E = 1
Wednesday
November 27, 1996
Part II
Environmental
Protection Agency
40 CFR Part 258
Financial Assurance Mechanisms for
Local Government Owners and Operators
of Municipal Solid Waste Landfill
Facilities; Final Rule
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60328 Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 258
[FRL-S654-3]
RIN 2050-AD04
Financial Assurance Mechanisms for
Local Government Owners and
Operators of Municipal Solid Waste
Landfill Facilities
AGENCY: Environmental Protection
Agency (EPA).
ACTION: Final rule.
SUMMARY: As part of the President's
regulatory reform initiative, the
Environmental Protection Agency (EPA)
is amending the financial assurance
provisions of the Municipal Solid Waste
Landfill Criteria, under subtitle D of the
Resource Conservation and Recovery
Act. The financial assurance provisions
require owners and operators of
municipal solid waste landfills
(MSWLFs) to demonstrate that adequate
funds will be readily available for die
costs of closure, post-closure care, and
corrective action for known releases
associated with their facilities. The
existing regulations specify several
mechanisms that owners and operators
may use to make that demonstration.
Today's rule increases the flexibility
available to owners and operators by
adding two mechanisms to those
currently available. The additional
mechanisms, a financial test for use by
local government owners and operators,
and a provision for local governments
that wish to guarantee the costs for an
owner or operator, are designed to be
self-implementing. Use of die financial
test provided in this rule allows a local
government to use its financial strengdi
to avoid incurring the expenses
associated with the use of a third-parry
financial instrument. Demonstrating
that the costs of closure, post-closure
care, and corrective action for known
releases are available protects the
environment by assuring that landfills
will be properly managed at the end of
site life when revenues are no longer
being generated and physical structures
may begin to break down.
DATES: The effective date for this final
rule is April 9, 1997. The compliance
date for MSWLF's is April 9, 1997,
except for small, dry or remote landfills
which have until October 9, 1997 to
comply.
ADDRESSES: Supporting materials are
available for viewing in the RCRA
Information Center (RIC), located at
Crystal Gateway I, first Floor, 1235
Jefferson Davis Highway, Arlington, VA.
The Docket Identification Number is F-
96-LGFF-FFFFF. The RIC is open from
9 a.m. to 4 p.m., Monday through
Friday, excluding Federal holidays. To
review docket materials, it is
recommended that die public make an
appointment by calling 703 603-9230.
The public may copy a maximum of 100
pages from any regulatory docket at no
charge. Additional copies cost $.15/
page. The index and some supporting
material is available electronically. See
the Supplementary Information section
for information on accessing tiiem.
FOR FURTHER INFORMATION CONTACT: The
RCRA Hodine toll free at (800) 424-
9346 or TDD 800 553-7672 (hearing
impaired). In the Washington, D.C.
metropolitan area, call 703 412-9810 or
TDD 703 412-3323; or George Garland,
Office of Solid Waste (5306W), U.S.
Environmental Protection Agency, 401
M Street SW, Washington, DC 20460 at
(703) 308-7272.
SUPPLEMENTARY INFORMATION: The index
and the Comment Response Document
are available on the Internet. Follow
these instructions to access die
information electronically:
WWW: http//www.epa.gov/epaoswer
Gopher: gopher.epa.gov
Dial-up: 919 558-0335
If you are using the gopher or direct
dialup method, once you are connected
to the EPA Public Access Server, look
for this report in the directory EPA
Offices and Regions/Office of Solid
Waste and Emergency Response
(OSWER)/Office of Solid Waste (RCRA).
FTP: ftp.epa.gov
Login: anonymous
Password: your internet address
Files are located in /pub/gopher/
OSWRCRA.
Preamble Outline
I. Authority
II. Background
III. Summary of Rule
A. Local Government Financial Test
1. Financial Component
a. Bond rating requirement
b. Financial ratio alternative to the bond
rating requirement
c. Compliance with GAAP
d. Operating Deficit Limit
e. Adverse or Qualified Auditor's Opinion
2. Public Notice Component
3. Recordkeeping and Reporting
Component
4. Calculation Of Costs To Be Assured
B. Local Government Guarantee
C. Discounting
D. Effective Date
IV. Responses to Comments and Analysis of
Issues
V. Economic and Regulatory Impacts
A. Executive Order 12866
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
D. Unfunded Mandates Reform Act
E. Submission to Congress and the General
Accounting Office
I. Authority
These amendments to Tide 40, part
258, of the Code of Federal Regulations
are promulgated under the authority of
sections 1008, 4004, and 4010 of the
Resource Conservation and Recovery
Act (RCRA), as amended, 42 U.S.C.
6907, 6944, and 6949a.
II. Background
The Agency proposed revised criteria
for municipal solid waste landfills
(MSWLFs), including financial
assurance requirements, on August 30,
1988 (see 53 FR 33314) pursuant to the
authority listed above. The purpose of
the financial assurance requirements is
to'assure tiiat adequate funds will be
readily available to cover the costs of
closure, post-closure care, and
corrective action associated with
MSWLFs.
In the August 30, 1988 proposal,
rather than proposing specific financial
assurance mechanisms, the Agency
proposed a financial assurance
performance standard. The Agency
solicited public comment on diis
performance standard approach and, at
the same time, requested comment on
whether the Agency should develop
financial test mechanisms for use by
local governments and corporations. In
response to comments on the August
1988 proposal, die Agency added
several specific financial mechanisms to
the financial assurance performance
standard of §258.74 in promulgating the
October 9, 1991 final rule on MSWLF
criteria (56 FR 50978). That provision
allows approved States to use any State-
approved mechanism that meets that
performance standard.
Commenters on the August 30, 1988
proposal also supported the
development of financial tests for local
governments and for corporations to
demonstrate that they meet the financial
assurance performance standard,
without the need to produce a third-
party instrument to assure that the
obligations associated with their landfill
will be met.1 The Agency agreed with
commenters and, in the October 9, 1991
preamble, announced its intention to
develop botii a local government and
corporate financial test in advance of
the effective date of the financial
assurance provisions.
On April 7, 1995, the Agency delayed
the date by which MSWLFs must
comply with RCRA subtitle D financial
1 For a description of the third-party instruments
available to MSWLF owners and operators, see 56
FR 50978.
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Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations 60329
assurance requirements until April 9,
1997 (see 60 FR 17649) (remote, very
small landfills as defined at 40 CFR
258.1(0(1) must comply by October 9,
1997). EPA extended the compliance
date to provide adequate time to
promulgate financial tests for local
governments and for corporations before
the financial assurance provisions take
effect The delayed effective date also
was intended to provide owners and
operators sufficient time to determine
whether they satisfy the applicable
financial test criteria for all of the
obligations associated with their
facilities, and to obtain a guarantor or an
alternate instrument, if necessary. The
Agency proposed a local government
financial test and a corporate financial
test on December 27,1993 (see 58 FR
68353) and October 12,1994 (see 59 FR
51523), respectively. The Agency
expects to promulgate the final
corporate test in the spring of 1997.
III. Summary of Rule
A. Local Government Financial Test
Today's rule allows local government
owners and operators of MSWLFs that
meet certain financial, public notice,
and recordkeeping and reporting
requirements to use a financial test to
demonstrate financial assurance for
MSWLF closure, post-closure and
corrective action costs up to a specified
maximum limit. The financial test
allows a local government to avoid
incurring the expenses associated with
demonstrating financial assurance
through the use of third-party financial
instruments, such as a trust fund, letter
of credit or insurance policy. Under this
approach, a local government must
demonstrate that it is capable of meeting
its financial obligations at its MSWLF
through "self-insurance".
1. Financial Component
A local government must qualify to
use the financial test by satisfying either
the bond rating provision or the
financial ratio alternative. These
provisions measure a local government's
current financial condition and, thereby,
indicate its ability to pay for closure,
post-closure and corrective action costs.
(a) Bond Rating Requirement
The financial test's bond rating
provision requires a local government to
have a current investment grade bond
rating (i.e., Aaa, Aa, A, or Baa, as issued
by Moody's, or AAA, AA, A, or BBB, as
issued by Standard and Poor's) on all
outstanding general obligation bonds.
