oEPA
              United States
              Environmental Protection
              Agency
             OWice of
             Solid Waste and
             Emergency Response
DfRECTIVE NUMBER:  9650.14
TITLE:  Monitoring the' Financial Soundness of
      - Approved State Assurance Funds
                12 1993
                I 9 IQQQ
                I L. IC730
                       l

                Office of Underground
                Storage Ta.nks
               APPROVAL DATE:
               EFFECTIVE DATE:
               ORIGINATING OFFICE:
               &FINAL
               DDRAFT
                 STATUS:
               REFERENCE (other documents):
 OSWER       OSWER       OSWER
'£   DIRECTIVE    DIRECTIVE    Di

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     o-EPA
          United States Environmental Protection Agency
                Washington, DC 204CO
OSWER Directive initiation Request
                             1. Directive Number

                              9650.14
                                2. Originator Information
     ^ame of Contact Person
       Sammy K.
     3, Title
Mail Code
OS 410WF
Office
  OUST
                                               reiephone Code
                                               703 308-8882
       Monitoring the  Financial Soundness of  Approved State Assurance  Funds
     4 Summary of Directive (include brief statement of purpose)

        The purpose of  this  directive is  to  provide guidance to EPA  Regional
        Offices regarding  monitoring state assurance funds that have been
        approved  by EPA to act  as financial  responsibility compliance
        mechanisms for  owners and operators  of  underground storage  tanks.
     5. Keywords                                              .     .
       State assurance  funds,  Regions,  financial responsibility
     '6m. Does This directive Supersede Previous Directive(s)?
     b. Does It Supplement Previous Directive(s)?
                                          No
                                          No
                                                  Yes   What directive (number, title)
                                  Yea   What directive (number, title)
     7. Draft Level
         A - Signed by AA/DAA
             8 - Signed by Office Director
                                   C - For Review 4 Comment
                                      D - In Development
8.
Document
to
be
distributed
to
States
by Headquarters?
X

Yes


No
             t Meats OSWER Directives System Format Standards
     9, Signature of Lead Office Directives Coordinator
        Beverly Thomas.  OUS
      10. Name and Title of Approving Official
     =PA Form 1315-17 (Rev. 5-87) Previous editions are obsolete.
   OSWER          OSWER               OSWER               O
VE    DIRECTIVE         DIRECTIVE        DIRECTIVE

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              UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

                         WASHINGTON, D.C. 20460
                                               \!2 1983
                                                I           OFFICE OF
                                                1      SOLID WASTE AND EMERGENCY
                                                I       .    RESPONSE

                                         OSWER Directive 9650.14
MEMORANDUM
SUBJECT:   Final  Guidance Entitled:   Monitoring the Financial
           Soundness  of Approved S/ts^te Assu^an^ceJ Funds
FROM:
TO:
David Ziegele, Directo
Office of Underground
                                    rage Tanks
UST Regional Program Managers
Regions I - X
     The purpose of this letter is to distribute the final
version of  the  guidance entitled,  "Monitoring the Financial
Soundness of  Approved State Assurance Funds."  jln addition,  this
package provides a brief overview of the comments received  by our
office as well  as our response to those comments.

     The purpose of the guidance is essentially two-fold:   first,
to help identify problems in approved funds, and second, perhaps
even more importantly,  to describe a process whjich will help
resolve those problems.  Flexibility has been purposefully
incorporated  into this guidance to encourage EP'A Regions and
states to work  together to effectively solve state, fund solvency
problems.   Only if the problems were so severe &nd if the process
and solutions that the Region and state have negotiated and
developed together to solve those problems failed to the point
that no options remained, would EPA consider withdrawing approval
of a state  fund.                               I

     I would  once again like to reiterate EPA's principal
interest in monitoring the financial soundness of approved  state
assurance funds.  EPA's principal interest is in ensuring that
state funds remain viable financial responsibility mechanisms for
owners and  operators of underground storage tanks (USTs).   It is
also important  to re-state that EPA's interest Jin monitoring
state funds is  only applicable with regard to compliance with the
financial responsibility reguirements.  In other words,
withdrawal  of EPA approval from a State fund mejans that the fund
no longer gualifies as a Federal financial responsibility
compliance  mechanism.  A state fund could continue to exist,
however, as a cleanup mechanism.
                                                      Recycled/Recyclable
                                                      Printed with Soy/Canola Ink on paper that
                                                      contains it least 50% recycled fiber ,

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                                        OSWER Directive 9650.14
     We received a total of thirteen comments on the draft
guidance from a variety of respondents including state UST
programs, EPA Regions, state assurance funds, and a petroleum
marketers' association.  A discussion of those comments and our
response is attached.

     If you have any additional questions, please do not hesitate
to contact Sammy Ng at 703 308-8882 or Andrea Osborne 703 308-
8883 of my office.

Attachments

cc:  UST/LUST Regional Branch Chiefs
     OUST Management Team
     OUST Desk Officers
     State UST/LUST Program Managers
     State Fund Administrators

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                                        OSWER Directive 9650.14

Attachment 1


                  COMMENT AND RESPONSE DOCUMENT
                                               i •
     Comment 1;   Measures of financial soundness need to be more
     specific.                                 \

     Several commenters expressed concern that[the measures of
     financial soundness are not sufficiently sjpecific.  One
     commenter suggested a standardized approach across all
     Regions with regard to certain measures,  iAnother expressed
     concern that some measures may not reflect actual fund
     operations.  Other commenters suggested tliat additional
     measures, such as average cleanup cost and average claim
     frequency by type of tank be1included in the guidance.
     Another commenter requested draft quantiteitive criteria in
     the form of specific examples.            i

     Response:

     OUST believes that the high degree,of variation among state
     funds necessitates a flexible approach tojmeasurement of
     financial soundness.  Since no two funds cire exactly. alike-,
     this guidance purposefully encourages Regions and states to
     develop and use measures which are meaningful to individual
     states and which accurately reflect a fund's operations.
     The list of measures in the guidance is intended to be
     illustrative and not necessarily prescriptive.  In some
     cases, Regions and states may decide to add additional
     measures and/or replace suggested measures from this
     guidance.  Region V, for example, recently met with its
     state fund administrators and agreed to consider adding
     additional measures which reflect not only the structure of
     the fund (i.e. eligibility criteria, deductible), but also
     intangibles such as legislative or industry support for the
     fund.  It is also important to note that the measures are
     intended to be cumulative. , A state with 
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                            2        OSWER Directive 9650.14

 Response;

 Again,  OUST stresses that the measures included in the
 guidance can be weighted as appropriate in different states
 and Regions.   For example,  a  low fund balance in an
 otherwise stable fund is not  necessarily an indication of a
 problem if the state explains the low fund balance in terms
 of  its  concern about a raid on the fund by other state
 agencies.   Measures  should be evaluated in terms of trends
 over time.   Communication between Regions and states is a
 key element in explaining discrepancies,  addressing
 concerns,  and solving problems.

