
b ($9950)°
0
0
0
0
0
0
0
0
0
68,500
16,700
16,700
0
0
0
0
0
0
0
0
0
bive
Action
(N/A)
0
0
0
7000
1700
200
20,900
5100
2300
106,200
25,900
25,900
0
0
0
0
0
0
38,900
11,800
11,800
($28,000
to
$250,000)b'e
0
0
0
4500
1100
100
14,300
3500
1600
144,900
35,300
35,300
0
0
0
0
0
0
45,500
13,800
13,800
All Tech-
nical Re-
quirements
1 N/A)e
0
0
0
24 , 200
5900
700
22,100
5400
2400
146,000
35,600
35,600
0
0
0
5000
1500
1500
56,430
17,100
17,100
Insur-
ance
Premiums
($750)a
• 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d
0
0
0
2900
700
100
16,800
4100
1900
52,900
12,900
12,900
0
0
0
0
0
0
0
0
0
State •
Fees
($20-30)a
0
0
0
0
0 .
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-------
GOVERNMENTS
o
CO
Large
Medium
Small
USTs
Facilities
Governments
USTs
Facilities
Governments
USTs
Facilities
Governments
Explanatory Notes:
General:
EXHIBIT C-8 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) xTHAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-NO STATE FUNDS
TYPES OF COSTS (Unit Costs)
Industry
Sector
Leak
Detec-
No. of tion
Units ($520)a
Tank
Repair
($5500)b
Tank
Re-
placement
($30,500)b
Tank Up-
Closure grading
($12,500)b ($9950)°
AH
Tech-
nical
Require-
ments
Except
Correc-
tive
Action
(N/A)
Correc-
tive
Action
($28,000
to
$250,000)b'e
All Tech-
nical Re-
quirements
N/A)e
Insur-
ance
Premiums
($750)a
Accel-
erated
Tank
Re-
place-
ment
($9950)d
State •
•Fees
($20-30)a
10,400
3500
400
47,800
25,dOD
25,000
3700
3600
3600
0
0
0
• 0
0
0
400
400
400
0
0
0
200
200
200
400
400
400
0
0
0
0
0
0
300
300
300
0
0
0
0
0
0
1300
1300
1300
0
0
0
400
400
400
2300
2300
2300
0
0
0
1100
800
800
1300
1300
1300
0
0
0
1100
800
800
2400
2400
2400
0
0
0
0
0
0
400
400
400
0
0
0
0
0
0
1900
1900
1900
The table uses data and methodologies from the RIAs; where possible, the data have been updated.
A problem is assumed to exist if a firm or government Is predicted to be In severe financial distress in at least one of the next ten years. Severe financial distress for a
private firm is defined as a situation in which baseline net income minus cash expenditures is less than minus 4 percent of assets. The minus .04 threshold is based on
prior research showing that firms in this financial position are likely to show signs of severe financial distress, such as closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments. Most firms in severe financial distress continue to operate, albeit with reduced size, poor credit prospects, or both.
. A government entity is considered to be in severe financial distress if regulatory cost exceed 4 percent of its revenues.
The analysis assumes no price increase.
In the general industry and government sectors, it is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
-------
EXHIBIT C-8 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-NO STATE FUNDS
(a) These costs (leak protection, slate fees, Insurance premiums) are constant annual costs. The use of severe financial distress as an indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively
easily passed on to customers; If they cannot be passed on to customers, some of them may cut seriously Into profit margins. In particular, almost half the profits of small retail
motor fuel outlets and many of SIGMA's members In the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If Insurance premiums rose to
$1500 to $2000 per LIST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general Industry firms would have similar
problems with premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA Is examining. When a leak
occurs, there will be corrective action costs, although these costs can range In value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that If a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If Insurers
require tank replacement rather than retrofitting, the costs are much larger.)
(e) Corrective action costs are calculated taking account of existing insurance policies but assuming that no state funds exist. It is assumed that firms not covered by any
form of financial assurance will have to meet corrective action costs from their own resources. It Is also assumed that corrective action costs of less than the deductible for
insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-9
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-STATE FUNDS WITH 50K DEDUCTIBLES
TYPES OF COSTS (Unit Costs)
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
Q Firms
^
Ol USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8400
217,800
66,000
66,000
207,900
63,000
63,000
Leak
Detec-
tion .
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
All
Tech-
nical
Require-
ments Correc-
Except tive
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
0
0
0
0
0
0
14,400
3500
1600
101,300
24,700
24,700
0 .
0
0
0
0
0
20,100
6100
6100
Closure
($12,500)
0
0
0
0
0
0
0
0
0
34,000
8300
8300
0
0
0
0
0
0
0
0
0
Tank Up-
grading
b ($9950)c
0
.0
0
0
0
0
0
0
0
68.500
16,700
16,700
0
0
0
o
0
0
0
0
0
Correc-
tive
Action
(N/A)
0
0
0
7000
1700
200
20,900
5100
2300
106,200
25,900
25,900
o
o
0
o
0
0
38,900
11,800
11,800
Action
(528,000
to
$250,000)b-e
0
0
0
0
0
0
2100
500
200
20,100
4900
4900
Q
o
0
Q
0
0
0
0
0
All Tech-
nical Re-
quirements
N/A)e
0
o
0
8200
2000
200
20,900
5100
2300
126,300
30,800
30,800
0
•
0
0
50,820
15,400
15,400
Insur-
ance
Premiums
($750)a
. 0
0
0
0
0
0
0
. 0
0
0
0
0
0-
t
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
C$9950)d
30
0
0
6
•ao
:o
0
0
0
0
0
0
0
0
0
0
0
0
0
0
State •
Fees
($20-30)a
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-------
EXHIBIT C-9 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-STATE FUNDS WITH 50K DEDUCTIBLES
All
Tech-
nical
Require-
ments Correc-
Industry
Sector
Leak
Detec-
No. of tion
Units ($520')a
Tank
Repair
($5500)b
Tank Re-
placement
($30,500)b
Tank Up-
Closure grading
($12,500)b ($9950)c
Except
Correc-
tive
Action
(N/A)
tive
Action
($28,000
to
$250,000)b'e
All Tech-
nical Re-
quirements
N/A)e
Insur-
ance
Premiums
($750)a
Accel-
erated
Tank
Re-
place-
ment
($9950)d
State •
.Fees
(S20-30)a
GOVERNMENTS
Large
Medium
Small
USTs
Facilities
Governments
USTs
Facilities
Governments
USTs
Facilities
Governments
10,400
3500
400
47,800
25,000
25,000
3700
3600
3600
0
0
0
0
0
0
400
400
400
0
0
0
200
200
200
400
400
400
0
0
0
0
0
0
300
300
300
0
0
0
0
0
0
1300
1300
1300
0
0
0
400
400
400
2300
2300
2300
0
0
0
1100
800
800
1300
1300
1300
0
0
0
1100
800
800
2400
2400
2400
0
0
0
0
0
0
400
400
400
Explanatory Notes:
General:
The table uses data and methodologies from the RIAs; where possible, the data have been updated.
A problem is assumed to exist if a firm or government is predicted to be in severe financial distress in at least one of the next ten years. Severe financial distress for a
private firm is defined as a situation in which baseline net income minus cash expenditures is less than minus 4 percent of assets. The minus .04 threshold is based on
prior research showing that firms in this financial position are likely to show signs of severe financial distress, such as closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments. Most firms in severe financial distress continue to operate, albeit with reduced size, poor credit prospects, or both.
A government entity is considered to be in severe financial distress if regulatory cost exceed 4 percent of its revenues.
The analysis assumes no price increase.
-------
EXHIBIT C-9 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS-STATE FUNDS WITH 50K DEDUCTIBLES
• • In the general industry and government sectors, it is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of severe financial distress as an indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively
easily passed on to customers; if they cannot be passed on to customers, some of them may cut seriously Into profit margins. In particular, almost half the profits of small retail
motor fuel outlets and many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If insurance premiums rose to
$1500 to $2000 per UST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general industry firms would have similar
problems with premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If insurers
• require tank replacement rather than retrofitting, the costs are much larger.)
(e) Corrective action costs are calculated taking account of existing insurance policies and assuming all States have state funds with $50,000 deductibles. It is assumed
that firms not covered by any form of financial responsibility will have to meet corrective action costs from their own resources. It Js also assumed that corrective action costs of less
than the deductible for insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-10
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS ~ STATE FUNDS WITH 10K DEDUCTIBLES
00
TYPES OF COSTS (Unit Costs)
Industry-
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Ho. of
Units
216., 900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8400
217,800
66,000
66,000
207,900 '
63,000
63,000
Leak
Detec-
tion
($520 )a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
All
Tech-
nical
Require-
ments Correc-
Except tive
Correc- Action
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
•
0
0
0
0
0
0
14,300
3500
1600
101,300
24,700
24,700
0
0
0
0
0
0
20,100
6100
6100
Closure
($12,500)b
0
0
0
0
0
0
0
0
0
34,000
8300
8300.
0
0
0
0
0
0
0
0
0
Tank Up-
grading
($9950)°
0
0
0
0
0
0
0
0
0
68,500
16,700
16,700
0
0
0
0
0
0
0
0
0
tive
Action
(N/A)
0
0
0
7000
1700
200
20,900
5100
2300
106,200
25,900
25,900
0
0
0
0
0
0
38,900
11,800
11,800
($28,000
to
$250,000)b-a
0
0
0
0
0
0
2100
500
200
0
0
0
0
0
0
0
0
0
0
0
0
All Tech-
nical Re-
quirements
N/A)e
0
0
0
0
0
0
20,900
5100
2300
110,700
27,000
27,000
0
0
0
0
0
0
38,940
11,800
11,800
Insur-
ance
Premiums
($750)°
. 0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
State •
Pees
($20-30)a
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
0
0
o
0
0
0
0
-------
EXHIBIT C-10 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS -- STATE FUNDS WITH 10K DEDUCTIBLES
TYPES OF COSTS (Unit Costs)
All
Tech-
nical
Require-
ments Correc-
Industry
Sector
Leak
Detec-
No. of tion
Units ($520 )a
Tank
Repair
($5500)b
Tank Re-
placement
($30,500)b
Closure
($12,500)b
Tank Up-
grading
($9950)°
Except
Correc-
tive
Action
(N/A)
tive
Action
($28,000
to
$250,000)b'e
All Tech-
nical Re-
quirements
H/A)e
Insur-
ance
Premiums
($750)a
Accel-
erated
Tank
Re-
place-
ment
($9950)d
State .
.Fees
($20-30)a
GOVERNMENTS
o
CO
Large
Medium
Small
USTs •
Facilities
Governments
USTs
Facilities
Governments
USTs
Facilities
Governments
10,400
3300
400
47,300
25,000
25,000
3dOO
3600
0
0
0
0
0
0
400
400
400
0
0
0
200
200
200
400
400
400
0
0
0
0
0
0
300
300
300
0
0
0
0
0
0
1300
1300
1300
0
0
0
400
400
400
2300
2300
2300
0
0
0
1100
800
800
1300
1300
1300
0
0
0
1100
800
800
2400
2400
2400
0
0
0
0
0
0
400
400
400
Explanatory Notes:
General:
The table uses data and methodologies from the RIAs; where possible, the data have been updated.
A problem is assumed to exist if a firm or government is predicted to be in severe financial distress in at least one of the next ten years. Severe financial distress for a
private firm is defined as a situation in which baseline net income minus cash expenditures is less than minus 4 percent 'of assets. The minus .04 threshold is based on
prior research showing that firms in this financial position are likely to show signs of severe financial distress, such as closing all or a portion of the business, selling assets,
defaulting on loans, or missing required debt payments. Most firms in severe financial distress continue to operate, albeit with reduced size, poor credit prospects, or both.'
A government entity is considered to be in severe financial distress if regulatory cost exceed 4 percent of its revenues.
The analysis assumes no price increase.
In the general industry and government sectors, it is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
-------
EXHIBIT C-10 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE SEVERE FINANCIAL
DISTRESS - STATE FUNDS WITH 10K DEDUCTIBLES
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of severe financial distress as an Indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively
easily passed on to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In particular, almost half the profits of small retail
motor fuel outlets and many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If Insurance premiums rose to
$1500 to $2000 per UST, almost all classes of firms needing Insurance would be spending half of their profits on Insurance. Many small general industry firms would have similar
problems with premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
Q that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next'two years, (If insurers
fo require tank replacement rather than retrofitting, the costs are much larger.)
o
(e) Corrective action costs are calculated taking account of existing insurance policies but assuming all states have State funds with $10,000 deductibles. It is assumed
that firms not covered by any form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that corrective action costs of less
than the deductible for insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-11
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES-
CURRENT MIX OF STATE FUNDS
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
O Firms
10
-1 USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
52,900
60
211,600
51,600
5,700
33,600
8,200
3,700
329,200
80,300
80,300
207,900
63,000
8,400
217,800
66,000
66,000
207,900
63,000
63,000
Leak
Detec-
tion .
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
TYPES
OF COSTS (Unit Costs )
All
Tech-
nical
Require-
ments Correc-
Except tive
Tank
Repair
(S5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
0
0
0
0
0
0
400
100
0
4900
1200
1200
0 .
0
0
0
0
0
4600
1400
1400
Closure
($12,500)
0
0
0
0
0
0
0
0
0
3300
800
800
0
0
0
0
0
0
0
0
0
Tank Up-
grading
b ($9950)=
o
0
0
0
0
0
0
0
0
16,000
3900
3900
0
0
0
0
0
0
0
0
0
Correc-
tive
Action
(N/A)
Q
0
0
0
0
0
2900
700
300
46,700
11,400
11,400
o
Q
0
0
0
0
6600
2000
2000
Action
($28,000
to
$250,000)b'e
>
0
0
1200
300
0
4100
1000
500
44,700
11,400
11,400
0
0
0
0
10,200
3100
3100
All Tech-
nical Re-
quirements
N/A)8
0
0
0
5700
1400
200
7800
1900
900
100,900
24,600
24,600
0
1300
400
400
12,900
3900
3900
Insur-
ance
Premiums
($750)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
o:
. 0
0
0
0
o
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d
0
0
0
1200
300
0
12DO ;.
300
100
6600
1600 -;
1600
0
0
0
d
0
0
0
0
0
State •
.Fees
($20-30)a
0
0
0
0
0 .
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-------
EXHIBIT C-11 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES-
CURRENT MIX OF STATE FUNDS
Explanatory Notes:
General:
• The table uses data and methodologies from the RIAs; where possible, the data have been updated.
• A firm Is counted as a business failure If meeting a given regulatory cost would force the firm Into bankruptcy. This measure does not take account of the possibility that
some of these firms might leave business voluntarily prior to Incurring a regulatory cost, or the possibility that some of these firms might have left business within a few
years even In the absence of regulatory expenditures. . .
• The analysis assumes do price increase.
• In the general industry and government sectors, it Is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress Imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of business failure as an indicator, though useful for estimating costs
that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs' that are relatively easily passed on
o to customers; if they cannot be passed on to customers, some of them may cut seriously Into profit margins. In particular, almost half the profits of small retail motor fuel outlets and
p>? many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If insurance premiums rose to $1500 to $2000 per
to UST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general industry firms would have similar problems with
premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy Insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If Insurers
require tank replacement rather than retrofitting, the costs are much larger.) •
(e) Corrective action cpsts are calculated taking account of existing State funds and existing insurance policies but assuming that no state funds exist. It is assumed that
firms not covered by any form of financial assurance will have to meet corrective action costs from their own resources. It Is also assumed that cprrective action costs of less than
the deductible for insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-12
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS
FAILURES-NO STATE FUNDS
o
TYPES OF COSTS (Unit Costs)
All
Tech-
nical
Require-
ments Correc-
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8,400
217,800
66,000
66,000
207,900 .
63,000
63,000
Detec-
tion
($520)a
0
0
0
0
0
0
0 '
0
0
0
0
0
0
0
0
0
o
0
0
0
0
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
o
0
0
o
o
. 0
0
0
Tank Re-
placement
(S30,500)b
0
0
0
0
0
400
100
0
4900
1200
1200
o
0
0
4600
1400
1400
Closure
(S12,500)b
o
0
0
0
0
0
0
0
Tank Up-
grading
($9950)c
0
Q
0
0
0
0
0
0
0
3300 16,000
800 3900
800 3900
Q
0
0
0
0
0
0
0
0
0"
0
0
0
0
0
0
0
0
Except
Correc-
tive
Action
(N/A)
0
0
0
0
0
2900
700
300
46,700
11,400
11,400
0
0
0
0
0
0
6600
2000
2000
tive
Action
($28,000
to
$250,000)b-e
0
0
0
2100
500
100
7400
1800
800
75,000
18,300
18,300
0
0
0
0
0
0
17,800
5400
5400
All Tech-
nical Re-
quirements
N/A)e
0
0
0
9000
2200
200
11,100
2700
1200
131,200
32,000
32,000
0
0
0
260d
800
800
17,800
5400
" 5400
Insur-
ance
Premiums
($750)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.
0
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d
^
0
0
0
2500
600
100
2500 "
600
300 1
13,500
3300
3300
0
0
0
0
0
0
0
0
0
State •
Fees
($20-30)a
0
0
0
0
0
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
0
0
-------
EXHIBIT C-12 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS
FAILURES-NO STATE FUNDS
' ' Explanatory Notes: '
General:
• The table uses data and methodologies from the RIAs; where possible, the data have been updated.
