EPS/530-SW-88-041
DRAFT
BACKGROUND DOCUMENT
CLOSURE/POST-CLOSURE CARE
AND FINANCIAL RESPONSIBILITY
REQUIREMENTS
(SUBPART C, §§258.30 - 258.32)
"CRITERIA FOR MUNICIPAL SOLID WASTE LANDFILLS"
(40 CFR PART 258)
SUBTITLE D OF RESOURCE CONSERVATION AND
RECOVERY ACT (RCRA)
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF SOLID WASTE
JULY 1988
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TABLE OF CORERTS
Page
1. background for closure, post-closure care and financial
assurance criteria I-;
1.1 Hazardous and Solid Waste Amendments (HSVA) Provisions
for Municipal Solid Waste Landfills 1-1
1.2 Rationale for Closure, Post-Closure Care and Financial
Assurance Criteria . . ..: 1-1
1.3 Organization of Document 1-3
2. CLOSURE AND POST-CLOSURE CARE STANDARDS 2-1
2.1 Introduction' 2-1
2.2 Closure Performance Standards .. . . : 2-3
2.2.1 Provisions of Performance Standard 2-3
2.2.2 Triggers for Closure 2-4
2.2.3 Options Considered and Rejected 2-6
2.2.4 Comparison vith Subtitle C 2-7
2.2.5 Consistency with State'Requirements 2-8
2.3 Post-Closure Care Standards 2-9
2.3.1 Types of Activities Required 2-9
2.3.2 Length of Post-Closure Care Period 2-12
2.3.3 Comparison with Subtitle C 2-15
2.3.4 Consistency'with State Programs 2-16
2.3.5 Options Considered and Rejected .; 2-18
2.4 Closur* and Post-Closure-Plans .v 2-24
2.4.1 Contents of Plans 2-25
2.4.2 Approval and Modification of Plan^ . ... . 2-26
2.4.3 Options Considered and Rejected 2-27
2.4.4 Comparison with Subtitle C 2-28
2.4.5' Consistency with State Programs 2-28
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TABLE OF COHTEHTS (continued)
Page
2.5 Closure and Post-Closure Care Certification 2-29
2.5; 1 Comparison with Subtitle C , 2-30
2.5.2 Consistency with State Programs 2-30
2.5.3 Other Options Considered 2-31
3. FINANCIAL ASSURANCE CRITERIA FOR CLOSURE, POST-CLOSURE CARE
AND CORRECTION ACTION 3-1
3.1 Scope of Coverage and Applicability of Criteria 3-2
3.1.1 Scope of Coverage 3-2
3.1.2 Applicability 3-4
3.1.3 Consistentency with State Requirements 3-7
3.2 Cost Estimating Criteria for Closure, Post-Closui«
Care and Corrective Action 3-7
3.2.1 Closure Cost Estimates 3-8
3.2.2 Post-Closure CarQ Cost Estimates 3-9
3.2.3 Cost Estimates for Corrective Action for
Known Releases 3-10
3.2.4 Consistency with State Requirements 3-12
3.3 Performance Standard Criteria for Financial Mechanisms ... 3-12
3.3.1 Description of Financial Assurance
Performance Standard 3-13
3.3.2 Consistency with State Requirements 3-20
4. FINANCIAL ASSURANCE MECHANISMS THAT MAY BE AVAILABLE TO MSVLF
OWNERS OR OPERATORS 4-1
4.1 Trust Fund 4-2
4.1.1 Features of the Mechanism 4-2
4.1.2 Use of Trust Funds in Other EPA Programs 4-2
4.1.3 Use of Trust Funds in State Programs Surveyed ..... 4-4
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TABLE OF GOBTEHTS (continued)
£&££.
4.1.4 Key Provisions o£ Che Trust Fund to Ensure
Adequacy, of Coverage 4-5
4.1.5 Cost and Availability of Trust Funds 4-6
4.2 Letters of Credit 4-7
4.2.1 Features of the Mechanism 4-7
4.2.2 Use of Letters of Credit in Other EPA Programs .... 4-8
4.2.3 Use of Letters of Credit in State. Programs
Surveyed 4-9
4.2.4 Key Provisions of Letters of Credit to Ensure
Adequacy of Coverage 4-10
4.2.5 Cost and Availability of Letters- of Credit 4-10
4.3 Surety Bonds 4-11
4.3.1 Features of the Mechanism 4-12
4.3.2 Use of Surety Bonds in other EPA Programs 4-13
4.3.3 Use of Surety Bonds in State Programs Surveyed .... 4-15
4.3.4 Key Provisions of Surety Bonds to Ensure
Adequacy of Coverage 4-15
4.3.5 Coat and Availability of Surety Bonds 4-16
4.4 State Assumptions of Responsibility 4-17
4.4.1 Features of the Mechanism 4-18
4.4.2 Us« of State Assumptions of Responsibility
In Other EPA Programs 4-21
4.4.3 Use of State Assumptions of Responiibility
in State Programs Surveyed 4-22
4.4.4 Key Provisions of State Assumptions of
Responsibility to Ensure Adequacy of
Coverage /. 4-24
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TABLE OP OUHTKHTS (continued)
Page
4.4.5 Cose and Availability of State Assumptions of
Responsibility 4-25
4.5 Insurance and Risk Retention Group Coverage 4-25
4.5.1 Features of the Mechanism 4-26
4.5.2 Use of Insurance and Risk Retention Group
Coverage in Other EPA Programs 4-29
4.5.3 Use of Insurance and Risk Retention Group
Coverage in State Programs Surveyed 4-29
4.5.4 Key Provisions of Insurance and Risk Retention
Group Coverage to Ensure Adequacy of Coverage 4-30
4.5.5 Cost of insurance and Risk Retention Group
Coverage 4-31
4.6 Financial Test 4-32
4.6.1 Features of the Meehanism % 4-32
4.6.2 Use of.Financial Tests in Other EPA Programs ...... 4-33
4.6.3 Use of Financial Tests in State Programs
Surveyed 4-35
4.6.4 Approach to Developing a Financial Test for
Local Governments ...- 4-36
4.6.5 Financial Tfest Based on Bond Ratings 4-50
4.6.6 Cost and Availability of Financial Tests 4-54
4.7 Ouaranceaa .4-55
4.7.1 Features of the Mechanism 4-55
4.7.2 Use of Guarantees in Other EPA Programs 4-57
4.7.3 Use of Guarantees in the State Programs Surveyed .. 4-58
4.7.4 Kjy Provisions of Guarantees to Ensure
Adequacy of Coverage 4-58
4.7.5 Co.- . o ~ the Guarantees 4-60
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TABLE OF CORIBRS (continued)
Page
4.8 Standby Trust Fund 4-6'i
4.8.1 Features of the Mechanism 4-62
4.8.2 Use of Standby Trust Funds in Other EPA Programs .. 4-62
4.8.3 Use of Standhy Trust Funds in State Programs
Surveyed 4-63
4.8.4 Key Provisions of Standby Trust Funds to-Ensure
Adequacy of Coverage 4-63
4.8.5 Cost and Availability of Standby Trust Funds 4-64
4.9 Combinations of Mechanism.* and Combined Coverages 4-65
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1. BACKGROUND FOR CLOSURE AND POST-CLOSURE fjm*
AND FINANCIAL ASSURANCE CRITERIA
1.1 HAZARDOUS AND SOLID HASTE AMENDMENTS (HSHA) PROVISIONS
FOR MUNICIPAL SOLID HASTE LANDFILLS
Under the Hazardous and Solid Vaste Amendments of 1984 (HSVA), EPA
muse revise che existing Federal criteria for municipal solid waste
landfills (MSWLFs) that may receive hazardous waste from households, or
small quantity generators. The Agency has determined that these revised
criteria should Include requirements for new and existing MSVLFs,
including closure and post-closure care requirements, and financial
assurance requirements for closure, post-closure care, and corrective
action for known releases.
1.2 RATIONALE FOR CLOSURE, POST-CLOSURE CARE AND FINANCIAL
ASSURANCE CRITERIA
MSVLFs are authorized to receive household hazardous wastes and
hazardous waste ,from small quantity generators. Since many of these
MSVLFs were constructed with minimal consideration.of location and
engineering design, there is a risk that a release.of hazardous
constituents from these landfills may present a risk of harm to human
health and the environment lifter they have ceased operation; even many
years after plosure.
In many areas of the country,- for example, unless rainwater
*
infiltration Into a closed landfill is controlled, leachate forms and is
eventually released into the environment. If suc& a closed landfill is
located in close proximity to usable groundwater or surface water, the
release of contaminants containing hazardous constituents into these media
is inevitable.
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action. Financial assurance requirements ensure that funds will be
available for these activities if an owner or operator of a MSWLF fails to
pay for then due to bankruptcy, abandonment of the facility, or any other
reason. The requirements also encourage owners or operators to properly
plan for the resources needed to perform closure, post~closure care and
corrective action.
1.3 ORGAHIZATIOH OF DOOliUiHT
This document supplements the preamble to the proposed Subtitle D
criteria by presenting additional information used by the Agency in
developing today's proposed closure, post-closure care and financial
responsibility criteria. Chapter 2 addresses in more detail the proposed
closure and post-closure care criteria in §§258.30 and 258.31. Chapters 3
and 4 discuss the financial responsibility.criteria proposed in §258.32.