Today's rule provides that a local
government with outstanding general
obligation bonds that do not meet die
bond rating requirement is not eligible
to use the financial test.
(b) Financial Ratio Alternative to the
Bond Rating Requirement
A local government that does not have
any outstanding general obligation
bonds, or that only has unrated general
obligation bonds, may qualify to use the
financial test if it satisfies both a
liquidity ratio and a debt service ratio.
(c) Compliance with GAAP
A local government that uses the
financial ratio alternative to qualify for
the financial test must determine
whether it satisfies the financial ratios
on the basis of a financial statement
prepared in accordance with Generally
Accepted Accounting Principles
(GAAP) for governments.
(d) Operating Deficit Limit
Notwithstanding whether a local
government meets the bond rating
requirement or the financial ratio
alternative, a local government is
disqualified from using the financial test
if its financial statements prepared in
accordance with GAAP show an
operating deficit equal to five percent or
more of its total annual revenue for each
of the past two years.
(e) Adverse or Qualified Auditor's
Opinion
A local government is also
disqualified from using the financial test
if an audit of its most recent financial
statement (prepared in accordance with
GAAP) receives an adverse opinion,
disclaimer of opinion, or other qualified
opinion.
2. Public Notice Component
A local government must disclose in
its annual budget or financial report the
estimated costs of its closure, post-
closure and corrective action
obligations, including the years when
such costs are expected to be incurred.
Closure, post-closure, and corrective
action costs that are to be incurred
during a local government's current
budget period must be included as line
items in that budget; those costs that are
to be incurred in future budget periods
need only be disclosed in a
supplemental section to a local
government's budget or financial report.
3. Recordkeeping and Reporting
Component
A local government must review its
financial situation every year to
determine if it satisfies the requirements
of the financial test and is still eligible
to use the financial test. If a local
government that is using the financial
test determines that it no longer meets
the financial test, then it must obtain
alternate financial assurance within 210
days of the close of its fiscal year.
If a local government meets the test's
financial requirements, it must also
satisfy certain public notice and
recordkeeping and reporting
requirements to demonstrate financial
assurance for MSWLF closure, post-
closure and corrective action costs. A
local government must also place in a
MSWLF's operating record:
(1) A letter from the local
government's chief financial officer that
certifies that the local government
satisfies the requirements of the
financial test for those costs for which
financial assurance is being
demonstrated through the financial test,
(2) A local government's
independently audited year-end
financial statement prepared in
accordance with GAAP,
(3) The opinion prepared by the
auditor of the local government's year-
end financial statement, and
(4) An evaluation by the local
government's auditor or by the
appropriate state agency that the
information in the chief financial
officer's letter to the operating record is
consistent with the local government's
audited year-end financial statement.
4. Calculation of Costs to be Assured
The financial test limits the amount of
closure, post-closure and corrective
action costs for which a local
government may demonstrate financial
assurance through use of the test, in
proportion to a local government's
financial capacity as represented by its
annual revenues. A local government
may only use the financial test to
demonstrate financial assurance for the
costs of its total environmental
obligations up to a maximum amount
that does not exceed 43 percent of the
local government's total annual
revenues (see discussion below of
Calculation of Costs to be Assured,
Section IV. A. 4).
B. Local Government Guarantee
Today's rule allows local governments
to guarantee the closure, post-closure
and corrective action costs of other
MSWLF owners and operators through
the use of the financial test.
Furthermore, local governments may
combine financial mechanisms and use
a financial test or guarantee to cover a
portion of the total costs of closure,
post-closure care and corrective action,
while the remaining costs are covered
by an alternative financial mechanism.
However, financial mechanisms that
guarantee performance of work, instead
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60330 Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations
of payment of costs, cannot be
combined with other instruments.
C. Discounting
Under today's rule, State Directors
may allow discounting at an essentially
risk free rate of interest for closure, post-
closure care, and corrective action cost
estimates under certain conditions as
described later in this preamble.
D. Effective Date
Today's rule allows State Directors to
waive the financial assurance
requirements for up to one year until
April 9, 1998 for good cause if an owner
or operator demonstrates to the
Director's satisfaction that the April 9,
1997 effective date does not provide
sufficient time to comply with these
requirements and that such a waiver
will not adversely affect human health
and the environment.
IV. Response to Comments and
Analysis of Issues
Forty commenters, primarily States,
local governments, and their
representative associations, commented
on the proposed local government
financial test. A compilation of all
public comments and the Agency's
responses is available in the Docket.
(See Comment Response Document for
Proposed Rule: Financial Assurance
Mechanisms for Local Government
Owners and Operators of Municipal
Solid Waste Landfill Facilities (40 CFR
Part 258, Docket F-93-LGFP-FFFFF).)
A. Local Government Financial Test
The Proposed Local Government
Financial Test included several
components: Financial, public notice,
recordkeeping and reporting, and a
limitation on costs to be ensured by the
test. (See Comment Response
Document, Sections 3.1, 3.2, and 3.3.)
Comment: Several commenters were
concerned that the financial test is not
stringent enough and would not
guarantee that the necessary funds
would be available to conduct closure
and post-closure care activities. Some
commenters further argued that, to the
extent that the financial test does not
guarantee the availability of funds, local
governments using the financial test
would be in violation of the financial
assurance requirements set out at 40
CFR 258.71(b) and 258.72(b) that
MSWLF owners and operators provide
continuous coverage of the costs of
closure and post-closure care.
Response: EPA is adopting the local
government financial test because it
believes some local governments
possess sufficient financial capacity and
fiscal responsibility to satisfy the
objectives of financial responsibility
without the use of a third-party
mechanism. The test's financial ratios
and bond rating criterion are intended
to ensure that a local government is
financially capable of meeting its
assured obligations. The public notice
requirement ensures that the local
governments using the test are
committed to planning for the assured
obligations and meeting them in a
timely manner. As discussed in greater
detail below, EPA believes that a local
government tiiat meets the financial,
public notice, and recordkeeping and
reporting requirements of the financial
test will be able to fund the assured
MSWLF closure, post-closure care, or
corrective action obligations in a timely
manner. The purpose of the test is not
to predict whether a local government
will go bankrupt but rather to indicate
whether it will have adequate funds to
establish a trust fund or other allowable
instrument to provide financial
assurance for closure, post-closure care,
or corrective action if its financial
position deteriorates beyond acceptable
levels.
Comment: Some commenters argued
that the financial test is too stringent
and that it could not be used by many
local governments, particularly small
local governments.
Response: The purpose of the
financial test is not to exempt local
governments from the financial
assurance requirements, but to allow
those local governments that possess
sufficient financial capacity and fiscal
responsibility to satisfy the objectives of
financial responsibility without the use
of a third-party mechanism. Inevitably
some local governments will not have
the financial capacity and fiscal
responsibility to benefit from the
financial test. Nevertheless, the Agency
estimates that 91 percent of all local
governments that own or operate a
MSWLF would be able to use the test for
at least some amount of their subtitle D
obligations, while 54 percent of all local
governments would be able to use the
financial test for all of their subtitle D
obligations. Accordingly, the Agency
believes that the financial test would
allow a reasonable number of local
governments to self-insure their MSWLF
obligations and still protect public
health and the environment by assuring
that adequate funds are available for
closure, post-closure care, and
corrective action.
1. Financial Component (§ 258.74(f)(l))
The proposed financial component
would require that all outstanding
general obligation bonds be rated
investment grade. Alternatively, the
local government could pass three
ratios:
—Liquidity Ratio (cash plus marketable
securities to total expenditures) must
be less than or equal to .05;
—Debt Service Ratio (annual debt
service to total expenditures) must be
less than or equal to .2; and
—Use of Borrowed Funds Ratio (long
term debt issued to capital
expenditures) must be less than or
equal to 2.
In addition to passing the bond test or
the ratio test, the local government
would have to:
—Not have an operating deficit greater
than 5 percent of expenditures for
each of the past two years;
—Prepare financial statements in
accordance with Generally Accepted
Accounting Principles; and
—Have an unqualified auditor's
opinion.
(See Comment Response Document,
Section 4.1)
Comment: A commenter suggested
that local governments should be able to
demonstrate financial assurance for
landfill closure, post-closure and
corrective action costs without having to
demonstrate their financial capability.