• A firm is counted as a business failure If meeting a given regulatory cost would force the firm into bankruptcy. This measure does not take account of the possibility that
some of these firms might leave business voluntarily prior to incurring a regulatory cost, or the possibility that some of these firms might have left business within a few
years even in the absence of regulatory expenditures.
• The analysis assumes rto price increase.
• Jn the general industry and government sectors, It Is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
_ (a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of business failure as an Indicator, though useful for estimating costs
• that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively easily passed on
£ to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In particular, almost half the profits of small retail motor fuel outlets and
many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If insurance premiums rose to $1500 to $2000 per
.UST, almost all classes of firms needing insurance would be spending half of their profits on Insurance. Many small general industry firms would have similar problems with
premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If insurers
require tank replacement rather than retrofitting, the costs are much larger.)
(e) Corrective action costs are calculated taking account of existing insurance policies but assuming that no state funds exist. It is assumed that firms not covered by any
form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that corrective action costs of less than the deductible for
•' insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-13
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES-
ALL HAVE STATE FUNDS WITH 50K DEDUCTIBLES
TYPES
OF COSTS (Unit Costs)
All
Tech-
nical
Require-
ments Correc-
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
O Firms
Ol USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
51,900
60
211,600
52,600
5,700
33,600
8,200
3,700
329,200
80,300
80,300
207,900
63,000
8,400
217,800
66,000
66,000
207,900
63,000
63,000
Leak
Detec-
tion
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
• o
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
0
0
0
0
0
0
400
100
0
4900
1200
1200
0
0
0
0
0
0
4600
1400
1400
Closure
($12,500)
0
0
0
0
0
0
0
0
0
3300
800
800
0
0
0
0
0
0
0
0
0
Tank Up-
grading
b ($9950)°
0
0
0
0
0
. 0
0
0
0
16,000
3900
3900
0
0
0
o
o
0
0
0
0
Except
Correc-
tive
Action
(N/A)
0
0
0
0
0
0
2900
700
300
46,700
11,400
11,400
0
o
0
o
0
0
6600
2000
2000
tive
Action
(828,000
to
$250,000)b'°
o
0
0
0
0
0
0
0
0
1600
400
400
0
0
0
0
0
0
All Tech-
nical Re-
quirements
N/A)e
0
0
4900
1200
100
4900
1200
500
108,200
26,400
26,400
0
0
,
0
0
0
6900
2100
2100
Insur-
ance
Premiums
($750)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950 )dt
0
0
0
0
0
0
0 .'."
0
0
0
0
0
0
0
0
0
0
0
0
0
0
State •
Fees
($20-30)a
0
0
0
0
. 0
0
0
0
0
0
0
0
0
0
0
0
0
o
0
0
0
-------
EXHIBIT C-13 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES-
ALL HAVE STATE FUNDS WITH 50K DEDUCTIBLES
Explanatory Notes:
General:
• The table uses data and methodologies from the RIAs; where possible, the data have been updated.
• A firm is counted as a business failure If meeting a given regulatory cost would force the firm into bankruptcy. This measure does not take account of the possibility that
some of these firms might leave business voluntarily prior to incurring a regulatory cost, or the possibility that some of these firms might have left business within a few
years even in the absence of regulatory expenditures.
• The analysis assumes rto price increase.
• In the general Industry dnd government sectors, It Is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of business failure as an Indicator, though useful for estimating costs
Q that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively easily passed on
^U to customers; If they cannot be passed on to customers, some of them may cut seriously into profit margins. In particular, almost half the profits of small retail motor fuel outlets and
o> many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If Insurance premiums rose to $1500 to $2000 per
UST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general industry firms would have similar problems with •
premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace a tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur in years 6 through 10. It Is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If Insurers
require tank replacement rather than retrofitting, the costs are much larger.) • •
(e) Corrective action costs are calculated taking account of existing insurance policies but assuming that all States have a $50,000 deductible. It is assumed that firms not
covered by any form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that corrective action costs of less than the
deductible for insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT C-14
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES--
ALL HAVE STATE FUNDS WITH 10K DEDUCTIBLES
o
Industry
Sector
RETAIL MOTOR FUEL
USTs
Large Facilities
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
Single USTs
Station Facilities
Firms
GENERAL INDUSTRY
USTs
Large Facili-ties
Firms
USTs
Medium Facilities
Firms
USTs
Small Facilities
Firms
No. of
Units
216,900
52,900
60
211,600
51,600
5700
33,600
8200
3700
329,200
80,300
80,300
207,900
63,000
8400
217,800
66,000
66,000
207,900
63,000
63,000
Leak
Detec-
tion .
($520)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
TYPES
OF COSTS (Unit Costs)
All
Tech-
nical
Require-
ments Correc-
Except tive
Correc- Action
Tank
Repair
($5500)b
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Tank Re-
placement
($30,500)b
0
0
0
0
0
0
400
100
0
4900
1200
1200
0 .
0
0
0
0
0
4600
1400
1400
Closure
($12,500)b
0
0
0
0
0
0
0
0
0
3300
800
800
0
0
0
0
0
0
0
0
0
Tank Up-
grading
($9950)°
0
0
0
0
0
0
0
0
0
16,000
3900
3900
0
0
0
0
0
0
0
0
0
tive
Action
(N/A)
0
0
0
0
0
0
2900
700
300
46,700
11,400
11,400
0
0
0
0
0
0
6600
2000
2000
($28,000
to
$250,000)b'e
0
0
0
0
0
0
0
0
0
4900
1200
1200
0
0
0
0
0
0
0
0
0
All Tech-
nical Re-
quirements
1 N/A)e
0
0
0
0
0
0
2900
700
• 300
46,700
11,400
11,400
0
0
0
6
0
0
6600
2000
2000
Insur-
ance
Premiums
($750)a
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0-
0
' 0
0
0
0
0
Accel-
erated
Tank
Re-
place-
ment
($9950)d;-:.
0
0
0
0
0
0
0 „
0
0
0
0
0
0
0
0
o
o
0
0
0
0
State •
Fees
(S20-30)a
0
0
0
0
0
0
0
o
0
o
o
0
0
o
0
o
o
0
0
0
0 '
-------
EXHIBIT C-14 (continued)
NUMBER OF FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE BUSINESS FAILURES-
ALL HAVE STATE FUNDS WITH 10K DEDUCTIBLES
Explanatory Notes:
General:
• The table uses data and methodologies from the RIAs; where possible, the data have been updated.
. A firm is counted as a business failure if meeting a given regulatory cost would force the firm into bankruptcy. This measure does not take account of the possibility that
some of these firms might leave business voluntarily prior to Incurring a regulatory cost, or the possibility that some of these firms might have left business within a few
years even In the absence of regulatory expenditures.
• The analysis assumes rio price Increase.
• In the general industry and government sectors, it is assumed that firms and governments will continue to need USTs. Firms or governments could alleviate the severe
financial distress Imposed by any of the UST technical requirements (except corrective action) by choosing not to use USTs any longer.
(a) These costs (leak protection, state fees, insurance premiums) are constant annual costs. The use of business failure as an indicator, though useful for estimating costs
n that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of costs that are relatively easily passed on
' to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In particular, almost half the profits of small retail motor fuel outlets and
oo many of SIGMA's members in the medium retail motor fuel class would be lost to pay for premium costs and leak detection. If insurance premiums rose to $1500 to $2000 per
UST, almost all classes of firms needing insurance would be spending half of their profits on insurance. Many small general industry firms would have similar problems with •
premiums of this magnitude.
(b) These costs will only be incurred by leaking USTs. Leaks are predicted to occur for 3 to 6 percent of USTs per year in the time period EPA is examining. When a leak
occurs, there will be corrective action costs, although these costs can range in value and some may be covered by insurance or state funds. In addition to corrective action, 60 to
65 percent of all leaks will require1 tank repair expenditures. Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note
that if a facility needs to replace & tank, it will also incur closure expenditures.
(c) Tank upgrading is assumed to occur In years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
(d) Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance requirements. We assume
that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must be done within the next two years. (If insurers
require tank replacement rather than retrofitting, the costs are much larger.)
(e) Corrective action costs are calculated taking account of existing insurance policies but assuming all states have funds with a $10,000 deductible. It is assumed that
firms not covered by any form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that corrective action costs of less than
the deductible for insurance or the state fund will be met from the resources of the owner.
-------
APPENDIX D
IMPACT OF COMPLIANCE COSTS ON RURAL MOTOR FUEL FACILITIES
-------
-------
APPENDIX D
impact of Compliance Costs on Rural Motor Fuel Facilities
The body of this report presents observations about the potential effects that
the Federal underground storage tank (UST) regulations may have on rural service
stations and the communities they serve. This appendix explains the methods and
evidence EPA used to develop these observations.
Rural Areas Have a Somewhat Larger Share of the Nation's Service Stations
In evaluating potential impacts of UST regulations on rural areas, EPA first
estimated the percentage of the nation's service stations are located in rural
areas.1'2
Selection of Sample Population
EPA's analysis used data on the number of households, the number of service
stations, the populations, and the areas (in square miles) of 1,991 randomly-selected
zip codes from all parts of the country. The data set was prepared on the basis of
information from the Census Bureau and the U.S. Postal Service.
Division of Zip Codes into Rural and Urban Groups
The zip codes in the sample were not originally labeled as either rural or urban,
and it was not clear which ones were outside Metropolitan Statistical Areas.
Therefore, as a proxy, EPA ranked each zip code based on population density. To
find the population density in each zip code, EPA divided each zip code's population
by its area in square miles to yield population per square mile. EPA then arranged the
zip codes in a list in order of population density, with the lowest population densities
at the top and the highest densities at the bottom.
EPA set a dividing line to separate the "rural" part of the zip code list from the
"urban" part so that the percentage of households located in the "rural" part would
equal the national percentage of households in rural areas. The Statistical Abstract of
the United States indicates that 24 percent of all households in the United States live
1 The working definition for "rural area" in part of this appendix is an area that is outside the
Census Bureau's Metropolitan Statistical Areas (MSAs). These metropolitan areas are defined in terms
of counties or townships that include large cities or are heavily settled. If data did not correspond to
MSAs, EPA used another indicator to determine if areas were likely to be rural or urban. This
alternative indicator, which is based on number of households, is described in the text of the
appendix.
2 For the purposes of this analysis, a "service station" is an establishment selling fuel at retail and
deriving a substantial share of its total revenues from fuel sales; a service station may be owned by a
firm with a number of other outlets, or it may be owned by a single-outlet establishment.
D-1
-------
in rural areas, and the remaining 76 percent live in urban areas. EPA found the
point on the list that divided the 24 percent of households in lower-density zip codes
from the 76 percent of households in higher-density zip codes using the following
steps:
The number of households in each of the 1,991 zip codes on the list was
divided by the total number of households in the entire list; this
procedure yielded the percentage of all households accounted for in
each zip code.
EPA added the percentage of households for each zip code (beginning
with the zip code having the lowest population density) until a cumulative
household percentage of 24 percent was reached.4
This point on the list was assumed to divide the list between rural zip codes and
urban zip codes, because those above the division point cumulatively contain the
same percentage of households as do the nation's rural areas and these zip codes
had been identified as having the lowest population densities in our sample.
Estimation of the Percentage of Service Stations in Rural Areas
To estimate the percentage of service stations in rural areas, EPA added up all
of the service stations in the group of zip codes identified as rural areas. Dividing this
sum By the total number of service stations in the entire list of zip codes (both rural
and urban) yielded the percentage of service stations that were in the rural part of the
sample of zip codes. This analysis showed that about 29 percent of the service
stations were in zip codes assumed to be rural areas.
Comparison of Rural Service Station Share to Rural Household Share
Thus, the rural share of service stations is estimated to be somewhat greater
than the rural share of all households. Rural areas have 29 percent of service stations
but only 24 percent of households. As a result, rural service stations may have fewer
customers and lower sales volumes than urban stations, a possibility discussed further
below.
3 Statistical Abstract of the United States. 1990. p. 28. The Census Bureau and the Statistical
Abstract of the United States both define "household" as an entity comprising all persons who occupy
a housing unit (that is a house, apartment, or other group of rooms or a single room) that constitutes
separate living quarters.
4 For example, suppose that the zip code with the lowest population density had 2 percent of the
households, the zip code with the second lowest density had 5 percent of the households, and the zip
code with the third lowest density had 3 percent of the households. The cumulative percentage of
households for the third entry on the list would be 10 percent.
D-2
-------
Sales and Profits May Be Lower at Rural Stations
One reason for EPA's concern that rural stations may have more trouble
affording the costs imposed by the UST regulations is that the typical rural station may
"be a relatively smaller, less robust entity than the typical station in urban areas. This
concern is based in part on the possibility that the typical rural station may have fewer
potential customers than the typical urban station. While EPA has no direct-proof that
sales volumes per station are lower in rural areas, our estimation that rural areas have
29 percent of service stations but only 24 percent of the households suggests that
each station is likely to have a smaller pool of potential customers from which to draw.
If rural stations have relatively fewer customers, they may have relatively lower sales
volumes than their urban counterparts. For example, data from Idaho (a
predominantly rural state) show that average service station sales volumes in that
state are well below the national average. Nationwide industry average gross receipts
of gasoline service stations were reported to be $1,200,000 per outlet in 1988, while
average gross revenues per outlet in Idaho were only $756,900 per year, or about 63
percent of the national average.5
Lower sales volume, in turn, tends to be associated with lower profits. Across
all single-outlet dealers (including both urban and rural outlet), lower revenues are
associated with lower total assets and lower net income.6 Thus, because rural
stations are more likely to have low revenues, they are likely to have lower assets and
net income as well. This relationship is corroborated by data on service stations in
Idaho, which show that service station assets in that state are only 71 percent of the
nationwide average, and profits are only half of the national average.7 EPA does not,
however, have direct evidence that rural stations as a whole are less profitable than
urban stations.
Rural Stations Are Less Likely To Be Owned by Major Oil Companies
Another aspect of the financial resiliency of a service station is the size and
strength of its owner. Stations owned by major oil companies are backed ultimately
by entities with great financial reserves, giving them the ability (among other things) to
demonstrate financial responsibility using the financial test.
EPA has some evidence that gas stations owned by the major refiners are less
common in rural areas than in cities. In Idaho, for example, only about 7 percent of
retail gasoline outlets are owned by the major refiners, in contrast to 25 percent
5 East-Central Idaho Planning and Development Association, Inc., Replacing Underground
Storage Tanks in Idaho. January 1990, pp. 2-4.
6 EPA Office of Underground Storage Tanks. Regulatory Impact Analysis for Financial
Responsibility Requirements for Petroleum Underground Storage Tanks. October 1988, Exhibit A-3.
7 East-Central Idaho Planning and Development Association, Inc. Replacing Underground Storage
Tanks in Idaho, op. cit.. pp. 2-8.
D-3
-------
nationwide.8' A trend away from rural areas among the major oil companies was
noted by the Petroleum Marketing Association of America, which observed that major
oil companies are placing greater emphasis on high-volume, high-profit metropolitan
locations.9
Impacts on Rural Service Stations Are Likely To Be Greater than Impacts on
Urban Stations •
To analyze the potential impacts of the" LIST regulations on rural service
stations, EPA used the same basic methodology it used for the nationwide UST
population. This methodology is described in Appendix C of this report and in the
RIAs for the UST Technical Standards and Financial Responsibility Regulations. In
brief, the methodology divides the regulated community into a large number of
representative "model facilities" of different sizes and financial characteristics. Using an
Affordability Model, the impact of various regulatory costs on the financial conditions
are assessed separately for each individual type and size of model facility; the overall
effects of the regulations are then estimated by taking into account how much of the
regulated community is represented by each model facility.10 For instance, the
analysis may predict that the smallest and weakest model facilities will be substantially
affected by the regulations. If they represent only a small fraction of the total
regulated community, however, the predicted regulatory impact on the community as
a whole could be slight.
In applying this methodology to rural entities, EPA took into account the special
characteristics of rural stations by placing more weight on the results relating to
smaller, weaker model firms. For example, where the nationwide analysis assumes
equal percentages of small, medium, and large single-outlet lessee dealers, the rural
analysis assumes that 67 percent are small, 22 percent are medium, and only 11
percent are large. Exhibit D-1 shows the differences between estimated nationwide
size distributions (in terms of assets and sales) and the size distributions assumed for
rural areas. Reweighting the analysis toward smaller, weaker facilities results in
predictions of greater impacts. As Exhibits D-2 and D-3 show, the model predicts 86
percent of these facilities could experience severe financial distress and 53 percent
could fail. If all states had funds with deductibles of only $10,000, failures would be
cut to 24 percent, while instances of severe distress would drop only to 78 percent.
8 In Idaho, only 68 retail facilities in the state were owned by major oil companies; this is less than
7 percent of the 1,050 retail facilities in the entire state (East-Central Idaho Planning and Development
Association, Inc., op.cit.j pp. 1-9). By contrast, Exhibit 3-1 and A-3 of the Regulatory Impact Analysis
for Financial Responsibility Requirements for Petroleum Underground Storage Tanks shows that
refiners own about 47,000 outlets, or roughly 25 percent, of the 193,000 retail outlets in the country.
9 Petroleum Marketers Association of America, The Journal of Petroleum Marketing. 1988 Industry
Report. March/April 1988, p. 18.
10 In this way, the analysis allows a very disaggregated examination of the differential effects of
the regulations on entities with different levels of assets, even within the 'small firms" category.