 Comment 3:   EPA should require an independent actuarial
 determination of fund soundness.

 One commenter argued that a statistical determination of
 fund soundness should be performed to monitor the financial
 soundness  of  states  funds.
                   X

 Response;

 OUST believes that actuarial  studies  are  not  necessary  to
 assess  fund soundness.   If  a  region and state want  to do a
 study to confirm their  findings,  or to satisfy state  audit
 requirements,  they would be able  to do so on  their  own.
 However, OUST believes  that the measures  listed in  the
 guidance can  give an overall  indication of fund solvency
 without the added cost  of an  actuarial study.   In addition,
 it  is important  to realize  that discovering a  problem is
 only the first objective of the guidance.  Even more
 importantly,  the guidance intends  to  create a  process to
 address solvency problems.  An actuarial  study might  not
 assist with this second  important  component of  the guidance.

 Comment 4:  The  guidance should consider  that  corrective
action requirements  (e.g. method of remediation selected at
a site)  affect the solvency of state  funds.

Response;

OUST acknowledges that the cost of  cleanup is an important
factor with regard to fund solvency.   States, however,
currently set  their own cleanup levels  for soil and
groundwater and  determine the appropriate remediation
technique to be  used at particular  sites.  EPA through
training assistance and technical  information transfer
continues to promote the use of better, cheaper and faster
technologies, but believes that this  issue is beyond the
scope of this guidance.

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                      ,3       OSWER Directive 9650.14
          1                   "             j •               '
 Comment 5;   The guidance may hinder the ability of states to
 protect human health and the environment if a fund decides
 to reduce fund eligibility to improve solvency. •

 Response;

 State assurance funds individually decide;what to reimburse
 and whether to provide coverage to a particular owner or
 operator.  Reducing the number of eligible owners or
 operators able to participate in a fund (e.g.  due to
 technical non-compliance)  is essentially 
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                           4       OSWER Directive 9650.14

Response;

OUST appreciates the comments and support.

Comment 8;  The reporting requirements are overly
burdensome.

Two commenters felt the guidance imposed excessive reporting
burdens.  One felt the six-month requirement was too time
consuming.  Another asked for additional information on the
proposed reporting time frames.

Response;

OUST emphasizes that the reporting time frames referred to
in the guidance are suggested time frames, subject to
negotiation between the Regions and states.  Six month time
frames may make sense, for example, when the reporting is
combined with a Region's semi-annual review of the tank
program.  In other cases, an annual review may be more
appropriate.  In states with solvency problems, more
frequent data collection may be needed.  This flexibility
has been clarified in the guidance document.

Data collection and reporting should balance the need for
timely collection of information (so that a problem;can be
solved before it becomes unworkable) with the level of
effort required by the state to report the information.

Comment 9;  Solvency of state funds is not a federal
concern.  Several commenters questioned EPA's authority to
withdraw approval of a fund.

Response:

EPA approves state assurance funds for use as acceptable
Federal financial responsibility compliance mechanisms (40
CFR 280.101).  Since the Agency approves state funds, it is
incumbent upon EPA to withdraw its approval for funds which
no longer provide the requisite Federal financial
responsibility coverage.  OUST notes that withdrawal of fund
approval refers only to the ability of that fund to act as a
Federal financial responsibility mechanism; the fund,
however, could continue to operate as a cleanup mechanism in
a state.

Comment 10;  This guidance appears to conflict with the 1989
state fund approval guidance, entitled "Reviewing State
Funds for Financial Responsibility."  Two commenters also
requested clarification on whether the guidance applies to
states that have received state program approval.

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                            5        OSWER Directive 9650.14

Response;

The  1989  guidance  is  still  used to determine  whether a  fund
which  has been submitted  to EPA could be approved  as a
Federal financial  responsibility compliance mechanism.
Today's guidance for  monitoring the financial soundness of
approved  state funds  would  be  required only for  funds that
have already  received EPA approval.   Therefore,  funds which
have been submitted and not yet approved \lrould not be
required  to submit data to  EPA.                       ;

In response to the second comment,  the Agency notes that
today's guidance is also  not required forjfunds  in states
which  have received state program approval under 40 CFR 281.
For  States with program approval,  EPA would monitor any
changes in state assurance  funds in terms of  whether the
program remains at least  as stringent,as tthe  Federal
requirements.      -                      i
                       '                   7                  •
OUST strongly recommends, however,  that today's  guidance be
implemented voluntarily as  a sound  fund management practice
in states  with funds  which  have  not yet been  approved or in
states which  have  been delegated the program  under state
program approval.                        , j

Comment 11;   One commenter  believed that the  document should
focus  on a risk-based approach  to cleanups in  order to  avoid
costly remediation in properties that posd no  risk to human
health and the environment.  Another commenter suggested use
of a prioritization system  which pays the worst  sites first
as a way of ensuring  the  adequacy of statej funds.

