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OFFICE OF INSPECTOR GENERAL
Evaluation Report
Continued EPA Leadership Will Support
State Needs for Information and
Guidance on RCRA Financial Assurance
Report No. 2005-P-00026
September 26, 2005
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Report Contributors:
Steve Hanna
Martha Chang
Jayne Lilienfeld-Jones
Abbreviations
ASTS WMO Association of State and Territorial Solid Waste Management Officials
EFAB Environmental Financial Advisory Board
EPA U.S. Environmental Protection Agency
OIG Office of Inspector General
RCRA Resource Conservation and Recovery Act
TSDF Treatment, Storage, and Disposal Facility
Cover photo: A Class I Landfill in post-closure
(Courtesy California Department of Toxic Substances Control)
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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
2005-P-00026
September 26, 2005
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What We Found
EPA does not have adequate data on financial assurance at hazardous waste
treatment, storage, and disposal facilities regulated under RCRA. Unlike many
other types of permit information, basic financial assurance information has not
been reported into EPA's national database. This hampers efforts to evaluate the
effectiveness of current financial assurance mechanisms and make adjustments to
ensure facilities have sufficient funds for closure and post-closure costs.
State and EPA financial assurance officials need to improve communication
mechanisms to share financial assurance information. EPA also needs to update
guidance, particularly for insurance, and needs to uniformly oversee State
programs. Such actions will improve the ability of States to make informed
decisions on the adequacy of financial assurance mechanisms. Further, States and
EPA staff have expressed concern with aspects of the financial test and other
financial assurance mechanisms. Although States and regions expressed concerns
about financial assurance, we noted few examples in which failures occurred.
EPA is taking positive steps to address various issues. The Office of Enforcement
and Compliance Assurance formally identified financial assurance as a program
priority. EPA is incorporating some necessary financial assurance data elements
into its information system, and recently implemented a successful financial
assurance training program for States. EPA has asked its Environmental Financial
Advisory Board to study and make recommendations on financial assurance issues
of concern. Our work supports EPA's efforts and identifies additional
improvement opportunities.
What We Recommend
We recommend that EPA implement financial assurance data elements after
ensuring the information needs will be satisfied by these elements; actively engage
States and regions in developing communication mechanisms and guidance;
continue support of financial assurance training; develop mechanisms to ensure
adequate EPA regional oversight of State programs; and clarify goals, milestones,
and timelines for addressing financial assurance modifications. EPA generally
agreed with our recommendations, and made suggestions that we incorporated into
the report. The Agency's full response to the recommendations is in Appendix A.
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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, DC 20460
OFFICE OF
INSPECTOR GENERAL
September 26, 2005
MEMORANDUM
SUBJECT: Continued EPA Leadership Will Support State Needs for Information and
Guidance on RCRA Financial Assurance
Report No. 2005-P-00026
FROM: Carolyn Copper /s/
Director for Program Evaluation
Hazardous Waste Issues
TO: Thomas P. Dunne
Deputy Assistant Administrator
Office of Solid Waste and Emergency Response
This is the final report on our evaluation of the effectiveness of EPA's hazardous waste financial
assurance requirements conducted by the Office of Inspector General (OIG) of the U.S.
Environmental Protection Agency (EPA). This report contains findings that describe the
problems the OIG identified and corrective actions the OIG recommends. This report represents
the opinion of the OIG and the findings in this report do not necessarily represent the final EPA
position. Final determination on matters in the report will be made by EPA managers in
accordance with established resolution procedures. The report includes EPA's full response to
the recommendations in Appendix A; we did not include the attachment providing specific
comments.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 days of the date of this report. You should include a corrective actions plan for
agreed upon actions, including milestone dates. We have no objections to the further release of
this report to the public.
If you or you staff have questions, I can be reached at (202) 566-0829, and Steve Hanna,
Assignment Manager, can be reached at (415) 947-4527.
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Table of Contents
At a Glance
1 Introduction 1
Purpose 1
Background 1
Scope and Methodology 4
2 Limited Financial Assurance Data Impacts Program Management 5
EPA and States Have Limited Data on Financial Assurance 5
EPA's Planned Actions May Address Some Data Limitations 7
Conclusions 8
Recommendation 8
Agency Comment and OIG Evaluation 8
3 Improved Communication, Guidance, and Oversight Needed 9
Better Communication Mechanisms Needed 9
Formal Guidance Remains a Concern 10
EPA Oversight of State Programs Has Missed Problems 11
Recent Training Successful, but Increased Support for States Needed 11
Conclusions 12
Recommendations 12
Agency Comment and OIG Evaluation 12
4 Several Indicators Show Need for Financial Assurance Modifications 13
EPA Has Plans and is Acting to Address Issues 13
States Have Taken Actions to Implement Additional Restrictions 14
States Expressed Concerns with Financial Test and Other Mechanisms 15
Industry Representatives Believe Mechanisms Adequate 17
Conclusions 17
Recommendation 17
Agency Comment and OIG Evaluation 17
ices "", . .. . "".- ^ " ;
A Agency Response to Draft Report 18
B Distribution 21
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Chapter 1
Purpose
This report focuses on efforts of the Environmental Protection Agency (EPA) to
address financial assurance concerns associated with hazardous waste treatment,
storage, and disposal facilities regulated under Subtitle C of the Resource
Conservation and Recovery Act (RCRA). Our specific questions were:
What information exists on the effectiveness of the existing RCRA Subtitle C
financial assurance requirements?
What assistance is provided to States and regions by EPA's Office of Solid
Waste to ensure adequate review of financial assurance requirements?