This commenter believed that one may
assume that local governments with
taxing authority will be in a position to
pay for closure, post-closure and
corrective action costs. The commenter
argued, therefore, that a local
government should qualify to use the
financial test, unless there are
indications that it is not financially
sound, such as a below investment
grade bond rating or being in default on
a bond issue.
Response: The Agency believes that it
is essential that a local government
demonstrate its financial capability to
qualify for the financial test, because a
local government must have sufficient
financial capacity to be able to obtain
the necessary closure and post-closure
funds at the time that the funds are
needed. Although most local
governments are able to pay off their
financial obligations over time,
conflicting financial demands could
cause financially weaker local
governments to delay necessary closure
and post-closure activities at MSWLF's.
Any delay in conducting necessary
closure and post-closure activities could
jeopardize public health and the
environment as well as significantly
increase response costs for corrective
action at a site. In some cases, such
increased costs would ultimately have
to be borne by State or federal response
audiorities.
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Comment: Another commenter argued
that only local governments with a
minimum annual revenue of $3 million
should qualify for the local government
financial test.
Response: Although the corporate
financial test is only available to
corporations with at least $10 million in
annual revenues, the Agency has not
adopted a similar minimum size
requirement for the local government
financial test because local
governments, unlike corporations, have
taxing authority and are, therefore, less
likely to become insolvent. Instead of
requiring a minimum size for a local
government to qualify for the financial
test, the test establishes a maximum
amount (43 percent of a local
government's total annual revenue) up
to which a local government may rely
on the test to demonstrate financial
assurance in order to ensure that the
costs being assured are appropriate in
relation to the size of a local
government.
a. Bond rating requirement
(§258.74(f)(l)(i)(A))
Comment: Some commenters believed
that the financial test's reliance on the
ratings of bonds issued by a local
government may be an inappropriate
measure of that local government's
financial strength. They argued that
general obligation bond ratings are not
good indicators of the financial health of
the local government that issues the
bonds, because the ratings indicate the
risk associated with the bonds
themselves rather than any risk
associated with the financial capability
of the issuing local government. They
also argued that ratings of other kinds of
bonds, such as insured bonds or
collateralized bonds, do not reflect the
issuing local government's financial
condition and, therefore, do not reflect
any changes in a local government's
financial strength over time.
Other commenters argued that the
financial test's bond rating requirement
is too restrictive, because it limits the
bond ratings allowed to general
obligation bond ratings and does not
include other forms of rated debt, such
as revenue bonds.
Response: Today's rule relies on a
local government's general obligation
bond ratings as a measure of a local
government's financial capability
because such bond ratings are based on
a comprehensive evaluation of a local
government's financial condition (See
Comment Response Document, Section
4.1.1 for more detail). Today's rule
disallows the use of insured general
obligation bond ratings, because the
rating of such bonds is based on the
financial capability of the insurer and
may not reflect a local government's
current financial condition. Today's rule
does not allow the use of revenue or
collateralized bond ratings as a measure
of a local government's financial
capability because such bond ratings
only reflect the financial risk associated
with a particular revenue source or asset
and not the general financial health of
the local government.
Comment: A commenter argued that
the financial test's bond rating
requirement should be made more
stringent by only considering the ratings
of general obligation bonds issued
within the previous two years by a local
government in an amount equal to the
funds necessary for closure and post-
closure care.
Response: Today's rule does not
impose such additional requirements on
qualifying for the financial test: The
ratings of outstanding general obligation
bonds are updated periodically to reflect
a local government's current financial
condition. In addition, § 258.74(0(4) of
today's rule already requires
proportionality between the amount of
costs that can be assured under the
financial test and a local government's
financial capability by limiting the costs
to be assured under the financial test to
a maximum of 43 percent of the local
government's total annual revenue.
Comment: Several commenters
pointed out that many local
governments may not have ratings on
their general obligation debt because it
is not always necessary to obtain a
rating to market bonds. They explained
that the language of the proposed rule
would preclude local governments with
unrated general obligation bonds from
qualifying for the financial test, because
not only would they be unable to satisfy
the bond rating requirement but they
also would be ineligible to use one of
the financial ratios to qualify for the
financial test; only local governments
with no general obligations bonds, rated
or unrated, would be eligible to use the
financial ratios to qualify for the
financial test.
Response: Sections 258.74(f)(l)(i)(A)
and (B) of today's rule clarify that the
bond rating requirement only applies to
local governments with "rated"
outstanding general obligation bonds.
This clarification provides local
governments that have unrated general
obligation bonds, and hence that cannot
satisfy the bond rating requirement, the
opportunity nevertheless to qualify for
the financial test by meeting one of the
financial ratio alternatives to the bond
rating requirement.
b. Financial ratio alternative to the bond
rating requirement (§258.74(f)(l)(i)(B))
Comment: Some commenters
questioned the appropriateness of the
proposed financial ratios. Suggested
alternatives include the ratio between
the total assessed value of a local
government's taxable real estate and the
actual amount of real estate taxes
collected or the ratio between a local
government's total general obligation
debt and its taxable real estate. Another
commenter suggested that ratios that
measure a local government's total debt
and pension fund obligations should be
added to the proposed financial ratios to
provide greater certainty of a local
government's financial ability to satisfy
its closure andpost-closure obligations.
Response: EPA considered these and
similar measures of a local government's
financial health in the course of
developing the local government
financial test proposed on December 27,
1993. As discussed in the preamble to
the proposed rule (58 FR 68353, 68356),
EPA analyzed the different financial
ratios and thresholds identified in the
literature on local government finances
and eliminated them from further
consideration if they could not be: (A)
Calculated easily from the financial
statements of local governments,
analyzed based on available data, or
used because they were clearly less
supported in the financial literature
relied upon in this rulemaking (See
Bibliography of Financial Sources and
References in the Docket) than similar
measures; (B) if the relationship
between the measure and financial
health appeared random; (C) if the
measures and associated thresholds
could not differentiate among local
governments; (D)if the measures were
highly sensitive to small changes in the
threshold value; or (E) if the measures
were highly correlated with other
measures already in the test that
evaluated the same aspect of local
government financial health. From the
remaining measures, EPA selected those
ratios and thresholds that were best
substantiated in the public finance
literature.
EPA rejected using the ratio between
the total assessed value of a local
government's taxable real estate and the
actual amount of real estate taxes
collected because, although the ratio
measures a local government's potential
revenue, it does not describe a local
government's willingness to use this
source of revenue. Similarly, EPA
rejected using the ratio between a local
government's total general obligation
debt and its taxable real estate because,
although it provides a measure of a local
government's revenue from property
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60332 Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations
taxes, it does not measure willingness to
use this revenue source (See Comment
Response Document, Section 4.1.2, for
more detail). EPA rejected ratios
evaluating pension funds because there
was no data to allow the Agency to
select an appropriate threshold to
indicate when pension funds may be in
financial difficulty. Finally, EPA;
decided that measures evaluating total
debt were unnecessary, because the debt
service ratio already measures a local
government's ratio of annual debt
service to total expenditures.
(1) The liquidity ratio
(§258.74(f)(l)(i)CB)(l))
Comment: Several commenters
questioned the appropriateness of the
liquidity ratio incorporated into today's
rule, because they believe that a local
government's cash balance is a poor
indicator of its financial capability.
Response: Although the liquidity
ratio, by itself, may not provide a
conclusive measure of a local
government's financial capability to
conduct closure, post-closure.care and
corrective action at a MSWLF, it does
provide a measure of a local
government's ability to meet current and
unexpected obligations. EPA is
concerned that a local government with
a cash shortage would have to delay or
restrict its services and would,
therefore, be unable to conduct any
MSWLF closure, post-closure care or
corrective action activities when
necessary.
Comment: Another commenter
suggested that a working capital ratio
would be preferable to a liquidity ratio,
because liquidity ratios, which are
derived from a local government's
balance sheet, can be manipulated to
reach a particular result.