D-4
-------
EXHIBIT D-1
COMPARISON OF NATIONWIDE ESTIMATES AND RURAL ASSUMPTIONS SHOWING SALES
AND ASSET BY TYPE AND SIZE OF FIRM
Asset Category/Size
Percentage in Category
Estimated
Nationwide
Assumed
Rural Only
Characteristics
Sales Per
Outlet
(thousands)
Assets
(thousands)
Jobbers*
Assets: < $500,000
Assets: $500,000 to $1,000,000
Assets: $1,000,000 to $2,000,000
Assets: $2,000,000 to $4,000,000
Assets: >$4,000,000
14%
31%
14%
19%
21%
29%
47%
9%
10%
6%
Average - National
Average - Rural
$958
$1,412
$1,429
$1,538
$1,684
$1,432
$1,315
$288
$746
$1,457
$2,848
$8,791
$2,910
$1,378
Single Stations, Owned by the Operator
Small
Medium
Large
38%
38%
25%
75%
17%
8%
Average - National
Average - Rural
$591
$638
$771
$654
$614
$130
$210
$500
$253
$174
Single Stations, Leased by the Operator
Small
Medium
Large
33%
33%
33%
67%
22%
11%
Average - National
Average - Rural
$886
$1,057
$1,153
$1,032
$954
$44
$82
$135
$87
$63
Jobbers are primarily petroleum wholesales, with some retail stations.
Percentages do not add to 100 percent due to rounding.
Based on Exhibit A-3, Regulatory Impact for Financial Responsibility Requirements for Petroleum
Underground Storage Tanks and EPA judgment of size breakdowns in rural areas.
D-5
-------
EXHIBIT D-2
PERCENTAGE OF RURAL.FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE
SEVERE FINANCIAL DISTRESS
No State Fund
USTs and Facilities
Firms
50K State Fund
USTs and Facilities
Firms
10K State Fund
USTs and Facilities
Firms
Current Mix of State Funds
USTs and Facilities
.Firms
AIITechnlcal
Standards
Except CA*
62
80
62
80
62
80
62
80
Corrective
Action
54
66
43
58
,
13
17
39
49
All Technical
Standards
Including CA
74
92
64
82
58
78
68
86
Insurance
Premiums
0
0
0
0
0
0
0
0
Accelerated
Tank
Replacement
55
72
0
0
0
0
31
41
State
Fees
0
0
0
0
0
0
0
0
o
O)
Leak detection, tank repair, tank replacement, closure and tank upgrading; most impacts in this group are due to tank replacement and upgrading.
Explanatory Notes
The table uses data and methodologies from the RIAs, adjusted to represent the smaller sizes of rural facilities; where possible, the data have been
updated.
A firm is counted as a business failure if meeting a given regulatory cost would force the firm into bankruptcy. This measure does not take account of
the possibility that some of these firms might leave business voluntarily prior to incurring a regulatory cost, or the possibility that some of these firms might have
left business within a few years even in the absence of regulatory expenditures.
The analysis assumes no price increase.
-------
EXHIBIT D-2 (continued)
PERCENTAGE OF RURAL FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE
SEVERE FINANCIAL DISTRESS
Costs for leak detection, state fees, and insurance premiums are constant annual costs. The use of business failure as an indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of
costs that are relatively easily passed on to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In
particular, almost half the profits of small retail motor fuel outlets and many of SIGMA's members In the medium retail motor fuel class would be lost to pay for
premium costs and leak detection. If insurance premiums rose to $1,500 to $2,000 per UST, almost all classes of firms needing insurance would be spending
half of their profits on insurance. Many small general industry firms would have similar problems with premiums of this magnitude.
Corrective action costs, tank repair, tank replacement, and tank closure costs will be incurred only by leaking USTs. Leaks are predicted to occur for 3
to 6 percent of USTs per year in the time period EPA is examining. When a leak occurs, there will be corrective action costs, although these costs can range in
value and some may be covered by insurance or state funds. In addition to corrective action, 60 to 65 percent of all leaks will require tank repair expenditures.
Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note that if a facility needs to replace a
tank, it will also incur cldsure expenditures.
Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced.
Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance
_ requirements. We assume that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must
• be done within the next two years. (If insurers require tank replacement rather than retrofitting, the costs are much larger.)
Corrective action costs are calculated taking account of existing State funds and existing insurance policies but assuming that no state funds exist. It
is assumed that firms not covered by any form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that
corrective action costs of less than the deductible for Insurance or the state fund will be met from the resources of the owner.
-------
EXHIBIT D-3
PERCENTAGE OF RURAL FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE
BUSINESS FAILURE
No State Fund
USTs and Facilities
Firms
50K State Fund
USTs and Facilities
Firms
10K State Fund
USTs and Facilities
Firms
Current Mix of State Funds
USTs and Facilities
Firms
All Technical
Standards
Except CA
16
22
16
22
16
22
16
22
Corrective
Action
12
15
6
8
1
2
8
10
All Technical
Standards
Including CA
- 52
68
49
66
18
24
41
53
Insurance
Premiums
0
0
0
0
0
0
0
0
Accelerated
Tank
Replacement
51
69
0
0
0
0
29
40
State
Fees
0
0
0
0
0
0
0
0
o
CD
Leak detection, tank repair, tank replacement, closure and tank upgrading; most Impacts In this group are due to tank replacement and upgrading.
Explanatory Notes
The table uses data and methodologies from the RIAs, adjusted to represent the smaller sizes of rural facilities; where possible, the data have been
updated.
A firm is counted as a business failure jf meeting a given regulatory cost would force the firm into bankruptcy. This measure does not take account of
the possibility that some of these firms might leave business voluntarily prior to incurring a regulatory cost, or the possibility that some of these firms might have
left business within a few years even in the absence of regulatory expenditures.
The analysis assumes no price increase.
-------
EXHIBIT D-3
PERCENTAGE OF RURAL FIRMS (AND ASSOCIATED USTS AND FACILITIES) THAT MAY EXPERIENCE
BUSINESS FAILURE
Costs for leak detection, state fees, and insurance premiums are constant annual costs. The use of business failure as an indicator, though useful for
estimating costs that last only for a few years, underestimates the importance of these costs in causing financial problems. However, these are the kinds of
costs that are relatively easily passed on to customers; if they cannot be passed on to customers, some of them may cut seriously into profit margins. In
particular, almost half the profits of small retail motor fuel outlets and many of SIGMA's members in the medium retail motor fuel class would be lost to pay for
premium costs and leak detection. If insurance premiums rose to $1,500 to $2,000 per UST, almost all classes of firms needing insurance would be spending
half of their profits on insurance. Many small general industry firms would have similar problems with premiums of this magnitude.
Corrective action costs, tank repair, tank replacement, and tank closure costs will be incurred only by leaking USTs. Leaks are predicted to occur for 3
to 6 percent of USTs per year in the time period EPA is examining. When a leak occurs, there will be corrective action costs, although these costs can range in
value and some may be covered by insurance or state funds. In addition to corrective action, 60 to 65 percent of all leaks will require tank repair expenditures'.
Those tanks that cannot be repaired (35 to 40 percent) will require tank closure and tank replacement expenditures. Note that if a facility needs to replace a
tank, it will also incur closure expenditures.
Tank upgrading is assumed to occur in years 6 through 10. It is assumed that any non-leaking tank can be retrofitted rather than replaced. .r.
Firms not having any current means of meeting financial responsibility requirements are assumed to upgrade their tanks to meet insurance
requirements. We assume that upgrading and not tank replacement will suffice to satisfy insurers. Unlike the upgrading required by EPA, this upgrading must
be done within the next two years. (If insurers require tank replacement rather than retrofitting, the costs are much larger.)
Corrective action costs are calculated taking account of existing State funds and existing insurance policies but assuming that no state funds exist. It
is'assumed that firms not covered by any form of financial assurance will have to meet corrective action costs from their own resources. It is also assumed that
corrective action costs of less than the deductible for insurance or the state fund will be met from the resources of the owner.
-------
, Because the Affordability Model assumes that the UST regulations impose very
similar costs per facility whether sales volumes are high or low, the smaller model
facilities were predicted to suffer disproportionately from regulatory costs. For
instance, a $5,000 cost is a substantial percentage of the assets of a firm that
operates a single leased service station and has assets of $44,000; because the
Affordability Model assesses impacts on the basis of net income compared to assets,
this small firm would be predicted to suffer severe financial impacts from a $5,000
cost. The Affordability Model would predict that the same $5,000 cost would be much
less likely to cause severe impacts to a larger station with assets of $135,000!
Because rural areas are assumed to have a larger percentage of firms with assets of
$44,000 than firms with $135,000 (see Exhibit D-1), the Affordability Model projects the
expected impacts of a given cost per station to be much higher for rural than urban
stations.
Whether the impacts predicted by the Affordability Model will actually occur
depends on market-related factors that the model does not take into account. For the
rural impact analysis, as for the nationwide analysis, neither prices nor sales were
assumed to increase as a result of the regulations. These are conservative
assumptions. If substantial numbers of service stations in rural areas do close, the
remaining facilities would have increased sales volumes (as customers of the stations
that closed would give their business to the survivors). In addition, the reduced
competition among remaining facilities would allow surviving stations to increase
prices. According to one study, "In California, reduced competition among gas
retailers was expected to lead to price increases of gas from 5 to 20 cents per
gallon."11 A combination of higher sales volumes and higher profit margins could
reduce the tendency for additional stations to disappear. There are limits to the extent
of possible price increases, however. The issue of revenue increases and their impact
on UST facility closures^ was discussed in more detail in the 1988 for the Technical
Standards Regulations.
12
Rural and Urban Closure Rates Have Differed Little So Far
Although EPA anticipates that the regulations may ultimately have greater
impact on rural stations, net closure rates of rural and urban USTs have not been very
different to date. One of EPA's goals was to test the hypothesis that the promulgation
of the regulations may have already resulted in a disproportionate rate of closures of
service station tanks in rural areas. EPA performed a partial test of this hypothesis by
analyzing data from five state notification data bases. The data bases were used to
11 East-Central Idaho Planning and Development Association, Inc., Replacing Underground
Storage Tanks in Idaho, op. ctt.. pp. 2-11.
12 EPA Office of Underground Storage Tanks, Regulatory Impact Analysis of Technical Standards
for Underground Storage Tanks, Volume 1, August 24, 1988, Chapter 8.
D-10
-------
estimate changes in the number of large (over 2,000 gallons) gasoline USTs at service
stations and other facilities from late 1988 to late 1990.13
To analyze the changes in UST populations, EPA compared the percentage of
USTs that were reported closed to the percentage of USTs reported to have been
installed in five western States with large rural populations: Colorado, North Dakota,
South Dakota, Montana, and Wyoming. For this part of the analysis, EPA could
determine which USTs were or were not inside metropolitan statistical areas (MSAs)
because each UST is identified by county and each county is identified as either inside
or outside of an MSA. The closure and installation data provided a measure of net
UST population changes. As shown in Exhibit D-4, net closure rates appear to differ
little between the rural (outside MSAs) and urban (inside MSAs) counties of each
State.
Impacts on Consumers of Service Station Closures May Be Greater in Rural
Areas
Station closures have not only direct effects (closure of the business) but also
indirect effects (reduced availability of fuel and potentially higher prices). One
measure of availability of fuel is the density of service stations in an area. By this
measure, rural areas have limited availability of fuel compared to urban areas: rural
areas have an average of one service station in 86 square miles, and urban areas
have an average of one service station in 3 square miles.14 This measure is not
adequate to determine potential impacts, however. For example, if rural stations are
grouped together (several located together in one town) a few closures could still
have only minor impact on the communities served.
Regarding the potential impact of service station closures on rural communities,
EPA developed several assumptions: fuel availability problems are most likely when a
town (1) has only one or two service stations; (2) has already suffered a loss of one-
third or more of its gasoline USTs, and (3) is more than 15 miles from the nearest
town with an adequate supply of additional service stations. These assumptions were
applied to data from five States. Using State notification data bases, EPA counted the
number of service stations per town in five predominantly rural western States:
Colorado, North Dakota, South Dakota, Montana, and Wyoming.15 The results
13 The State data bases for Montana and South Dakota do not identify which USTs are owned by
service stations; for these states, the number of facilities with gasoline USTs larger than 2,000 gallons
was used as a proxy for the number of service stations.
14 EPA estimated these averages by dividing the total number of square miles in the zip codes in
our sample that we had assumed to be rural or urban by the total number of service stations in all the
zip codes in our sample.
15 The State data bases for Montana and South Dakota do not identify which USTs are owned by
service stations; for these states, the number of facilities with gasoline USTs larger than 2,000 gallons
was used as. a proxy for the number of service stations.
D-11
-------
O
EXHIBIT D-4
COMPARISON OF CLOSURE RATES IN URBAN AND RURAL AREAS
CO
^
D
III
d
a:
LU
a.
LU
CD
DC
O
LU
5
cc
LU
CC
D
CO
3
O
LU
(Estimated closure rates through 1990}
20%
15%
10%
5%
0%
-5%
RURAL
URBAN
RURAL
URBAN
RURAL
URBAN
URBAN
URBAN
RURAL
RURAL
S. DAKOTA
MONTANA
N. DAKOTA
WYOMING
COLORADO
URBAN COUNTIES I I RURAL COUNTIES
SHOWS PERCENTAGE OF LARGE GASOLINE USTs WHICH HAVE BEEN CLOSED AND NOT REPLACED
-------
were plotted on maps. Road mileage data on the maps was used as an indication of
the distances separating the service stations in one town from those in the next. EPA
used information on LIST population changes on a town-by-town basis to identify
potential fuel availability problems.
The analysis suggested that, in general, sparsely populated areas are more
likely to have an impending fuel availability problem than are areas near MSAs. In
Wyoming, for example, there are 67 towns with only one or two service stations.
Twenty-three of these towns are at least 15 miles away from any other service
stations. Almost a quarter of the towns with only one or two service stations have
already lost a third or more of their service station USTs. In addition, the lack of
nearby competition could allow some isolated stations to raise fuel prices.
Both of these problems for consumers - limited availability of service stations
and lack of competition ~ would worsen if significant numbers of rural stations
disappeared. Thus, the impact on consumers of LIST closures in rural areas may be
greater than the impact of urban closures even if the net rate at which USTs close is
similar in urban and rural areas. Additional closures would threaten the availability of
fuel in small communities much more than would the closure of a few stations in a
large city.
D-13
-------
-------
APPENDIX E
PREVENTING LEAKING UNDERGROUND STORAGE TANKS: USING GOVERNMENT
ASSISTANCE PROGRAMS TO FINANCE TANK SYSTEM IMPROVEMENTS
-------
-------
PREVENTING
LEAKING
UNDERGROUND
STORAGE TANKS
wtneasti
Midwest
NORTHEAST
MIDWEST
INSTITUTE
THE CENTER FOR REGIONAL POLICY
-------
The Northeast-Midwest Institute was formed in 1977 at the request of representatives and senators who
wanted to ensure the future economic vitality of those states that historically have formed the nation's
industrial heartland. The Institute works closely with the Northeast-Midwest Congressional Coalition, a
bipartisan group of nearly 200 representatives, and with the 36 senators who comprise the Northeast-
Midwest Senate Coalition. In addition to elected officials, the Institute provides information and analysis
to corporate, academic, and labor leaders who recognize the common problems facing their states and the
fact that federal policies often create obstacles to regional economic growth. Institute staff work in five
major issue areas: economic development, human resources, energy, natural resources, and trade.
-------
PREVENTING
LEAKING
UNDERGROUND
STORAGE TANKS
Using Government Assistance Programs
to Finance Tank System Improvements
Carol Andress
Charles Bartsch
Northeast-Midwest Institute
218 D Street, S.E.
Washington, D.C 20003
(202) 544-5200
vvEPA
This report was prepared under an award
from the U.S. Environmental Protection Agency,
Office of Underground Storage Tanks
EPA Project Number: X-816694-01-0
EPA Project Officer: Nancy Martin
-------
-------
Table of Contents
Executive Summary
Introduction ....................................... ............................. | 3
The Problem .................................................. ' ............ 3
1. Key Factors to Consider in Formulating UST Assistance Program ....................... ... 5
A. Setting Terms of Assistance ................................................ 5
B. Reaching Targeted Customers .............................................. 6
C Determining Funding Needs ............................................... g
D. Minimizing Administrative Burdens ................... ... .................... 9
E. Using Private Lending Institutions .......................................... n
F. Measuring Program Success ..................................... .......... 12
. 2. Public Finance Tools ......... ...................................... ..... . ...... !5
A. Grants .......... . [[[ 15
B. Loans ................................. . ............................. 18
C. Loan Guarantees ........ .......................... . ................. , . . 21
D. Interest Subsidies ---- ...................... . ............... ............ 23
E. Business Development Corporations ........................................ 24
F. Tax Abatements [[[ 26
G. Other Applicable Financing Tools ......................................... 27
H. Combining Incentives for UST Initiatives ...... ......................... ..... 29
3. Conclusion .............. . ................................. . ...... 31
Appendix A; Examples of State UST Assistance Programs ................................ 32
-------
-------
Executive Summary
Without some form of assistance, many small underground storage tank (UST) owner/opera tors-typic-
ally "mom and pop" gasoline service stations-will not meet new federal tank standards and will have to close.
The new standards will force many businesses to upgrade existing tanks or install entirely new tank systems
(tanks and associated piping). Undertaking such improvements requires capital. Because of their size, lack
of sales volume, and limited collateral, however, small businesses often are rejected for loans, or the terms and
conditions are so restrictive as to discourage them from accepting conventional financing.