Response;

OUST agrees that cost control and reductions  in the overall
costs  of remediation  at leaking  underground storage tanks
sites  is a key component  to the  success  oft not only state
assurance  funds, but  the  UST program in  general.    For this
reason, EPA has been  actively promoting  the use of  improved
technologies  and administrative  streamlining.   A risk-based
approach to clean-ups is  not at  all  precluded by this
guidance.                                 i
                                          I-
A prioritized  reimbursement system ensuring that the worst
sites  are  cleaned up  first  is also a workable option under
this solvency  guidance.   States with prioritization
schedules  may want to work with a region t|p modify the
guidance accordingly.   For example,  a statfe may argue that
the measure of time required to pay  a claim should be
different  for high versus low priority sites.,

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Attachment 2                           OSWER Directive 9650.14


      MONITORING THE  FINANCIAL  SOUNDNESS  OF  APPROVED STATE
                          ASSURANCE  FUNDS
   *             v                    {

Introduction and Summary
                 ™~~^~   ^~^^*">
                                               i
     The purpose of this  guidance is to provide  staff in EPA
Regional Underground  Storage Tank (UST) programs with criteria
and procedures for monitoring the financial  sovindness of approved
State financial assurance funds.  EPA's principle interest in
monitoring the financial  soundness  of approved State assurance
funds is to ensure that they remain viable mechanisms for
complying with the financial responsibility  requirements.
     "         '                          "  '     I
     EPA believes that State funds  play a vital  role in the UST
program.  They provide tank owners  and operators with an
affordable financial  responsibility compliance[mechanism and they
provide large sums of money for UST cleanups; rhoney  that would
not be available otherwise.  Therefore, it is in the interest of
not. only EPA, but States,-tank  owners and opereitors,  and the
environment that these funds remain financially  viable.   This
guidance is intended  to help EPA work with State assurance funds
to help them identify deficiencies  over time arid to  work to
remedy deficiencies.  The guidance  is particularly relevant
given the financial pressures that  many State funds  are under, as
the number of claims  outpaces the amount  of  funding  available.
In addition, by issuing this guidance, we hope to foster
consistency between Regions "in  the  monitoring of approved  State
funds.                            '

     If the financial soundness of  a State fund  is so
questionable that it  no longer  is a viable finetncial    .
responsibility compliance mechanism, Regions maiy be  required to
withdraw fund approval.   This, guidance will  heip describe  those
circumstances under which fund  approval must be  withdrawn.
Withdrawal of EPA approval of a State fund means that the  fund no
longer qualifies as a Federal financial responsibility compliance
mechanism.  A State fund  could  continue to exisit, however,  as a
cleanup mechanism,                             ;

     Previously-issued guidance (November 17, 3-989) enabled
Regional staff to evaluate the  appropriateness of State  funds
submitted to EPA for  approval as equivalent  financial  assurance
mechanisms.  The 1989 guidance  contained  the following fund
evaluation criteria:  funding source, amount of  fund,  coverage
provided,  fund eligibility, and method of paymejnt to  tank  owners
and operators.               ,     .  '           I
                                               I
     This guidance differs from the 1989  guidance in  that  it
focuses strictly on the availability of funds for corrective

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                                        OSWER Directive 9650.14
action and third party claims.  In addition, the guidance
provides an array of solvency measures which can be tailored to
each State fund.  Applying these measures should not burden
Regional staff or States, but should provide Regions with an
oversight mechanism for identifying potential problems in
sufficient time to work with States to take appropriate steps to
address weaknesses.  By providing step-by-step monitoring and
remedial measures, the guidance should provide a vehicle for
assuring the viability of funds.  This guidance should also
provide States and the regulated community with information on
how they should assess their State funds.

Background

     In promulgating financial responsibility requirements for
owners and operators of underground storage tanks  (USTs), EPA
attempted to assure adequate and reliable financial assurance for
the costs of UST releases while also allowing flexibility to the
regulated community.  Accordingly, the financial responsibility
requirements permitted a wide array of compliance mechanisms,
including State assurance funds, insurance, risk retention group
coverage, financial tests of self insurance, guarantees, letters
of credit, surety bonds, fully-funded trust funds, and state-
required mechanisms  (40 CFR Part 280.94).  However, since the
financial responsibility regulations took effect on January 24,
1989, State assurance funds have become the most available and
lowest cost financial responsibility compliance mechanism for
tank owners and operators.  For some segments of the regulated
community, State  funds constitute the only  feasible compliance
mechanism currently available.

     To date,  43  States have passed legislation to establish
funds to assist tank owners and operators in complying with the
financial responsibility requirements.  Although all of these
funds are designed to assist tank owners in meeting Federal
requirements,  no  two funds are  identical.   These funds vary in
the amounts and types of coverage they provide, in their
eligibility requirements, in the amount of  funding, funding
source, method of payment, and  program implementation.  Even the
responsibility for  implementing the fund can vary; the agency
administering  the fund could  be the Department of  Environment,
Commerce or Insurance.   In a  few States, all or part of the fund
implementation has been  contracted out to private  third party
administrators.

     This  diversity  is expected since States are not required by
law or  the financial responsibility rule to establish assurance
funds.  Rather,  States that have chosen  to  establish funds have
done so to provide assistance to tank owners and operators in
complying  with the Federal financial responsibility requirements,
cleaning up releases from tanks, and,  in some cases, paying for
third party damages  associated  with releases from  USTs.

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                                3       OSW'ER Directive 9650.14

     As States have gained experience in the implementation of
funds, many have modified^their programs, either by statute,
regulation, or operating procedures.  Some haves streamlined
claims administration procedures, increased funding, limited
activities that the fund will pay for, or established reasonable
cost guidelines.  In other cases, States have experienced an
unanticipated demand for reimbursement.  State !financial crises
have sometimes impacted funding and administrative resources, and
threaten to compromise the ability of those State funds- to
consistently achieve their dedicated purpose.

     There are currently no independent State eigencies with
clear-cut responsibility for oversight of theses assurance funds.
In general, when creating these funds, the States did not assign
responsibility for overseeing the soundness of these funds to
State entities similar to those that were created to regulate
insurance, sureties and other equivalent mechanisms that owners
and operators might use to satisfy financial responsibility ~
requirements.  Even if a State agency does haves an oversight
role, EPA has no control over how well that function is
exercised.  While many assurance funds have Fund Boards or
Advisory Committees (composed of members of the regulated
community, officials from State Departments of Environment or
Insurance), these Boards main functions are to approve or
disapprove claims for reimbursements, and recommend changes to
fee structures.