Chapter 3 discusses the proposed cost estimating provisions and criteria
for demonstrating.financial responsibility. Chapter 4 discusses financial
assurance mechanisms that may be available to owners or operators of
MSVLFs.
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EPA believes chat closure is extremely important in protecting the
public and the environment from contamination by hazardous wastes. The
limited data available indicate that MSVLFs have received hazardous wastes
even chough they often were not designed to manage these wastes in an
environmentally sound manner. Many of the MSVLFs do not have liners or
leachate collection systems, and are located in poor hydrogeological
settings "(e.g., shallow ground water, highly permeable soils, high net.
water infiltracion, and high ground-water flow rates).^
The available information also indicates that many States already
require some measures to be taken at facility closure to prevent
contaminant escape, though the measures may not have been designed to
prevent releases of hazardous constituents.^ Due to poor i«cat
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2. CLOSURE AND POST-CLOSURE CARS STANDARDS
2.1 IRBODDCTiaR
The primary purpose of the proposed closure and post-closure care
standards under Subtitle D is to establish the minimum Federal standards
necessary to ensure protection of human health and the environment after
operations have ceased at MSWLFs. The closure and post-closure care
criteria in the proposal are designed to achieve that goal by providing
for the minimization of the formation and release of leachate and
explosive gases as. part of the site-specific closure requirements, and by
providing for post-closure monitoring and maintenance requirements to
protect against damages caused by age and deterioration of the MSWLF after
closure. In addition,' the proposed closure and post-closure care criteria
require owners or operators of MSWLFs to plan for their future closure and
post-closure care obligations to ensure that adequate preparations and
resources are available when needed.
Because the Subtitle D program is to be implemented by the States, one
objective of these criteria is to minimize inconsistencies between the
Federal closure and post-closure care requirements and State program
requirements that are already in place or are now being developed. . In
addition, EPA recognized that requirements under existing State programs
and State Implementation experience would provide useful insight for
developing the Federal Subtitle D program. Therefore, in developing the
revised closure and post-closure care criteria, tfee Agency reviewed all
State solid waste regulations, and selected nine States for more extensive
review.
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The StAtes selected for case study were California, Florida,
Louisiana, Maryland, New York, Oregon, Texas, Washington, and Wisconsin.3.
Officials responsible for implementing the closure and post-closure care
requirements in these States were interviewed by, telephone to obtain
additional information on the general scope of their closure and
post-closure programs, the rationale used in developing program
requirements, and their implementation experience. The following
considerations were usea to select these States:
• Scope of the closure and post-closure care
requirements. The States chosen generally
have comprehensive programs;
• Length of the post-closure care period.
The case .studies selected represent a
range of post-closure care periods; and
• Number of municipal solid waste landfills
in the State.. Five of the States chosen
(California, Louisiana*, New York, Texas,
and Wisconsin)- represent a relatively
large percentage of the total number of
U.S. landfills.4
Section 2.2 discusses the proposed closure performance standard,
Section 2.3 addresses post-closure care- requirements and Sections 2.U and
2.5 describe the proposed closure and post-closure procedural requirements
(i.e., closure and post-closure plans and certification requirements).
3 See ICF Incorporated, "Survey of State Closure and Post-Closure
Care Regulations for Solid Waste Facilities," Draft, May 1987.
4 See U.S. Environmental Protection Agency, "Census of State and
Territorial Subtitle D Non-Hazardous Waste Programs," Office of Solid
Waste, EPA/530-SW-86-039, October 1986.
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2.2 CLDSTO PERF08MABCE STAHDARDS
The proposed closure performance standard under Subeiele D.provides a
general requirement for ensuring that closure is effectively performed,
similar to the performance standard for closure unide'r Subtitle C for
hazardous waste facilities. The standard specifies the objectives that
closure must achieve, but not the particular activities or methods for
attaining that end.
2.2.1 Provisions of Performance Standard.
The closure performance standard proposed in §258.30(a) for MSWLFs
establishes preventative measures designed to minimize threats to human
health and the environment. The MSWLF facility owner or operator must
close the facility in a manner that minimizes the need for further
maintenance and minimizes the release of leachate and explosive gases to
the air, ground water or surface water after closure to the extent
necessary to protect human health and the environment. The closure,
performance standard provides flexibility for owners or operators and the
States to determine the specific steps necessary to achieve these general
environmental goals based oA site-specific conditions. In addition, the
Agency is proposing a risk-based performance standard for the final cover
design, specified In 8258.40. The final cpver performance standard
specifies the expocced achievement of the final cover, although it does
not provide technical design specifications. Thl# risk-based performance
standard is addressed in detail in the Background Document for Subtitle D
design criteria for MSVLFs.
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2.2.2 Triggers for Closure
To ensure.Chat landfill units are closed in a timely manner after
operations at the unit have ceased and to protect against threats to human
health and the environment posed by open but inactive landfills, the
Agency is requiring in §258.30(d) that owners or operators must begin
closure activities at each unit, in accordance with the approved closure
plan, no later than 30 days after the final receipt of wastes at each
landfill unit. Extensions may be granted at the discretion of the State,
if the owner or operator of the MSWLF demonstrates that the open landfill
unit will not pose a threat to human health or-the environment. These
closure trigger provisions in §258.30(d) are consistent with the closure
trigger mechanisms for hazardous waste facilities under S-ibtiJs
States may wish to refer to the language in 40 CFR Parts 264 and 265,
Subpart G as guidance for developing more detailed provisions.
The Agency encourages States to define "final receipt of wastes" to
preclude landfill units from remaining inactive for an indefinite period
of time without closing. For example, States may wish to adopt the
provisions applicable to hazardous waste facilities that specify that
closure must begin no later* than 30 days after the final receipt of
hazardous wastes, or no later than one year after the most recent receipt
of hazardous wastes. Furthermore,' States are encouraged to establish
specific criteria for granting extensions to the deadline tor beginning
closure. For example, the Subtitle C regulations for hazardous waste
facilities specify that an extension will be granted only if the owner or
operator demonstrates that, among other requirements, the facility has
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remaining capacity, ami Che owner or operator is operating in compliance
with all applicable regulations and will continue to do so.
As noted above, the Agency is allowing the States to develop their own
procedural requirements, including provisions for owners or operators to
notify Che States of their intent to close a landfill unit. States are
encouraged to establish notification requirements that provide them with
sufficient advance notice to inspect the facility and to ensure that the
approved closure plan is still applicable to the facility's current
conditions. States may wish to adopt the notification provisions included
in the Subtitle C regulations, which require advance notice prior to
closure of each unit of the landfill. Particularly if States allow owners
or operators to gradually fund trust funds as demonstration of financial
assurance (See Section 4.1 below), notice of closure is Important to
ensure that the trust fund is fully funded at least by the time closure is
triggered. For example, Subtitle C requires an estimate of the expected
year of closure to be included in the closure plan if the owner or
operator expects to close the landfill prior to the end of the required
trust fund pay-in period.
While, the proposed'criteria specify when closure must begin, the
Agency is not proposing deadlines for completing closure of a landfill
unit. Howmr, the Agency is concerned that the completion of closure not
be delayed unnecessarily and is encouraging States to specify deadlines
and interim milestones. For example, the Subtitl! C regulations for
hazardous waste facilities specify a 180-day deadline for completing
closure and an intaria milestone of 90 days for managing all inventory at
the site. Extensions to these deadlines may be granted if (1) the closure
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accivicies vlll cake longer Chan 180 days co compleCe, 2£ <2) there Is a
reasonable likelihood chat Che ovrner or operacor or a person ocher Chan
the owner or operacor will recommence operacion of che facility, the
landfill has addicional capacity co receive wasce, and closure would be
incompaCible wich concinued operacion of che facilicy- In all cases, if
an excension for complecing closure is granced,, che owner or operacor of a
Subtitle C facilicy remains subject Co all applicable permic requirements
and muse cake all che necessary seeps co ensure procection of human healcfi
and che environmenc.
2.2.3 Options Considered and Rejected
The Agency cpnsidered Cvo other options when determining what types of
standards should be used to establish che closure sCandard. One opcion
was co specify a set of stringent technical closure sCandards. Technical
scandards provide certainty to the regulated community regarding design
requirements and ensure a consistent level of technology. In addition,
there are regulatory precedents in Subtitle C for landfill design
specifications. However, specifying technical closure standards does not
allow for rapid adoption of* innovative technical approaches and may
unnecessarily require installation of designs that go beyond techniques
needed to protect health and the environment. In addition, such a
standard may not account for design responses to all facility or
environmental conditions and therefore may not adequately protect health
and che enviroruient. Finally, specifying a detailed design standard is
inconsistent with cue overall goal of providing flexibility to the Scaces.
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Second, the Agency considered specifying a more stringent performance
standard that vould require owners or operators of a MSVLF to close the
landfill In a manner chat prevents all releases from the landfill,
regardless of the potential threat to human health and the environment.