The potential for loss of many small service stations has caused concern among federal, state, and
local leaders. Loss of a business can hurt a community, especially a rural community with only one source
of gasoline and heating fuel. Loss of jobs and tax revenue would bring more problems to economically
distressed areas. Furthermore, leaks from abandoned underground tanks may go undetected and uncontained
for long periods of time, thus contaminating the groundwater.
Governments at all levels can find creative ways to help small businesses overcome these problems.
Setting up finance programs to ease the cost or terms of borrowing, augment private funds, or fill funding gaps
that the private sector will not bridge are among the best options. For decades, federal, state, and local
governments have used or sponsored public finance mechanisms to stimulate economic activity in certain
geographic areas or industries. Some can be adapted and targeted to UST owner/operators. Already a few
states have started such financial assistance programs.
All state and federal economic development tools fall into two broad categories: financial and
nonfmancial assistance. Finance incentives are the focus of this report. (Nonfmancial assistance includes
training and technical assistance such as management counseling and marketing advice.) Six types of financial
incentives are particularly relevant for adaptation to U?T needs: grants, loans, loan guarantees, interest
subsidies, business development corporations, and tax abatements. Other finance programs such as bond
programs, equity financing, tax credits and deductions, tax increment financing, and tax-free zones, have less
general applicability, although they could prove quite suitable given the right circumstances.
These financial incentives can be used individually or combined to address a full range of needs. For
example, grants can be combined with loan guarantees to target businesses not reached by the loan program.
In designing an UST finance program, whether using one tool or a blend of tools, public officials should
consider a number of factors. Six that are most crucial to success, are:
• setting terms of assistance to address the most important needs and correct for market
shortcomings;
• targeting the program to businesses that really need it to improve and modernize without giving
unnecessary subsidies to those capable of making investments on their own;
• determining the amount of funding needed and the timeframe in which those resources must be
made available;
• minimizing the cost and complexity of administering and participating in a program;
• finding the optimal level of participation by private lending institutions; and
• determining the appropriate measure of program success to help policy-makers and administrators
make informed decisions about needed modifications or changes in level and type of support.
-------
This, report is intended for states considering the establishment of an UST financial assistance
program. Its purpose is to foster a better understanding among public officials of the various financing tools
available and how such tools could be put to use in helping UST owner/operators. Most states have had
similar economic development programs for years, but have only recently considered adapting them to meet
environmental concerns.
This report is organized into three sections. The introduction provides background information on
the problem faced by small businesses in complying with federal tank requirements. The first part discusses
the key factors that public officials must consider when formulating an UST assistance program. The second
pan describes the kinds of public finance programs that could support UST improvements. The appendix
describes the UST assistance programs of two states, Iowa and Ohio.
-------
Introduction
EPA encouraged the Institute to prepare this report as part of the agency's continuing effort to
provide information and assistance to state underground storage tank programs. The agency is concerned
about the ability of small businesses to comply with federal requirements and the potential impact of business
closings on communities and the environment. The objective of this report is to foster a better understanding
among public officials of the various financing tools that could be used to encourage small businesses to
improve tanks.
The Problem
As deadlines near for improving underground storage tank (UST) systems, many small tank
owners/operators assert that they cannot afford to meet the new requirements. Upgrading tank systems (tanks,
pipes, and leak detection) requires capital; however, conventional sources of capital often are out of reach for
small, disadvantaged, and "high-risk" businesses. Bankers are skittish about environmental concerns. Even
assuming that a commercial bank or other financial institution is comfortable with the environmental situation
and possible liability that a prospective borrower shoulders-which they usually are not-the well-known risks
associated with small business lending keep many smaller enterprises from securing the capital they need.
Because of their size, lack of sales volume, and limited collateral, small business loan applications often are
rejected, or the terms and conditions placed on them are so restrictive as to effectively discourage small
businesses from accepting conventional financing.
Problems encountered by small businesses in obtaining the capital needed for improvements has
caused many local leaders to fear that many businesses will simply close. The Petroleum Marketers
Association of America estimates that approximately 26,500 stations are likely to close as a result of
regulations. It projects that 61 percent of these stations are in communities of fewer than 10,000 people. Loss
of a business can have a serious adverse effect on a community, especially a rural community that may have
only one source of gasoline and heating fuel. Economically distressed areas will suffer further the loss of jobs
and tax revenue. Finally, because the closed property probably will be untended, leaks may go undetected and
uncontained for long periods of: time, thus contaminating the groundwater.
To overcome such problems, the public sector can initiate a variety of finance programs to ease the
cost or terms of borrowing, augment private capital resources, or fill funding gaps that the private sector will
not bridge. This country has a long history of public-sector support for economic development activities. In
recent years, governors and mayors have given top priority to retaining and helping businesses; many are doing
so in a more creative, sophisticated, and comprehensive way than in the past.
Public-sector initiatives no longer rely solely on administrators with grantsmanship skills pushing a
few applications. Now, governments take a more activist role: many have adopted an entrepreneurial stance,
identifying and packaging public and private resources to put the economic development puzzle together.
Increasingly, the solution requires a broad-based commitment from diverse players in several sectors-busi-
nesses and financiers, public and private economic development and training agencies, and resource institutions
such as colleges and professional associations. It reaches into new sectors, like secondary schools and utilities,
and incorporates new concerns like historic preservation and environmental well-being.
Spurred by concerns that small gas stations may close or that old tanks threaten the state's
groundwater, a few states have started financial assistance programs to encourage UST owner/operators to
improve their tank systems. The types and scope of these programs vary considerably based on each state's
needs and goals. For example, Iowa's program supports rural businesses and is part of a broad state policy
-------
to preserve fanning communities. In contrast, programs in Rhode Island and New Jersey seek comprehensive
cleanup of leaking tanks. Encouraging rapid improvements in tank and leak-detection equipment are crucial
to the ultimate goal of protecting human health and the environment
The information that follows is intended for states that are contemplating an UST financial assistance
program. Its purpose is to foster a better understanding among public officials of the various financing tools
available and how such tools could be put to use in helping UST owner/operators. Many of these tools have
been in place for years to spark state and local economic development activities, but they have never been
adapted to meet environmental concerns.
The first section of this report discusses the key factors that public officials must consider when
formulating an UST assistance program. The second section describes the kinds of public finance programs
that could support UST improvements. The appendix describes the UST assistance programs of two states:
Iowa and Ohio.
-------
1. Key Factors to Consider in Formulating UST Assistance Program
Public officials contemplating an UST assistance initiative should consider a number of factors. This
section discusses six that are most critical in planning a program, before final enaament: setting terms of
assistance; reaching targeted customers; determining funding needs; minimizing administrative burdens; using
private lending institutions; and measuring success.
A. Setting Terms of Assistance
The needs of the state and the goals or intended outcome for the program will drive decisions on the
terms of assistance. Put differently, officials must ask themselves what is the problem and what do we want
to achieve? Rather than superseding the important role of key private-sector players, officials need to identify
and assess market shortcomings and tailor a course of action to intervene, filling gaps or correcting
weaknesses.
In determining the appropriate terms of assistance, officials need to decide the types and amounts of
costs to be covered. Help could be provided for:
• some or all of the costs of tank system upgrades;
• some or all of the costs of improved leak detection;
• some or all of the costs of replacing tanks with new, protected tank systems;
• some or all of the costs of cleanups not covered by insurance; or
• some combination, or all of the above.
With a limited pool of funds, an agency could reach more businesses by restricting the amount of
coverage~for example by covering only the cost of tank upgrades. On the other hand, it could provide greater
public benefit by supporting fewer businesses but ensuring thorough cleanup and state-of-the-art protection.
The decision depends on the amount of money available and the magnitude of the problem. In some cases,
financial matching requirements could be used to stretch limited resources further.
Also important is the type and location of business and the type of aid needed by that business.
Programs could be planned to support only small or disadvantaged businesses that otherwise could not afford
to comply, or to support those in rural areas that serve as the sole source of gasoline or heating fuel for a
community. If the primary goal of the program is to cleanup existing leaks, the most appropriate customer
may be owner/operators of tanks known or suspected of leaking, or those located near drinking water wells.
In setting the terms of assistance, the governing agency must give due regard to the needs of the
targeted customer. Both the timing and type of assistance provided is important In a one-time improvement
(either a cleanup or new or upgraded tank), the recipient's chief need is easily determined. For example, the
recipient may have no access to capital at all, a situation which public programs can help rectify. This
situation often occurs when the operator is a small business or one in a distressed community or inner-city
neighborhood. In other cases, an operator may be faced with financing terms too steep to meet. Public
agencies then can help reduce the costs of the initial capital by offering incentives to commercial lenders or
by providing the capital themselves. In yet other situations, periodic offsets to ongoing capital demands, such
as reducing taxes'due, may be enough to ensure that needed investments are made.
-------
In sum, officials must understand the obstacles to investment and attempt to overcome them. Many
tools are available for public agencies to resolve economic development problems; eleven are described in the
second section of this report Some version of these tools can be used-separately or in combination--to meet
several objectives, including:
• reducing the lender's risk by providing incentives for lenders to help seemingly risky businesses;
• reducing the borrower's cost of financing, for example, making capital more affordable by
subsidizing or eliminating the interest charged on certain loans or allowing tax write-offs of
interest payments;
• easing the borrower's repayment situation by providing flexible payment terms such as allowing
the borrower to make payments over a longer time, or allowing an initial grace period;
• improving business cash flow by reducing or forestalling taxes; and
• providing start-up capital in exchange for partial ownership in the project.
B. Reaching Targeted Customers
One of the most difficult and controversial issues facing officials as they devise financial aid programs
to meet UST-related capital needs is defining who is eligible. Officials must determine a viable threshold of
need; the program must offer sufficient help to businesses that really need it to improve and modernize
without giving unnecessary subsidizes to companies capable of making investments on their own.
Economic development officials use targeting techniques to decide who benefits from the program
incentives and to address the special needs of people, places, or firms. Targeting strategies are diverse but all
have a common thread—to channel investment activity to, and derive benefits for locations, sectors, or groups
that are at some perceived disadvantage in the private marketplace.
The advantage of targeting is that it channels activity to make maximum use of limited resources.
The disadvantage is that it can be difficult to define the primary target; thus needy people, places, and firms
on the margin may be excluded from the program in a seemingly arbitrary manner. For example, Ohio's
special loan program-limits those eligible to tank owners with six or less tanks. This cut-off was based on a
determination that most of the intended targets, primarily small single-outlet marketers, would fall within that
definition. An owner of seven tanks, however, could well be a small, struggling operation unable to afford
compliance, but is excluded from the program. As a result, the loan program puts this business at a severe
competitive disadvantage.
The appropriate definition or threshold will vary significantly among states and regions. For example,
while Ohio defines a small business as one owning six or less tanks, Iowa's cut-off is 12 tanks or less. Before
defining the targets, state agencies must have information on the businesses to be targeted and their needs.
Many states have undertaken surveys to determine the number, size, location, ownership, and type of business
of tank owner/operators. Public officials also need to know how many businesses need or would be eligible
for help to determine how the program should be structured.
Program resources can be targeted several ways: tailoring incentives to be useful only to intended
targets; directly through eligibility requirements; indirect targeting; and discretionary targeting.
-------
Tailored Incentives
The most direct way to target incentives is through statutes and regulations that make the incentive
useful only to specific types of firms, like station operators, or for specific activities, like replacing tanks.
Guidelines could be written, for example, to cover only the costs for cleanup of a leaking tank or tanks at least
20 years old. It is important that appropriate incentives be linked to the targeted beneficiaries. For example,
tax credits may stimulate little activity for a cash-strapped operator; interest subsidies, on the other hand, can
make a project economically viable.
Eligibility Requirements
Program use can be limited by establishing eligibility requirements in the enabling statute or
regulation. Such requirements could be geared to certain business characteristics such as size, type, or
ownership. For example, a few states provide assistance for small owner/operators by defining eligible
businesses as those that own less than a specified number of tanks, or ones that sell less than some designated
amount of gasoline per month. The definition of a small tank owner/operator will vary among regions and
states.
Other criteria of this type could be linked to the site and might include age of tanks. Eligibility
criteria could also be geared to the broader economic context of the business operation. For example,
assistance could be tied to the projected economic impact on the local area such as tax revenues lost due to
closure or jobs retained because the business is able to continue operating.
Eligibility can also be defined by purely geographic factors. For example, assistance could be
restricted to businesses in specially designated distressed areas, towns with less than some specified population,
counties with less than a minimum number of service providers, or areas of unique environmental conditions,
such as groundwater vulnerability, percentage of population relying on groundwater for drinking water, and
so forth.
Targeting through eligibility requirements allows very little flexibility, which may be a problem for
certain businesses that do not meet the criteria exactly. This type of targeting, however, is advantageous if the
government plans to rely on private institutions to administer the program (this is discussed more fully later
in this section). .
Indirect Targeting
Sometimes, indirect targeting is politically advantageous. This strategy involves laying out a
broad-based program but structuring the assistance to be useful only to certain types of firms, or defining
program criteria in such a way that effectively limits its use to certain firms. This can be done in numerous
ways. For example, an UST program could be indirectly restricted to smaller companies by setting a relatively
low cap on the amount of loan proceeds that can be guaranteed or funding improvements for six tanks per
business only.
Program resources also could be targeted indirectly to small users posing the greatest environmental
threat by linking the program to certain levels of contamination while limiting outlays per business. This can
be done, for example, by providing money only for replacing known or suspected leaking tanks, but then
limiting the assistance to six tanks per business. This would narrowly focus the program on small operators
with big problems-and also those most likely in need of help-without specifically eliminating from contention
a range of operators whose political support may be needed to pass a program.
Discretionary Targeting
An alternative to targeting with stria eligibility criteria is to permit the administering agency to
exercise discretion in approving program applicants that meet broad eligibility criteria. This is essentially
targeting on a case-by-case basis and is often used when important criteria are not easily defined or quantified,
-------
such as in venture capital programs where the chief factor is the potential for success. Similar approaches
could be used "for UST assistance based on level of need or extent of threat to public health and the
environment This type of discretionary approach, however, must be carefully sheltered from political
pressures if it is to succeed.
In the case of UST, several types of targeting could occur depending on priorities and amount of
funding available. Small, independent operators could be the primary targets specified in the eligibility criteria.
The administrative agency could then have discretion in selecting priorities among the small businesses based
on level of risk (tank age, proximity to drinking water wells), location, or other appropriate factor.
C. Determining Funding Needs
As previously mentioned, the types of costs covered, the number of targeted users and the amount
necessary to meet their needs are important factors in determining how much money must be allocated to an
UST assistance program. Also important, however, is the type and terms of financial assistance offered. The
actual cash needs for any program vary, and are determined by several design elements. For example, a direct
loan program has very different funding needs and outlay timetable than a loan-guarantee program or
interest-subsidy incentive.
Financing programs can be grouped in several ways, according to the level of resources needed for
the program to operate, and the timeframe in which those resources must be made available.
Continuous Funding Needs
Public officials and business persons who have little contact with financial-assistance programs
commonly perceive that they require a regular source of revenue to continue and must be fully funded at the
outset of each funding cycle. In reality, however, only a few programs require this kind of funding. Grants
are the most common, but also the most costly per project because there is no direct return on the money and
the grant generally covers most, and in some cases all, of the costs of the project In addition to grants,
programs offering subsidies to reduce the interest charged on loans issued by private lenders also must be
replenished if they are to continue as there is no payback. However, these programs require less funding per
project than grants.
A variation of continuous-funding needs are programs that result in foregone tax revenues rather than
requiring a specific annual appropriation. Such tax-abatement programs reduce or eliminate tax payments due
on specific property, often for live years or more. Although these programs do not need to be funded directly,
the net effect is that total tax revenues are reduced. In some ways, tax abatements are like back-door grants.
The major disadvantage of continuous-funding programs»in an era of increasing demand but fewer
public-development resources-is that they are very costly on a per-project basis. Such programs allow no
direct recovery of the state's investment, although the funds may be returned in other forms such as increased
tax revenue from profitable businesses or retained jobs. Also, until a program is firmly entrenched, it is
subject to the whims of the appropriations process each year.
On the other hand, because the government is, in essence, funding significant portions of the project,
it can exercisexonsiderable^ontrolover.iiow.the^uids^re-io.bejisedjuid who is to benefit. Program goals
can be defined more narrowly and refined as circumstances change, and-in theory-resources can be targeted
most effectively. Such programs allow the government to address the most pressing problems without having
to attract and keep third-party participation. Finally, a well-structured grant or tax-abatement program
generally will incur fewer administrative costs than other types of assistance programs and issues of default
and cost-recovery~so vital to direct loan and loan guarantee programs-are largely moot
-------
One-Time Infusion of Funds
Across the country, hundreds of development-finance programs have been launched with a one-time
infusion of public money. Although their objectives and constituencies vary, virtually all are set up as direct
loan programs or revolving loan funds. Loan funds may be designed so that-if properly managed-they can
become self-sustaining and do not need additional public resources. In this case, the fund pool is replenished
by loan repayments and interest income so that new loans can be made. In many instances, the interest paid
on the loan is earmarked for administrative costs.
The amount of money needed initially depends on several factors: amount of assistance offered to
each participant, number of potential participants, and expected payback and default rates. The primary
advantage of this type of financing mechanism is that public funding can serve as a catalyst, rather than
becoming an ongoing need. Political leaders may be more willing to risk funds on a one-time basis, especially
for a new initiative. If it fails, losses are minimized. Also, the one-time infusion can be a good way to test
a particular approach to addressing the problems of UST owners—a small amount of money can be devoted
to the program initially and increased with subsequent appropriations if the program proves successful.