EPA/s Role

     In terms of. assuring that a State fund is'established on
sound financial footing, the financial responsibility regulations
establish a well-defined role for EPA.  A States must submit its
fund to EPA for formal approval if the fund is :to qualify as an
equivalent financial assurance mechanism for Use by its UST
owners and operators in meeting the Federal financial
responsibility requirements in whole or in part (40 CFR Part
280.101).  On November 17, 1989, EPA issued a document entitled
"Final Guidance for Reviewing State Funds for Financial       ,-
Responsibility" to help EPA reviewers understand what to look for
as they evaluate submissions of State funds as financial
assurance compliance mechanisms.  The review olr a State fund
includes the following elements: funding source, amount of fund,
coverage provided, fund eligibility, and method of payment to
tank owners and operators.  In examining these elements of State
funds, reviewers were to ascertain that money Would be reasonably
certain and available to pay for cleanup and third-party damages.
It should be emphasized that this solvency guidance doesn't
replace the 1989 guidance with regard to the initial review and
approval of a submitted fund.
                                           -.!''•     • -  -      •
     To date, 30 funds have been approved by EPA Regional
Administrators to serve as Federal financial responsibility

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                                        OSWER Directive 9650.14
compliance mechanisms.  Once approved, tank owners and operators
in these States are deemed to be in compliance with the financial
responsibility requirements for the types and amounts of coverage
provided by the State funds.  In addition, seven funds have been
submitted to EPA Regional Administrators for approval.  Owners
and operators in these seven States are also deemed to be in
compliance with the financial responsibility requirements until a
final determination is made by EPA.  This guidance is only
intended to help monitor approved State funds, and is not
applicable to those funds that have only been submitted.

     The 1989 guidance did not establish absolute levels of
funding as a prerequisite to approval, but instructed reviewers
to consider the amount in the State fund in terms of the overall
design of the State's cleanup and enforcement program, as well as
the ability of the State to expend monies from the fund.  This
pragmatic approach recognized that a fund could be approvable if
adequate funds would be reasonably available over time, although
fluctuating demand could result in temporary periods when.funding
might not be keeping pace with expenditures.

     Once a fund is approved, neither the 1989 guidance nor the
financial responsibility regulations impose specific requirements
for continuing oversight of fund soundness, either on the State
or EPA.  Nor do the approval guidance or the regulations set
forth criteria for revoking approval.  The regulations contain
procedures for addressing the effect of bankruptcy, disability on
the part of a guarantor, and other situations where a provider of
financial assurance is unable to assure funding for corrective
action or third-party damages, but do not specify what should be
done when a State fund's ability to provide assurance is
questionable.  If, as EPA's research  indicates, financial
assurance funds do not receive the same oversight as  insurance
companies, sureties, risk retention groups, or similar
enterprises, EPA needs to scrutinize the ability of a fund to
provide  financial assurance that is equivalent to other approved
mechanisms.  This guidance  fills the need for explicit procedures
for EPA  review of the on-going soundness of approved  State funds.

     Once a State has an approved UST program, EPA will continue
to monitor overall program  performance, including the financial
soundness of State assurance  funds, but only  as it relates to the
overall  stringency of the UST program as  a whole.  Therefore,
there will be no additional monitoring of the financial soundness
of  funds above and beyond the routine oversight of approved State
programs.  While use  of this  solvency guidance is not mandatory
in  States with approved programs,  or  in States with submitted
funds,  EPA recommends that  these States voluntarily collect data
to  assess  fund soundness as part of routine fund management.

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                                5       OSWER Directive 9650.14

Purpose of Guidance

     This guidance is  intended to provide  staff  in EPA Regional
UST programs with specific procedures  for  monitoring the
financial soundness of approved State  assurance^  funds.  The
purpose of the guidance is to ensure that  each; approved State
fund provides reasonable assurance that funds etre available to
pay for the costs of corrective action and third party damages.
In satisfying this purpose, EPA will ensure that approved State
assurance funds provide financial assurance thett is equivalent to
the other compliance mechanisms allowed by the |Federal financial
responsibility regulations.

     This guidance builds on the previously-issued guidance for
evaluating the overall viability of State  funds;.  The additional
tools contained in this guidance should enable JRegional staff to
assure that these funds continue, to provide reeisonable assurance
that monies will be available for corrective action and third
party claims.  The, guidance provides flexible measures which
should minimize the burden on Regional staff and on States, but
will provide a mechanism for identifying potential problems in
ample time to work with States to take appropriate steps.  A
primary objective of this guidance is  to provide a vehicle for
improving the solvency of funds rather than necessitating drastic
action, such as withdrawing fund approval.  In^addition, we hope
that this guidance serves as a tool to help States identify fund
weaknesses and provides them with a framework for improving these
deficiencies.  This guidance can also'serve to [bolster a fund
board's recommendation for a tax or fee increasie.

Definition of Financial Soundness

     The definition of financial soundness provided in this
guidance is built upon the functional  definition of soundness
provided in the State  fund approval guidance.  |A State assurance
fund is financially sound if it provides reasonable assurance
that funds are available to pay for the costs of corrective
action and third party damages.  "Reasonable asisurance" would be
evident, for instance, if the fund assets  are gjreater than
liabilities or there are sufficient funds  to meet current
demands, that is, the  normal timing of payment of claims is not
significantly delaying cleanups.  If funding levels or claim
processing time has a  negative impact  on the clieanup of releases
from USTs (i.e., causing undue delays  in cleaning up releases
therefore harming human health and the environment), then EPA is
concerned about the financial soundness of the fund.  The
reviewer should look for evidence that reasonable assurance is
provided, but other parties such as cleanup contractors, fund
administrators, other  State officials, and tank  owners and
operators should also  have reason to believe that the funds are
reasonably available.