Specifying a stringent performance standard would allow for rapid
incorporation, of technological advanced in closure design, would provide
maximum flexibility to the owner or operator and regulators to determine
the most appropriate closure technical design to satisfy the performance
standard based on site-specific conditions, and would ensure a consistent
achievement, of a specific level of environmental protection among
landfills undergoing closure. The Agency, however, was concerned that a
closure performance standard requiring prevention of all releases may be
unnecessarily stringent for low-risk facilities. The Agency therefore is
proposing a performance standard designed to minimize threats to human
health -and the environment, thereby allowing risk factors to be taken into
account when closing MSWLFs.
2.2.4 Comparison with Subtitle C
Like the closure performance standard specified in the Subtitle C
regulation* (see 40 CFR 264.111 and 265.111), the proposed closure
performance standard for MSVLFs allows owners or operators to incorporate
site-specific considerations in determining the type of closure activities
that will satisfy the standard. Subtitle C, however, also specifies
process-specific technical closure standards (e.g., strict design
standards for the final cover) in addition to a performance standard. The
Agency has decided not to specify technical closure design standards for
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MSVLFs in order to allow Staces maximum flexibility in developing Subtitle
D programs.
2.2.5 Consistency with State Requiresents
Of the nine States surveyed, only Washington includes both a closure
performance standard and design standards in their closure rules. Prior
to 1985, Washington's solid waste regulations specified only a performance
standard. However, due to difficulties in implementing such a standard,
the State revised the regulations to include design standards as well.
Washington's current performance standard also requires the owner or
operator to return the land to the appearance and use of surrounding areas
and to continue monitoring all media as long as necessary for the waste to
stabilize and to protect human health and the environment.
Although the remaining States surveyed do not include design
standards, each of them requires the owner or operator to perform specific
technical activities during the closure process. For example, each of the
States requires at least a final cover and grading, and some also require
revegetation of the cover and drainage of the landfill. Therefore, the
Agency believes that requiring a performance-based standard and final
cover requireaent will not be inconsistent wich State programs.
2.3 POST-CLDSnSB GARB S1AHDARDS
The post-closure care activities, under-§258.31^of the proposed
criteria are similar in intent to the post-closure care requirements under
the Subtitle C regulations. Post-closure care is intended to control the
formation of leachate containing hazardous constituents and its release
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into the environment after closure of the MSWLF, as well as to minimize
the formation of explosive gases that collect in the landfill system. The
criteria propose that post-closure care be carried out in two phases, with
the initial phase lasting for 30 years and a second, less- intensive phase
to be defined by the States.
2.3.1 Types of Activities Required
The proposed criteria in §258.31(a) define the minimum activities that
must be performed following the completion of closure during each phase of
post-closure care. Specifically, the proposed criteria require owners or
operators of MSWLFs to perform routine maintenance and monitoring
activities for the final cover, leachate collection system, grcuna-water
monitoring system, and gas monitoring programs during the first phase of
post-closure care. During the second phase of care, owners or operators
must, at a minimum, continue to operate their ground-water monitoring and
gas monitoring systems in order to detect any contamination that might
occur after the initial post-closure care period. This second phase is
in tender1 to ensure that a minimum level of care is continued at a MSWLF to
detect any release that migfit occur in the long tern, while minimizing the
burden on owners or operators of continuing extensive post-closure care
activities for an extended period of time
Generally, the post-closure care period at the MSWLF facility is
intended to minimize releases of hazardous constituents from a MSWLF after
closure of the facility by prescribing routine maintenance and monitoring
activities, and to deitect as early as possible any releases that do occur.
For example, maintaining the integrity and effectiveness of the cover may
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include taring and replanting of che vegetative cover, repairing the cap,
and correcting che effects of erosion. These activities are designed to
prevent the net infiltration of rainwater through the final cover and into
the waste after closure of the unit. If the final cover is properly
maintained, evaporation and plant transpiration of the rainwater should
occur before water has the opportunity to infiltrate the waste and cause
leachate formation. Moreover, correction of the effects resulting from
settling, subsidence and erosion will help maintain the integrity of the
final cover, and will provide an incentive to the owner or operator to
properly place and compact the waste during the operation of the MSWLF.
The specific activities that will be necessary to maintain the integrity
of the containment system will depend in part on the site-specific nature
of the final cover material, and environmental conditions.
Operating and maintaining the leachate collection system at MSWLFs
with liners until leachate is no longer generated is required to protect
surface water from che "bachtub effect," i.e., leachate collecting on top
of che liner. Routine ground-water monitoring is necessary to detect
ground-water contamination in a timely fashion should Che waste
containment structure* fail*or a design or operating error occur.
Likewise, the gas monitoring program serves Co ensure chat explosive
gases, sueh a* methane gas, generated by tfee landfill do not accumulate in
landfill structures in concentrations in excess of 25 percent of the lower
explosive limit (LEL) for the gases, as specified in S258.23.
The proposed criteria also restrict the post-closure use of landfill
property by specifying that after closure, the use of the property must
never be allowed to disturb the integrity of the final cover, liner(s),
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any components of the containment system, or the function of the
monitoring system unless it can be demonstrated that these uses will not
pose a potential threat to human health and the environment, or that such
disturbance is necessary to reduce a threat to human health and the
environment. The objective of the restrictions on the post-closure use of
the property is to ensure that the post-closure care requirements can be
implemented effectively in a manner protective of human health and the
environment. For example, disturbing the integrity of the final cover
could increase potential leachate migration and pose a potential risk of
harm to human health and the environment. Interference with the operation
of the monitoring systems, could prevent timely detection of ground-water
contamination or excessive releases of methane gas. Unmonitored access to
the property after closure also could result in the release of hazardous
constituents or actual exposure of buried wastes as a result of
disturbances of the site.
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2.3.2 Length of the Post-Closure Care Period
Section 258.31(b) proposes to require a two-phase post-closure care
period for all MSVLFs. The Initial period must last for a minimum of 30
years and consist of extensive post-closure activities described in the
previous section. The duration of the second phase, which requires less
intensive post-closure activity, must be determined by the States. Based
on limited data on the rate of deterioration of containment systems
coupled vith improvements in containment technologies that will delay
their deterioration and thus delay releases, the Agency'believes that this
two-phased post-closure care period is warranted to ensure long-term
protection of human health and the environment.
The rationale for the proposed post-closure care period at MSVLFs is
based in part on the results reported in the Regulatory Impact Analysis
(RIA) conducted by the Agency for the proposed criteria.^ The RIA
assessed the risk to human health and the environment posed by solid waste
management at MSVLFs. The analysis concluded that post-closure formation
of leachate and its transport in ground water, combined with a lack of
ground-water monitoring, could lead to significant levels of contamination
of drinking water supplies around MSVLFs. This contamination could, in
turn, post significant risks to human health and the environment. Hence,
the aim of tha two-phased post-closure car* requirement is to:
(1) maintain th« integrity of the landfill's,final cover and other
containment structures to prevent the formation of leachate for an initial
30-year period, and (2) continue ground-water and gas monitoring during
5 Draft Regulatory Impact Analysis of Proposed Revisions to Subtitle
D Criteria for Municipal Solid Waste Landfills. June 22, 1987. Prepared
for-Economic Analysis Staff, Office of Solid Waste/EPA.
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and beyond the initial 30-year period to ensure that migration of leachate
and collection of explosive gases can be detected prior to posing a threat
to human health and the environment.
Once a unit is closed, the bottom liner of the landfill will
deteriorate over time and, consequently, will not prevent the transport of
leachate out of the unit. Therefore, the only way to prevent leachate
transport is by preventing leachate formation through preservation of the
landfill cover. Although some leachate will be formed during the active
life of a landfill unit,, the RIA noted that the design and operating
standards imposed by the proposed criteria will limit the amount of
leachate released from the landfills. However, in the absence of
post-closure care to maintain the cover, the cover will deteriorate and
leachate can form following closure in sufficient quantities to pose a
threat to human health and the envlrorunent.
The types of activities required and the duration of these activities
could vary significantly among facilities depending on location and
design. For example, the RIA estimated that a synthetic membrane, which
might be required ac some MSVLFs to satisfy the health-based limit
performance standard, will deteriorate in 35 years. Therefore, in the
absence of a longpost-closure care period (i.e., significantly beyond 35
years), cba impermeable properties of ,the membrane can be expected to
decrease, thereby increasing leachate formation and potential threats to
human health and the environment. On the other hand, at a facility
designed with a vegetative cover, the Agency expects that over time the
cover will become more protective as a result of factors such as the solid
establishment of vegetation, the cessation of settling and subsidence, and
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the general stabilization and proven integrity of the cover. For this
type of cover, maintenance activities in the early years of the post-
closure care period could be extensive, but should become increasingly
less extensive over the duration of the period to achieve the same level
of protection to human health and the environment.
As discussed earlier, the Agency believes that extended ground-water
and gas monitoring are essential complements to the maintenance
requirements for protecting human health and the environment. Final cover
permeability and the need for monitoring, subject to site-specific
conditions, will most likely have an inverse relationship. That is, the
more impermeable the final cover, the less the need for extensive
monitoring, and conversely, the less impermeable the covet., tl.e au.re
monitoring that will be required.
The Agency anticipates that in -the 'first phase of the post-closure
care period, semiannual monitoring, consistent with the operating iife'
requirements, and routine cover maintenance (e.g., periodic mowing,
fertilizing, vector control, soil replacement) would be appropriate at
most MSVLFs. in later years, however, the Agency expects that at most
facilities only minimal-care will be required. Thus, during the second
phase o£ post-closure care, annual monitoring with reduced cover
maintenance, for example, may be adequate to protect human health and the
environment. If more Intensive activities are warranteu at a particular
facility during later years, States have the authoflty to require
extensive care during this second phase as well-.