Often, as programs show signs of success, demand will increase and states will supplement the original fund
with additional capital. This allows the program to make more loans more quickly than repayments of the
original fund would allow.
Reserve Fund
A third category of financial programs requires establishing some type of reserve fund at the outset
that is not regularly tapped. Usually, this "reserve fund" is a fraction of the total level of program activity.
The federal Small Business Administration program; for example, set aside a reserve fund of only $107 million
in fiscal 1989 to support the nearly S3 billion in new loan guarantees for that year.
Such reserves typically are set up for loan-guarantee programs in which the government guarantees
to pay off a sizeable (usually 75 to 90 percent) portion of a loan made by a private lender in the event the
borrower defaults. Reserves are drawn upon only when a firm defaults. If default rates are low,
loan-guarantee programs will cost little over time. However, with each default, the cost of a guarantee
program increases.
Initiatives based on reserve funds have the advantage of encouraging considerable investment without
large public outlays. In fact, a program that closely scrutinizes the loans it is asked to guarantee may have
virtually no defaults, making its actual cost to the public sector very low. On the other hand, a low default
rate may mean that the eligibility requirements are so stringent that the truly needy tank owner/operators are
excluded because they cannot meet creditworthiness standards. Generally, loan-guarantee programs are best
targeted to businesses oh the margin of risk, rather than those that carry big risks.
Other programs that help with or promote financing require little in the way of cash from the state
to operate; their benefits come in other ways. Instead, the government might participate in a linked deposit
program by placing state funds in private banks to encourage them to lend in targeted areas. Such programs
cany no risk; the only cost is that the government may accept a lower return on its deposit in exchange for
the lender's participation. These and other tools are described in detail in the second part of the report.
D. Minimizing Administrative Burdens
The cost and complexity of administering an assistance program is often overlooked by legislators in
their push to develop a program that addresses constituents needs. While it should not be the only factor
considered, relative ease of administration can have a significant impact on the overall success of the program.
Complex programs usually require more money to administer, leaving less for project assistance.
-------
Programs must be flexible and easy to use, allowing variable approaches to reach a common objective.
A web of local, state, and federal programs, policies, and regulations has grown that too often stifles rather
than helps states and municipalities make the best use of available resources. As a result, opportunities are
missed and jurisdictions are prevented from making the most logical and cost-effective use of their own
resources to advance their interests. An overly complex program may intimidate potential customers,
especially if the targets are small or rural businesses with little experience with public finance programs.
In planning a program, public officials must consider which agency or organization will have primary
responsibility for administering the program. Officials must consider expertise required, most appropriate
organizational structure, and the agency's or organization's relationship with potential customers. Many types
of organizations can be used with equal success.
State Economic or Community Development Departments
Every state development department or agency administers some type of financial-assistance
program-sometimes dozens of them. They are, therefore, veterans at implementing and monitoring public
and public-private financing initiatives. Many are ably staffed with experienced business development and
credit analysts. Because of constitutional or statutory restrictions, however, some agencies may be limited in
their experience in structuring targeted or creative finance programs tailored to certain constituencies or needs.
In addition, because state development agencies are so visible, with the governor held accountable-justifiably
or not-for their record of success, they are often reluctant to take on unusual projects or deals with a
perceived high risk.
Local Government Agencies
Numerous city and county departments of planning, economic development, or public works operate
local grant, loan, and other types of financial-assistance programs. Many have considerable experience in
program targeting and linking public to private resources. At the same time, many of these same agencies
often are hamstrung by limited staff capacity-both in terms of numbers and expertise-rand are not able to take
on additional program responsibilities.
State and Local Development Authorities
These organizations are authorized with the express mission of maintaining or expanding the state
or local economic base. Many are empowered to raise funds by issuing bonds. Development authority staff
usually have considerable expertise in financial packaging and public-private endeavors. Authorities can be
more bottom-line oriented than public agencies, however, and they may be less willing to work with marginally
viable businesses needing larger subsidies or partial grants. In fact, the nature of the financing author-
ity-which may mandate a minimum level of cost recovery-can preclude them from offering this type of help.
Quasi-Public Business Development Corporations and Economic Development Corporations
These entities are often certified by federal agencies or chartered by state governments to provide a
more flexible mechanism to deliver financial assistance. Some states have used them to circumvent their
constitutional limitations on providing financial help to private companies. Typically, development
corporations lend money to firms not able to borrow what they need from conventional lenders. Often they
augment private capital at favorable rates. Some development corporations make equity investments, rather
than loans, offering money in exchange for partial ownership in the project.
Business development corporations raise money through sales of stock. In this way, they spread the
risk among many investors that no single lender is willing to assume. Local development corporations operate
in a similar fashion; they are accountable to local government but are administratively independent. In either
situation, these public corporations, in theory, could expand their scope to include an UST component to help
companies that are creditworthy enough, or positioned to offer a sufficient return on an equity investment.
10
-------
State Regulatory Agencies
State departments of environmental protection that are familiar with the targeted customers also can
administer assistance programs. Generally, however, they do not have the expertise and organization to handle
or monitor the financial transactions. Also, possible or perceived conflicts between the agency's mission of
regulating, the goal of easing the burden of compliance, and the responsibility of managing a large fund may
cause some uneasiness among agency officials.
Any UST assistance program will require a great deal of coordination between the regulatory agency,
which is familiar with the potential problems and needs of tank owner/operators, and the economic
development agency, which is familiar with planning and implementing public-finance programs. Private
institutions, as discussed in the following section, also can play a significant role in providing capital, assessing
creditworthiness of an applicant, or even administering the entire program with limited government oversight.
One option pursued by some states with an UST assistance program is to establish a special board
or commission authorized to oversee the program. Such an organization could draw from the directors of the
relevant government agencies as well as private-sector representatives. For example, the Iowa UST board,
which is responsible for overseeing the state's UST loan-guarantee program (among other responsibilities),
consists of the directors of the departments of environment, commerce, and treasury and representatives of
the insurance and banking industries. It may not be practical to create a new entity solely to administer an
UST financial-assistance program unless it is given other UST- or financial-assistance-related responsibilities.
Another alternative is to hire a private company to administer the program under the direction or
supervision of a state agency. Iowa lawmakers authorized its UST board to hire a private company to manage
the UST insurance and loan guarantee programs rather than hire additional state employees. Employing a
private administrator allows for quicker start-up of the program since the state hires only one company with
the needed staff and experience, rather than several individual employees. Such a company may provide
expertise not easily available through state hiring channels and at state pay scales. A private administrator
also may be viewed as independent of any one interest-not solely the environmental or the economic
development agency-especially if supervised by an independent UST board or commission. Finally, because
the assistance programs may be temporary, the state can easily cancel the contract once the program expires.
A disadvantage of using a private administrator is that, the state may lose some degree of control over the
program.
Finally, states have an advantage if they already administer a compatible development-finance
program, which could be used as a model or expanded to include UST assistance. Such background makes
it easier to provide the assistance quickly, without long program development and startup time and can make
the program easier to sell to the legislature, businesses, and financial institutions.
E. Using Private Lending Institutions
Private institutions often are brought into the public-finance program to participate either directly
or in a supportive capacity. Banks participating directly could take applications, evaluate creditworthiness,
and make lending decisions. Their incentive would be the prospect of increased business. Sweeteners, such
as free advertising (through community program promotions or brochures, for example,) could also encourage
their involvement.
Institutions playing a supportive role in a public-finance program may undertake one or more of the
following loan-related tasks:
• take applications;
• advise businesses referred by public agencies;
11
-------
• do preliminary screening of applicants;
• perform loan underwriting (credit analysis, risk evaluation, and setting terms and conditions); and
• advise government agencies on the creditworthiness of an applicant
Depending on the nature of the finance program, they may also help with loan packaging and even
participate in the financing themselves. Governments can contract for bank services or can "swap" for them.
Linked deposit programs are based on the latter arrangement; agencies deposit their own funds in designated
banks and agree to take a lower rate of return in exchange for bank staff performing various loan analysis and
servicing functions for the program.
In either role, involvement of financial institutions can be structured to relieve government from the
need to staff up to administer a financing program. This is the principal advantage of this approach; bank
involvement in a financing program can prove to be the difference between program use and disuse for
staff-starved local governments, especially in small towns and rural areas. In addition, this type of
private-sector participation can enhance the credibility of the program in the eyes of potential beneficiaries,
who might be more comfortable in dealing with their local bank than a government agency.
However, private institutions that take a direct role-do the lending themselves~are hesitant to reach
out to marginal prospects or may not be willing to participate if the program is overly complex or
cumbersome. The banker's aversion to risk will permeate the program, even if safeguards (such as state
guarantee of repayment) are built in to protect the institutions. Bankers are particularly skittish in the wake
of the recent savings and loan crisis since regulators may scrutinize high-risk projects more closely, intensifying
banker's risk aversion.
The government trades off some degree of program control when it turns over program operation to
the private sector. For example, since the bank, not the government, decides who receives assistance, targeting
of specific sectors may not be easy. To ensure that the desired groups are reached, government agencies will
have to define eligible targets precisely and explicitly in law or regulations. Because of these factors, some
states have undertaken a dual approach when involving private lenders in public-finance program. In one
situation, the government could refer qualified prospects directly to the participating bank. In the case of
financially weaker companies, states may rely on private institutions for processing the paperwork or even
analyzing the company's creditworthiness, but offer the actual financing themselves.
When contemplating use of a private entity or even a quasi-public corporation for administering an
UST assistance program, states must face the issue of liability. Banks or other private financial institutions
may be reluctant to participate because as creditors they may incur unwanted liabilities, such as cleanup or
third-party damages, especially in the event of foreclosure. They may demand a special release from liability
requirements. Lender liability is a sensitive issue and is often misunderstood. In planning an UST assistance
program, this issue should be resolved early, possibly by including private entities in initial discussions on
program administration. In fact, if the state is contemplating using private institutions for any aspect of the
program, it is best to consult with them early. Too often programs are created with expectations of
private-sector involvement only to find private lenders unwilling to cooperate.
F. Measuring-Program Success
When elected officials or program staff speak of measuring a program's effectiveness or the relative
success or failure in achieving its mission, they are faced with the inevitable question of how to measure
success. Such performance assessment is a key pan of the program's decision-making and management
process. Measuring a program's level of success helps policy makers and administrators make informed
decisions about needed program modifications or changes in the level and type of support.
12
-------
These program operate in a political milieu and, therefore, measures of success involving public
programs and resources should not be made strictly from a dollars-and-cents perspective. Rather, governing
agencies must examine the overall impact on a community and be willing to incur costs and/or risks to realize
potential business and community benefits. Depending on the specific program design, benefits that might
be measured-in addition to whether the program is within budget limits-could include:
• number of businesses retained;
• number of jobs retained;
• amount of tax revenues maintained or added;
• amount of private investment attracted to publicly-assisted projects; or
• increase in the size or number of private loans made to target businesses.
Public officials must also bear in mind that the assumption of risk not only is acceptable, but is a vital
element of public finance programs. Reaching the businesses underserved by conventional lenders (the small,
high-risk, often rural concerns), requires the state to assume a greater level of risk than private lenders would
accept. This is not to say that public program managers should disregard conventional underwriting standards;
a firm's general creditworthiness and management capacity must be thoroughly assessed so that despite risks
higher than private institutions would accept, losses can be controlled. At the same time, public leaders must
recognize and accept the fact that implicit in the assumption of risk is the possibility of default. Thus, when
defaults do occur the entire program should not be jeopardized. Losses should be planned for and considered
acceptable costs.
Instead of relying on profits, the program's success should be defined and measured based on its goals
and intended outcome—what was it intended to accomplish, for whom, how much will be accomplished and
within what timeframe. But because these goals and expectations are largely established through a political
process, inflated promises are often made in the guise of program goals to secure the necessary votes.
Moreover, these goals may lack clarity and coherence and may even be—in practice—incompatible.
Nevertheless, an efficient program-measurement process is an important
component for both politicians and administrators; it helps them to answer the following questions:
• how well is the program managed;
• is the program doing what it was established to do;
• are realistic program goals achieved and why; and
• • what difference did the program make-in the targeted area, among designated participants, etc.
. A variety of external factors will also impact a programs success. Unfortunately, no consensus exists
on exactly what outside factors are appropriate to consider.
13
-------
14
-------
2. Public Finance Tools
The term economic development has been defined in various ways over the years, but basically it is the
process by which individuals and organizations- decide to, and then invest capital in projects in a given area.
The results are retained, expanded, or new industrial, commercial, or service enterprises, and new or retained
jobs. Across the country, federal agencies and state and local governments are becoming more involved in
meeting the challenges posed by economic change and increasing environmental sensitivity.
During the last 30 years, federal, state, and local officials have devised many methods, techniques, and
strategies to stimulate development activities. They have moved, especially in the last decade, beyond the mere
spending of more money. Now, programs and incentives may be very different in terms of targeted clientele,
size, and required outcomes. As a result, the level and terms of assistance often vary between states for similar
types of efforts.
As public-sector leaders work to craft effective financial-assistance programs targeted to UST-related
needs, they should study case examples and other analyses that might provide valuable lessons. They should
steer clear of a "cookbook" approach, however, and recognize that the principal element of success is
government responsiveness to the needs of both investors and business operators in the state and local
economy. This may involve mixing and matching of various tools to address different needs.
All state and federal economic development tools fall into one of two broad categories: financial and
nonfinancial assistance. The former, finance incentives, are the focus of this report. (The latter include
training and technical assistance initiatives, such as management counseling and marketing advice.) This
section describes 11 types of financing programs. For purposes of this discussion, they are grouped into two
categories. Six types seem particularly relevant for adaptation as UST initiatives—grants, loans, loan
guarantees, interest subsidies, development credit corporations, and tax abatements. The chart on the
following page summarizes their key features. All six are analyzed in some detail to explore the relative
advantages and disadvantages if incorporated into an UST assistance program. Examples of the programs in
practice also are briefly described. The other five-bond programs, equity financing, tax credits and deductions,
tax increment financing, and tax-free zones-have less general applicability, although they could prove quite
suitable given the right circumstances, .
A. Grants
Grants provide direct financial help and carry no repayment obligation. They are the most direct form
of assistance, and the most heavily subsidized. States offering grant programs expect the recipient to survive
and prosper as a result of the cash infusion, and maintain or expand their employment rosters and tax
liabilities. Because repayment is not required, this type of assistance can be costly and require states to
commit considerable resources continually. Using grants for UST-type programs may be complicated by legal
restraints in many states on giving direct grants to specific businesses for permanent capital improvements.
When funding private-sector initiatives, political leaders recognize the potential for abuse~or the
appearance of abuse-particularly in determining need and recipients. They are sensitive to charges of
favoritism in dealing with private companies. Therefore, grants usually are given to pay for related costs of
economic development, such as training, infrastructure improvements, or site preparation. In this manner,
they can be tools for supporting the development process and serve as catalysts in making other deals or
projects actually happen. • • . .
15
-------
JKey Factors to Consider in Formulating an UST Assistance Program
Type of
Assistance
Terms of
Assistance Purpose
Principal
Financial
Supporter
Effect on
Targeting
Grants
Loans
Loan
Guarantees
Interest
Subsidies
Few, if any condi-
tions placed on
assistance. Some
states may require
match.
Public money is
loaned for specific
purpose; repayment
expected. May
offer no or low
interest terms.
Public pledge to
cover private loans
made to riskier
businesses in the
event of default
Lower interest
rates, because of
direct state subsidy
or incentives to
private institutions.
Improves access to
capital and reduces
cost of capital.
Improves access to
capital and/or re-
duces cost of capi-
tal.
Reduces lenders
risk.
State taxpayers.
State taxpayers.
Banks.
Reduces capital
costs.
Banks
Allows greatest tar-
geting flexibility
and control.
Allows targeting
flexibility, with
careful program
planning.
Difficult, since gov-
ernment does not
decide who receives
loan that's guaran-
teed. Important to
have explicit eligi-
bility criteria.
Does not help
business on the
credit margin.
Required outcomes
(e.g., businesses
retained) can be
stipulated.
Business
Development
Corporations
Tax
Abatements
Private funds
offered to busines-
ses otherwise un-
able to obtain
loans.
Reduced or elimi-
nated taxes owed.
Increases access to
capital.
Improves business
cash flow.
Private-sector
members or
subscribers.
Local taxpayers.
State has little or
no control on tar-
geting.
Can be tied to spe-
cific industries,
activities, or areas.
16
-------
Key Factors to Consider in Formulating an UST Assistance Program
Program Funding Needs/ Administrative
Timing of Outlays Burden
Potential to Use
Private Financial
Institutions
Other
Comments
High per-project cost.
Requires continuous
funding.
Low administrative costs;
can be easily incor-
porated into existing
grant programs.
None.
Susceptible to abuse.
Best suited for mix-and-
match approaches.
One-time infusion. Pro-
grams can be made self-
sustaining; easily
expanded.
Can be costly and time
consuming, since each
loan must be carefully
evaluated.
Not practical, although
use as companion/sub-
ordinate loans can en-
courage private lender
participation.
Often administered by
state chartered agency or
corporation.
Reserve fund required to
cover default payouts as
needed. Fund can begin
small and increase as
program expands.
Private lenders shoulder
most of the administra-
tive burden; borrowers
absorb most costs.
Maximizes private sector
involvement and flexibil-
ity.
Neediest firms often fail
to qualify. Easy to ex-
pand program.
Continuous funding
required to provide sub-
sidies to banks.
Private lenders shoulder
most of the administra-
tive burden; borrowers
absorb most costs.