Should existing financial assurance requirements be modified?
Background
EPA implemented financial assurance regulations under RCRA to ensure that
facilities will have sufficient funds to properly close their permitted and interim
status units and maintain the site for the duration of post-closure responsibility.
EPA implemented these regulations to prevent default to Federal funds in the
event that RCRA facilities are unable or unwilling to cover closure and post-
closure costs. Financial assurance is required for major regulated entities in all
three of the RCRA programs:
RCRA Subtitle C: Hazardous waste treatment, storage, and disposal
facilities (TSDFs). Interim status TSDFs, which are allowed to continue
operating if their activities predated a new RCRA statute or regulation, are
also required to have financial assurance mechanisms.
RCRA Subtitle D: Municipal solid waste facilities.
RCRA Subtitle I: Underground storage tanks.
EPA has authorized all but two of the States (Iowa and Alaska) to implement the
base RCRA Subtitle C program. TSDFs are required to demonstrate financial
assurance for closure costs, post-closure costs, and third-party liability insurance
coverage for sudden and non-sudden accidental contamination. Financial
assurance requirements do not apply to hazardous waste generators and State or
Federally owned and operated facilities.
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Closure and post-closure costs are components of the formal RCRA permit.
Estimates must be updated annually to account for facility expansion as well as
inflation. Software has been developed by EPA to estimate closure and post-
closure costs.
The allowable RCRA Subtitle C financial assurance mechanisms are listed in
Table 1.1.
Tatte i
Financial test
Corporate
guarantee
Trust fund
Letter of credit
Surety bond
Insurance
Combinations
A test that evaluates the assets and liabilities of a company to determine
whether it will have resources available to cover closure/post-closure costs.
The guarantee of closure/post-closure costs by an affiliated corporation, such
as a parent company, another firm under the same parent company, or a firm
with a substantial business relationship with the RCRA facility.
Money set aside in a trust, specifically allocated for closure and post-closure
expenditures.
Credit issued by a financial institution that guarantees payment of the RCRA
facility's obligatons up to a specified amount
Guarantees issued by a surety company that specified obligations will be
met. The bonds are either in the form of payment (payment bonds) or
commitment to comply with closure, post-closure, and liability requirements
(performance bonds).
An insurance policy for the value of closure/post-closure costs. The policy
must guarantee that funds up to the face amount of the policy will be
available for payment of closure or post-closure care upon the direction of the
permitting authority.
Trust funds, letters of credit, surety bonds guaranteeing payment, and
insurance can be combined for a facility if together their value is at least
equal to the closure or post-closure cost estimate. Surety bonds
guaranteeing performance, financial tests, and corporate guarantees cannot
be combined.
Financial Assurance Concerns
The States and regions we interviewed expressed consistent concerns with aspects
of financial assurance. They believed these concerns would be best addressed at
the national level by EPA, including a rulemaking process that would revise the
existing financial assurance regulations. Their concerns included:
Lack of national data on companies and financial assurance providers.
Lack of an effective mechanism for communicating financial assurance
concerns to appropriate State and regional staff in a timely manner.
Insufficient guidance, especially on insurance.
Allowance of captive insurance as a mechanism.
Conflicts between the current financial test and generally-accepted
accounting principles.
* Lack of regulations on corrective action financial assurance.
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The Association of State and Territorial Solid Waste Management Officials
(ASTSWMO) articulated these State concerns, and in 2003 formed an internal
group to address State problems with financial assurance methods. Their draft
paper, completed in 2004, was originally distributed at a meeting of EPA's
Environmental Financial Advisory Board, a Federally chartered advisory group
that provides advice to EPA. The paper identifies the following issues:
Financial Test/Corporate Guarantee: Various States are of the opinion that
EPA should reconsider the financial test and corporate guarantee as financial
assurance mechanisms, in light of recent financial failures of several large
corporations.
Insurance: States cited numerous problems, including the difficulty of
getting claims paid and lack of State awareness of the true coverage provided
by the policy. The lack of standardized language for policies was a major
complaint. The lack of independence associated with "captive" insurance and
"fronting" arrangements were also of concern.1
Corrective action: Many States want EPA to finalize corrective action
financial assurance; cost estimation guidance is needed.
The ASTSWMO paper recommends the following improvements:
1. Ensure adequate cost estimates for closure and post-closure are complete prior
to permit issuance.
2. Provide financial assurance in corrective action prior to remedy selection.
3. Incorporate financial assurance information into the RCRAInfo database.
4. Investigate complex insurance issues and review State needs for additional
guidance.
5. Update the Financial Assurance guidance.
Prior Evaluation
In March 2001, EPA OIG published a report entitled "RCRA Financial Assurance
for Closure and Post-Closure." EPA requested the evaluation to determine
whether RCRA financial assurance requirements and the implementation of those
requirements provided adequate funding for facility closure and post-closure
activities. This evaluation included both RCRA Subtitle C and D facilities, and
included a detailed analysis of financial assurance data from multiple States. The
report recommendations and their implementation status are shown in Table 1.2.
1 "Pure Captive" insurance is insurance issued by a wholly-owned subsidiary of the company being insured.
Regarding "fronting" arrangements, if an insurance company wants to issue a policy outside the State in which it has
been licensed, it can arrange for a State-licensed insurer to write the policy on its letterhead; the actual policy is
underwritten by the first company but "fronted" by the carrier that can do business within the State.
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Recommendation
Develop specific financial assurance guidance for insurance.