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                                        OSWER Directive 9650.14
     In the following section, this guidance will provide
Regional reviewers and States with indicators with which to track
and evaluate the viability and financial soundness of approved
State assurance funds.  Finding the appropriate evidence and
correctly interpreting it is by no means a precise or mechanical
exercise.  EPA has researched the approaches to oversight used by
well-established institutions, such as insurance commissions,
State and Federal bank regulators, and the U.S. Department of the
Treasury.  While the experience of these institutions is too
specific to the businesses regulated for direct application to
UST fund guidance, their general approach is helpful.  They allow
regulators considerable discretion in defining and evaluating
measures of soundness, and in acting on signals provided by these
measures.  These institutions explain that oversight must be
conducted with great care and sensitivity because overzealous
intervention could have a profound impact on regulated
enterprises or on the public that relies on the enterprise.
Similarly, State assurance funds meet a critical need for
demonstrating financial assurance as well as providing another
source of funds for response to releases.

Measures of Fund Soundness

     There are a number of potentially useful measures of the
financial soundness of State assurance funds:

     (a)  Fund Balance
     (b)  Rate of Collection
     (c)  Rate of Disbursement
     (d)  Collections Projected for Next Reporting Period
     (e)  Disbursements Projected for Next Reporting Period
     (f)  Number or Dollar Amount of Pending Claims
     (g)  Number of Days Between Claim Submittal, Approval, and
          Payment
     (h)  Major or Pending Changes to Fund

     Each of these measures is discussed in more detail in
Appendix A.

     In using a measure, a reviewer needs to clearly define the
time period over which the data is collected, whether calendar or
working days are intended, whether a term like "payment" means
issuance of a reimbursement check or transfer of approval to the
accounts payable department.  The time frame, therefore, is
critical for comparison of measures.

     We do not believe that any one measure will indicate
whether or not a fund is financially sound.  Obtaining data on
all the measures is also not necessary to develop a reliable
picture of a fund's soundness.  Each Region should select from
among the measures those that the Region can obtain with relative
ease, that have inherent meaning for the fund under review, and

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                                7       OSWER Directive 9650.14
                                               j   •:
that provide a meaningful  indicator over time.  Combinations of
measures could be used, or certain measures or ratios could be
used to trigger analysis of other measures.  As" discussed
earlier, State funds exhibit great diversity in design and
implementation, and oversight should take into Consideration the
unique characteristics of  each fund.  Regions will be accorded
broad discretion in selecting and applying measures.  However,
since this area is a novel one for many Regional staff, EPA has
some suggested procedures  that could be used.

Procedures                                     !
     :           -                               |

     The following procedures present one logical approach to
using the measures to establish a monitoring methodology and
apply it over time.  Even  for those funds that are currently
experiencing financial difficulties, it is important that Regions
follow these procedures to establish a baseline of information
and to allow the State to  discuss fund problems! arid, perhaps, to
begin to remedy the problems.
     (1) Establish baseline measures.  Begin by
selecting the
most useful set of measures for the State.  Since each State fund
will differ even from other funds in the Region, measures should
be tailored to each State fund on a state-by-state basis.  As
noted above, each measure will need to be clearly defined.
Although a measure could have different meaning for different
States, the purpose is to establish a baseline for each State
fund, evaluate soundness at the start, and compare performance
based on uniform measures over time.  When selecting measures,
Regions and States should also consider factors'such as ease of
reporting by a State, whether the measures are stable or can be
expected to fluctuate dramatically, and whetherfa measure already
indicates a problem.                          . i     '
                            •                   i  .
     In developing this guidance other approaches were considered
and rejected.  The Federal Reserve looks at banks as peer groups
based on common characteristics such as size and location.  In
the case of State financial assurance funds, the small number of
States with approved funds and the diversity ofithese funds
undercut the ability to create meaningful peer groups.
                                               i     •
                                               i
     (2) Estimate baseline soundness.  What do the baseline
measures tell you about current soundness?  At this early stage
in measuring soundness, this determination cannot be conclusive.
Instead, discretion should be used to decide what indicators will
be most helpful.  This guidance does not propose absolute
measures for determining soundness.  The Federal Reserve and
other bank and insurance regulators designate absolute levels of
capitalization or liquidity as a measure of an institution's
soundness.  Without greater experience, we cannot accurately
determine what would be comparable benchmarks for State funds.

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                                8       OSWER Directive 9650.14
     While absolute values are not available, some relationships
between measures should prove helpful.  For example, if the
current rate of disbursement is several times larger than the
rate of contribution, a reviewer should examine other measures
and track these rates over time.  If the dollar amount of the
pending claims is several times larger than the fund balance,
then the fund's soundness could be compromised.  Again, there may
be simple explanations for why these measures are not threatening
the fund's soundness or delaying cleanups.  The persistence of
measurement gaps over time, however, will provide a better
indication of the problem.

      (3) Check for explanations for current status.  EPA research
into the approaches to oversight taken by other financial
institutions shows that indicators are used as screens to.
identify the need for action, but that early action usually means
further exploration of apparent problems.  If a measure indicates
a potential problem, discussions with State staff would be
appropriate.  There may,  for example, be a simple explanation for
the problem.  More importantly, these measures might not threaten
the fund's soundness or delay cleanups.  The persistence of a
measurement gap over time will provide a better indication of the
problem.

      (4) Monitor trends over time.  State funds are like bank
accounts that can fluctuate over time without threatening; the
account's  stability  or solvency.  However, increasing  disparities
between  income  and disbursements over time could  indicate
underlying weakness.  Similarly, the  time interval  between
submittal  of  an invoice for a cleanup action and  payment could  be
several  months  without affecting the  willingness  of contractors
or  owners  to  undertake response to  releases.   If  the  interval is
increasing over time, delays might  begin  to  impact  cleanup and
should trigger  the need to investigate other measures  or factors
to  determine  the effect of payment  delay  on  release response.

      We recommend in this guidance  that  States which  are
experiencing financial difficulties with  their funds  should
report data on each  applicable  measure to EPA  Regions at the
frequency that the State  currently  generates such information,
but no less frequent than six month intervals.  There is no
readily adaptable experience  from other  oversight programs for
setting response times.   Banks  report financial data  quarterly,
but that frequency is consistent with other  events that occur on
a Quarterly basis in the  financial  community.   Semi-annual
reporting is a compromise between setting an interval that does
not allow enough time to  encompass  important events (f-f-/
periodic replenishment of funding or average time Periods  for
 administration of claims) and setting an interval that is  too
 long to catch serious erosion in soundness.   This frequency  also
will afford EPA greater opportunity to provide timely assistance
 before more serious intervention becomes necessary.