Response: EPA adopted a liquidity
ratio because such a ratio is appropriate
for local governments. A working
capital ratio is appropriate to evaluate
corporations. Today's rule also limits
the potential for satisfying a particular
financial ratio through the use of
inappropriate accounting practices by
requiring that a local government's
financial statement comply with
Generally Accepted Accounting
Principles (GAAP).
Comment: Some commenters
questioned the appropriateness of the
liquidity ratio threshold that requires
that a local government maintain a
minimum five percent cash balance in
its budget in order to satisfy the
liquidity ratio. One commenter believed
that a five percent cash balance is too
low, another that it is too high, and yet
another that such a minimum cash •
balance requirement would require local
governments, which must maintain a
balanced budget under state law, to
specifically budget a five percent cash
balance.
• Response: EPA does not believe that
it is necessary to require that a local
government maintain more than a five
percent cash balance, because it is
unnecessary that a local government
maintain a sufficient cash balance to be
able to respond to all of its potential
MSWLF closure, post-closure and
corrective action obligations at any one
time. Instead, as discussed above, the
purpose of the liquidity ratio is to
ensure that a local government has the
financial flexibility to be able to respond
to some unexpected obligations in
addition to fulfilling its planned or
anticipated obligations. Not only should
a local government be financially able to
meet its planned MSWLF obligations in
the face of other unexpected obligations,
but it should also be able to respond to
immediate and unexpected MSWLF
obligations. It is generally accepted in
the financial literature (See
Bibliography of Financial Sources and
References in the Docket) that a five
percent cash balance is a sufficient
financial "cushion" for local
governments to be able to meet both
current and unexpected obligations in
most situations. On the other hand, EPA
does not believe that a minimum five
percent cash balance is too high a cash
balance for a local government to be
able to maintain or that such a
requirement would disqualify many
local governments from using the
financial test to demonstrate financial
assurance. EPA's research shows that;.
over 96 percent of all local governments
that own or operate MSWLFS maintain
such a minimum cash balance and
would satisfy the liquidity ratio. EPA
also does not expect that local
governments, which must maintain a
balanced budget under state law, would
have to specifically budget a five
percent cash balance in order to satisfy
the liquidity ratio. As indicated above,
EPA's research shows that the vast
majority of local governments already
maintain enough of their assets in cash
and in current investments to pass the
liquidity ratio.
Comment: A commenter questions
whether the financial test's liquidity
ratio is the standard measure of
liquidity typically used in financial
analyses and whether it provides a
meaningful assessment of a local
government's fiscal responsibility.
Response: The financial test's
liquidity ratio is a standard measure of
liquidity employed in financial analyses
of municipal governments (See
Bibliography of Financial Sources and
References in the Docket). Additionally,
as discussed above, liquidity provides
an important measure of a local
government's ability to meet current and
unexpected obligations.
(2) The debt service ratio
(§258.74(f)(l)(i)(B)(2))
Comment: Some commenters question
the appropriateness and the value of a
debt service ratio, on the grounds that
it is unclear how such a ratio
contributes to an evaluation of a local
government's financial capability and
that such a ratio would only apply to
other than general obligation bond debt
(only local governments without general
obligations bonds may use the financial
ratio alternative). ,
Response: As discussed in the
December 27, 1993 proposal, debt
service represents a fixed expense that
limits the flexibility of local
governments. High debt service
significantly reduces the resources
available to fund current operating
expenses, the flexibility to fund
unexpected needs, and the ability to
obtain additional loans or issue
additional debt. The Agency believes
that local governments that are overly
burdened by debt service payments may
have greater difficulty paying for
assured activities in a timely fashion.
Standard & Poors, for example, employs
the debt service ratio in evaluating and
rating municipal bond issues and
considers such a ratio to be high, similar
to the threshold percentage in today's
rule, when it exceeds 20 percent of
annual expenditures. Although the debt
service ratio would not measure debt
service from rated general obligation
bonds, it would measure debt service
from unrated or insured general
obligation bonds, revenue bonds and
debt service attributable to other
government funds, including special
assessment bonds, certificates of
participation and bank loans.
(3) The use of borrowed funds ratio
(Proposed §258,74(f)(l)(i)(B)(2))
Comment: Commenters noted that
borrowed funds, especially those
received late in the year, are typically
not all spent in that year. Even when
they will eventually be spent on capital
improvements, these unspent borrowed
funds will result in failing this ratio.
Response: We agree that this is a
problem and found that attempting to
define Current Year Long Term Debt
Issued to avoid that problem was very
complicated. Moreover, the requirement
that a local government not have an
operating deficit in excess of 5% for
each of the last two years also assures
that the local government is not
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substantially relying on long term debt
to pay short term expenses. That is,
there is not a large gap between
expenses and revenues which must be
filled by long term debt. Since this was
the purpose of the use of borrowed
funds ratio and the use of borrowed
funds ratio may have unintended
consequences, the Agency decided to
drop the use of borrowed funds ratio.
c. Compliance with GAAP
(§258.74(0(l)(il))
Comment: Three commenters from
Nebraska, including the State of
Nebraska, argue that requiring local
governments to use GAAP would be
unnecessarily burdensome, because
most Nebraskan local governments use
cash basis accounting to prepare their
financial statements and that these local
governments would have to prepare
duplicate financial statements using
GAAP to qualify for the financial test.
Response: The Agency believes that it
is necessary for local governments to
prepare an annual financial report in
compliance with GAAP, because the
Agency's analysis of the financial test
ratios was predicated on ratios derived
from financial statements prepared in
accordance with GAAP. The use of
other forms of accounting could alter
the results of the ratios. Indeed, it
appears that although Nebraska state
law allows local governments to use
cash basis accounting to prepare
financial statements, it recommends that
statements be prepared in accordance
with GAAP. Of course, a State could
develop its own financial test pursuant
to §258.74(1) which relied on cash flow
accounting, subject to approval of its
State MSWLF permit program.
d. Operating Deficit Limit
(§258.74(f)fl)(iii)(3))
Comment: Commenters noted that the
proposal does not define operating
deficit, total revenue, or total
expenditures.
Response: Today's rule does define
these terms at § 258.74(f)(l)(iv) in
accordance with definitions included in
the Background Document.
Comment: There is an inconsistency
between the preamble and the text of
the December 27,1993 proposed rule,
which provided that the operating
deficit limit applied if a local
government experienced a greater than
five percent deficit in "each", and in
"either", of the past two years.
Response: Today's rule clarifies that
the operating deficit limit applies if a
local government experiences such a
deficit in "each" of the past two years.
2. Public Notice Component
(§258.740®)
In order to ensure that a local
government using the test acknowledges
the obligations it is seeking to assure
and that the community decisionmakers
are aware of and agree to the
commitment of future local government
funds, the proposed rule would require
that a local government, in each year
that the financial test or guarantee is
used, identify assured costs in either its
budget or its comprehensive annual
financial report. (See Comment
Response Document, Section 4.2)
Comment: Several commenters noted
that the public notice requirement in the
proposed rule was inconsistent with the
Governmental Accounting Standards
Board (GASB) Statement Number 18,
"Accounting, for Municipal Solid Waste
Landfill Closure and Postclosure Care
Costs."
Response: The Agency agrees and has
modified the public notice requirement
to be consistent with GASB 18.
Accordingly, a local government in
compliance with GASB Statement
Number 18, which requires more
information than today's rule, will also
meet the public notice requirement of
the financial test.
Comment: One commenter stated that
it may not be possible to include a
notice of corrective action in a
Comprehensive Annual Financial
Report or annual budget within 120
days after the corrective action remedy
has been selected.
Response: The Agency recognizes the
difficulty raised by the commenter.
Today's rule modifies the public notice
requirement in the event that corrective
action is necessary. The modification
allows a local government to place a
letter in an MSWLF's operating record,
if it is not possible to include a notice
of the corrective action in a
Comprehensive Annual Financial
Report or annual budget within 120
days after the remedy has been selected.