Improve existing financial assurance training material
Post financial assurance information on internal bulletin boards.
Develop criteria to establish appropriate post-closure care time frames.
Provide cost estimation software to States.
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Agency
Response
Agree
Agree
Agree
Agree
Agree
Action
Taken?
No
Yes
No
No
Yes
Scope and Methodology
We conducted our program evaluation field work from July 2004 through March
2005 in accordance with Government Auditing Standards, issued by the
Comptroller General of the United States. We reviewed management controls
related to EPA oversight of State financial assurance mechanisms. The lack of
Federal financial assurance data prevented a substantive review of these controls
and of data quality. Identification of problem facilities was provided by
interviewees, and details on the nature and scope of the problems were obtained
from the State or region with primary regulatory responsibility at each facility.
We evaluated data from four State databases by compiling and summarizing data
supplied by those States.
To achieve our objectives, we interviewed EPA staff from the Office of Solid
Waste within the Office of Solid Waste and Emergency Response, and staff from
the Office of Enforcement and Compliance Assurance. We also interviewed staff
in EPA Regions 4, 6, 8, 9, and 10, to obtain a regional perspective on the issues.
For external stakeholders, we interviewed officials in six States - California,
Colorado, Connecticut, New York, Texas, and Washington. States were selected
to include programs with expertise in financial assurance. We also interviewed
staff at ASTSWMO, an organization of State environmental officials. Further, we
interviewed industry representatives from the American Chemistry Council,
Environmental Technology Council, and Waste Management Incorporated, based
on their known interest or involvement in financial assurance.
To answer our evaluation questions, we asked regions and States a series of
structured questions specific to regulatory issues and EPA's management of the
financial assurance program. We questioned other stakeholders about financial
assurance in general, including their opinions on financial assurance mechanisms.
We reviewed numerous documents, Web sites, and publications. We obtained
State program information from State and regional financial assurance staff.
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EPA does not have adequate data at the State or national level to determine the
effectiveness of EPA efforts regarding financial assurance for TSDFs regulated by
RCRA Subtitle C. Unlike many other types of permit information, basic financial
assurance information has not been reported into EPA's national database
(RCRAInfo). This hampers efforts to evaluate the effectiveness of current
financial assurance mechanisms and make adjustments where needed to ensure
facilities have sufficient funds for closure and post-closure costs. EPA is
addressing this issue by identifying appropriate financial assurance data elements
for incorporation into its national database. Although States and regions
expressed concerns about financial assurance, we noted few examples in which
failures occurred.
EPA and States Have Limited Data on Financial Assurance
Financial Assurance Information Not Routinely Collected
Our efforts to determine the nature and scope of financial assurance problems
have been hampered by the lack of essential data in RCRAInfo, the Office of
Solid Waste's primary information system. Although financial assurance
mechanisms have been required for over 20 years, no history exists on
mechanisms used, company or corporate problems, financial assurance provider
problems, or cost estimate accuracy. According to RCRA regulations, closure
and post-closure estimates are required to be submitted in the biennial hazardous
waste report. This report is required of all TSDFs, but EPA apparently never
included the financial assurance information in its biennial report forms.
Some States developed financial assurance databases to support their programs.
However, these databases do not contain the same information in the same
formats, and are not in use in all States. This prevents the development of a
national perspective on financial assurance based on the data in these systems.
Additionally, States may include non-RCRA facilities in their data systems, which
can further complicate the use of State data
We obtained information available from four State systems, covering over
470 facilities, which may include some non-RCRA TSDFs. Analysis of
information from these State databases indicates that all types of financial
assurance mechanisms are used (see Figure 2.1). The financial test and corporate
guarantee, which rely on a company's financial strength to pay for closure and
post-closure, occur with the highest frequency (40 percent of the facilities).
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Figure 2.1 - State Financial Assurance Mechanisms
(Source: GIG analysis of data from CA, CT, TX, and WA)
Surety Bond
5%
Letter of Credit
16%
Some Information on Problem Facilities Indicates Problems
Not Due to Failure of Financial Assurance Mechanisms or Oversight
Due to a lack of comprehensive data on the effectiveness of the RCRA financial
assurance program, we asked all interviewees to identify RCRA facilities with
potential financial assurance "problems" to determine whether case studies could
provide additional insight into any problems or failures. The interviewees
identified 21 facilities, including TSDFs as well as facilities never formally
regulated as TSDFs, such as generators and recyclers.
Analysis of the problem facilities indicated that financial assurance for closure
and post-closure of permitted and interim status units generally were not the
primary issues of concern. Instead, these facilities appeared to have significant
remediation costs beyond financial assurance coverage for closure and post-
closure. Of the 21 problem facilities, only 3 had financial assurance as the
primary problem. Nine had no unresolved financial assurance problems, and the
other nine had significant remediation costs not covered by financial assurance for
closure and post-closure. The facilities subject to remediation included generators
and recyclers as well as TSDFs. Specific issues for the three facilities with
financial assurance problems were:
* Bankruptcies: All three facilities were abandoned, insolvent, or filed for
bankruptcy.
Cost estimation: Two facilities had underestimated closure and/or post-
closure costs.
Insurance transition: One facility presented a problem in continuing the use
of insurance upon the prospective sale of the facility.
Two other companies out of the 21, found to have no financial assurance issues,
still illustrate one State's concern with existing Federal financial assurance
requirements. The two companies financially assured their facilities with the
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financial test but later entered or nearly entered into bankruptcy. The affected
State regulatory agency successfully obtained alternative instruments from the
companies. Although the companies fiscally recovered, the State is still
concerned that it will not have the flexibility to deny the financial test because
Federal regulations do not provide any justification for such a denial despite the
companies' past financial failures.