Maximizes private in-
volvement, increases
business's ability to take
on debt.
Subsidies can be pro-
vided for different
amounts and in different
forms (e.g., linked
deposit program). Does
not improve small busi-
ness's access to capital.
No public funds required
to capitalize; may be
linked to other pro-
grams.
Administered-entirely by
private corporation with
periodic oversight by
state regulators.
Private program subject
to state rules.
Can adopt more flexible
guidelines than state
agency.
Foregone tax revenues
for a specified time per-
iod (commonly 5 or 10
years).
Minimal, once
structured. Needs over-
sight if sliding scale
pegged to business
performance.
None.
Not cost-effective to gov-
ernment. Does not help
companies needing capi-
tal up .front
17
-------
To ensure program effectiveness, states must administer grant programs themselves. In this way, states
have direct control over how the funds are spent. This includes screening applications and monitoring
projects. Both tasks could be done jointly by state economic development and environmental protection
agencies. Administrative costs will include managing the fund, evaluating the applications, disbursing money,
and overseeing grantees. These costs will vary depending on the number of applicants, the complexity of
eligibility criteria, and the number of recipients. For recipients, the ease of participating in the program will
depend on the length of the application process and the amount of documentation required.
UST grant programs would eliminate the difficulties that small and economically disadvantage tank
owners face in obtaining low-cost financing, the biggest problem for state officials contemplating an UST
grant program would be how to define need and target program beneficiaries-obviously, every owner would
like free money to do necessary upgrades. Program size would be largely determined by state ability and
willingness to pay.
To stretch limited resources, states may decide to offer grants on a matching basis, requiring tank
owners to cover some of the costs. Alternatively, they may limit the type of activity eligible for grant funding
to those having the greatest potential benefit, such as leak detection equipment. When considering such
variations, though, state leaders will have to decide how to identify and serve tank owners who are unable to
meet even minimal matching requirements.
The advantages of a grant program are that the state (or the state in conjunction with local
governments) would decide which owners and operators should be helped, without regard to creditworthiness
judgments of private lenders. Grant programs allow states the greatest flexibility in targeting program
resources. They are the easiest way to reach the most economically needy owners. The disadvantages are the
high public cost per-project, and the fact that the funds are never recaptured. Far fewer owners and operators
can be helped with grants than with other types of financial assistance.
There are several ways to measure grant program performance, many based on ancillary benefits to
the community. The most common yardsticks are grant costs per job retained or added, businesses retained,
and tax revenue (sales and property) generated per project assisted.
Examples of Successful Grant Programs
More than half the states offer some kind of economic development grant program. Many of these
programs require companion private investment as a condition of receiving state grant funds. Missouri's
Development Action Grants (MODAGs) are patterned after the successful federal Urban Development Action
Grant (UDAG) program. MODAGs are awarded competitively to cities with less than 50,000 residents, which
use the proceeds to make low-interest loans for construction or renovation of buildings, machinery and
equipment, and for working capital. Indiana, Michigan, New York, New Jersey, and several other states offer
similar programs. In addition, federal Community Development Block Grant (CDBG) money distributed by
the Department of Housing and Urban Development (HUD) can be used in both large and small cities for
a variety of economic development purposes as long as projects meet HUD's broad eligibility criteria, which
include expanding economic opportunities and encouraging private investment. Virtually all CDBG recipients
have used a portion of their grant allocations for economic development projects.
B. Loans
Loans allow companies to borrow from states or the federal government either directly or through
local economic development agencies, authorities, or corporations. Loans are extensions of credit that require
businesses to repay the principal amount with a specified rate of interest by a predetermined date. Most states
have established loan programs; state agencies either extend the loans directly, or authorize state-chartered
corporations or organizations to implement the programs. State officials must address several process
considerations when structuring a loan program:
18
-------
• the nature of the decision-making process-who will make decisions, what form of analysis and
review will be used, how documentation will be verified, and the length of time required to
approve or disapprove a loan;
• application information requirements and how they may vary by type of project;
• variables that influence loan terms and conditions, such as creditworthiness, collateral
requirements, loan size, interest rates, time period money will be loaned, penalties, disbursements,
and others;
• how the loan is to be serviced—who will monitor the loan, accept payments, deal with
delinquencies, and related tasks; and
• reporting requirements to enable the agency to monitor the .business's progress in carrying out
the funded project.
Most states require collateral before issuing a loan so that if the business defaults, the state does not
lose its entire investment. Loans often are made at advantageous terms and below-market interest rates,
although federal Small Business Administration (SBA) loan programs-which in practice meet capital needs
of small business-can carry interest rates up to 2.5 points above the prime lending rate. Most programs
require a review of a business's financial status, including the qualifications of management; market potential
for the product; level of collateral to secure the debt; and projections of cash flow to pay the interest and loan
amount.
Loan programs often are pivotal in launching new or small businesses or firms engaged in speculative
undertakings such as new technology development; these companies usually lack access to affordable capital
from conventional lending sources. If states are willing to take the risk, they can use a direct loan program
to provide loans that commercial lenders would usually refuse to make; for example, such targets could include
small or financially shaky owners or operators, or projects needing only a small amount of money. Many state
programs offer low interest rates. Some forgive or defer loan repayments or interest charged if certain
thresholds-often linked to job opportunities-are reached. Most state loan programs currently in place finance
long-term fixed assets, such as machinery or buildings. Tanks and related capital improvements would make
excellent candidates for loan assistance. Loan programs can be structured in a variety of ways.
Revolving Loan Funds (RLFs)
Several states provide development loans through RLFs. These are pools of funds that can be
compiled from several sources, including federal and/or state funds and investments from private institutions.
RLFs gain an advantage by design, which is flexible and simple. The basic concept is straightforward. A state,
city, or designated development organization provides businesses with direct loans, companion loans, or other
financial assistance. An UST-related program, for example, would need investments related to tank system
modernization improvements. As the loans are repaid, the money is made available to other firms; in essence,
it revolves for new uses. The advantage of an RLF is that allows continual recycling of the original pool of
money. This process makes public-sector investments go further and provides the state or issuing agency with
a dependable, ongoing source of funds.
Subordinated Loans
In some situations, loans from public agencies are made as subordinated or secondary loans.
Essentially, they serve as companion loans to lending that the company obtains from a private lender. They
improve business creditworthiness by reducing private lenders' risks in two ways. First, they lower the amount
of capital that private financiers must invest in a single project. Second, subordinated loans give the private
lender first claim on assets in the event of a default by the borrower.
19
-------
Simply put, a secondary loan program would operate in this way. A station operator needing $100,000
for tank improvements may be able to borrow only $60,000 from his or her local bank; collateral requirements
and other factors may make the bank hesitate to commit a greater amount to the project. A state program
could fill this gap by lending the balance and taking what is known as a subordinated lending position. In the
case of default, the bank would have first claim on the collateral, up to the balance on the $60,000 loan;
anything left over could be used to redeem pan of the state loan. If there is no default, both the state and
the bank are repaid. By reducing the risk for the bank, the state has encouraged the investment needed to
make the tank improvements without having to finance the entire project itself.
Companion Loans
Some state programs attempt to reduce borrowing costs to companies by combining publicly
subsidized loans with conventional private-sector loans. The state program offers a portion of the loan at a
below-market rate. The private financier provides the balance at the prevailing loan rate, or whatever rate
the state and the lender agree upon. The combination of the two loans gives the company sufficient capital
for the project; the combination of interest rates results in a blended rate which is less costly to the borrower
for the entire amount than the prevailing rate. This blended rate can make an otherwise unaffordable deal
economically viable. It also reduces the state share of participation.
Program administration costs of loan programs vary. A few states have reached agreements with
private financial institutions to administer their programs, but others have had difficulty in finding a willing
private-sector participant States undertaking administration of their loan programs will have to make sure
that they have staff with adequate financial-analysis expertise if they are to control the risk of default. This
is an important consideration, because many of the applications they review will be from companies that have
been rejected by commercial lenders as too risky. In addition to the cost of credit analysis, states will have
to cover expenses related to loan servicing, receipt of repayments, and project monitoring.
Loan programs are used to maximize state resources. Repayments can be used as capital for future
loans; interest payments can be earmarked to cover program administrative costs. Earmarking state loan funds
as companion loans can invite private-sector participation and stretch state funds even further, a companion
loan program may also offer an opportunity to piggyback state program administration needs with comparable
activities that the private lender will perform.
Loan programs bring several other advantages. They could address tank owners' lack of access to
long-term financing; because the state typically would control the decision-making process, the programs could
address common problems that businesses face such as obtaining long-repayment periods, securing relatively
small amounts of capital, and overcoming inadequate credit records. This situation increases the likelihood.
that targeted owners and operators will get the assistance they need. To ensure that only firms with real
difficulties get state help, applicants could be required to show that they had been rejected by commercial
lenders, or able to secure only a portion of the needed project financing.
Loan programs also carry some disadvantages. Administrative costs for a direct loan program can
be high because of the need to conduct credit analyses. Typically, application processing costs can run from
several hundred to $1,000 per application-whether or not it is approved. Little savings are to be expected
by contracting this task out to a private firm. In addition, because state loan programs often serve as the last
resort for participating companies-those unable to secure financing elsewhere-the loan program, could face
a number of loan defaults. This will jdrive.up.program costs.
Defining the criteria for measuring success will in large part determine if a loan program is successful.
Too often state officials emphasize the number of loans repaid, effectively discouraging loan-processing staff
from taking any chances on marginal projects. A more appropriate set of evaluation factors would also
include: consideration of the number of companies kept in business and the number of jobs retained
(compared to the amount of assistance), the percentage of private capital, and the amount of tax revenue
generated. In essence, public officials should look at the total economic benefit to a community stemming
from loan program activity.
20
-------
Examples of Successful Loan Programs
Nearly all states have authorized one or more direct loan programs to address a variety of business
financing needs. Most programs are carried out by state government-sanctioned development authorities.
Loan programs are of special interest to small- and medium-sized companies because maximum loan amounts
are typically Si million or less. The source of loan funds may be state tax revenues or the proceeds from
general obligation bonds floated to capitalize the program. Direct loan programs are often used when a state
wishes to make a one-time budget appropriation to help small firms or a certain business sector. Usually, a
state program will provide less than 100 percent of the project costs, requiring a company to either inject some
of its own cash or secure a portion of the project financing from conventional lenders. The interest rate, loan
maturity, and maximum loan amount differ among states, and sometimes even within states for different
businesses.
Some 35 states operate loan programs specifically aimed at financing equipment and machinery
purchases. Illinois's Small Business Development Program offers long-term, fixed rate, low-interest loans of
up to 5750,000 for fixed-asset financing, particularly for buildings and equipment State loans are limited to
25 percent of the total project cost and must attract private financing. New York's Targeted Investment
Program (TIP) helps industrial and commercial firms in areas of proven business risk-especially in blighted
communities and areas of high unemployment. The Massachusetts Business Development Corporation
(MBDC) provides loans for small or medium-sized businesses that cannot obtain all financial requirements
from conventional sources. Financing for 100 percent of project costs is available. To stretch MBDC
resources, program loans often are joined with federal Small Business Administration (SBA) financing
resources offered through SBA's "development company" program, also known as the SBA Section 504
program. (In the 504 program, an SBA-certified development company guarantees 40 percent of the project
costs, and a private or non-federal lender; such as MBDC, covers most or all of the balance.) In these
situations, MBDC finances the capital needs of a business that are not covered by SBA assistance.
C. Loan Guarantees
Loan guarantees were devised to minimize the risks that often make private financial institutions
hesitant to lend to small businesses. They are the pledge of the state or federal government to cover most or
all of the outstanding balance of a loan made by a private lending institution in the event the borrower
defaults. Loan guarantees lower the risk of lending, thereby increasing the availability of capital and often
reducing the cost of borrowing. A loan guarantee program would make commercial lenders more likely to
offer loans to small operators and those whose fiscal health would ordinarily make lending to them too dicey.
Many banks, in fact, are eager to make guaranteed loans because the guarantee lowers what bank regulators
refer to as "risk ratios;" the guarantee strengthens the performance of a bank's loan portfolio in the eyes of
regulators because the guaranteed portion of the loan can not be subject to default or become—in banking
parlance~"nonperforming." Loan guarantees provide banks with a sought-after backstop.
In essence, loan guarantee programs serve as a risk "cushion" that encourages private lenders to make
loans to businesses that otherwise would not qualify for them. Because the loan is backed by the government
guarantee, banks are more easily persuaded to lower interest rates or collateral requirements. States find loan
guarantees more attractive than direct loans because they are less expensive: most guarantees are never
exercised.
Government agencies must establish a reserve fund that they can tap to repay defaulted loans.
Generally, this reserve should be about 10 to 20 percent of the outstanding loan balance during the early
stages of program life, depending on the expected level of risk built into the program design and the portion
of the loan the agency pledges to redeem (most programs guarantee between 75 and 95 percent of the loan
amount). Once a track record is established, the amount of the reserve can be adjusted. .For example, SBA,
which has operated loan guarantee programs for decades, is proposing to add only $91 million .in fiscal 1991
to support more than S3.8 billion in new loan guarantees—a reserve of less than 3 percent
21
-------
Guaranteed loans are generally used by states that prefer the private sector to provide funding or
share in the risk of extending credit. As with direct loans, guarantee programs are generally limited to small
and mid-sized companies. The fact that private lenders or the business owners themselves must bear some
of the risk-namely, part of the loan (ranging from 5 percent to 25 percent) that is not guaranteed-serves to
restrict the size of individual loans. Most loan guarantee programs are limited to firms that demonstrate
(through rejected loan applications) an inability to obtain private credit
Administrative procedures are the same for virtually all state guarantee programs: a private financial
institution evaluates the creditworthiness of the applicant and provides the loan funds and the state agency
or authority guarantees repayment of a substantial portion of the loan. By reducing or eliminating the lender's
risk of loss due to default, guarantee programs make capital more available or affordable to business owners.
Loan guarantees do not require as much staff expertise as direct loans because most or all of the loan
processing, risk assessment, and credit analysis is performed by the private lender. In implementing a
guarantee program, state leaders will want to define eligibility standards, an application review process, and
procedures to follow in the event a business defaults on its loan. Agency staff will want to estimate possible
financial liabilities and determine likely losses that might arise from the program. State officials will also want
to oversee the terms that banks are extending on the loans that the state is guaranteeing to make sure that
program requirements are met and program targets are reached.
Loan guarantee mechanisms can stretch available state resources even further than direct loans and
can serve as an effective vehicle for involving the private sector. At the same time, greater direct participation
by private lenders generally reduces the ability of state and local agencies to target program resources directly.
Private institutions will seek to reduce risk and liability and may not be sensitive to other program goals.
Guarantee programs have several advantages. For example, the presence of a loan guarantee may
prompt commercial lenders to extend the loan repayment terms, which makes the capital more affordable.
It also allows some flexibility as the state can reduce the percentage of the loan it is willing to guarantee,
thereby cutting its level of risk and potential for loss. For example, a state can limit the guarantee level to
75 percent or less, reducing its potential liability without changing any component of the program. Agencies
can even offer variable guarantees based on a businesses creditworthiness. In Iowa's UST assistance program,
for example, banks are allowed to charge a slightly higher rate of interest if the state only guarantees 50
percent of the loan. The bank then has an incentive to assume a slightly higher level of risk but is likely to
do so only if the business receiving the loan is financially sound.
By reducing its guarantee level the state may also reduce its program costs, since banks assuming 25
percent or more of the risk will probably be more conservative in evaluating a company's financial information
than if they had to take only 5 percent-or none~of the loan risk. This reduces the likelihood that the
program reserve will have to be tapped to redeem a defaulted loan. At the same time, more conservative bank
scrutiny means that fewer and fewer marginal or needy projects will be approved for funding. As private
lenders are asked to bear more risk, they are less likely to lend to firms with marginal fiscal qualifications.
This increases the possibility that the loan guarantee program will simply become a substitute for private
lending that would have occurred anyway. Thus, tank owners and operators most in need of a loan guarantee
may end up being the ones least likely to get it.
As they do with loan programs, states frequently will increase guarantee program authority
periodically; ihis^ctionjequires-aJarger-reserye.lund,.although it_may be A smaller fraction than originally
established'if the program demonstrates a successful history of paybacks. If default rates are low,
loan-guarantee programs will cost little over the long term. However, with each default, the cost of a
guarantee program increases.
In contemplating program performance, state ot
-------
Examples or Successful Loan Guarantee Programs
Nearly 20 states and the federal government provide loan guarantee programs to support lending to
private businesses. California's Small Business Loan Guarantee program guarantees up to 90 percent of the
total amount financed for short- and long-term loans for a variety of needs, up to 5350,000. Louisiana
Guaranteed Loan Program guarantees up to 75 percent of commercial loans to small and medium-sized
businesses, up to S500,000. The federal SBA offers two major loan guarantee programs-known as the Section
7 (a) and the Section 504 Certified Development Company (CDC) programs-and several small ones targeted
to specific constituencies such as veterans and the economically disadvantaged. The largest is the Section 7(a)
program which will make more than S3.9 billion in loan guarantees available in fiscal 1990 to small companies
on the risk margin. Loans involving Section 7(a) guarantees are made at prevailing market rates; loans for
machinery and equipment can be guaranteed for up to 15 years. The Section 504 program is more structurally
complex. Essentially, it guarantees up to 40 percent of project costs incurred for buildings, equipment,
machinery, and land. Up to $750,000 in proceeds can be guaranteed, for terms as long as 20 years. In both
programs, the effect of the guarantee is to reduce lender's risk which encourage them to make loans they
otherwise would avoid.