3. Recordkeej
Component ({
ling and Reporting
1258.74® (3))
In order to confirm that the self-
implementing requirements of the
financial test have been met, the
proposed rule would require local
governments to document their use of
the test by placing four items in the
facility operating record: (1) A letter
signed by the local government's chief
financial officer (CFO), (2) the local
government's independently audited
year-end financial statements for the
latest fiscal year, (3) the auditor's
unqualified opinion of the year-end
financial statement for the latest fiscal
year, and (4) the special report of the
independent certified public accountant
or State Agency upon examination of
the CFO's letter. In addition, owners
and operators would be required to
update these items annually, and to
notify the State Director and obtain
alternative financial assurance if the
local government is no longer able to
pass the financial test. (See Comment
Response Document, Section 4.3)
Comment: Commenters suggested
several clarifications to the
recordkeeping and reporting
requirements. For example, the
proposed rule incorrectly provided that
the CFO letter only certify that the local
government meet "either" requirement
and inadvertently omitted the operating
deficit requirement from the
certification requirement in the local
government certification letter.
Response: Today's rule adopts
standard language suggested by the
American Institute of Certified Public
Accountants to be used in the report of
the independent CPA or State Agency
verifying the accuracy of the
information provided by the local
government's chief financial officer
pursuant to § 258.74(f)(3)(i)(A) of the
rule. Today's rule also clarifies that the
local government CFO letter to be
placed in a facility's operating record
must certify that a local government
"both" meets the bond rating/financial
ratio requirement and that it prepares its
financial statements in conformity with
Generally Accepted Accounting
Principles and provides that the local
government CFO letter must also certify
that the local government has not had
an operating deficit greater than or equal
to five percent in each of the past two
years.
Comment: Some commenters believed
that 90 days was an insufficient amount
of time to update the records and
several noted that their States allowed
180 days to obtain audited financial
reports.
Response: Today's rule doubles the
amount of time allowed to update the
records to be maintained in a facility's
operating record from 90 to 180 days
after the end of a local government's
fiscal year. Today's rule, like the
proposed rule, continues to require that
a local government obtain alternate
financial insurance—if a local
government determines that it no longer
meets the financial test based on the
results of the annual records update—
within thirty days of the deadline by
which a local government must update
its records; however, to reflect the
additional 90 days provided to local
governments to update their records,
today's rule also extends the total time
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60334 Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations
from the end of a local government's
fiscal year by which a local government
must obtain alternate financial
assurance from 120 to 210 days.
4. Calculation Of Costs To Be Assured
Under the proposed rule, a local
government would not be able to use the
financial test to assure closure, post-
closure care, and corrective action costs
that exceed 43 percent of the local
government's total annual revenue.
Additionally, if a local government
assures the costs of other environmental
obligations through the use of other
financial tests, then it could use today's
financial test for closure, post-closure
care, and corrective action costs only to
the extent that its total environmental
obligations assured through the use of a
financial test do not exceed 43 percent
of its total annual revenue. This amount
was derived from estimates in the
financial literature (See Bibliography of
Financial sources and References in the
Docket) that a local government may
typically incur additional expenditures
up to 5 percent of its current annual
budget without unreasonable stress.
Discounting a 20 year stream of such
payments at 10 percent yields the
amount of a bond issue (43 percent of
expenditures) that might be handled by
a local government using future
financial flexibility. (See Comment
Response Document, Section 4.4.)
Comment: One commenter argued
that the financial test should be made
more stringent by disqualifying local
governments wh'ose financial assurance
obligations are greater than 43 percent
of their total annual revenues from
using the financial test. If only local
governments with financial assurance
obligations that are less than 43 percent
of the local government's total annual
revenue could use the financial test, it
would, they argue, better ensure that
local governments are financially able to
fulfill their closure, post-closure care
and corrective action obligations.
Response: The 43 percent threshold
limit on a local government's ability to
"self-insure" its environmental
obligations ensures that a local
government's environmental
obligations, for which a local
government proposes to demonstrate
financial assurance on the basis of its
financial ability, are not
disproportionate to its relative financial
capability to fulfill those obligations.
EPA has determined that a local
government may reasonably be expected
to be able to pay the costs of its
environmental obligations that it is
"self-insuring" at any one time up to 43
percent of its total annual revenues. To
the extent that the anticipated costs of
a local government's environmental
obligations that are being deferred at
any one time were to exceed 43 percent
of its total annual revenues, EPA
believes that it would be substantially
less likely that a local government
would be financially able to, in fact,
fulfill those obligations at the time that
they were to become due. Since EPA
believes that a community may safely
"self-insure" its environmental
obligations up to 43 percent of its total
annual revenues, it is not necessary to
disqualify a community from using the
financial test if its total environmental
financial assurance costs are greater
than 43 percent of its total annual
revenues. In such a case, a community
should be able to realize the same cost
savings as other communities by self-
insuring at least a portion of its
environmental obligations and obtaining
third-party financial assurance
instruments for any costs that exceed
the 43 percent threshold. Although a
requirement that a community be able to
self-insure all of its environmental
obligations within the 43 percent
threshold would certainly limit the
number of communities that could use
the financial test and, thereby, guarantee
that the necessary funds are available in
the future by requiring those
communities to obtain third-party
financial assurance instruments, such a
requirement would disproportionately
disqualify smaller local governments,
which are the local governments that
can least afford the expense of obtaining
a third-party financial instrument.
Comment: Other commenters
suggested that the 43 percent threshold
was either too high or too low thereby
making the financial test, respectively,
not stringent enough or too stringent.
Response: EPA believes that the 43
percent threshold is appropriate. As
discussed in greater detail in the
Comment Response Document, Section
4.4, the threshold is based on
information contained in the public
financial literature (See Bibliography of
Financial Sources and References in the
Docket) about the percent of total
revenues that a local government should
be able to devote in the course of a year
to meet environmental obligations over
a twenty year period and not experience
undue financial difficulty.
B. Local Government Guarantee
(§258.74(h))
Under the proposed rule, a local
government could guarantee the costs of
closure, post-closure and corrective
action associated with a MSWLF owner
by another local government or by a
private business. The local government
guarantor would have to promise to take
responsibility for the obligations of the
owner or operator if the owner or
operator fails to do so and provide proof
that it passes the financial test
requirements. (See Comment Response
Document, Sections 5.1 and 5.2)
Comment: Some commenters opposed
allowing a local government to
guarantee the costs of the environmental
obligations of other MSWLFs because
MSWLF owners and operators are less
likely to manage their MSWLFs
appropriately if they do not have to pay
closure, post-closure or corrective action
costs. One commenter was particularly
concerned about the potential for abuse
inherent in the use of public funds or
credit to guarantee the closure, post-
closure and corrective action costs of
privately-owned MSWLFs and pointed
out that such practices are prohibited in
many states.
Response: Today's rule maintains the
local governments guarantee as
proposed and does not restrict its use.
As discussed above, EPA believes that a
local government that meets the
financial, public notice, and
recordkeeping and reporting
requirements of the financial test will be
able to fund the assured MSWLF
closure, post-closure care or corrective
action obligations in a timely manner. A
local government may, of course, only
guarantee the closure, post-closure or
corrective action costs of another
MSWLF owner and operator, if such an
arrangement is consistent with state
law. Even if a, local government
guarantee is not precluded by state law,
a state may nevertheless disallow the
use of the guarantee if it determines that
there is the potential for abuse.
Comment: Commenters suggested
several clarifications to provisions of the
proposed local government guarantee.
Response: Today's rule clarifies that if
a guarantee is cancelled, then pursuant
to §258.74(h)(l)(iii) the owner or
operator of the MSWLF must obtain
alternate financial assurance within 120
days following "the guarantor's notice
of cancellation" (not within 120 days
following "the close of the guarantor's
fiscal year"). Similarly, today's rule
clarifies that if the local government
guarantor no longer qualifies to use the
financial test, then, pursuant to
§ 258.74(h)(2) (iii), the owner or operator
of the MSWLF must obtain alternate
financial assurance within 90 days
following "the determination that the
guarantor no longer meets the
requirements of paragraph (f)(l) of this
section"; not within 90 days following
"the guarantor's notice of cancellation."