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                                9       OSWER E>irective 9650.14
                            -•'.•_     '       '
     (5) Use discretion.  At this stage in the ;evolution of the
UST financial assurance program, there is no perfeet guidance for
oversight.  The measures provided and steps suggested are
imprecise instruments for monitoring soundness.  At any step,.
oversight should be tempered with discretion.  .Explanations
should be sought, discussions held, and assistaince offered to
remedy problems.  Despite any measure, the important criterion is
whether funds are reasonably available for cleanup and third
party claims.  This determination will continue' to require a
considerable amount of subjective judgement on the part of EPA
Regions.                                       !

EPA Regional Response                          !             .
                                               I
     This section elaborates on the steps described above by
focusing specifically on the Regional action required to
implement the monitoring process.  The suggestesd process is
displayed in Appendix B.                       i

     After the State and Region have identified and defined the
key performance measures that will be used to monitor the
soundness of the State's assurance fund, the State should report
those measures to the Region.  Once the Region !has received the
baseline data from the State and the Region has; reviewed the
data, the Region should ask the State any questions it has
regarding the information..  The Region can then,make an initial
determination about the financial soundness of the fund.
If the Region is uncertain about what the financial measures
reported by the State indicate, the Region mayjconsider asking
the State to do more in-depth analysisi        i

     As a result of the initial assessment of fund soundness, the
Region may determine that the fund is basically sound.  If this
is the case, the Region can determine how frequently the State
should provide information on the financial stcitus of the fund;
Aa a rule, the Region should ask the State'for a financial status
report during its semi-annual review of the program.
                                               1
     If, after the initial assessment of fund ssoundness, the
Region determines that the financial status of | the fund is
questionable, data could be collected from the State more
frequently, as deemed necessary by the Region and the State.
When the next set of data is sent, the Region sphould review and
compare it to the prior data that was submitted by the State.
The Region should pay particular attention to einy trends
indicated by the data.  If the data show a negeitive trend, (e.g.
the amount of time to reimburse a claim increasses) , the ^Region
should verbally inform the State of its concern and ask the State
to explain why the time has increased.  At thisi time, the Region
should also inform EPA Headquarters about its concerns.  If claim
processing time is the problem, for example, perhaps the increase
in processing time resulted from the State assurance fund losing

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                                10       OSWER Directive 9650.14

key staff.  The Region can then ask the State about its plans for
filling those fund positions and encourage the State to proceed
with plans to fill those positions.  The Region should, of
course, continue to monitor the financial status of the fund.

     If the downward trend persists, the Region should write a
formal letter to the State requesting a meeting to discuss EPA s
concerns and possible remedies.  The letter should be sent to the
State official who originally requested formal approval of the
fund.  (The appropriate addressee may vary by State, and can be
left to the discretion of the Region.)  At the meeting, the
Region should ask the State to develop a plan that addresses the
identified deficiencies and a schedule for implementing the plan.
It might be helpful to think of this step as analogous to
requiring a tank owner or operator to develop a compliance plan.
After receiving the plan, the Region should monitor the progress
of the plan's implementation by the State.  EPA Headquarters
should also be notified when the letter is sent, when the State
meeting is scheduled, and when the plan is submitted to the
Region.

     If the State fails to  implement the plan in a timely fashion
or if the implemented remedies haven't resulted in any
improvements  in the downward trend, and EPA makes a judgement
that the  fund is no longer  a viable financial responsibility
mechanism, the Region should write a  formal letter to the head of
the Agency that is responsible  for  implementing the State fund.
In this letter, the State will  be  notified that EPA may withdraw
approval  of the State fund,  in  which  case,  it can no longer be
used by tank  owners and operators  to  comply with the Federal
financial responsibility  requirements.  The State will then be
required  to send a notice to  the  tank owners and operators that
aS  covered by the State  fund,  informing  them that their coverage
under  the State fund will no  longer be acceptable as a mechanism
for  complying with the  financial  responsibility requirements  as
of  60  days  after receipt  of the notice(40 CFR 280.105).  Within
30 days  after receipt,of  this notification, owners  or  operator
must obtain alternate  financial assurance provided  that the  owner
or  operator is  required to  comply with the financial
responsibility  requirements.   (40 CFR 280.110)]

      It is  our  hope  that both the tiered Regional Response
process that has  been outlined and the reliance on  monitoring and
 evaluating trends  over time will serve to alert States as  early
 as possible in the review process about potential  fund
 deficiencies.  If  appropriate,  this commun^atlon.wl"v^^°a^t
 stakeholders on notice that there is a problem with a  fund and
 that their involvement may be required to remedy the situation.
 It is important to stress that EPA does not want to precipitate  a
 crisis- EPA recognizes that solutions to identified weaknesses
 will be State-specific and may require months or years to
 implement.   By alerting affected/interested parties of EPA's

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                                11
OSWER Directive 9650.14
concerns regarding the financial soundness of funds, adequate
time will be given to discuss the reasons for the  fund
weaknesses, identify possible remedies to improve  the weaknesses,
and agree oh appropriate and reasonable time frames for States to
implement remedies.

Possible Remedies
                         '           -           i       -
                                               I    '  •   *      ',
     When establishing deadlines for remedial eiction, Regions
should .acknowledge that some remedies may take[varying amounts of
time to implement.  When evaluating fund weaknesses and
negotiating possible solutions with States, Regions must consider
the amount of time necessary to implement the remedies.  Possible
remedies might include:
          Raising additional revenues.
          keep up with claim demand.
This would help a fund
     o    Modifying the coverage provided by the fund.  By
          reducing the coverage that the fund provides to tank
          owners the amount of funding required to pay claims in
          a timely fashion might be reduced,  in addition, by
          reducing the coverage that the fund provides, existing
          funding could be adequate to process claims in a timely
          fashion.

     o    Streamlining the administrative processes of the fund.
          This might help speed up the processing of claims.
                                       •        i               •
     o    Hiring additional fund staff.  This remedy could also
          help speed up the processing of claims, or have other
          positive effects depending on the weciknesses
          identified.