EPA's Planned Actions May Address Some Data Limitations
EPA has proposed additional financial assurance data elements for RCRAlnfo in
two areas - "coverage" and "financial assurance instrument" - and these proposed
elements have been accepted by States and EPA. Coverage data elements include
the type of financial assurance required (closure, post-closure, corrective action,
or liability), start/end dates of financial assurance requirements, cost estimates,
and environmental obligations of the owner/operator. Financial assurance data
elements include the mechanism type, identifier, start/renewal dates, provider, and
face value. The majority of these data elements are mandatory.
These planned actions represent significant progress in developing financial
assurance data at a national level. States and regions interviewed agreed the
proposed data elements were adequate and should be mandatory. One additional
step EPA needs to take is to clearly define the desired financial assurance outputs
from RCRAlnfo prior to defining the data elements. This is a critical first step in
systems analysis, and provides assurance that the information collected will
support programmatic needs. Examples of additional factors that need to be
considered prior to designing the system are:
Tickler reports - "Tickler" reports are typically used to provide information
on pending events or milestones. An example of a tickler report for financial
assurance would be a list of facilities whose mechanisms are scheduled to
expire or whose annual inflation update is due in the next month. If tickler
reports are required, they must be programmed and appropriate data must be
defined to generate the reports.
* Financial Assurance Provider links - If a provider experiences financial
problems, links to all facilities and States using the provider would help
inform the regulators. Providers must be capable of being linked by a unique
identifier other than name, to provide accurate computer matching.
Company links - If the system is to identify facilities within the same
company, a parent company identifier (such as a Dun and Bradstreet number)
is needed, since names typically do not provide accurate computer matching.
Historical trends - Stakeholders believe trend shifts in the financial assurance
mechanism market can anticipate potential market-wide mechanism failures.
If historical analysis is used, the system must be designed to store all prior
entries instead of just replacing the data and storing only the current entry.
Cost Estimate Accuracy - One concern consistently expressed by States and
regions was the accuracy of the projected versus actual closure and post-
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closure costs. Actual cost data are not usually available, as the TSDF is not
required to report the costs. However, this information sometimes is available
and should be considered as data elements when that is the case.
Annual Reports - To provide effective regional oversight and ensure entry of
mandatory data elements, annual reports should be defined to identify
apparent discrepancies in program activity or data entry. Examples would be
reports on facilities with expired mechanisms or overdue annual updates.
These reports should be defined prior to system modifications to ensure the
necessary data elements are collected and the report capability developed.
Financial test data verification - Companies using the financial test are
required to include a list of all TSDFs covered by the test, irrespective of their
State location, to allow verification that sufficient company resources exist to
cover the requirements for all facilities. However, at least one State has
discovered that the same list of TSDFs may not be reported to the appropriate
States, and cross-State comparisons could prevent this inconsistency.
Conclusions
Despite ongoing concerns from States and regions about financial assurance
issues, the problems cannot be readily defined because of the lack of uniform
national data. Consequently, EPA lacks complete information to manage
financial assurance issues and activities at the national level. EPA's proposed
financial assurance data elements will help address the fundamental requirements
of a national system and, with improvements, add value to managing this
information. Prior definition of the information products needed from the new
system will help ensure that the modifications provide the tools necessary to
manage financial assurance activities and policies, and monitor performance.
Recommendation
To ensure that data are collected to provide tools and information necessary to
manage and monitor financial assurance activities, we recommend that the
Deputy Assistant Administrator for Solid Waste and Emergency Response:
2.1 Incorporate the planned modifications to RCRAInfo to improve financial
assurance data collected at the national level, and require a clear definition
of outputs and features of the system prior to final definition of the
required data elements. This could include such additional planned
actions as tickler reports and improved financial assurance provider links.
Agency Comment and OIQ Evaluation
EPA agreed with our recommendation, and indicated that financial assurance data
elements will be incorporated into the next upgrade of RCRAInfo. We consider
EPA's actions to be appropriate. The Agency's full response to the
recommendation is in Appendix A.
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Improved Communication, Guidance,
State and EPA financial assurance staff currently do not have adequate
communications mechanisms in place to share financial assurance information.
EPA has not provided States updated guidance, especially on insurance, despite
requests and recommendations for such guidance. EPA regions do not uniformly
oversee State programs, as indicated by State allowance of inappropriate or
questionable mechanisms. The inadequate communication, guidance, and
oversight may affect the ability of States to make informed decisions on the
adequacy of financial assurance mechanisms, and contribute to the State
acceptance of inadequate or inappropriate mechanisms. Recent EPA-sponsored
training for States and regions on financial assurance should help support some
States' needs for technical information and guidance.
Better Communication Mechanisms Needed
State financial assurance concerns extend beyond each State's boundaries. For
example, the failure of a single company that provides financial assurance to
TSDFs in multiple States would impact programs in each of those States. Good
communication between all States and regions would allow sharing and learning
about financial assurance information, concerns, and pending problems. The
2001 OIG report had recommended the development of an electronic bulletin
board to foster this level of communication, and we found that States and regions
generally supported the implementation of a Web site for their use.
EPA has not developed a master list of State and regional financial assurance
contacts, and therefore has no apparent ability to directly share information with
these contacts. EPA indicated it typically communicates with State
environmental executives, but this mechanism may not provide the most efficient
notification to financial assurance staff on time-sensitive issues, such as pending
financial assurance provider failures.