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C. Discounting of Costs in Calculating
Financial Assurance Cost Estimates
The financial assurance requirements
under RCRA subtitle D currently require
owners and operators to calculate cost
estimates in current dollars, and
aggregate these estimates (even though
these costs may be incurred many years
in the future). Owners must obtain a
financial responsibility instrument for at
least the amount of this aggregated cost
estimate. In the preamble to the
December 27.1993 proposed rule (58 FR
68353, 68361), EPA solicited comments
on whether MSWLF owners and
operators should be allowed to use a
present value based on a discount rate
to esdmate certain financial assurance
costs. Cost discounting would allow
owners and operators to adjust an
aggregated cost estimate to reflect the
fact that activities are scheduled to
occur in the future and to obtain a
financial instrument for less than the
aggregate costs (i.e. the "present value"
of the aggregated costs). (See Comment
Response Document, Section 7)
Comment: A number of commenters
opposed allowing MSWLF owners and
operators to discount financial
assurance costs because of their belief
that landfill owners and operators often
underestimate cost estimates and that
the timing of a closure event is
uncertain. One commenter suggested
that the risks of discounting could be
minimized with State oversight if EPA
provided specific guidelines.
Response: The Financial Accounting
Standards Board (which sets standards
for corporate accounting) allows
discounting only when costs and timing
of closure are certain and then only for
an essentially risk free rate, adjusted for
inflation. The Agency agrees with
commenters that cost estimates are
frequently underestimated and that the
closure date is usually uncertain
because sites may fill up more quickly
than expected or they may close because
of enforcement actions as a result of rule
violations. We also agree with the
Financial Accounting Standards Board
that discounting is only appropriate
when cost estimates and closure dates
are certain. For these reasons, the
Agency has decided against allowing
discounting without State oversight.
Because the Agency recognizes that
there are cases where cost estimates are
accurate and closure dates are certain,
we have decided to allow State
Directors to allow discounting for
closure, post-closure, and corrective
action costs if they believe that cost
estimates are accurate and the closure
date is certain and where the local
government has submitted a finding
from a Registered Professional Engineer
that cost estimates are accurate and
certifies that there are no known factors
which would change the estimated
closure date. The State must also
determine that the facility is in
compliance with all regulations it
determines to be applicable and
appropriate. Consistent with other
elements of this rule, cost estimates
must be adjusted annually to reflect
inflation and remaining site life. The
discount rate used may not be greater
than the rate of return for essentially
risk free investments, such as 1 year
Treasury bills, net of inflation. As noted
above, discounting at an essentially risk
free rate of return is that allowed by the
Financial Accounting Standards Board
and was suggested by several
commenters. The Government
Accounting Standards Board notes that
EPA is already allowing for discounting
for inflation because it allows annual
adjustments of cost estimates for
inflation. For this reason the Agency
requires that inflation be deducted from
an essentially risk free rate of return in
calculating a discount rate. The
resulting rate allows conservatively
invested funds to grow to the needed
amount in the time available. (See
Comment Response Document, Section
7)
D. Different Financial Tests for Local
Government Owners and Operators of
MSWLFs and Underground Storage
Tanks
The financial test proposed for use by
local government owners and operators
of MSWLFs under subtide D of RCRA
was different from the previously
adopted financial test for use by local
government owners and operators of
underground storage tanks (USTs) under
subtitle I of RCRA. As discussed in the
preamble to the December 27, 1993
proposed rule (58 FR 68353, 68362),
while EPA generally strives to maintain
consistency between programs, EPA
believes that there are important policy
reasons to use a different test for the two
programs. All commenters on this issue
agreed with EPA that the financial test
for local government owners and
operators of USTs would be
inappropriate for use by local
government owners and operators of
MSWLFs. The Agency agrees with
commenters and has not allowed the
UST test to be used for MSWLF's. (See
Comment Response Document, Section
8)
E. Effective Date for Financial
Responsibility Requirements for
Municipal Solid Waste Landfills
The effective date for financial
responsibility requirements for
MSWLF's is April 9, 1997 except for
small, dry or remote landfills which
have until October 9, 1997 to comply
(see 60 FR 52337, October 6, 1995). In
response to commenters who said that
they needed up to 18 months after
promulgation of the local government
financial test to comply with the
financial responsibility requirements for
municipal solid waste landfills, the
Agency has decided to allow State
Directors to waive the financial
assurance requirements for up to an
additional 12 months as described
earlier in section III of this preamble.
This would provide the 18 months
requested by certain commenters. (See
also Comment Response Document,
Section 12.5)
V. Economic and Regulatory Impacts
A. Executive Order 12866
Under Executive Order 12866, EPA
must determine the economic impact of
a rule. The Agency estimates that
today's rule will save local government
owners and operators of MSWLFs
$105.1 million annually: $96.6 million
attributable to the availability of the
local government financial test and $8.5
million attributable to the availability of
the local government guarantee. A
complete discussion of the Agency's
analysis can be found in the docket for
today's rule.
To calculate the cost savings
associated with today's rule, the Agency
updated the information used to
calculate the anticipated cost savings
discussed in the December 27, 1993
proposed rule (58 FR 68353, 68363).
The Agency updated the 1987 data on
the universe of existing MSWLF
landfills by accounting for the number
of MSWLF landfills that have been
closed since then and adjusted
accordingly the representative sample of
local government owners and operators
of MSWLFs used to determine how
many local governments would meet the
financial ratios of the financial test. The
Agency also adjusted the costs of
closure and post-closure care for
inflation. Based on this updated
information, the Agency believes that 91
percent of all local governments that
own or operate a MSWLF would be able
to use the test for at least some amount
of their Subtitle D obligations, while 54
percent of all local governments would
be able to use the financial test for all
their subtitle D obligations.
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Of approximately 3400 landfills in
this analysis, 2700 are publicly owned,
and of those 1500 (54%) were estimated
to be able to use the financial test for all
of their Subtitle D obligations. Of the
remaining 1200, about half would be
able to satisfy the financial test on their
own and with the guarantee assistance
of local governments that also use their
landfill. The other half, about 600,
would not be able to pass the financial
test nor get help with the guarantee and
so would need to set up a mechanism
for financial assurance. EPA estimated
that the cost to these landfills to obtain
letters of credit is about $18.1 million
per year (1.5% annual administrative
cost for letters of credit "times" the
closure and post-closure costs for these
landfills of about $1.2 billion). These
landfills could also assure by
establishing trust funds, entailing the
costs of the funds set aside, the
opportunity cost of the funds, and trust
fund administrative costs. EPA believes
that the cost if all chose to establish
trust funds would be similar to the cost
of using a letter of credit. Of these 600
or so landfills, 520 are owned by local
governments with populations of 10,000
or less.
Today's rule will not result in an
adverse impact on the ability of U.S.-
based enterprises to compete with
foreign-based enterprises in domestic or
export markets. This rule has been
reviewed by the Office of Management
and Budget in accordance with
Executive Order 12866.
B. Regulatory Flexibility Act
Under the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. at the time an
Agency publishes a proposed or final
rule, it generally must prepare a
Regulatory Flexibility Analysis that
describes the impact of the rule on small
entities, unless the Administrator
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities.
Today's rule adds a local government
financial test and local government
guarantee as two additional mechanisms
that can be used to demonstrate
financial responsibility for
environmental obligations. Entities able
to use these mechanisms will be
allowed to demonstrate financial
responsibility for their environmental
obligations without incurring the costs
of obtaining a third-party mechanism.
The Agency has allowed local
governments of any size to use up to
43% of their revenues to assure
environmental obligations if they pass
the financial test. This contrasts with
suggestions from some commenters that
a minimum size requirement should be
part of the test. Because this rule is
deregulatory in nature, I certify
pursuant to 5 U.S.C. 605b, that this
regulation will not have a significant
impact on a substantial number of small
entities.
C. Paperwork Reduction Act
OMB approved the information
collection requirements of the MSWLF
criteria, including financial assurance
criteria, under the provisions of the
Paperwork Reduction Act, 44 U.S.C.
3501 etseq., and assigned OMB control
number 2050-0122. The burden
estimate for the financial assurance
provisions included the burden
associated with obtaining and
maintaining any one of the allowable
financial assurance instruments,
including a financial test.
D. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 (UMRAJ, Pub. L.