     o    Limiting fund eligibility (e.g. requiring tank owners
          and operators to be in "substantial compliance11 with
          State regulations.)  This could alsoiconserve fund
          monies; fewer tank owners would be eligible to submit
          claims to the State fund.            i

     Implementation of these remedies may require statutory
changes which, depending on the length and timing of the
legislative sessions in States, may take up to two years to
implement.  Other possible remedies would require program policy
changes that also might require a significant ctmount of time to
implement.  Regions need to keep these timing issues in mind when
working with the State on remedies.            j

EPA Headquarters Response
     During the collection of baseline information and throughout
the monitoring process, EPA Headquarters will l>e available to

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                                12       OSWER Directive 9650.14

informally discuss and evaluate the fund data at the request of
the Region.  Headquarters can provide comments concerning the
evaluation of the fund data and will provide other technical
assistance necessary to help Regions implement the monitoring
process.  For instance, if the Region is unable to evaluate the
measures provided by the State and believes that further analysis
is required, EPA Headquarters can provide support (technical,
financial, etc.) to the Region.  At the request of the Region,
EPA Headquarters will also be available to provide written
comments on any formal letters that the Region sends to States
regarding the financial soundness of the fund.  Finally, if the
Region has concerns about the financial soundness of the fund and
discusses those concerns with the State verbally, EPA
Headquarters should be notified.  EPA Headquarters should also be
informed about the plan that a State develops to address the
identified deficiencies and the schedule for implementing the
plan.

     If a Region determines that fund approval-must be withdrawn,
Headquarters must be consulted and must concur on the Regions
withdrawal determination for a number of reasons.  First, EPA
Headquarters has an obligation to ensure National consistency and
uniformity in fund withdrawal decisions.  Headquarter's
involvement at this time will also lend support to the withdrawal
action.

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                                                                OSWER  Directive 9650.14
                                         APPBMDIX A
                 PROPOSED DEFINITIONS OF MEASURES OF
                         SOUNDNESS FOR STATE FUNDS
 Fund Balance
        There are several potential measures of fund balance.  The least conservative is the cash-basis
definition: the fund balance is defined as the amount of cash currently in the state fund (or in the
account maintained by the state treasurer for the fund), minus any outstanding checks for
reimbursement under the fund. Under this definition, the fund balance woiild exclude as-yet
unprocessed claims against the fund or any recognition of future claims likely to be submitted for
known releases.

                        Fund Balance = Cash in Fund - Claims Process
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                                                                   OSWER Directive  9650.14


Rate of CoBactfon

        The rate of collection is the amount of money collected for us* by the fund over a specified
oeriod   The period should correspond to the fee collection mechanism.  For example, many fund*
SS'aiunial tank fees; consequently, the appropriate period is one year, corresponding to payments
of SffSOther funds,  especially those funded through per-gallon fees on petroleum products, may
Save nSrl frequent requirements for payments (e.g., monthly or quarterly)  and thus a!low for a
chort^Deriodfor estimating the rate of collection.  For the purpose of tracking fund solvency, the
^Se^o^SLnud (six month) basis probably provides a reasonable balance between
the information collection burden and the amount of information obtained.

                Rate of Collection = Amount of Money Collected / Reporting Period

        The rate of collection can be used in at least two ways.  First, decreasing trends in the rate of
collection may indicate that tanks are being taken out of operation, reducing the amount of Avenue
waSSte toSe fund because closed tanks do  not pay fees. In comparing penod-to-penod collections,
however  it may be important to consider any significant seasonal patterns.  For example, gasoline
sate^e generally higher in the summer, so that fund revenues may show a decrease from summer to
winter months.

         Second  the rate of collection should be compared to the rate of disbursement as a means  of
                  al future shortfalls in the fund.  If the rate of collection exceeds the rate of
            n      fund balances will increase over time and the fund will become increasmgly more
          lf the rate of collection is less than the rate of disbursement, then  fund balances will
 decrease and the fund will become less solvent.

 Rate of Disbursement

         The rate of disbursement is the amount of money spent by the fund Cm actual payments) over
 a set time period. As discussed under rate of collection, the appropriate time penod may vary
 i^een States depending on their different fiscal cycles. In general, disbursements per penodshould
 pS a time p^iod long enough to smooth out the effects  of single, large disbursements, but short
 enough to provide timely identification of significant increases or decreases in the rate of
 Sursements.  The period used for rate of disbursement should correspond to the period used for the
 rate of collection.

                     Rate of Disbursement = Actual Payments / Reporting Period

 Collections Projected for Next Reporting Period

         Collections projected for the next reporting period is the state's estimate of the dollar amount
 of funds that will be collected for use by the fund at any time during the next state fund «*vency
 ?eDOrtSg period  This measure is similar to the rate of collection, but, rather than calculating current
 STeSover time, the measure projects total collections  over a future time period^ Tne measure is
 intended to estimate additions to the fund for use in paying existing and projected future claims
 against the fund, and should not be confused with fund balance. The state must rely on ,te judgement
 if estimating future collections.  Tne state should make a reasonable Judgement of funds_ that it
 Relieves will be available for disbursement to pay claims made against the fund, rather than either a

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                                                                    OSWER Directive  9650.14
                                                                     i
             "                                .                        ''           '
liberal or conservative estimate.  The estimate should account for other relevant information, such as
past rates of collection and major or pending changes to the fund.         j

     Collections Projected = Estimated Amount of Money to be Collected in a Reporting Period

        As in the case of the rate of collection, the reporting period should be as short as possible
subject to constraints  imposed by the fee collection mechanism.  In many states, financial information
is commonly reported on a quarterly basis for fiscal purposes, consequently, quarterly projections
should provide reasonably accurate data without unduly burdening the state!.  Semi-annual reporting
would also be appropriate if no appreciable collections would be received in some quarters, the
estimate would be  misleading or unreliable, or rates of collections are fairly constant.