During the past year, EPA has held quarterly conference calls with the States to
discuss financial assurance issues. These calls represent an important step in
developing contacts and sharing information nationally. To date, 37 States have
participated in these calls, indicating a high level of State interest. EPA's pending
revisions to RCRAInfo should also indirectly contribute to enhancing cross-State
and regional communications of key financial assurance facts.
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Formal Guidance Remains a Concern
EPA issued formal guidance on financial assurance in 1982 to assist States and
TSDFs in obtaining adequate closure and post-closure coverage. However, the
guidance has not been formally updated since then, and States and regions are
generally unaware of the existence of the 1982 EPA guidance. Updated guidance
on financial assurance has been requested by States for years, and was
recommended by the 2001 OIG report and the ASTSWMO report, as discussed
previously. States are especially concerned about guidance in the area of
insurance, which was also mentioned in both reports. Concerns about insurance
include the following:
Standardized policy - States and regions expressed concerns about complex
insurance policy language and indicated a need for standardized, clear, and
concise language. Problems may arise if regulators do not have the necessary
expertise to adequately interpret a policy. However, development of
standardized policy language is complicated by the existing regulation of
policies on a State-by-State basis by State insurance commissions.
Certificate versus insurance policy - TSDFs using insurance for financial
assurance are required to submit a certificate of insurance; the detailed
insurance policy is not required. However, the certificate by itself does not
guarantee the policy meets financial assurance requirements. For example,
one State reported it received a certificate that identified coverage for post-
closure and corrective action, yet the policy was only written for post-closure.
* Implementation problems - The regulatory agency's ability to use funds may
be limited by an insurance company's procedures and payment schedule, such
as reimbursing the regulator for cleanup costs instead of providing direct
access to the funds. States have also expressed concern mat drawing on an
insurance policy may require litigation, especially if the facility has been
abandoned or the company is in bankruptcy.
Insurance cancellation - The insurance company is required to notify the
regulator prior to cancellation of the policy, but the company is not required to
provide notification if it becomes insolvent or its license is suspended. States
have reported cases in which a policy was canceled by the insurance
company, leaving the TSDF without any financial assurance coverage and in
violation of RCRA requirements. In these cases, prompt action by States is
required, as the insurance company is obligated to provide 120 days notice
prior to cancellation of the policy. The State must act to secure the funds
within that time frame if the facility has been unable to find an alternative
financial assurance mechanism, to guarantee the availability of funds to cover
closure and/or post-closure costs.
The development of guidance documents does not need to be solely the
responsibility of the Office of Solid Waste, although it should play a central role.
Some States and regions have considerable expertise in financial assurance, and
three EPA regions have staff positions dedicated to support of financial assurance.
10
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Further, some States have developed checklists to assist staff in evaluating various
financial assurance mechanisms.
EPA Oversight of State Programs Has Missed Problems
States have allowed the use of financial assurance mechanisms not explicitly
allowed by Federal regulations. This suggests problems with EPA oversight and
also supports die need for additional guidance. States also do not always follow
prudent fiscal practices in the implementation of the mechanisms. Examples of
unallowable mechanisms or imprudent fiscal practices include:
Having State financial assurance regulations less stringent than RCRA.
Allowing the use of certificates of deposit.
Allowing the use of cash payments.
Allowing the use of Treasury notes.
Allowing the use of municipal bonds.
Allowing trust funds to be funded with stock, including stock of the
regulated company.
Allowing trust funds to be funded with real estate.
Allowing financial tests for a company with less than 90 percent of its
total assets in the United States. Regulations require a company using the
financial test to have at least 90 percent of its total assets in the United
States.
Not storing original letters of credit in fireproof safes.
Not regularly updating cost estimates and mechanism values.
Recent Training Successful, but Increased Support for States Needed
EPA recently provided four week-long training sessions on RCRA Subtitle C
Financial Assurance for States and regions. The training has been offered at
varying locations at no cost, with participants responsible only for their travel
costs. Cost estimation training has been given in four regions and is planned for
the remaining regions. Both the need and success of the training are indicated by
the high level of participation by States and regions. Representatives from all
EPA regions and over half the States have attended one of the three training
sessions provided.
State participation in training could be expanded if EPA provided travel funds for
States in need. This could also be achieved by scheduling training in conjunction
with conferences, such as ASTSWMO or EPA RCRA conferences, for which
travel funds may already be available. Another option is to provide shortened
courses targeted to specific States that have been unable to attend the longer
course. In recent months, the Office of Civil Enforcement has provided mini-
training courses on financial mechanisms in several States and regions.
11
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Conclusions
States have expressed the need for better communication and guidance on RCRA
financial assurance. Some States are implementing invalid financial assurance
mechanisms, which supports the needs for better guidance and communication
along with improved EPA oversight of State programs. Continued support for
EPA's RCRA financial assurance training will help address some of the needs.
However, training is a one-time event. To effectively manage financial assurance
responsibilities over the long-term, EPA needs to establish better and consistent
communications between and among States and regions and consistently provide
current and relevant guidance.
Recommendations
We recommend that the Deputy Assistant Administrator for Solid Waste and
Emergency Response:
3.1 Establish effective mechanisms of communication with State and regional
financial assurance staff. This should include development and
maintenance of master lists of financial assurance contacts, as well as
implementation of an automated mechanism for information sharing and
communication. State and regional expertise could be leveraged for this
process, including the development of a communications working group
with State and/or regional responsibility for specific areas,
3.2 With input and assistance from States and regions, define the guidance
necessary for States to manage their programs. Guidance should include
checklists and best practices for each mechanism. Guidance could be
developed in a workgroup environment using State and regional resources,
and could use products already developed and in use by some States.