The specific timing and nature of post-closure care activities will
vary on a site-by-site basis. As discussed earlier in this document, the
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2-15
Subtitle D program is designed to be handled by the States. Therefore,
the development and implementation of specific procedures for determining
bpth the start of the second, less-intensive phase of post-closure care
and the appropriate nature and levels of continuing care during the second
phase will be addressed by each State.
2.3.4 Comparison vith Subtitle C
Generally, the post-closure care requirements in today's proposed
criteria -- routine maintenance of the cover, collection of leachate,
ground-water ponitoring and restricted land use -- are similar to the
activities required under the Subtitle C requirements for hazardous waste
facilities (40 CFR 264.117 and 265.117). Unlike Subtitle C, however,
today's criteria specifically require gas monitoring because of the
inherent nature of MSVLFs. In addition, unlike Subtitle C, which requires
deed notices and survey plats to be filed after closure of landfills (see
40 CFR 264.119), the proposed Subtitle D criteria require only a deed
notation to be filed after closure.
The required post*closure care period for Subtitle C facilities is
currently set at 30 years with a provision allowing extensions or
reductions Co the length of the period (see 40 CFR 264.117 and 265.117).
While the requirement for two-phased post^closure care in the proposed
criteria for MSVLFs Is more stringent than the Subtitle C requirement,
information collected since the promulgation of tile Subtitle C
requirements on May 19, 1980 (45 £& 33154) suggests that a longer
post-closure care period may be necessary to protect human health and the
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2-16
environment.* The Agency is also currently considering extending the
post-closure care requirements for Subtitle C facilities located in
certain environments likely to pose significant threats to human health
and the environment.
2.3.5 Consistency with State Progress
All of the nine States included in the Agency's case studies, except
.Maryland, specify the types of activities to be conducted during the
post-closure care period. Under its current rules, Maryland may require
post-closure care through the permit system on a case-by-case basis.
Maryland recently proposed revised solid waste regulations that would
specifically require postrdosure care. The discussion of post-cl6sure
care requirements that follows includes Maryland's proposed regulations
rather than its current regulations.
All of the States studied explicitly require either cover or 4ite
maintenance during the post-closure care period (e.g., maintenance to
prevent and repair cracking, erosion, or settling of the cover,
maintenance of the drainage system, and revegetatlon as needed).
Monitoring requireaents vary somewhat across the nine States examined.
Most of tha States reviewed either explicitly require leachate and gas
control for all facilities or require the»won a case-by-case basis. All
of the State regulations studied contain some type of provision for
ground-water monitoring. Six .of the States studied (California, Florida,
Louisiana, New York, Oregon, and Washington) require ground-water
6 Draft Regulatory Impact Analysis of Proposed Revisions to Subtitle
D Criteria for Municipal Solid Waste Landfills. June 22, 1987. Prepared
for Economic Analysis Staff, Office of Solid Waste/EPA.
-------
2-17
monitoring for all MSWLFs; Wisconsin and Maryland require ground-water
monitoring on a case-by-case basis; Texas requires chat any monicoring
programs, such as ground-water monitoring, in effect during the operating
life of the facility shall be continued during post-closure care.
The level of control that the implementing agencies have over the
post-closure use of MSVLFs varies across the nine States that the Agency
reviewed. At a minimum, however, most of the States- studied require a
notation to the property deed indicating that the property was used as a
MSWLF, so chat future property owners will be aware of the need to
maintain Che structural integrity of the covered landfill. Some States
(California, Florida, Maryland, and Texas) exercise control over the
future land use explicitly by requiring that all proposed activities or
construction be reviewed and approved by the State. The extent to which
these States may effectively interfere with future land use, however,
varies. Other States (Louisiana, Hew York, Wisconsin) do not include
explicit provisions in their regulations to control post-closure land use
at MSWLFs, but use their general authority to protect human health and the
environment and their authority over post-closure plans to oversee
post-closure land use. Basfed on these States, the Agency believes that
the required post-closure care activities under the proposed criteria will
not be inconsistent with existing State programs.
The Agency waa particularly interested,in how the States selected the
length of the post-closure care period and in datA that may be available
to support a specific time period. As a result, the Agency reviewed all
State programs. The results of this review are presented in Exhibit 2-1.
The Agency survey indicated that forty-two States require post-closure
-------
EXHIBIT 2-1
sun nBT-angB cub
d none rasT-
OU
Alibm
Alaska
Ailtoo*
Alkuuu
California
2 yaara
Colorado
Connecticut
Delaware 2 years -- for
MCM««ry rcjMirt
Florida
Georgia
Hawaii
Idaho
Ullnola
1 year at laaat
1 yaar at laaat
1 yaar
3 yaara
usib tm rosT-nnHnw cam phucd
nimw w tmw
Iftfl" TiflM
x
5 yaara
(or longs r as
required by
Board, enforce-
a>ant «|ancy, or
Matar Quality
Control Board)
30 yaara
(if monitoring Is to
required by Dapart- ^
mnl; if not, no oo
post-closure care
period)
5 yaara -- for moni-
toring (or longer as
required)
20 years
(Department nay
extend period if
necesaary; owner or
operator may apply
for reduced ten)
-------
EXHIBIT 2-1
-------
naniT a-i <
AA.
IttiMurl X
(u MUHtiy durlDi
and following act.lv*
tfKitlon)
Montana X
Habraaka X
(u aMMiiry during
and fbllofUii actlva
operation)
Hav^i X
(tn^tloai allowad for
cartain facllltlaa)
Haw Baapahlra X
(aa apaclflad In
clcsura plan)
Haw Jaraay
Haw Haalco
Haw York
North Carolina
X
("futura nacaaaary oaln-
tananca and watar
ltjr wool tor lng aha 11 ba
tha raaponalbl»Ity of
tha OMBii;" pu-inlt,
bowavar, la ta.iolnatad
whan tba alt* la
adaquataly cloaad)
¦tlauad)
** '"T-fivriTffi r/inr rmiT
1— —tusm— —19 rwffi M/3n mm
to
30 yaaxs . •
(variances by datar- ^
mintiion of Depart-
mant; anyon* may
patltlon for a
varlanca)
3 yaara
(or longer aa
apaclflad by
Oaparlaant)
-------
mUBIT 2-1 (contiwad)
sun foot-
¦> ancmc rcsr-
SIAIB
North Dakota
Ohio
_Li±.
3 years
(continued laachata
monitorin* bay and
3 y*iti required
as determined
nacaaaary by Agency)
Gklahoaa
Or a#an
Peimsy Ivan la
(until vegetation
eetabliahad to pre-
vant corrosion)
Shod* Itland
South Carolina
(Ins pactions for parlod
Mcaaaary to asaura
satisfactory land
racovary; aonitorinc
avary 3 aonths it
daimid nacaaaary by
Board of Baalth)
South Dakota
(until slta has set-
tlad and no filling
or draining problasa
aalet)
Taimi
1- yaac
inrm i rfi
vt TBHff if mm
WW TKIM
0 yaars ainlnoi
(Department inspacta
annually for S yaars)
x
(Department nay extend
or raduca parlod aa
needed; permittee say
requeat utainon or
raduction).
K>
I
ro
-------
Hill MIT 2-1 (continued)
sun fVBT-OUBnE
WD UKlflC rasr-
sua
Tezaa
1-1 WWW
IWBW «w t-ff miop
Utah
Vamont
Virginia
Washington
Wait Virginia
Ml is. a aln
1 year
(until alt* barwaaa
atabilisad and aon-
llailui can be aafely
dlacoatlnued)
Hjrcaini
V? TOOT
Iff TFiNTff
»/*>
S yaara at laast
(if problsma persist
beyond 5 yaara. tha
operator la raapon-
albla for correction
until Oapartaant
deteminaa that
problaaa ara ade-
quately resolved)
N.
N>
30 years
(20 yaars If approved
by Department)
3 years - nacaaaary
cover repair
3 yaara -- for gaa/
laacbate control
-------
2-23
care, but that the length of the period specified by each of the States
varies widely. While four States require post-closure care for up to 30,
years, most States require care periods of less than five years.
2.3.6 Options Considered and Rejected
The Agency considered setting the length of the post-closure care
period at 30 years with the option to reduce or extend the period,
consistent with the approach taken in Subtitle C. As indicated above,
information included in the RIA for the proposed criteria suggests that a
period longer than 30 years is warranted, particularly in light of
improvements in containment technology that have the effect of delaying
releases. The Agency also considered making; the post-closure care period
consistent with some of the periods specified in' existing State programs
(e.g., 5, 10, or 20 years). Although the Agency acknowledges that no
other State or Federal authority currently requires a two-phased
post-closure care period, the Agency has no data to support these shorter
periods. - The results of the survey-of State requirements suggest that the
lengths of the State periods were generally set as a result of political
considerations, economic considerations, or professional judgment. No
State reported using empirical data or predictive models to determine an
appropriate length for the post-closure cite period. Therefore, the
Agency doe* not believe the existence of shorter post-closure care periods
in the States is a persuasive reason for limiting the requirement in the
proposed rule. Moreover, based on the data available, the Agency believes
that1 a minimum 30-year period and a second phase specified by the State is
necessary.to protect human health and the environment. Finally, the
-------
2-24
Agency considered requiring an extended pose-closure care period with an
option to reduce the period only if the owner or operator could
demonstrate that a reduction in the period would not pose any potential
threat to human health and the environment. The Agency determined that
extended care would create an unreasonable burden on the States to
establish criteria £or terminating post-closure care and on owners or
operators- to demonstrate that post-closure care activities were no longer
needed.