104-4, establishes requirements for
Federal agencies to assess the effects of
their regulatory actions on State, local,
and tribal governments and the private
sector-Under section 202 of the UMRA,
EPA generally must prepare a written
statement, including a cost-benefit
analysis, for proposed and final rules
with "Federal mandates" that may
result in expenditures to State, local,
and tribal governments, in the aggregate,
or to the private sector, of $100 million
or more in any one year. Before
promulgating an EPA rule for which a
written statement is needed, section 205
of the UMRA generally requires EPA to
identify and consider a reasonable
number of regulatory alternatives and
adopt the least costly, most cost-
effective or least burdensome alternative
that achieves the objectives of the rule.
The provisions of section 205 do not
apply when they are inconsistent with
applicable law. Moreover, section 205
allows EPA to adopt an alternative other
than the least costly, most cost-effective
or least burdensome alternative if the
Administrator publishes with the final
rule an explanation why that alternative
was not adopted. Before EPA establishes
any regulatory requirements that may
significantly or uniquely affect small
governments, including tribal
governments, it must have developed
under section 203 of the UMRA a small
government agency plan. The plan must
provide for notifying potentially
affected small governments, enabling
officials of affected small governments
to have meaningful and timely input in
the development of EPA regulatory
proposals with significant Federal
intergovernmental mandates, and
informing, educating, and advising
small governments on compliance with
the regulatory requirements.
Today's rule is not subject to the
requirements of sections 202, 203 and
205 of the UMRA. EPA has determined
that this rule does not contain a Federal
mandate that may result in expenditures
of $100 million or more for State, local,
and tribal governments, in the aggregate,
or the private sector in any one year. On
the contrary, as described above, the
Agency estimates that today's rule will
save local government owners and
operators of MSWLFs $105.1 million
annually by allowing local governments
to use a financial test or a local
government guarantee to demonstrate
financial responsibility for
environmental obligations without
incurring the costs of obtaining a third-
party mechanism. Although today's rule
is specifically intended to "significantly
or uniquely affect small governments,"
the Agency does not believe that today's
rule is subject to section 203 of the
UMRA to the extent today's rule
provides regulatory flexibility for local
governments and does not to impose
additional regulatory requirements.
Indeed, today's rule is being
promulgated in response to a long
standing request by local governments
after substantial input from such local
governments into the rule's
development.
E. Submission to Congress and the
General Accounting Office
Under 5 U.S.C. 801(a)(l)(A) as added
by the Small Business Regulatory
Enforcement Fairness Act of 1966, EPA
submitted a report containing this rule
and other required information to the
U.S. Senate, the U.S. House of
Representatives and the Comptroller
General of the General Accounting
Office prior to publication of the rule in
today's Federal Register. This rule is a
"major rule" as defined by 5 U.S.C.
804(2).
List of Subjects in 40 CFR Part 258
Environmental protection, Closure,
Corrective action, Financial assurance,
Waste treatment and disposal, Water
pollution control.
Dated: November 15, 1996.
Carol M. Browner,
Administrator.
For the reasons set forth in the
preamble, title 40, chapter I of the Code
of Federal Regulations is amended as
follows:
PART 258—CRITERIA FOR MUNICIPAL
SOLID WASTE LANDFILLS
1. The authority citation for part 258
continues to read as follows:
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Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations 60337
Authority: 42 U.S.C. 6907(a)(3), 6912(a),
6944(a). and 6949a(c); 33 U.S.C. 1345(d) and
1345(c).
2. Section 258.70 is amended by
adding paragraph (c) to read as follows:
§258.70 Applicability and effective date.
*****
(c) The Director of an approved State
may waive the requirements of this
section for up to one year until April 9,
1998 for good cause if an owner or
operator demonstrates to the Director's
satisfaction that the April 9,1997
effective date for the requirements of
this section does not provide sufficient
time to comply with these requirements
and that such a waiver will not
adversely affect human health and the
environment.
3. Section 258.74 is amended by
adding text to paragraphs (f) and (h) and
by revising paragraph (k) to read as
follows:
§258.74 Allowable mechanisms.
*****
(f) Local government financial test. An
owner or operator that satisfies the
requirements of paragraphs (9(1)
through (3) of this section may
demonstrate financial assurance up to
the amount specified in paragraph (f)(4)
of this section:
(1) Financial component, (i) The
owner or operator must satisfy
paragraph (f)(l)(i)(A) or (B) of this
section as applicable:
(A) If the owner or operator has
outstanding, rated, general obligation
bonds that are not secured by insurance,
a letter of credit, or other collateral or
guarantee, it must have a current rating
of Aaa, Aa, A, or Baa, as issued by
Moody's, or AAA, AA, A, or BBB, as
issued by Standard and Poor's on all
such general obligation bonds; or
(B) The owner or operator must satisfy
each of the following financial ratios
based on the owner or operator's most
recent audited annual financial
statement:
(1) A ratio of cash plus marketable
securities to total expenditures greater
than or equal to 0.05; and
(2) A ratio of annual debt service to
total expenditures less than or equal to
0.20.
(H) The owner or operator must
prepare its financial statements in
conformity with Generally Accepted
Accounting Principles for governments
and have its financial statements
audited by an independent certified
public accountant (or appropriate State
agency).
(ill) A local government is not eligible
to assure its obligations under
§258.74(0 if it:
(A) Is currently in default on any
outstanding general obligation bonds; or
(B) Has any outstanding general
obligation bonds rated lower than Baa as
issued by Moody's or BBB as issued by
Standard and Poor's; or
(C) Operated at a deficit equal to five
percent or more of total annual revenue
in each of the past two fiscal years; or
(D) Receives an adverse opinion,
disclaimer of opinion, or other qualified
opinion from the independent certified
public accountant (or appropriate State
agency) auditing its financial statement
as required under paragraph (f)(l)(ii) of
this section. However, the Director of an
approved State may evaluate qualified
opinions on a case-by-case basis and
allow use of the financial test in cases
where the Director deems the
qualification insufficient to warrant
disallowance of use of the test.
(iv) The following terms used in this
paragraph are defined as follows:
(A) Deficit equals total annual
revenues minus total annual
expenditures;
(B) Total revenues include revenues
from all taxes and fees but does not
include the proceeds from borrowing or
asset sales, excluding revenue from
funds managed by local government on
behalf of a specific third party;
. (C) Total expenditures include all
expenditures excluding capital outlays
and debt repayment;
(D) Cash plus marketable securities is
all the cash plus marketable securities
held by the local government on the last
day of a fiscal year, excluding cash and
marketable securities designated to
satisfy past obligations such as
pensions; and
(E) Debt service is the amount of
principal and interest due on a loan in
a given time period, typically the
current year.
(2) Public notice component. The
local government owner or operator
must place a reference to the closure
and post-closure care costs assured
through the financial test into its next
comprehensive annual financial report
(CAFR) after the effective date of this
section or prior to the initial receipt of
waste at the facility, whichever is later.
Disclosure must include the nature and
source of closure and post-closure care
requirements, the reported liability at
the balance sheet date, the estimated
total closure and post-closure care cost
remaining to be recognized, the
percentage of landfill capacity used to
date, and the estimated landfill life in .
years. A reference to corrective action
costs must be placed in the CAFR not
later than 120 days after the corrective
action remedy has been selected in
accordance with the requirements of
§ 258.58. For the first year the financial
test is used to assure costs at a particular
facility, the reference may instead be
placed in the operating record until
issuance of the next available CAFR if
timing does not permit the reference to
be incorporated into the most recently
issued CAFR or budget. For closure and
post-closure costs, conformance with
Government Accounting Standards
Board Statement 18 assures compliance
with this public notice component.
(3) Recordkeeping and reporting
requirements, (i) The local government
owner or operator must place the
following items in the facility's
operating record:
(A) A letter signed by the local
government's chief financial officer that:
(1) Lists all the current cost estimates
covered by a financial test, as described
in paragraph (f)(4) of this section;
(2) Provides evidence and certifies
that the local government meets the
conditions of paragraphs (f) (1) (i),
(f)(l)(ii), and (f)(l)(iii) of this section;
and
(3) Certifies that the local government
meets the conditions of paragraphs (f)(2)
and (f)(4) of this section.