        The projection of collections, while speculative, may be used as an early indicator of potential
solvency problems. First, the projection of collections may be compared vtfth the projection of
disbursements as a means of drawing attention to potential future shortfalls] in the fund.  Second, die
projections of collections and disbursements could be combined with the baicklog and fund balance to
determine whether the current backlog will grow or contract.            j

Disbursements Projected for Next Reporting  Period
                                                                     i     / •  •
                                                                    ' i •
        Disbursements projected for the next reporting period is the state's estimate of the dollar
amount of anticipated disbursements from the fund to pay claims for the n^xt full reporting period.
In projecting disbursements, the state should make a reasonable estimate of the costs of claims it
expects will be submitted and require payment during the reporting period.  This  measure of
disbursements projected from the fund will be  compared with the measure pf collections projected
into the fund in order to establish,an early indicator of potential problems ^ith fund solvency.
Consequently, when developing estimates for disbursements projected and collections projected, die
assumptions and reporting period used should be consistent (e.g., if the state has a six month
reporting period and  is accounting for a pending change to the fund when deteirmining collections
projected, it must  also have a six month reporting period for the disbursements; projected and account
for the same pending change in the fund). Although projecting disbursements requires speculation by
the state, the projection should  account for past patterns of claims received and the current number of
claims filed but not paid, and reflect pending or major changes to the fund thai: are likely to affect.
disbursements.                                                       j.
                                                                     i -         , '
                                                                   •  i
        Disbursements Projected = Estimated Dollar Amount of Disbursements to be Paid in a
                                             Reporting Period

Number or Dollar Amount of Pending Claims

        The number of pending claims is defined as the total number of claiims against the fund that
have been received but that have not been approved for payment at the close of the reporting period.
Similarly, the dollar amount of pending claims is the dollar amount of received claims that have not
been approved for payment at the close of the reporting period. These measures  are intended to
provide the state and region with a firm estimate of claims against die fund that are likely to be
realized as disbursements at a later date, even  though processing is not complete.


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                                                                 OSWER  Directive  9650.?
          Number of Pending Claims = Number of Claims Received but not yet Processed

    Dollar Amount of Pending Claims = Dollar Amount of Claims Received but not yet Processed

       The region may request that the state report either the number or thedollar amount of
pending claims in order to track a rise or fall in either measure over time  The state <'"eg.onm.ght
fiTdI to the dollar amount of pending claims is a more direct indicator of the fund's tou«»habilmes
San number of claims, because it can be compared to the fund balance and rate of collection to
provide a measure of solvency. In contrast, collecting data on the numbers of claims permits
observation of the trend in claims without bias introduced by indivjdual large claims.

Number of Days Between Claim Submittal, Approval, and Payment

        The number of days to process claims is only a partial indicator of fund  solvency. Even a
relatively long period for processing may not indicate solvency problems, as long as owners and
ope So s and  corrective action contractors continue to clean up sites. An increasing period, however,
may Indicate that the state fund has inadequate staff or administrative procedures to process cairns on
rSIrSstent schedule. A decreasing period probably reflects reduced demands on the fund, or
improved administrative procedures.

                  Measure = Number of Days between First Receipt and Payment
                                              or
           Measure = Number of Days between Receipt of Complete Package and  Payment

        The start date for each part of the approval process must be clearly defined. In some cases^
there may be  a significant lag (up to several months) between the time a claim ,s first sub^ted and
Se time L owner and operator finally supplies all necessary ^formation (for example, comp ete
fcvofces, documentation of types of costs covered by the invoices).  As a consistent meagre  to first
date the claim is submitted is probably best.  A lengthy period may suggest tha  'tates need to
sVeamline their guidance for claims and/or improve their outreach to consultants and contactors so
Sey know w?at must be submitted.  In addition, the date used as the date of approval may vary
bm^n funds.  In some states, the technical  staff reviewing claims have the authority to approve
 payment  based on their  review.  In other states, an independent board or agency must ratify the
 deS of the technical staff.  The appropriate date is the date that all necessary approvals and
 reviews have been met.  The date of payment should be the date the check u.written by the state
 tteasury to the owner or operator (or cleanup contractor in states that allow direct payment)
 sSificant lengths of time between approval and payment may indicate that disbursements are held up
 to prevent overdrawing accounts.

 Major or Pending Changes to the  Fund

        Major or pending changes to the fund could be either economic or administrative, Positive or
 negative  Impending negative impacts could include legislative expansion of fund coverage to include
         universe of tanks or facilities without additional funding.  Regulatory amendments that either
         "braised the costs of corrective action are respective examples of potentially positive or
          impacts. Direct effects on staffing levels or productivity, such as hiring freezes would be
          hT  Finally,  the most obvious major change to be considered would be one that will likely

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have a direct effect on a fund's finances, for example, the reporting of
release.
                                                                    OSWER Directive  9650.14
                                                                    extraordinarily large
       Besides the measures listed above, another important factor in assessing the financial
soundness of a fund is gauging the degree to which cleanups are being delayed due to fund-related
issues. One approach to getting such qualitative information is to monitor me complaints made by the
regulated community and/or cleanup contractors to the state or EPA about the cleanup delays that are
being caused by slow fund payments. There may also be other  ways to obtain this information.
Obviously, the reasons for delays in fund payments may not always be finiincial.  For instance, the
delays could be caused by lack of staff to process claims.  Reviewers should use complaints as a
starting point for further analysis rather than as a financial determination olf a fund's financial
condition.

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                                           OSWER Directive  9650,
     Illustrative Representations of Trends in
     Measures of Soundness for State Funds
1
I

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                     OSWER Directive 9650.14
STATE FUND SOLVENCY


Fund is Sour



'8 10Subn
». 0
' Da

L_ • ' '

t
F

16Subn
' Ito O
Da












id . ' '
Fund
is
Sound
i



nittal Meeting
f 	 ^ and


ta Evaluation
Problems
Remain
i





Go to 12
- • i
Fund
Improves
;


nittal Meeting
f ......^ and
ta Evaluation




Problems
Remain y
17 Written
strdtooy
Presented









Submittal
r,t
Data















-
18 Submittal
of
Data










Meeting
and
Evaluation

Problems
Encountered
\

	 ^. GO to 2
Fund

Sound

i •
Go to 8



' - Go to 12

i




. Fund
Improves






'


18
Meeting

j~ualuatJQn
Problems
Remain \









20 Initiate
Withdrawal of
State Fund
Approval





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^^^^^^^»

-------