2.4 CLOSURE AMD POST-CLOSURE PLANS
To ensure that the owner or operator has prepared for activities
needed to close a MSWLF facility in accordance with the cirsure
performance standard, and to ensure that the facility is effectively
maintained following closure, the Agency is proposing that owners or
operators, of all new and existing MSVLF facilities prepare written closure
and post-closure plans (§§258.30(c) and 258.31(c)). These written plans
will provide a basis for the implementing'State agency to evaluate the
adequac-' of closure and post-closure care, and will serve as the
instrument for enforcing and establishing violations of the Subtitle D
closure and post-closure criteria. In addition, these written plans will
serve as th* basis for developing'site-specific cost estimates that in
turn will deternine the amount of financial assurance required (see
Chapter 3).
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2-25
2.4.1 Contents of Plans
The written closure plans under the proposed Subtitle D criteria oust
describe, at a minimum, the methods, procedures and processes necessary to
close each MSWLF unit in accordance with both the closure performance
standard in §258.30(a) and the final cover performance standard in
§258.40: The closure plan must also include estimates of the maximum
extent of operation that will ever be open, the maximum inventory of
wastes that will ever be on-site over the active life of the HSVLF, and a
schedule of closure activities. In order to be prepared to close the
facility at any point during its active life, the1 description of closure
activities must include the steps necessary to close the facility at its
maximum extent of operation. The maximum extent of operation should
include the maximum area of the HSVLF that contains wastes and has not
been closed in accordance with today's'criteria. The maximum extent of
operation, however, does not include areas of the facility not subject to
these criteria (e.g., areas closed prior to the effective date of these
criteria). The closure plan should also describe, at a minimum,
activities such as removing, treating, or disposing of waste inventory
(based on the nsxiaua inventory of wastes ever on site), .decontaminating
the facility, installing the final cover, monitoring ground-water, and
managing lsschste, run-on and run-off, and. explosive gases.
The written post-closure plan under today's criteria must include a
description of the post-closure care monitoring aAd maintenance activities
specified under Section 258.31(a) and (b), and the frequency at which
these activities will be performed. The post-closure plan must also
specify the naae, address, and telephone number of the person or office to
-------
2-26
contact about Che facility during the post-closure period. In addition,
the post-closure plan oust include a description of the planned uses of
the property during the post-closure care period in accordance with the
restrictions on post-closure use specified in Section 258.31(c)(3).
The Agency believes that the regulations specify the minimum
information that must be included in the closure and post-closure plans to
ensure that adequate preparations have been made for closure and
post-closure care activities. The Agency encourages the States to develop
detailed guidelines elaborating on the contents of these plans to, ensure
that owners or operators adequately address all necessary activities.
2.4.2 Approval and Modification of Plans
The proposed rule requires closure and post-closure plans to be
prepared byN the effective date of the rule or the initial receipt of waste
at the HSVLF, whicnever is later. The initial plans and any modifications
must be approved by the State. However, the proposed rule leaves it to
the States' discretion to specify the procedures and deadlines under which
closure and post-closure plans must be submitted or otherwise made
available to the implementing State agency as well as the criteria,
procedures, and deadlines for modifying these plans. EPA believes that
allowing the States to determine procedural issues offers the States the
necessary flexibility to Incorporate the revised Subtitle D criteria into
their existing State programs. The proposed criteria do require that the
closure plan be maintained at the facility or some other place designated
by the owner or operator until final closure of the MSVLF. Likewise, the
post-closure plan must be maintained during the post-closure period at the
-------
2-27
facility or some other designated location. This requirement Imposes
minimal burden on owners or operators of MSWLFs and ensures that
facilities keep records/of their plans.
2.4.3 Options Considered and Rejected
The Agency considered waiving the closure and post-closure plan
requirements for MSWLFs located in the lowest risk areas (e.g., locations,
where there is deep underlying ground water, highly impermeable soils, low
net water infiltration, and low ground-water flow rates). The Agency
rejected this location-based approach because it believes that planning
for closure and post-closure care is essential at all MSWLFs. Even a
facility in a low-risk area may cause threats to human health and the
environment if Improperly closed. Moreover, it will be difficult for the
State to evaluate the adequacy of closure and post-closure care at a MSWLF
without a closure and post-closure plan.
EPA also considered relying on the closure performance standard rather
than a written closure and post-closure plan to ensure that the landfill
is closed and maintained properly after closure. While this option would
provide the maximum flexibility to the States to determine the need for
plans on a ease-by-case basis, and would reduce costs to owners or
operatorsi the Agency rejected this optiott because it does not ensure that
the MSWLF owner oroperator has adequately prepared for closure and post-
closure care. Moreover, this approach would greatly Increase the
administrative burden of evaluating the adequacy of closure activities and
post-closure care.
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2-28
2.4.4 Comparison with Subtitle G
The proposed requirements under today's SubtLtle D criteria to prepare
detailed written closure and post-closure plans are consistent with the
Subtitle C requirements in 40 CFR 264.112, 264.118, 265.112 and 265.118
for hazardous waste facilities. The requirement to submit closure and
post-closure plans to the State for approval and modification is also
consistent with Subtitle C. However, unlike Subtitle C, which specifies
in the regulations the conditions and establishes deadlines and procedures
for submitting and modifying closure and post-closure plans, the proposed
Subtitle D criteria leave these decisions to the States.
2.4.5 Consistency with State Progress
Based on the results of the Agency's survey of the solid waste
regulations in nine States, the Agfency expects that the proposed
requirement to require closure and post-closure plans will not be
inconsistent with most State programs. Of the nine States reviewed, only
Maryland does not require a closure plan; however, closure procedures must
be included in the engineering plans as a condition of receiving a permit.
Each o£ these nine States also requires either an additional plan for
post-closure care or requires that post-closure care be addressed in the
closure plan. (Maryland recently proposed revised solid waste regulations
that would specifically require post-closure care.)
Most of the States in the survey already have'procedures for approving
and modifying closure and post-closure plans. In a process similar to
Subtitle C, seven of the eight States requiring closure and post-closure
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2-29
plans require that these plans be approved as-part of the permit process,
and require that modifications be approved by .Che implementing Agency.
2.5 CLOSURE AND POST-CLOSURE CARE CERTIFICATION
Today's proposed criteria require owners or operators to submit,
following the completion of closure,and post-closure care at each landfill
unit, a certification, verifying that closure and post-closure care
activities have been completed at that unit in accordance with the
approved plans (§§258.30(e) and 258.31(f)). These certifications must be
based on a review of the unit by a qualified party and must provide an
objective evaluation of the performance of closure and post-closure care.
The Agency is requiring objective certifications of closu^s aud
post-closure care in order to provide a mechanism for ensuring that these
activities have been conducted properly and in accordance with State-
approved plans. In addition, a certification requirement provides an
effective trigger mechanism for releasing owners or operators from
financial responsibility requirements for closure and post-closure care
upon corpletion of closure and post-closure activities (see Chapter 3).
Consistent with the overall 'strategy of providing flexibility to the
States and Minimizing the inconsistencies between existing State programs
and the proposed criteria", the Agency is allowing the States to determine
who is qualified to make such.certifications. Qualified parties might
include an independent registered professional engineer, an'in-tiouse
registered professional engineer who can make an objective evaluation, or
Stace inspection officials.
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2-30
2.5.1 Comparison vlth Subtitle C
The Subtitle C requirements in .40CFR 264.115 and 265.115 require
owners or operators of hazardous waste facilities and independent
registered professional engineers to certify chat closure of each disposal
unit (i.e., each landfill cell or trench, surface•impoundment, waste pile,
and land treatment area) and closure of the entire facility have been in
accordance with the approved closure plan. These certifications must be
submitted to the Regional Administrator for approval. The Subtitle C
regulations specify an analogous certification requirement for the
completion of the post-closure care period at each unit. The proposed''
requirements for MSWLFs under the proposed Subtitle D criteria are
consistent in intent to Subtitle C, but allow States to specify acceptable
certifications in order to provide flexibility in State programs.
2.5.2 Consistency vith State Programs
The results of the Agency study of selected State regulations showed
that all of thei nine States chosen for case study, except for Uasnington,
require either a certification by the facility owner or operator or
inspections by the State agency or a registered professional engineer at
the time of closure to ensure that activities have been conducted
properly. California requires a certification by the facility owner or
operator while the others (Florida, Louisiana, New York, Oregon, and
Texas) require inspections by the implementing agCncy for closure
approval. Florida also requires a registered professional engineer to
monitor closure activities to ensure that the closure plan is being
carried out as written. Washington and New York are revising their solid
-------
2-31
waste regulations to require that closure be certified by an independent
registered professional engineer. Although Wisconsin and Maryland do not
Include inspection or cercification requirements in their regulations,
both of these States inspect facilities on a routine basis. Wisconsin
also requires most sites to submit documentation of closure activities,
including photographs, as a condition of being released from the financial
responsibility requirements.