3.3 EPA should develop mechanisms to ensure adequate oversight of State
programs by EPA regions.
3.4 EPA should continue providing financial assurance training and explore
mechanisms to facilitate State participation. This could include offering
training in conjunction with conferences for which State travel costs may
be covered, providing additional travel funds for States, and offering
training to specific States.
Agency Comment and OIG Evaluation
EPA generally agreed with our recommendations. EPA indicated it will
implement an information sharing mechanism available to both regions and
States. EPA also indicated it will develop guidance, initiate oversight, and
provide training. We consider EPA's actions to be appropriate. The
Agency's full response to the recommendations is in Appendix A.
12
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Chapter 4
States have expressed concerns with aspects of the financial test and other
financial assurance mechanisms. Some State laws allow States to implement
financial assurance requirements more restrictive than EPA's by excluding certain
mechanisms and modifying the requirements of others, while other States have
chosen not to adopt more stringent standards. As EPA states in its June 2004
regulatory agenda, without a rulemaking (on the financial test), the improvement
in the test would not be implemented in States that have chosen not to adopt
standards more stringent than Federal standards. At EPA's request, the EPA
Environmental Financial Advisory Board (EFAB) is reviewing several aspects of
RCRA Subtitle C financial assurance and is developing recommendations.
EPA Has Plans and is Acting to Address Issues
In its June 2004 regulatory agenda, EPA planned a public notice in 2004 (notice
of data availability) and a final rule in 2006 addressing RCRA Subtitle C financial
test requirements. However, in 2004, the Office of Solid Waste placed its
financial assurance rulemaking on hold as it posed several questions to the EFAB.
Chartered in 1989 under the Federal Advisory Committee Act, the purpose of
EFAB is to provide analysis and advice to EPA on financial issues. EFAB's
membership includes prominent experts from the finance and banking
community, industry, national organizations, and all levels of government.
Issues EPA asked EFAB to address included:
Improvements to the financial test and corporate guarantee.
Guidance on insurance, including captive insurance.
Methods to improve cost estimates.
Applicability of financial assurance to entities not currently covered by RCRA
financial assurance requirements.
In March 2005, EFAB drafted a letter proposing changes in the financial test.
In the recommendations, EFAB defined criteria for an adequate test and then
measured the adequacy of the existing financial test against those criteria.
While the need for EFAB's review is supported by our own review, the lack of
milestones for EFAB's completion and EPA's action on EFAB recommendations
remains an obstacle to implementation of improvements.
The Office of Enforcement and Compliance Assurance recently identified
financial assurance as a priority and demonstrated leadership on the issue. Recent
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financial assurance activities of the Office of Enforcement and Compliance
Assurance have included:
Taking primary responsibility for the development and implementation of
financial assurance training.
Actively participating in development of new financial assurance data
elements to be incorporated into RCRAInfo,
Developing pilot State programs to analyze the effectiveness of States'
existing financial assurance mechanisms.
Formally identifying financial assurance as a priority in the 2006 National
Program Managers' Guidance.
The Office of Enforcement and Compliance Assurance is also currently
performing an analysis of some financial test submittals. This analysis includes
reviewing the submittals and, where appropriate, a review of data required under
the Sarbanes-Oxley Act2 or other publicly available information. The Office has
found weaknesses in the evidence being used to support a company's eligibility
criteria for the financial test. Some companies have junk bond status or received
an adverse auditor's opinion citing material weaknesses regarding compliance
with the Sarbanes-Oxley Act.
States Have Taken Actions to Implement Additional Restrictions
Twenty-six States have implemented additional provisions that are more
restrictive than the RCRA regulations. These restrictions include:
Exclusion of captive insurance - Thirteen States do not accept captive
insurance as a financial assurance mechanism
Reduced pay-in period for trust funds - Fourteen States require a shorter
period for fully-funding a trust than specified in the RCRA regulations, with
some States requiring full funding up front.
Limitations on financial test and corporate guarantee - Ten States have
additional restrictions on the financial test and corporate guarantee.
States and regions support the revision of national financial assurance standards
through a formal rulemaking process. This is especially true for those States
whose statutes prevent them from being more stringent than RCRA and who must
abide by current regulatory requirements. EPA clearly states in its June 2004
regulatory agenda that without a rulemaking (on the financial test), the
improvement in the test would not be implemented in States that cannot have
regulations more stringent than Federal standards.
2 The Sarbanes-Oxley Act of 2002 includes provisions addressing audits, financial reporting and disclosure,
conflicts of interest, and corporate governance at public companies.
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States Expressed Concerns with Financial Test and Other
Mechanisms
Financial Test Lacks Transparency and is Not Current with Standards
States and regions expressed specific concerns with documentation requirements
for the RCRA Subtitle C financial test:
Letter from the chief financial officer - Federal regulation requires a letter
from Ihe chief financial officer outlining the company's financial test
performance. The chief financial officer letter must list all company facilities
and their closure/post-closure cost estimates that are covered under the
financial test. Because State regulators cannot easily verify the completeness
of this list, especially for those corporations with facilities in multiple States
and regions, regulators cannot preempt problems arising from incomplete
chief financial officer letters that do not calculate all liabilities into the
financial test.
* Opinion of the certified public accountant - The financial test requires a
report stating the opinion of a certified public accountant on a company's
audited financial statement's conformance with generally accepted accounting
principles. RCRA Subtitle C financial assurance regulations can accept the
financial test on a less stringent opinion than those that certify conformance
with generally accepted accounting principles.