(B) The local government's
independently audited year-end
financial statements for the latest fiscal
year (except for local governments
where audits are required every two
years where unaudited statements may
be used in years when audits are not
required), including the unqualified
opinion of the auditor who must be an
independent, certified public
accountant or an appropriate State
agency that conducts equivalent
comprehensive audits;
(C) A report to the local government
from the local government's
independent certified public accountant
(CPA) or the appropriate State agency
based on performing an agreed upon
procedures engagement relative to the
financial ratios required by paragraph
(f)(l)(i)(B) of this section, if applicable,
and the requirements of paragraphs
(f)(l)(ii) and (f)(l)(iii) (C) and (D) of this
section. The CPA or State agency's
report should state the procedures
performed and the CPA or State
agency's findings; and
(D) A copy of the comprehensive
annual financial report (CAFR) used to
comply with paragraph (f)(2) of this
section or certification that the
requirements of General Accounting
Standards Board Statement 18 have
been met.
(ii) The items required in paragraph
(f)(3)(i) of this section must be placed in
the facility operating record as follows:
(A) In the case of closure and post-
closure care, either before the effective
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60338 Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations
date of this section, which is April 9,
1997, or prior to the initial receipt of
waste at the facility, whichever is later,
or
(B) In the case of corrective action, not
later than 120 days after the corrective
action remedy is selected in accordance
with the requirements of § 258.58.
(iii) After the, initial placement of the
items in the facility's operating record,
the local government owner or operator
must update the information and place
the updated information in the
operating record within 180 days
following the close of the owner or
operator's fiscal year.
(iv) The local government owner or
operator is no longer required to meet
the requirements of paragraph (f) (3) of
this section when:
(A) The owner or operator substitutes
alternate financial assurance as
specified in this section; or
(B) The owner or operator is released
from the requirements of this section in
accordance with § 258.71(b), 258.72(b),
or258.73(b).
(v) A local government must satisfy
the requirements of the financial test at
the close of each fiscal year. If die local
government owner or operator no longer
meets the requirements of the local
government financial test it must,
within 210 days following the close of
the owner or operator's fiscal year,
obtain alternative financial assurance
that meets the requirements of this
section, place the required submissions
for that assurance in the operating
record, and notify the State Director that
the owner or operator no longer meets
the criteria of the financial test and that
alternate assurance has been obtained.
(vi) The Director of an approved State,
based on a reasonable belief that the
local government owner or operator may
no longer meet the requirements of the
local government financial test, may
require additional reports of financial
condition from the local government at
any time. If the Director of an approved
State finds, on the basis of such reports
or other information, that the owner or
operator no longer meets the
requirements of the local government
financial test, the local government
must provide alternate financial
assurance in accordance with this
section.
(4) Calculation of Costs to be Assured.
The portion of the closure, post-closure,
and corrective action costs for which an
owner or operator can assure under this
paragraph is determined as follows:
(i) If flie local government owner or
operator does not assure other
environmental obligations through a
financial test, it may assure closure,
post-closure, and corrective action costs
that equal up to 43 percent of the local
government's total annual revenue.
(ii) If the local government assures
other environmental obligations through
a financial test, including those
associated with UIC facilities under 40
CFR 144.62, petroleum underground
storage tank facilities under 40 CFR Part
280, PCB storage facilities under 40 CFR
Part 761, and hazardous waste
treatment, storage, and disposal
facilities under 40 CFR Parts 264 and
265, it must add those costs to the
closure, post-closure, and corrective
action costs it seeks to assure under this
paragraph. The total that may be assured
must not exceed 43 percent of the local
government's total annual revenue.
(iii) The owner or operator must
obtain an alternate financial assurance
instrument for those costs that exceed
the limits set in paragraphs (f)(4) (i) and
(ii) of this section.
* * * * *
(h) Local Government Guarantee. An
owner or operator may demonstrate
financial assurance for closure, post-
closure, and corrective action, as
required by §§ 258.71, 258.72, and
258.73, by obtaining a written guarantee
provided by a local government. The
guarantor must meet the requirements of
the local government financial test in
paragraph (f) of this section, and must
comply with the terms of a written
guarantee.
(1) Terms of the written guarantee.
The guarantee must be effective before
the initial receipt of waste or before the
effective date of this section, whichever
is later, in the case of closure, post-
closure care, or no later than 120 days
after the corrective action remedy has
been selected in accordance with the
requirements of § 258.58. The guarantee
must provide that:
(i) If the owner or operator fails to
perform closure, post-closure care, and/
or corrective action of a facility covered
by the guarantee, the guarantor will:
(A) Perform, or pay a third party to
perform, closure, post-closure care, and/
or corrective action as required; or
(B) Establish a fully funded trust fund
as specified in paragraph (a) of this
section in the name of the owner or
operator.
(ii) The guarantee will remain in force
unless the guarantor sends notice of
cancellation by certified mail to the
owner or operator and to the State
Director. Cancellation may not occur,
however, during the 120 days beginning
on the date of receipt of the notice of
cancellation by both the owner or
operator and the State Director, as
evidenced by the return receipts.
(iii) If a guarantee is cancelled, the
owner or operator must, within 90 days
following receipt of the cancellation
notice by the owner or operator and the
State Director, obtain alternate financial
assurance, place evidence of that
alternate financial assurance in the
facility operating record, and notify the
State Director. If the owner or operator
fails to provide alternate financial
assurance within the 90-day period, the
guarantor must provide tiiat alternate
assurance within 120 days following the
guarantor's notice of cancellation, place
evidence of the alternate assurance in
the facility operating record, and notify
the State Director.
(2) Recordkeeping and reporting, (i)
The owner or operator must place a
certified copy of the guarantee along
with the items required under paragraph
(f)(3) of this section into the facility's
operating record before the initial
receipt of waste or before the effective
date of this section, whichever is later,
in the case of closure, post-closure care,
or no later than 120 days after the
corrective action remedy has been
selected in accordance with the
requirements of § 258.58.
(ii) The owner or operator is no longer
required to maintain the items specified
in paragraph (h)(2) of this section when:
(A) The owner or operator substitutes
alternate financial assurance as
specified in this section; or
(B) The owner or operator is released
from the requirements of this section in
accordance with § 258.71(b), 258.72(b),
or 258.73(b).
(iii) If a local government guarantor
no longer meets the requirements of
paragraph (f) of this section, die owner
or operator must, within 90 days, obtain
alternative assurance, place evidence of
the alternate assurance in the facility
operating record, and notify the State
Director. If the owner or operator fails
to obtain alternate financial assurance
within that 90-day period, the guarantor
must provide that alternate assurance
widiin the next 30 days.
* * * * *
(k) Use of multiple mechanisms. An
owner or operator may demonstrate
financial assurance for closure, post-
closure, and corrective action, as
required by §§258.71, 258.72, and
258.73, by establishing more than one
financial mechanism per facility, except
that mechanisms guaranteeing
performance, rather than payment, may
not be combined wiui ouier
instruments. The mechanisms must be
as specified in paragraphs (a), (b), (c),
(d), (f), (h), (i), and (j) of this section,
except that financial assurance for an
amount at least equal to the current cost
estimate for closure, post-closure care
and/or corrective action may be
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Federal Register/ Vol. 61, No. 230/Wednesday, November 27, 1996/Rules and Regulations 60339
provided by a combination of
mechanisms, rather than a single
mechanism.
» * * * *
4. Section 258.75 is added to subpart
G to read as follows:
§268.75 Discounting.
The Director of an approved State
may allow discounting of closure cost
estimates in § 258.71(a), post-closure
cost estimates In § 258.72(a), and/or
corrective action costs in § 258.73(a) up
to the rate of return for essentially risk
free investments, net of inflation, under
the following conditions:
(a) The State Director determines that
cost estimates are complete and accurate
and the owner or operator has submitted
a statement from a Registered
Professional Engineer so stating;
(b) The State finds the facility in
compliance with applicable and
appropriate permit conditions;
(c) The State Director determines that
the closure date is certain and the owner
or operator certifies that there are no
foreseeable factors that will change the
estimate of site life; and
(d) Discounted cost estimates must be
adjusted annually to reflect inflation
and years of remaining life.
[FR Doc. 96-30038 Filed 11-26-96; 8:45 am]
BILLING CODE 6560-50-P
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