Procedures for ensuring that post-closure care is carried out properly
vary among the nine States reviewed. Texas and New York require
inspections at the end of the post-closure care period by the State agency,
for approval. In Florida, inspections are made throughout the
post-closure care period; in Louisiana and Wisconsin, reports verifying
that post-closure care is being carried out according to the post-closure
plan must be submitted to the implementing Agency during the post-closure
care period.
2.5.3 Other Options Considered
The Agency considered allowing, the States to develop procedures for
approving completion of clo&ure and post-ciosure care at MSWLFs rather
than specifying certification requirements. This option would provide
maximum flexibility to the States. However, EPA was concerned that a
minimum requirement for verifying that closure and post-closure care
activities have been adequately completed is necessary to ensure the
protection of human health and the environment. For this reason, the
proposed rule re^i^ei objective certifications consistent with Subtitle
-------
2-32
C, but allows States to specify who may make the certification in order to
preserve flexibility.
-------
3. FTHAHCIAL ASSURANCE CRITHtIA FOR CLOSURE,
POST-CLOSURE CARE AHD CORRECTIVE ACTIOS
The proposed criteria require owners or operators of MSWLFs to
demonstrate.financial assurance for the costs of conducting closure and
post-closure care and, if applicable, corrective action for known
releases The purpose of financial assurance is to ensure that if an
owner or operator of a MSWLF declares bankruptcy, abandons the facility,
or otherwise fails to pay for closure, post-closure, or corrective action,
adequate funds will be available to cover these costs. The amount of
financial assurance required is based on site-specific cost estimates of
hiring a third party to perform closure, post-closure care, and corrective
action.
This chapter describes in detail the analysis and rationale behind
the proposed financial assurance requirements. It is organized, into three
sections. The first section discusses'the scope of required coverage and
the applicability of the requirements. The second section discusses the
cost estimating requirements foreclosure, post-closure care and.corrective
action, which establish the amounts for which financial assurance must be
provided. "Hie third section examines the Agency's approach to requiring
financial assurance for the'estimated costs of closure, post-closure care
and corrective action. To maximize flexibility for States in developing
financial assurance requirements, the Agency's approach is to specify
performance standards for financial assurance mechanisms rather than
specifying the mechanisms themselves. Chapter 4 provides a detailed
analysis of mechanisms that State may wish to allow for demonstration of
financial assurance.
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3-2
3.1 scars or coverage ahd applicability of criteria
This section discusses two key elements of the proposed financial
assurance criteria: che scope of financial assurance coverage required,
and the entities that are required to provide such coverage. These
elements are addressed separately because the approaches proposed in the
Subtitle D criteria differ from other EPA financial assurance programs.
This section also examines the approaches to scope of coverage and
applicability currently used in State financial responsibility programs
for MSWLFs.
3.1.1 Scope of Coverage
As discussed in the previous chapter, the proposed criteria require
owners or operators of MSWLFs to provide financial assurance for closure,
post-closure care and corrective action for known releases. The
provisions for estimating the costs of the activities are discussed in
Section 3.2.
The Agency considered requiring owners and operators of MSWLFs to
demonst.ate that funds would be readily available to compensate injured
third parties. For several*reasons, however, the Agency has decided to
defer proposing such liability requirements at this time. First, the
Agency la concerned chat it does not have "sufficient data at this time to
specify the amount of liability coverage that would be appropriate for an
MSWLF. Unlike Subtitle I of RCRA, which mandates a minimum level of
coverage for underground storage tanks, Subtitle D of the statute does not
specify any minimum financial assurance requirements for MSWLFs. To date,
little,data exist concerning third-party awards resulting from releases at
-------
3-3
MSVLFs. While nore data are available Co assess potential awards from
Subtitle C facilities, the Agency is reluctant to extrapolate from these
data or to adopt directly the levels of coverage required for Subtitle C
facilities without further analysis comparing the risks and resultant
third-party claims froa MSULFs and Subtitle C hazardous waste facilities.
Second, RCHA §4010(c) allows the Agency discretion to take into
account the practical capability of MSULFs when developing the new
criteria. The proposed criteria apply an extensive set of new regulations
to a new universe of waste facilities, many of which nay not otherwise
have been subject to regulation. In light of the costs associated with
imposing today's proposed requirements on a new universe of facilities and
the current constraints in the insurance market, the practical capability
of owners and operators to provide financial assurance for liability
coverage is highly uncertain.
For these reasons, the Agency has chosen to focus on financial
assurance requirements for costs of activities that are certain to be
incurred (i.e.closure, post-closure care, and corrective action for
known releases) with the objective of mininizlng potential third-party
exposures. In deferring third-party liability requirements, the Agency
.hopes to provide more time to obtain data on potential coverage levels and
for the liability Insurance market'to adjust to a new potential market.
The Agency adopted a slailar approach when promulgating liability coverage
requlreaents for Subtitle C requirements when it pfiased in the
requirements over a three-year period to allow the market to adjust to the
demand for Increased capacity.
-------
3-4
Deferring third-party liability coverage requirements at this time,
however, does not preclude the Agency from promulgating such a requirement
for MSWLFs at a later date. Further, the Agency encourages States to
consider requiring such coverage if they choose. This decision to defer
the requirements of course in no way relieves an owner or operator of
liability, should injury to third parties be shown to nave resulted from
operations of the MSWLF.
The Agency also considered requiring financial assurance for
corrective action for releases that have not yet been detected; however,
this approach was rejected. The Agency based this decision in part on the
absence of data available for predicting future corrective action costs.
For example, to require a facility with a high probability of a release to
demonstrate financial assurance for corrective action costs, the risks
posed by a facility as well as the potential size, impact and costs to
remedy.such releases are needed. Such facility risk analyses could
require considerable time to complete and thus could also delay the
adoption and implementation of regulations by States. Moreover, the
Agency's approach is consistent with EPA corrective action requirements in
Subtitle C.
3.1.2 Applicability
The proposed criteria exempt Federal and State government entities,
defined as those entities whose debts and liabilities are also those of
the Federal or State government, from the financial responsibility
requirements for .iSWLis. All MSVLFs that are either owned or operated by
a Federal or State government entity are covered by this exemption.
-------
3-5
Because Federal and State government entitles are permanent and stable
institutions that exist to safeguard health and welfare, the Agency
recognizes that they have the requisite financial strength and incentives
to cover the costs of closure, post'dosure care, and corrective action
for known contamination in a timely manner. Moreover, this approach is
consistent with the approach used under Subtitle C. The Agency believes,
therefore, that it Is not necessary to impose financial requirements on
Federal and State government entities..
The Agency is considering an explicit exemption from the financial
assurance requirements for Indian Tribes. The rationale for such
exemption is that under the treaties negotiated between the Indian tribes
and the Federal Government, the Federal Government has a continuing
obligation to protect the health and welfare of the tribes. The'Bureau of
Indian Affairs acts as trustee for the Federal Government in these
treaties and the courts have broadly construed this trustee obligation.
This obligation implies Federal support/intervention in the case of Tribal
inability to pay. In the proposal, the Agency requested public comment on
this issue.
The Agency has decided* not to exempt local governments from financial
assurance requirements because, relative to Federal and.State government
entitles, they generally (1) have more limited.financial resources and
less < flexibility in their annual budgets, making reallocation of funds for
a specific purpose in a given year difficult; (2)*cannot necessarily avail
themselves of the traditional sources of municipal* financing (i.e.,
intergovernmental transfers, bond issues, and taxes) quickly enough to
ensure funding in a timely manner; and (3) have been more prone to
-------
3-6
bankruptcy and defaults than Federal and State government entitles. The
first two of these considerations are fully discussed in Section 4.7.4.
The third consideration is discussed briefly below.
Comprehensive data on local government financial distress are
difficult to obtain. However, a report prepared by the Advisory
Commission on Intergovernmental Relations (Bankruptcies. Defaults, and
Other Local Government Financial Emergencies. March 1985), indicates that
(1) three general purpose local governments and 15 other local government
units filed for bankruptcy under Chapter 9 of the Federal Bankruptcy Code
between 1973 and 1983; and (2) -32 local government units defaulted on
government-purpose debt.bett/een 1972 -and 1983. Uhile these daga indicate
that local government bankruptcy and default are relatively rare, the
Agency is concerned that financial stress could delay the timeliness of
meeting the potentially sizeable Subtitle D obligations. Timely funding
of obligations is threatened even if.bankrupt or defaulting governments
are eventually able to pay their debts through restructuring of terms or
infusion of funds froa other sources. Therefore, today's proposal
requires local governments owning or operating KSWLFs to provide financial
assurance in order to ensure that the Subtitle D obligation will be met in
a timely lannar.
3.1.3 Consistency vlth State Requirements
Approximately twenty States currently have financial assurance
requirements for Subtitle D facilities,. One of the Agency's major
considerations in designing the proposed rule was to avoid, as far as
practicable, disruption'to these existing programs.