Special report of the certified public accountant - The Subtitle C financial
assurance regulations require an attestation of negative assurance from a
certified public accountant that "no matters came to his attention which
caused him to believe that the specified data should be adjusted." This is in
conflict with existing accounting standards. For Subtitle C financial tests,
EPA issued a guidance letter in response to the changes in the professional
auditing standards suggesting alternatives and stating that, "The Agency
intends to change the regulations so that they conform to the new professional
auditing standards."
Captive Insurance Viewed as High Risk by States and Regions
Captive insurance is defined as insurance issued by a wholly-owned subsidiary of
the company being insured. The financial health of the captive insurance
company is closely tied with the parent company, so if the company encounters
financial difficulties there is no guarantee that the captive insurance company
would retain the necessary resources to fund closure and post-closure. This
concern was expressed in our 2001 report and the ASTSWMO paper. Although
we found no specific instances of financial assurance failure associated with
captive insurance, States and regions remain concerned because there is no
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Table 4.1
MECHANJSM
irtsuraaoe
JttSK
Low
LOW
Medium
COST
Medium
Low
Sources: OIO Analysis and QAO-06-658 Report "Environmental
Liabilities: EPA Should Do More to Ensure That Liable Parties
Meet Their Cleanup Obligations"
independence of risk between the corporate parent and the company insured.
Table 4.1, based upon our interviews and a recent report of the U.S. Government
Accountability Office,
shows the relative cost and
risk for the various
mechanisms from the
perspective of the
regulator. In this table,
"risk" refers to the risk of
funds for closure and post-
closure being unavailable
to the regulator; "cost"
refers to the relative cost to
the facility. States and
regions interviewed consider captive insurance to be the highest risk, and almost
universally oppose the concept.
Development of Corrective Action Regulations Supported
Due to the lack of explicit corrective action regulations, EPA provided guidance
in 2003 addressing financial assurance at corrective action facilities. In this
guidance, EPA acknowledges a potential problem if financial assurance is not
required until a remedy has been selected. With few exceptions, States and
regions interviewed expressed the opinion that the financial assurance component
of the corrective action should be addressed through development of explicit
regulations, including the ability to require financial assurance prior to remedy
selection.
Need for Financial Assurance Beyond 30 Years Unresolved
States and regions interviewed expressed concern with the potential need for post-
closure financial assurance beyond the required 30 years for land-based units
closed with waste in place. Although current regulations require post-closure
financial assurance for land-based RCRA permitted units closed with waste in
place for 30 years, regulators may extend the post-closure period at any time
during or before the post-closure period, to protect human health and the
environment. In our 2001 report, we found that most State agencies interviewed
had not developed a policy or process to determine whether post-closure care
should be extended. We had made a recommendation to develop criteria to
establish appropriate post-closure care time frames, and while the Agency agreed
with the recommendation it has not implemented it.
We believe this issue needs to be considered further. Some facilities are
approaching the latter half of their 30-year post-closure period, and there is
increased risk of a facility becoming insolvent with time. For example, a landfill
in post-closure since 1989 followed the appropriate RCRA financial assurance
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regulations and received an appropriate level of oversight by State regulatory
staff. However, in 2004, the company notified the State that it could no longer
care for the landfill, forcing State regulators to take emergency action and assume
control of the landfill. This supports the need for EPA to develop plans for
funding of post-closure beyond 30 years.
Industry Representatives Believe Mechanisms Adequate
Industry representatives generally considered the financial assurance mechanisms
to be adequate, at least for large companies. Some industry representatives
expressed the opinion that regulatory agencies should pay more attention to
smaller companies, because the larger ones will more likely have resources to
fund closure and post-closure.
Conclusions
States and regions have expressed concerns about the existing RCRA Subtitle C
financial assurance regulations, especially in recent years. These concerns range
from general issues with financial assurance mechanisms to specific requirements
at odds with generally accepted accounting principles. Some States have
implemented State-level financial assurance requirements more stringent than the
Federal requirements. Other States cannot implement financial assurance
requirements more stringent than Federal requirements, and therefore may only
obtain relief from financial assurance problems through new Federal rules.
Recommendation
We recommend that the Deputy Assistant Administrator for Solid Waste and
Emergency Response:
4.1 Develop and communicate EPA's plan for addressing concerns with the
existing financial assurance regulations, including captive insurance, the
financial test, expansion of financial assurance beyond TSDFs, corrective
action, and post-closure coverage beyond 30 years. The plan should
include milestones, decision points, and timelines for taking action, and
indicate when and how EPA will determine if a rulemaking is necessary.
Agency Comment and OIG Evaluation
EPA agreed that a plan should be developed to address concerns with the existing
financial assurance regulations. However, EPA believes this plan should be
developed after completion of the Superfund 120 Day Study and after further
progress by EFAB. We agree that a detailed plan should be developed after
completion of the Superfund 120 Day Study and further progress by EFAB.
However, EPA should develop and communicate an estimated timeframe for the
completion of these tasks. The Agency's full response to the recommendation is
in Appendix A.