D. Interest Subsidies
The interest subsidy is an attractive alternative to direct loans that has emerged at the state level in
recent years. Basically, this incentive encourages private lenders to make loans to businesses at terms more
favorable than the borrower would otherwise expect, or where the borrower would otherwise not be able to
secure the loan at all. Interest subsidies-sometimes known as interest "buydowns"~make loans more
affordable to business borrowers by reducing their carrying charges. Frequently, rates are brought down
several points below the prevailing market rate. In exchange, the government sponsor usually stipulates
eligible uses or outcomes (such as type or location of investment, or number of jobs created) for the proceeds
of the subsidized loan.
Interest subsidies can take several forms:
• the state can pay banks a fixed number of interest-rate points, regardless of the terms of the loan;
• the state can cover any interest payments in excess of a specified interest rate; or
• the state can pay a fixed portion of the total interest payments.
In the first case, the state will know in advance exactly what its costs will be; it is the borrower who
will have to grapple with fluctuations in interest rates. If the state agrees to pay three interest points on any
loan taken for an UST-related project, the actual rate that the tank owner pays will depend on the market rate
at the time the loan is secured. For example, if the market rate is 10 percent, the owner will pay 7 percent;
if on a subsequent project the rate has risen to 12 percent, the owner wilf have to pay 9 percent. This version
is the most politically palatable because it allows the state to firmly fix its share of costs. However, it offers
the least help to needy companies in times of high interest rates; even with the subsidy, many cannot afford
to borrow.
In the second case, the state assumes the risk of changing interest rates; the rate paid by the tank
owner remains unchanged, but the level of subsidy provided by the state would fluctuate as interest rates
changed. In other words, if the state agrees to pay any interest costs in excess of 7 percent, the state will pay
three points on a project financed at 10 percent interest, but five points if interest rates rise to 12 percent
This option provides businesses with the best buffer against unstable interest rates, and increases the chance
that they will be able to pass the scrutiny of private lenders. Under this option, the state runs the greatest
risk of significantly, higher costs if market rates rise significantly. (Of course, the state could see its
commitment reduced if rates fall.) This type of interest subsidy requires sophisticated state staff expertise to
forecast state costs.
23
-------
The third type of interest subsidy is essentially a hybrid of the first two. Generally, the state agrees
to pay a reasonable portion of all interest costs, say 25 percent. In this case, both the state and the private
•business agree to absorb the fallout from fluctuations in the market interest rate.
Linked Deposit Programs
Occasionally, states use an indirect form of interest subsidy such as the linked deposit In this
instance, a state government deposits its funds in designated financial institutions and agrees to accept
lower-than-prevailing interest rates. In exchange, the institution agrees to make loans (usually, up to the
amount of the state deposits) to specific classes of borrowers at correspondingly reduced rates. States have
used linked deposits to channel capital to distressed areas and to boost projects considered important for
public purposes that private lending institutions otherwise might not consider.
As with loan guarantee programs, administrative responsibility for all types of interest subsidy
programs resides chiefly with the private lenders making the loans. Although the state would not need to do
its own credit analysis, it would have to track the interest subsidy fund to make sure that it has enough money
to meet its share of the necessary subsidy payments. State administrative tasks would include processing the
bank's applications for subsidies, arranging payments to participating banks, and monitoring projects to make
sure that the subsidy funds were spent on projects that met program objectives.
The chief advantage of this program is its ease of administration. Unlike loan or loan guarantee
programs, the state can rely totally on private lenders to conduct credit analyses, assess risks, and make the
loans. The state can articulate its intentions on program targets in the agreement signed with participating
lending institutions. The state simply sends payment for its share of the interest carrying costs.
On the other hand, interest subsidies do not improve a borrower's creditworthiness nor increase a
tank owner's access to capital Loans are approved or disapproved based on a business's credit standing; the
interest subsidy simply reduces the cost to the borrower. In effect the subsidy makes borrowing more
attractive, even in larger amounts. If the interest subsidy is not great enough, tank owners and operators have
no incentive to participate. An interest subsidy of only a point will save the borrower $1,000 or less on the
typical UST loan during the course of a year-not enough to encourage the desired investment.
Interest subsidy programs are best measured in terms of the amount of increased investment activity
they stimulate. For example, because businesses could obtain larger loans without paying more in interest,
they might invest in better protected tanks. Another way of evaluating their effectiveness is determining how
many loans were made affordable to borrowers because of reduced interest costs.
Examples of Successful Interest Subsidy Programs
The pioneering linked deposit program is Ohio's, initiated by the state treasurer in 1983. Known as
the Withrow program, it invests up to 12 percent of the state's investment portfolio in one- and two-year
certificates of deposit (CDs) at Ohio banks at terms up to 3 percent below, prevailing market rates. In return,
participating financial institutions holding these CDs lend amounts equivalent to their value at 3 percent below
the prevailing rate. Iowa's Community Economic Betterment Fund offers a subsidy to reduce the interest rate
on loans that promote economic development-essentially, the program buys-down the rate several interest
points. The Maryland Small Business Development Financing Authority provides interest subsidies of up to
4 percent on loans to finance buildings, equipment, and similar needs.
£. Business Development Corporations
An important source of investment capital, especially for small companies, is the publicly chartered
private development bank, usually called business development corporations (BDCs) or development credit
corporations. These organizations are privately operated but are authorized by state legislation and operate
24
-------
under state rules. Several states have chartered them as an alternative to direct loan and loan guarantee
programs, especially those with constitutional restrictions on using state funds to help private business.
BDCs generate most of their capital from private sources, such as banks, insurance companies, and
similar institutions, that purchase shares of stock, provide advantageous loans, or extend lines of credit to the
corporation. Some of the most recently authorized BDCs have used state-granted tax credits to attract
individual and business investments in the corporations. Often, participation in a BDC allows the financial
institution to participate in less risky companion or shared loans as part of a financing package assembled by
the BDC for a small business. In some cases, companies participate for public relations purposes or to
demonstrate social responsibility.
BDCs make credit available to businesses that cannot secure it from conventional lenders and tend
to be more flexible in their financing guidelines than state agencies. Interest rates are generally above prime,
meaning that the BDC program does little if anything to reduce the cost of capital; this minimizes its
usefulness for firms with cash-flow difficulties. Eligibility for assistance and the terms and conditions of the
loans vary among the different state BDCs. Some of the more restrictive corporations will consider only loan
requests referred by member or investor organizations willing to participate in the lending for the project.
Most BDC activity is directed to small companies that use the funding for construction and working capital.
The size of any BDC loan pool usually is limited by the size of the reserve fund maintained by the
corporation and the willingness of member financial institutions to make companion loans or otherwise
participate in project financing. BDCs rarely make individual loans greater than $500,000. Often, a
conventional lender will refer a marginal borrower to a BDC; the lender may then share the financing with
the BDC, taking a senior loan position (which means that it has first claim on collateral assets in the event
of a default).
The primary advantage of BDCs is that they can provide money for businesses that would otherwise
be considered too risky for conventional loans. BDCs are not subject to the same federal or state loan
performance regulations as traditional financing institutions and therefore may assume greater risks. BDCs
also make an attractive partner for conventional lenders to team up with to share financing of a project; the
BDC is often willing to assume a subordinate position. For example, a private financier could provide 60
percent of the financing for a $100,000 project, with the BDC supplying the remaining $40,000. Since the
private lender would have first claim on assets in the event of a default, this loan-sharing lessens the private
lender's risks, encouraging them to look more favorably at UST small business loans. It also could lessen
collateral requirements for prospective small business borrowers who may only have to secure S60.000 of a
$100,000 loan. Finally, because BDCs typically handle mostly high-risk loans, they have more experience in
working with such projects and can process them more efficiently than most conventional lending institutions.
The state assumes no risk in BDCs, although most monitor them to ensure compliance with state
rules. Some development officials have observed that BDCs tend to become conservative lenders, even though
they are chartered as risk-taking institutions, because of their need to attract participating banks or
stockholders.
Examples of Successful Business Development Corporations
More than 30 states have chartered BDCs, including large and small, and urban and rural
states-Connecticut, Pennsylvania, Rhode Island, Illinois, and Montana, among others. The Iowa Business
Development Credit Corporation, a consortium of financial and lending entities, provides loans of up to
$500,000 to businesses for fixed-asset financing. The Indiana Corporation for Innovation Development, which
focuses on emerging products and technology, raised $10 million in initial capital by offering private investors
a 30 percent credit against state taxes owed. The Louisiana Small Business Equity Corporation acts as a
financing intermediary, providing loans of up to $2 million to local development corporations and certified
development companies, which then re-lend the proceeds to small business.
25
-------
F. Tax Abatements
Tax abatements are reductions in, or forgiveness from, tax liabilities for a period of time. They are
most commonly given for property taxes, but they also are granted for sales, inventory, and equipment taxes.
Tax abatements stimulate new construction or building improvements in areas where property taxes or other
conditions discourage additional private investment
States must usually authorize local governments to offer tax abatement programs. Most state
legislation designates only certain areas, such as economically distressed communities or deteriorating
neighborhoods, as eligible for abatements. Abatements can be tied to specific industries or activities, company
size, or sales volume. Some states abate taxes on various types of machinery and equipment, such as
pollution-control equipment
Tax incentives such as abatements reduce a business or property owner's tax payment, which can leave
them with more cash to invest in site improvements or expansions. The cash-flow savings associated with tax
incentives also may help the business owner or developer obtain financing from private lenders. When
assessing a project, lenders examine projected revenues and operating expenses. The larger the excess of
revenues over expenses, the greater the company's ability to support debt.
Tax abatements are among the oldest economic development incentives. They can take several forms:
freezing the assessed value of land or buildings at some point in time (often, at a pre-development date);
reducing the tax rate for a certain period of time (commonly five or ten years); and exempting certain types
of property from taxes altogether. Some abatement programs feature sliding scales-full abatements are
granted initially, when business cash needs are the greatest; the level of abatement is reduced (and the amount
of tax owed increases) over time until the .firm pays its normal levy. Other programs link tax payments to
business income or profitability. Frequently, the percentage of abatement is tied to company performance in
areas such as increasing job opportunities or investment within the state.
Tax abatement programs, like most tax programs, are easy to implement once decisions on program
incentives and design have been made. Tax programs are usually administered by state or local revenue or
tax departments, or the treasurer's office.- Virtually every state operates some sort of tax abatement program.
Typically, tax abatement incentives are best suited for physical, "bricks-and-mortar" development
projects than job-generating activities. If used alone, tax abatements would only be useful to UST businesses
where cash-flow is a problem and would not help owners and operators who need money up front to make
needed improvements. Many small businesses need greater financial help than reduced tax liabilities.
Tax abatement programs must be carefully designed to target intended beneficiaries without offering
unnecessary subsidies. This is important, because tax abatement programs have numerous detractors. From
the government's standpoint, tax abatements mean a reduced stream of tax revenues. From a public policy
standpoint, considerable evidence exists that tax incentives are the least cost-effective form of subsidy that
governments can offer; one tax dollar a city forgoes generally results in less than a dollar in actual benefit to
a firm. (For example, while the business's local taxes decrease, the amount the company can deduct from
federal taxes also decreases, thereby increasing the business's federal tax liability.) Many economic
development officials and state and local governments complain about tax abatements, disputing their
effectiveness and stressing their economic inefficiencies; yet nearly all states offer them. The key advantage
of tax abatemems-is-that-they-give-local-governments-a -workable -incentive :that helps influence private
investment decisions.
Defining standards to measure the level of success of tax abatement programs in a way which reflects
their actual impact on business operations can be difficult Few revenue baselines exist against which to
measure changes in revenue attributable to the abatements. One important effect that can be documented
is the extent to which necessary UST improvements are made by recipients of the abatements.
26
-------
Examples of Successful Tax Abatement Programs
Tax abatement programs have been implemented for decades in hundreds of cities across the nation.
Ohio's program, authorized by its Impacted Cities Act, allows abatements for large and small-scale industrial,
commercial, and multi-family residential projects. Missouri's program allows local development corporations
to improve property. In addition, tax abatements have been included as incentives by nearly all of the 32 states
implementing "enterprise zone" economic development programs since 1980. Connecticut's enterprise zone
program permits a 7-year abatement on taxes attributable to property improvements. Kentucky's program
allows local governments added flexibility in granting tax abatements and other incentives for businesses within
designated zones.
G. Other Applicable Financing Tools
The remaining five programs will have less general applicability, although they could prove valuable
in specific circumstances. The first of these, bond financing, is less prominent since passage of the 1986 tax
act, which cut the number of eligible activities and added other restrictions. .Creative equity financing is a
"comer" in economic development circles, poised to assume a larger role in financing strategies as more
agencies gain expertise in promoting this type of program. The other programs examined are various tax
incentives, which offer many of the same opportunities and suffer from the same problems as tax abatements.
Bond Financing Programs
Bond financing programs help economic development projects in every state. They take several forms.
General Obligation (GO) Bonds
GO bonds are issued for a many types of activities-traditional public projects such as schools,
construction of infrastructure facilities such as roads and sewers, and others activities. They are also floated
to meet various financing needs. For example, states can issue GO bonds to provide funding for economic
development loan funds like those described earlier in this section. General obligation bonds are backed by
the "full faith and credit" of the issuing jurisdiction. In the event of a default, the government that sold them
would ultimately would be responsible for paying bondholders for the bonds and accumulated interest.
Because of the government backing, GO bonds can be issued easily with few restrictions on their use,
provided the sponsoring jurisdiction has a good credit rating. However, these bonds require voter approval
All types of programs and projects use GO bond proceeds.
Industrial development bonds (IDBs)
When speaking of bond financing for economic development purposes, officials and practitioners
usually are referring to IDBs. The bonds are authorized or issued by cities, public agencies, or development
authorities. They provide financing to help a private company acquire buildings, equipment, and the like for
an industrial project Because they are issued on behalf of private enterprises, they are commonly called
private purpose bonds. In legal parlance, they are "revenue bonds"; essentially, this means that the company
is responsible for repaying the debt If the company defaults, the bondholders, not the local taxpayers absorb
the loss.
IDBs are used for projects such as mass-transit facilities, privately- operated waste-disposal facilities,
and manufacturing projects. The interest paid on IDBs is not subject to federal or state taxation, so they can
be offered at lower-than-market rates. In essence, IDBs are a form of interest subsidy with the government
agreeing to forego some tax revenue to lower the interest rate required by investors.
27
-------
Pooled Bond Issuances
Some jurisdictions use pooled or umbrella bond issuances to offer financing to smaller projects.
These bonds are issued by states on behalf of a number of companies that individually would be too small to
qualify for a normal bond program. Several individual bond issues of $1 million or less are put together in
one package. Under most umbrella or pooled IDE programs, eligible loans are bundled as a package and
issued as part of one bond offering (typically a minimum of $8 to $10 million). Pooling reduces the risk to
the bond purchasers and enables small businesses to raise needed funds. Currently, umbrella bond programs
are operated in nearly half the states.
Equity Financing .
Equity financing programs try to make capital available to needy businesses rather'than lower its cost.
They promote development by investing funds in capital-poor but otherwise competitive companies. In
practice states make equity investments much like private investors: through its administering agency, the
state takes an ownership interest in a company in exchange for funds. The company is expected to repay the
loan as its income or profit increase. Equity is a riskier channel of investment for the state. If there are no
profits or the business folds, the state makes nothing or even loses its money. On the other hand, if the
company does well, the state can reap a substantial return.
Equity programs have proven most popular in high-growth industries offering the potential for
substantial return on investment, which is how this type of investment is justified politically. Since UST
projects rarely fit this economic profile, the practical use of equity financing programs for them is limited.
They can fill a niche in some cases, however. Equity programs are well suited to narrow targeting; for
example, to rural areas where station operations are pivotal to the health of the area economy.
ample,
Tax Credits and Deductions
Tax credits and deductions are provided against business income tax liability to encourage specific
economic behavior. A tax credit usually takes the form of a direct reduction in the amount of taxes owed by
a company. Tax credits are offsets to taxes due, and accordingly increase a company's cash-on-hand by
lowering the amount that has to be paid in taxes. In contrast, a tax deduction reduces a firm's taxable income,
meaning that the actual benefit to the business depends on its tax rate. Because a deduction is subtracted from
income before taxes, while a tax credit is subtracted from the taxes due, a deduction provides less of an
incentive than a tax credit of equal amount, but also costs less to the government in terms of foregone
revenue.
Like tax abatements, credits and deductions will not help the small tank owners and operators who
need mortey to make improvements. They can, however, improve cash flow so that the company can has a
better chance of qualifying for needed private financing to undertake the improvements. Tax credits and
deductions also are easily targeted to specific activities. They can be structured, for example, to encourage
tank upgrading; states could adopt tax incentives that give credits for certain portions of cleanup costs or
deductions for leak-detection systems.
Tax Increment Financing
Tax increment financing (TIP) uses the anticipated growth in property tax revenues generated by a
development project to finance public-sector investment for it TIP does not lower the amount of tax revenues
collected, nor does it impose special assessments on the project area. For example, a successful station now
pays 512,000 in taxes. The city or state determines that if the station were abandoned, it would only pay
55,000 in annual taxes. Under a TIP system, the city will use the $7,000 difference to finance long-term site
improvements that would otherwise not be financially viable.
Government agencies often use this method to encourage growth in large, multibusiness areas that
are underdeveloped or abandoned. Tax. increment financing for UST-related efforts would be most appropriate
28
-------
in encouraging-reuse and modernization of unused sites. This type of financing can be costly to administer
although some economies can be achieved if several sites are targeted.