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The Agsncy conducted a study of nine State financial assurance
programs.7 The study found considerable variations among State programs
regarding the applicability of the requirements and the types of
mechanisms allowed to provide financial assurance. For example, some of
the States examined exempt all governmental entities, including
municipalities, from the requirements; others directed their requirements
only to operators rather than to owners. Given this variation in the
applicability of requirements, it is not possible for the Federal
provisions to be fully consistent with State practices. In deciding on
the applicability of the financial assurance requirements, EPA was
therefore guided principally by its conviction that the rule should be
broadly applicable in order to provide adequate coverage of ciesu.e, post-
closure care and corrective action responsibilities.,
3.2 COST ESTIMATOR CRITERIA FOR CLOSURE, POST-CLOSURE CARE AHD
CORRECTION ACTION
The proposed Subtitle D criteria specify requirements for estimating
the costs of closure, post-closure care, and corrective action. These
requirements, discussed below, establish the amounts for which owners or
operators oust demonstrate financial assurance.
3.2.1 Closura Cost Estimates
Financial assurance for closure must be basetf on a site-specific
estimate of the cost of conducting closure activities that are necessary
7 See Case Studies of State Financial Responsibility Programs for
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated.
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to satisfy che closure performance standard. The proposed criteria
require Che closure cose estimate to equal the maximum cost of closing the
facility ac any time during the life of the facility (i.e., at the point
of maximum extent of operation as estimated in the closure plan); This
requirement ensures that adequate funds are available for closure even if
closure takes place earlier than expected. If owners or operators close
units successively as they are filled, rather than operating multiple
units simultaneously, the maximum area of the facility ever open at one
time will be minimized, thus reducing the size of the cost estimate.
The proposed criteria require the closure cost estimate to be updated
annually for inflation and'whenever changes to the closure plan or
landfill conditions Increase the cost estimate, until the entire HSWLF has
been closed. The Agency is proposing to delegate to the States the
procedures for updating these estimates. The Agency would suggest that
the States rely on inflation factors that are readily available to owners
or operators (e.g., the Implicit Price Deflator for GNP). Owners! or
operators may also request a reduction in the closure cost estimate if
changes in plans result in a reduction in the maximum costs of closure.
Such adjustments would be lhade on a case-by-case basis. These provisions
are consistent with requirements under Subtitle C. Finally, the owner or
operator aust keep a record of the most up-to-date cost estimate for
closure at the HSVLF until he is no longer required t~o demonstrate
financial assurance.
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3.2.2 Post-Closure Care Cost Estimates
Today's proposed criteria require owners or operators of MStfLFs to
demonstrate financial assurance for both phases of post-closure care to
ensure chat adequate funds will always be available in the event chat the
owner or operator fails to.conduct post-closure care.. The amount of
coverage must be based on the most expensive costs of post-closure care
during each phase, as reflected in the post-closure care cost estimate.
The cost estimate for each phase of post-closure care is calculated by
multiplying Che annual cost estimate for each phase by the number of years
of post-closure care required in that phase. The annual costs of
post-closure care are the costs of monitoring and maintaining thie MSWLF
after closure in accordance with the post-closure plan. Because not all
post-closure activities are conducted on an annual basis (e.g., cap
replacement and monitoring well replacement may only be required
periodically), the cost estimate should be adjusted to include'these
periodic costs as well as routine annual costs. For instance, if a final
cap deteriorates over a 10-year period, the owner or operator would have
to replace the cap three times over the initial 30-year phase of the post-
closure care period. A share of this expense would be incorporated inco
the annual cost estimate for the first phase of post-closure care by
dividing Che total coat of cap replacemet\£s (i.e., the cost of cap
replacement x 3) by 30 years.
Like the closure cost estimate, the post-cldbure care cost'estimate
must be adjusted annually for inflation and if changes in the post-closure
plan or landfill conditions increase the cost estimate. Inflation
adjustments are required only during the active life of the MSVLF. This
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is consistent with the requirements in Subtitle C. The owner or operator
also oust retain records of the post-closure cost estimate until released
from financial assurance for post-closure care.
The amount of coverage provided under the financial assurance
mechanism(s) must equal the sum of the cost estimates.for each phase of
the post-closure care period. Coverage must be continuously provided
until certification of post-closure care and release from financial
assurance requirements. If the State has any reason to believe that post-
closure care has not been conducted in accordance with the post-closure
plan, it must provide a written statement of reasons to the owner or
operator.
3.2.3 Cost Estimates for Corrective Action for Known Releases
The proposed criteria require 'owners or operators to demonstrate
financial assurance for corrective action for known releases. The amount
of assurance required is based on the corrective action cost estimate,
which must equal the sua of the annual costs of conducting the corrective
action program over the duration of such a program. The State is
authorized to set the period over which the corrective action program must
be completed. As with closure and post-closure ca're, the Agency
anticipate* that all of the mechanisms discussed in Chapter 4 will' be
available for coverage of corrective action costs. Possible exceptions
are insurance and payment bonds (see discussion ill Sections.4.4 and 4.6).
The Agency is proposing that financial assurance for corrective
action for known releases be demonstrated after the estimate has been
prepared.and.approved as required by §258.32(d). Because the cost
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estimate is based on the site-specific corrective action program, there
oay be a significant lag between the detection of a release and final
approval of a corrective action program and .cost estimate. For example,
assessments of the extent of¦contamination and analyses of alternative
remedies may take several years. Prior to the onset of corrective action,
an owner or operator may take interim measures, such as replacement of
drinking water, to protect against immediate damages. Such measures may
delay the commencement of actual corrective action measures. Because
there may be a substantial time lag between discovery of the need for
corrective action and the final preparation of a cost estimate for
corrective action. States may wish to require demonstration of some
financial assurance during this interim period (e.g., financial assurance
for the costs of interim measures, or a flat amount of coverage to cover
minimum costs).
An owner or operator must adjust the corrective action cost estimate
to reflect price increases due to inflation arid whenever the annual costs
for the remaining corrective, action period exceed the cost estimate. As
the number of years remaining in the corrective action period declines,
owners or operators may request a reduction in the corrective action cost
estimate sod the corresponding amount of financial assurance to reflect
the remaining costs to be incurred.
3.2.4 Consistency with State Prograns
The Agency's study of nine States revealed that all nine currently
require or intend to require coverage for the costs of closure, and
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post-closur* care based on facility-specific cost estimates. None of the
States had corrective action programs.
3.3 PERFORMANCE STANDARD CRITERIA FOR FINANCIAL ASSURANCE MECHANISMS
Historically, regulation of Subtitle 0 facilities.has been a
State-run program. One of the considerations guiding the Agency's
approach to the financial assurance rule was to create requirements that
will foster State implementation of the Federal criteria for financial
assurance. For this reason, the proposed criteria make no specification
as to allowable financial assurance mechanisms, but instead establish a
performance standard for financial mechanisms, thus allowing the States
maximum flexibility for determining allowable mechanisms.
States also will be responsible for specifying procedural
requirements necessary to ensure that the performance standard and other
financial responsibility requirements are satisfied, ^such as procedures
for obtaining, reviewing, cancelling, or substituting mechanisms,
procedures in the event of bankruptcy, and provisions for financial
assuranra in the evenc of.transfer of ownership. Although it is
impossible to foresee all etfe contingencies that may arise and affect the
ability of a. given mechanism to meet the obligations for which it was
intended, it should be possible to- develop.mechanisms that will perform
under a number of common contingencies..
The remainder of this section describes the performance standard
criteria for financial assurance mechanisms authorized by States' Chapter
Four discusses mechanisms that States may want to use and the provisions
that may be helpful in meeting the performance standard.
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3.3.1 Description of Financial Assurance Performance Standard
The performance standard in Seccion 258.32(e) of the proposed
criteria specifies five provisions that financial assurance mechanisms
must meet to ensure that adequate funds are readily available to cover the
costs of conducting closure, post-closure care, and corrective action for
known releases if the owner or operator fails to do so. The five
provisions, discussed below, are:
(1) Sufficiency •• the mechanism must ensure that the
proper amount of funds will be available;
(2) Availability -- the mechanism must ensure
that funds will be available whenever they
are needed;
(3) . Continuity -- the mechanism must guarantee
the availability of the required amount of
coverage at all times without any gaps in
coverage;
(4) Flexibility -• the mechanisms allowed by the
State must provide flexibility to owners or
operators; and
(5) Enforceability -- the mechanism must be legally
valid and binding, and enforceable under State
and Federal law.
Sufficiency of Funds
To enaura that enough funds are available when needed, mechanisms
should gMMTAlly guarantee the full amount, of financial assurance
required, baaad on the current cost estimate, at the time they are
established. However, because it may be difficult to fully fund a trust
fund at the time it is established, States that allow trust funds as
financial assurance mechanisms may wish to allow.a pay-In period. Many
small owners or operators may. not be able to obtain other mechanisms, and
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Co require laaedlate funding of a trust could be overly burdensome.
Subtitle C allows owners or operators to build up the trust over the life
of the facility or 20 years (10 years for permitted facilities), whichever
is shorter. States may wish to adopt similar requirements for MSWLFs. to
meet the performance standard, however, the trust would have to be fully
funded by the end of the MSWLF's active life. States may alternatively
opt to require a shorter build-up period or accelerated payments into the
trust in the earlier years of operation.