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Appendix A
Agency Response to Draft Report
August 30, 2005
MEMORANDUM
SUBJECT: Comments on Draft Evaluation Report:
Continued EPA Leadership Will Support State Needs for Information and Guidance
on RCRA Financial Assurance
Assignment No. 2004-001336
FROM: Thomas P. Dunne/s/
Acting Assistant Administrator
TO: Ms Carolyn Cooper
Director for Program Evaluation
Hazardous Waste Issues
Office of Program Evaluation
Office of Inspector General
Thank you for the opportunity to comment on the draft report. Your office investigated an
important aspect of our program on which we have focused as well. Your August 1,2005 memo
requested that I comment on the factual accuracy of the draft report and indicate concurrence
with each finding and proposed recommendation.
I have attached our comments on the draft report as well as our response to your
recommendations, with which we largely agree. Generally, however, we are pleased to learn
that, while your office identified several concerns that need to be addressed, you found very few
actual instances of financial assurance problems in the course of your interviews with State and
regional personnel.
We are also pleased to see the OIG endorses the plan to include financial assurance
information in RCRAInfo.
If your staff has any questions on the comments, please contact Dale Ruhter (703) 308-8192
in the Office of Solid Waste.
Attachments:
I. EPA's Response to OIG Draft Recommendations
II. Specific Comments (not included in this report)
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Attachment I.
EPA's Response to OIG Draft Recommendations
Recommendation 2.1
Incorporate the planned modifications to RCRAInfo to improve financial assurance data
collected at the national level, and require a clear definition of outputs and features of the system
prior to final definition of the required data elements. This could include such additional planned
actions as tickler reports and improved financial assurance provider links.
EPA Response:
We generally agree. The EPA-State Executive Steering Committee for the RCRA data system
(RCRAInfo) has formally accepted the data changes identified by the EPA-State Permitting-
Corrective Action workgroup, and these changes will be incorporated in the next upgrade to
RCRAInfo. As EPA develops the program design changes necessary to track the new data
elements related to financial assurance, we and the States will carefully consider the IG
recommendations related to data links, reports, and similar items. For this early in system
development, we are not prepared to reach final conclusions on the specific enhancements
suggested by the IG; see our specific comments in Attachment II.
Recommendation 3.1
Establish effective mechanisms of communication with State and regional financial assurance
staff. This should include development and maintenance of master lists of financial assurance
contacts, as well as implementation of an automated mechanism for information sharing and
communication. State and regional expertise could be leveraged for this process, including the
development of a communications working group with State and/or regional responsibility for
specific areas.
EPA Response:
We generally agree. EPA will implement an information sharing mechanism through
QuickPlace for financial assurance. We will make this system available to both regional and
State financial assurance experts. EPA will maintain a list of regional financial assurance
contacts. With respect to State contacts, the currency of the list will depend largely upon the
States updating them. For the sake of continuity, some States may choose to use management
personnel as the contact persons. We will also explore with States the feasibility of maintaining
a communications working group, and we will continue to hold our regular conference calls with
the States.
Recommendation 3.2
With input and assistance from States and regions, define the guidance necessary for States to
manage their programs. Guidance should include checklists and best practices for each
mechanism. Guidance could be developed in a workgroup environment using State and regional
resources, and could use products already developed and in use by some States.
EPA Response:
EPA agrees that appropriate guidance needs to be developed, based on input and assistance from
the States and regions. We will work closely with the States in identifying priority areas. The
timing of developing such guidance will depend on the resources that are available.
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Recommendation 3.3
EPA should develop mechanisms to ensure adequate oversight of State programs by EPA
regions.
EPA Response:
EPA agrees. OSWER will request that regions incorporate financial assurance into routine state
oversight activities. OECA has developed guidance, the State Review Framework, which is
being used by OECA and Regions to review state enforcement and compliance assurance
programs. It describes how EPA will evaluate the enforcement and compliance assurance
components of authorized or approved environmental programs implemented by the States. The
scope of the review will include activities and outcomes related to compliance monitoring,
inspections, and civil enforcement, as well as assistance and innovative programs.
Recommendation 3.4
EPA should continue providing financial assurance training and explore mechanisms to facilitate
State participation. This could include offering training in conjunction with conferences from
which State travel costs may be covered, providing additional travel funds for States, and
offering training to specific States.
EPA Response:
EPA continues to provide financial assurance training on the mechanisms, and explore
mechanisms to facilitate State participation. For example, we have provided over the past
several months mini-training courses on the financial mechanisms in several States and regions.
This training has been well-received and we plan to continue this type of training as funding
permits. Financial assurance experts from the States typically do not attend conferences from
which State travel costs may be covered. However, we continue to look for opportunities to
provide financial assurance training, which may, depending on the type of audience at the
conference, facilitate another opportunity to provide specific training regarding financial
mechanisms or other training with regard to financial assurance.
Chapter 4, Recommendation 4.1
Develop and communicate EPA's plan for addressing concerns with the existing financial
assurance regulations, including captive insurance, the financial test, expansion of financial
assurance beyond TSDFs, corrective action, and post-closure coverage beyond 30 years. The
plan should include milestones, decision points, and timelines for taking action, and indicate
when and how EPA will determine if a rulemaking is necessary.
EPA Response:
EPA agrees that a plan for addressing any concerns identified should be developed, but believes
that we need to complete the analyses being conducted as a result of the Superfund 120 Day
Study and be further along in the EFAB process before answering the questions of whether rule
changes are needed and if so, what they are. Once this assessment is completed, we would
expect to put together a plan for addressing the appropriate concerns.
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Appendix B
Distribution
Office of the Administrator
Deputy Assistant Administrator, Office of Solid Waste and Emergency Response
Director, Office of Solid Waste
Agency Followup Official (the CFO)
Agency Followup Coordinator
Audit Liaison, Office of Solid Waste and Emergency Response
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Inspector General
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