Tax-Free Zones
Tax-free zones are targeted geographical areas, such as state enterprise zones, in which special
activities are allowed or incentives are offered that are not available outside of the zones. These include
investment tax credits and other tax benefits such as exemptions from incomes and property taxation. Some
states give preference to zone businesses when considering applicants for loan and grant programs.
In other cases, state and local governments designate certain areas to receive special public support.
For example, states use public funds to upgrade and prepare sites for development projects, adding utility
hookups, upgraded infrastructure, parking, and other physical improvements. Economic development agencies
also may lower site costs by selling publicly owned land and buildings to developers at less than market value,
or donating it outright.
Developing a new state tax-free zone program targeted to UST owners and operators will be
politically difficult if not impossible. However, it may be practical to add UST-related investments to approved
lists of eligible program activities, or increase tax benefits for UST projects to encourage investment activity.
In any event, state and local officials should explore whether station owners and operators doing business
within an existing enterprise zone could benefit from their location within a designated zone.
H. Combining Incentives for UST Initiatives
Each of the financing incentives described above can be used by itself as the basis for structuring an
UST program to promote tank modernization and upgrading. As indicated by the matrix on pages 16 and 17,
however, different types of incentives address different financing needs. Often, a business will have diverse
financial needs and require more than one type of incentive to secure necessary funds for improvements at
rates and terms for which it can both qualify and afford.
In many instances, state officials will want to encourage a mixing and matching of available financial
incentive programs to address a full range of needs. Sometimes, they might urge tank owners and operators
to tap into existing economic development finance programs; in other cases, state leaders will want to press
for the creation of new initiatives. Most of the 11 incentives described above are suitable for this type of
combination approach. .
• Grants can be combined -with loan guarantees and interest subsidies to fill financing gaps that
private lenders will not address.
• Low- or no-interest public loans can be offered as subordinate or companion loans to private
market-rate loans to result in an affordable financing rate for the total funding needed for a
project
• The combined financial impact of interest subsidies and tax abatements or credits can improve
a company's overall cash-flow position to allow it to take on a larger amount of debt, and thus
make a greater investment in tank improvements.
• Complementary state programs can be linked to federal financing programs, expanding the impact
and usefulness of both.
There are as many possible mix-and-match combinations as there are financing needs to be met For
example, an interest subsidy program will reduce the cost of capital, but will not minimize a lender's concern
about the project's level of risk if that also is a problem. Therefore, a loan guarantee may also be needed to
reduce the risk sufficiently to attract private capital. In other cases, a bank may have concerns about the
29
-------
amount of collateral that is offered, or the ability of station owner to meet loan payments. In these situations,
the state may offer a grant to accompany the private loan.
Sometimes, UST financing needs are best met by splitting a loan into two parts-one private, and one
state-subsidized-to make it affordable to the station owner. If a station owner needs $100,000 to upgrade but
prevailing private interest rates put payments beyond reach, the state could step in with a low-interest loan
program for half of the financing, so that the combined payments to the private lender and the state would
be affordable. In this case, if the station owner was offered a $50,000 state loan at 4 percent, he or she would
only need to borrow $50,000 at prevailing small business rates, approximately 14 percent -When the two
interest rates are blended together, the station owner in effect has received the $100,000 loan at 9 percent
interest This would reduce monthly payments on a ten-year loan by $270, or $32,400 over the life of the loan.
In considering various types of program incentives, state and local officials are likely to find that no
one type of incentive best fits the needs of a most station owners and operators. Therefore, several
complementary financing options might need to packaged together. This could mean a small grant program
to help the neediest businesses make necessary UST improvements; a loan guarantee program to attract
private capital to projects on the risk margin; and an interest subsidy program aimed at operators who are
cash-poor but otherwise bankable. Both Iowa and Ohio, for example, are considering adding a grant program
to target businesses not reached through the states' other UST financial assistance efforts.
State programs also can be combined with federal programs, notably SBA loan guarantees or HUD
Community Development Block Grant (CDBG) funds. State programs can be designed so they can serve as
matching funds for federal assistance, or address financing gaps left by federal programs. For example, SBA's
Section 504 program requires project financing to be arranged as follows:
Funding Source .
Private-sector/non-federal financier
SBA 504-backed security
Local injection/owner contribution
Amount
50%
40%
10%
For the typical $100,000 tank improvement project, the SBA 504 program could provide $40,000 in
assistance. SBA defines private sector as any non-federal source. Therefore, a state loan program could make
a $50,000 loan to cover the required private participation in the project. The 10 percent local injection must
take the form of cash or property, according to SBA regulations. However, states can further support the
project by giving a grant to the company to meet the local injection requirement.
30
-------
3. Conclusion
Since World War II, state and federal officials have created many programs to spark general economic
activity and investment as well as address specific development problems that have emerged. Many of these
initiatives failed to achieve their goals, however, particularly those that were overly ambitious or vaguely
defined. Unsuccessful programs tend to be those that:
• provide insufficient funding or resources to achieve program goals;
• experience changes in eligibility criteria from year to year, complicating planning efforts by
potential recipients;
• require excessive interagency coordination at either state or federal levels;
• designate a lead agency that has only a marginal stake in the program;
• use agency personnel that already have other full-time program responsibilities; or
• require a substantial amount of complex, long-range planning and program management without
providing enough support to program administrators that must bear those responsibilities.
There are no strict guidelines on how to pursue economic development The experiences of other
states and communities may be instructive, but each locale must identify its own gaps and move to fill them
in its own way. However, several factors improve a program's odds of survival. First, programs should be
clearly focused and feature objectives; they should be framed by a succinctly worded, easily understood mission.
Second, successful capital programs should provide a creative way to finance needed improvements,
tailoring incentives and terms of assistance to the needs and capacity of the targeted business. To the extent
possible, private-sector participation should be encouraged. Most publicly sponsored programs simply cannot
succeed without involvement and cooperation from banks, other financial institutions, and the business sector.
Programs also- must be easy to plan and administer. Local banks, government agencies, and potential
recipients must understand how to participate.
Finally, flexibility is essential. The development-finance process-especially in new arenas such as
USTs-is characterized by shifting arrangements, unexpected opportunities, a changing cast of players, and
changing relationships between them. Program managers must be able to respond quickly and effectively to
the changing economic development climate; programs mired in rigid rules are usually doomed to failure.
Government agencies with experience in administering assistance programs and those familiar with
the needs of the targeted beneficiaries can be an important resource to lawmakers in crafting new programs.
Agencies can help identify key issues and needs, define opportunities and goals, and devise strategies and
programs to address all of these.
In the final analysis, the success of a public finance program is defined by its initial goals. If the
intention is to preserve small, rural businesses, then one measure of success will be if enough of these
businesses continue to operate. However, success has many routes. This paper outlines some of the tools to
select from and factors to consider that will help achieve success.
31
-------
Appendix A
Examples of State UST Assistance Programs
This appendix examines the underground storage tank assistance programs of two states: Iowa and
Ohio. These programs include many of the options that states can use to help underground storage tank
owner/operators.
• *
Iowa's Loan Guarantee Program
Concerns about the adverse impact of new federal tank requirements on the state's farming
communities spurred Iowa legislators to consider ways to assist small tank owner/operators. The state
estimated that as many as one-third of Iowa's gasoline stations would close as a result of new federal
requirements Losses would be concentrated in rural communities, potentially devastating the small farms
already stressed by the farm depression of the 1980s. Lawmakers also sought to protect groundwater, an
important natural resource given Iowa's dependence on fanning and large number of shallow wells.
In 1989 the legislature overwhelmingly voted for House File 447, which is designed to address both
the rural economic and environmental issues raised by new federal tank rules. The new law contains, among
other elements, an UST loan-guarantee program. The law encourages banks to loan money to small, high-risk
businesses for the purpose of improving or replacing tank systems (including pipes and monitoring equipment)
to meet new federal standards. As incentive to the banks, the state guarantees to repay up to 90 percent of
the loan amount if the small business defaults. Banks also are protected for liabilities associated with the loan
by receiving financial responsibility coverage as part of the state insurance program.
Lawmakers considered-several forms of assistance, including direct loans. They settled on a
loan-guarantee program primarily because it allows the state to stretch funds further than direct loan or grant
programs. Another advantage of loan-guarantee programs is the involvement of the private sector which
minimizes the need for increased state bureaucracy.
The goal of the program is to help small tank owner/operators in rural areas, especially those that
are the sole source for a community's gasoline and heating fuel. The law defines specific requirements as to
what business may be eligible for assistance. A business must meet the following criteria: own no more than
two locations and no more than twelve tanks; possess a net worth no greater than $400,000 and show a
previous rejection by at least two financial institutions. In applying for a loan, the applicant must complete
a financial statement, which is verified by past income tax reports.
The law specifically targets small businesses that are the sole source of fuel for a community. Local
governments are permitted to offer a property tax credit to small businesses that own or operate underground
tanks in order to protect public drinking water supplies, preserve business and industry within a community,
maintain convenient.access-to gas .stations, or.other public purposes. The business may use the credit to
improve existing tanks or install new tanks only.
A second allowance allows the state to give sole-source businesses priority for loan-guarantee
assistance if needed. Thus, the state will give priority to sole-source businesses in paying off defaulted loans.
This issue will arise only if the funds for a given year are not sufficient to cover all defaults, in which case
payments may be delayed on other defaulted loans. Banks thus have added assurance that sole-source loans,
even if slightly riskier than others, will be repaid first
32
-------
. The vast scope of the new law (which also creates a fund for cleanup and insurance), made it
impossible to settle on one state agency to administer the program. The insurance commission supported the
bill actively, but the program also required the participation of the Department of Natural Resources, which
was responsible for implementing the new federal technical requirements, the state treasury, and the Iowa
Finance Authority, a quasi-public/private agency that issues state-backed bonds. Legislators also were wary
of increasing the size of the state bureaucracy when the program will end in ten years when all tank
owner/operators must meet federal standards or close. To accommodate all responsible agency interests, the
legislature created a five-member UST Board to supervise the program. Board members include the director
of the Department of Natural Resources, the state treasurer, the commissioner of insurance, and two private
representatives with experience in financial markets and/or insurance.
The board's primary task is supervising the program; it hired a private consultant, Williams and
Company, to run it day to day. For the legislature, the advantages of a private contractor conducting tine daily
administration include the company's expertise in insurance, banking, and environmental regulation and the
fact that a private contract could be canceled when the program expires. The legislature's goal of privatizing
the insurance function of the program at some point is advanced by building necessary experience and capacity
within the private sector. Legislators believed that a supervisory board with diverse interests and a private
administrator would provide the program with efficient management without permanently increasing the size
of state government.
Local banks are responsible for issuing the loans after approval by the board. Banks have some
flexibility in determining the terms and conditions of the loan within state guidelines, depending on the
creditworthiness of the business. For example, if the bank is willing to accept a 50 percent rather than a 90
percent guarantee, the bank can charge a slightly higher interest rate. In this transaction, the bank assumes
a greater risk (it may lose half of the loan amount), but benefits from the higher interest revenue. No limits
are placed on loan amounts, which can be used to pay the costs of improving or replacing tanks, pipes, and
monitoring equipment as well as the owner's "copayment" portion of cleanup (the owner's 25 percent share
of cleanup costs, or a minimum of $5,000).
i
The board expects that 7 to 12 percent of the businesses will default based on the federal Small
Business Administration's default rate for small businesses. Defaults are paid from a loan loss reserve account
which is part of the trust fund established by the legislature. The trust fund is supported largely by an
environmental protection charge (EPC) assessed against the volume of petroleum presumed to be lost into
the environment through releases and evaporation. (The state has a constitutional provision that any direct,
per-gallon gasoline tax must be used for road-related expenditures.) The EPC is to generate $12 million per
year. To provide initial capital for the trust fund, the state will issue revenue bonds which will be repaid by
the EPC. .
After one year with the program, the state expects to seek adjustments in the law. Eligibility criteria
were changed in April 1990 to widen the number of businesses that could benefit from the program. Another
problem that has surfaced is that small, rural banks, which are the primary source of loans for the small gas
stations, lack experience with loan guarantee programs and may be reluctant to participate. To correct this,
a proposal to consider adding direct loans, when no bank is available for a loan guarantee, will likely be
presented to the board.
The challenge for the board is to ensure that the assistance is channelled to businesses with critical
needs without exceeding estimated default rates. Without the assistance program, one-third of the gasoline
stations were projected to close. With the loan-guarantee program, the state hopes to keep the number of
business closings to less than 15 percent.
Ohio's Linked Deposit Program
In 1989, Ohio lawmakers debated approaches to structuring the state's underground storage tank
program to meet federal requirements. They realized that small businesses would be financially strapped to
33
-------
comply with the federal insurance requirements alone. Thus, these businesses would have no funds remaining-
to improve their tank systems.
Under pressure from the oil industry to help small businesses in meeting federal technical
requirements, the Ohio legislature included a financial-assistance package in its comprehensive underground
sSe^rdTprogram. Ba^ed on the recommendation of the state treasurer, lawmakers specifically selected
a linked deposit type of interest subsidy to help UST owner/operators.
Under the linked deposit program (LDP), tank owner/operators apply to a local bank for a loan to
cover replacement or upgrading cits. The bank may either approve or du*ppr™ ££j^°££
applicant creditworthiness. If approved, the bank may then apply £ the sf^ea^^^°5m^"t£
the Petroleum Underground Storage Tank Release Compensation Board) for a inked deposit After the
boardApproves a bank's application, it directs the state treasurer to deposit a low-interest Certificate of
SSositP(CD^th that bank! In exchange for paying lower interest to the state, the bank agrees to reduce
the interest charged on the loan to the tank owner/operator.
Legislators, the state treasurer, and industry supported the LDP in large part because the state had
used such programs successfully for many targeted businesses (for example, dairy fanners). The LDP offered
several advances over other forms of assistance for UST activities. The same funds to be used for the LDP
m^t also ~ver cleanup and insurance, so the state wanted a safe, low-cost way of helping small businesses.
Because the money is invested in CDs, the state has no risk of losing its investment The primary cost to the
state is forgone imeresl revenues that it would have received on a regular CD However, over the long term,
the loss in interest income should be replaced by tax revenue from more profitabte businesses and retained
emplojLent For past LDPs, the state Treasurer has estimated that $3 is returned to the state in increased
tax revenues and reduced unemployment and assistance costs for every dollar invested.
The LDP lowers the cost of borrowing for small businesses, making it more cost-effective to borrow
or encouraging them to borrow more money, for example to undertake more thorough tank improvements.
However, an LDP does not help marginal businesses that would not otherwise be eligible for a loan. To
change for this situation, the legislature specified that banks give priority to the economic needs of thearea
in which owners' tanks are located. In practice, this may mean that, all other things being equal, the board
may be more willing to participate in a linked deposit on a loan to a business in an economically distressed
area. This emphasis is likely to be an issue in years that money for the LDP is limited.
The statute specified that only loans to businesses that own six tanks or less are eligible for the LDP.
This threshold-was determined from information provided by industry and the Ohio Fire Marshal s office (lead
state agency for USTs) that small tank owner/operators in Ohio typically owned one or two stationswith two
to four tanks per station. Legislators also considered restrictions on eligibility based on income. They were
concerned that even large companies (for example an airline) might only own six tanks and would thus be
elieible for assistance. At the time the legislation was going through, however, figures on the appropriate
income threshold were difficult to identify. As a result, lawmakers left it to the board to make the appropriate
cutoff. .
Other details also were deliberately omitted from the statute, such as the procedures for banks to
apply for a linked deposit. Instead, the board was given responsibility for issuing rules governing
administration of the program.
Although the state treasurer had experience with administering LDPs, the UST program was assigned
to the board to manage. Unlike past LDPs that were funded with state money, this one uses funds paid by
the petroleum industry through fees on underground tanks. The industry was more comfortable knowing that
their money would be handled by an independent entity whose primary interest was to manage the fund.
The board consists of nine members appointed by the governor and confirmed by the state Senate.
Only five can belong to the same political party. Members must include representatives of petroleum refiners,
petroleum marketers, retail petroleum dealers, and local government Two must represent businesses that own
34
-------
petroleum tanks, but are not primarily engaged in selling petroleum; two must be professional engineers with
experience in geology or environmental engineering and not associated with petroleum industry; and one must
have experience in casualty and fire or pollution liability insurance. The state treasurer and directors of the
Ohio Commerce Department and Ohio Environmental Protection Agency are nonvoting members of the
board.
The state treasurer is the custodian for the fund, but all other aspects of its management are the
responsibility of the board. The board also has the authority to raise additional revenue, if needed, by issuing
revenue bonds. Revenue bonds combine neatly with the LDP, since as the CDs mature, they can be used to
retire the bond, debt The board also has authority to raise the tank fee after one year. The state treasurer
estimates that the initial tank fee will generate approximately S20 to S24 million each year. Funds must cover
cleanup costs, insurance claims, the LDP, and administrative costs of the board. Despite urgings by some state
officials, no minimum amount of funds were set aside for the LDP; the board must determine the appropriate
allocation based on funds remaining after cleanup and insurance claims are paid.
In.the future, the state may consider adding a grant program to the UST financial-assistance package
to aid some of the marginally profitable businesses that are not helped by the LDP. The advantage of a grant
program over the LDP is that the state can have total control and flexibility in targeting businesses. For
example, they could focus assistance solely on stations with older tanks and located in economically distressed'
areas.
35
-------
------- |