Availability of Funds
A mechanism should have clearly specified conditions under which it
will be drawn upon to ensure that procedural challenges do not
unnecessarily restrict the States' prompt access to needed funds to
perform closure, post-closure care or corrective action in a timely
manner.
To satisfy these provisions, States may need to establish standby
trust fund requirements for certain mechanisms (e.g., letters of credit,
surety bonds). The State may not be the appropriate recipient of funds,
since in some states money may be required to be transferred to the State
Treasury, where it becomes'subject to appropriation by State legislatures.
Because « txust Is a separate legal entity, the transfer of funds into a
standby crust does not trigger the transfer requirements to a State
Treasury (since the funds are not legally the possession of the State).
However, the State could be given discretion to ofder the trustee to make
payments as necessary. States could follow Subtitle C standby trust
requirements under <*0 CFR 264 and 265.
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Continuity of Coverage
Over cine, the original conditions that prevailed when the financial
assurance mechanism was first established are likely to change, and, these
changes, unless anticipated and planned for, could result in gaps in
coverage for the costs of closure, post-closure care, and corrective
action. For this reason, the Agency requires in the proposed criteria
that the financial mechanism remain reliable over time by guaranteeing the
availability of required coverage until the owner or operator is released
from financial responsibility, or until he obtains an alternate mechanism.
In particular, States should establish provisions to prevent gaps in
coverage that address contingencies such as (1) cancellation or
termination of the mechanism by the provider, and (2) bankruptcy or
incapacity of*the financial assurance provider or the MSWLF owner or
operator.
Ill Cancellation or Termination of Mechanisms. If a provider of
financial assurance cancels or fails to, renew a mechanism, an owner or
operator may not be able to 'secure alternative mechanisms- immediately,
thereby creating a potential gap in coverage. To avoid this gap, States
may consider requirements governing the cancellation of mechanisms.
However, States also should consider that strict cancellation provisions
may limit th« availability of mechanisms.,
States may consider, requiring providers of financial assurance to
give owners or operators adequate notice of cancellation so that the owner
or operator can secure alternative assurance before the current mechanism
is cancelled. For example, Subtitle C and proposed Subtitle I regulations
require notification of cancellation to be provided at least 120 days in
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advance of cancellation. Subtitle C rules also require that all
providers, except insurers (who may directly reimburse the insured), fund
a standby trust fund if the owner or operator is unable to obtain
alternative assurance. The proposed Subtitle I financial assurance rule
also proposes that a provider fund a standby trust fund in the event that
the owner or operator is unable to obtain alternative assurance, but only
if a release from the UST is suspected or confirmed. (Subtitle I, unlike
Subtitle C and.the proposed criteria for Subtitle D, requires financial
assurance for contingent costs only.) In addition, when the current
instrument expires, whether or not it has been drawn upon, States may
consider requiring the owner or.operator to have an alternative mechanism
in place. In summary, cancellation provisions similar to those on the
Subtitle C and Subtitle I programs can ensure the certainty of funds for
closure, post-closure care, or corrective action for known releases by
requiring that either funds are drawn from the mechanism before it can be
cancelled, or that the owner or operator must secure alternate coverage
before the mechanisa may be cancelled.
The disadvantage of imposing strict cancellation provisions is that
there may be a greater likelihood that the mechanisa will be drawn upon,
which may discourage providers from offering the mechanisa. When
designing financial responsibility program^, States should attempt to
strike a balance between more strict cancellation provisions that may
reduce the availability of the mechanism and less Strict cancellation
provisions that may provide less certainty that funds will be available
when needed.
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121 UT,lr">?rpv or Incapacity. The bankruptcy or incapacity of a
MSWLF owner or operator or provider of a financial assurance mechanism
could also result in a lack of funds when needed if the State has not
established certain procedural requirements. The Agency believes that it
is important that the State be notified if any of these parties files for
bankruptcy proceedings because it threatens (1) the continuity of
operations at the landfill and the ability of the owner or operator to
meet the financial obligations of closure, post-closure care, and/or
corrective action or (2) the ability of the provider of financial
assurance to satisfy its obligation. Likewise, the Ager-y believes that
it is important that an adequate time period be specified to allow owners
or operators time to obtain an alternative mechanism if tne pro/ider of
the instrument Is bankrupt.
States may wish to use the procedural requirements of Subtitle C or
Subtitle I as guidelines. For example, those regulations require an owner
or operator and providers of assurance, such as corporate guarantors or
banks, to notify the Regional Administrator within 10 days after they
enter a bankruptcy proceeding and allow the owner or operator 60 days to
secure alternative assurance. States should consider ways to ensure that
financial Assurance contracts will be considered as an obligation of the
bankrupt provider in a court proceeding.
Subtitle I proposes to extend the applicability of the bankruptcy
notification provision to States that provide a State fund as evidence of
financial assurance. If the State fund becomes incapable of providing
financial assurance, the State is required to notify the Regional
Administrator and owners and operators covered within 10 days of the fund
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becoming incapable of providing required coverage. The incapacity of a
State fund la a concrete, definable event that could occur if monies in
the fund are depleted. In order for States to ensure that owners and
operators of MStfLFs have adequate financial assurances for closure
post-closure care, and corrective action, the State should recognize the
importance of notifying MSWLFs in the event that the State fund becomes
incapable of providing financial assurance. By providing notice to the
MSWLF of the incapacity of a State fund; the owner or operator has time to
obtain alternative coverage and remain in compliance with the regulations.
Flexibility
States, in authorizing financial assurance mechanisms for
demonstrating financial assurance, should provide a range of mechanisms to
provide owners or operators of MSVLFs with flexibility for demonstrating
compliance while at the same time ensuring that they meet the regulatory
requirements. For example, the Agency would not consider a program that
restricted owners or operators to using only a financial test or insurance
to be flexible enough because such restrictions would likely impose a
significant burden on much of the regulated community. Small owners or
operators may not pass the financial test and nay similarly be unable to
obtain Insuxa&ca for their MSWLF because of constraints in the insurance
market. Hm objective of financial assurance requirements is to ensure
that all owners or operators plan and set aside funds for the cost of
closure, post-closure care, and corrective action, if applicable; thus
States should establish a program sufficiently flexible to allow owners or
operators to obtain financial assurance.
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La gal Validity and Enforceability
Allowable mechanisms for financial assurance must be legally valid
and enforceable In order to ensure that the required funds will be
available In the event they are needed. The validity of financial
mechanisms is largely a matter of State lav. However, a mechanism will
generally be valid if it is Issued by an institution that has the legal
authority to issue the mechanism, and that is legally acceptable and/or
regulated by a Federal or State Agency. In addition, other factors nay
affect the validity and enforceability'of a financial mechanism. For
instance, a mechanism should provide a way to resolve disagreements over
interpretation of its contents. Rules of disclaimer in the mechanism
might also be used to prevent delay in the application of the mechanism.
And to determine which claimants will prevail in procedures like
bankruptcy, where more than one claimant asserts a claim to assets, rules
of priority should be established. Some mechanisms, .such as cash deposits
or deposits of government securities may not be secure in bankrupt
proceedings, especially if the deposit is viewed as a "pledge" to the
government.8 Other contract clauses, such as those pertaining to changes
in the agreement, may also 'affect the treatment of the mechanism in a
bankruptcy proceeding.
To halp anaura that financial assurance mechanisms are enforceable,
States.may wish to spacify wording for the mechanisms. Specified wording
would make mechanisms uniformly enforceable and wiuld eliminate the need
for States to review mechanisms on a case-by-case basis. Subtitle C
8 Douglas F. Brenman, "Regulating Financial Responsibility for
Bankrupt Operators, National Environmental Enforcement Journal. November
1987.
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regulations for hazardous waste facilities specify wording for trust
funds, surety bonds, letters of credit, and insurance, and requirements
for the financial test and corporate guarantees. States may wish to refer
to these requirements for guidance, which are found at 40 CFR 264.151.
3.3.2 Consistency with State Requirements
The nine States studied differed with respect to the procedures and
types of mechanisms allowed for demonstration of financial assurance. At
one extreme, Massachusetts currently allows only a performance bond, while
at the other extreme, Wisconsin allows performance or payment bonds,
deposits of cash or^other liquid securities, escrow accounts, irrevocable
trust funds, letters of credit, Insurance, financial tests, and any other
mechanism found acceptable by the implementing agency. For the proposed
criteria, EPA decided that the most flexible approach would be to allow
the States to determine which mechanisms to allow, rather than attempting
to prescribe either a broader or narrower range of mechanisms than are
currently being used by the States, and to provide a set of performance
standards for the mechanisms chosen.
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4. FINANCIAL ASSURANCE MECHANISMS THAT MAT BE
AVAILABLE TO MSWLF OWNERS OR OPERATORS
In developing their own financial responsibility prograas, States
will determine the types of financial assurance mechanisms that will be
allowable under their programs. This chapter provides general information
on seven financial assurance mechanisms that are currently allowed or
proposed for demonstrating financial assurance in various federal EPA
programs, including: closure and post-closure care, liability coverage,
and corrective action for known releases for hazardous waste management
facilities under RCRA Subtitle C (40 CFR Parts 264 and 265, Subpart H);
the proposed corrective action and liability coverage requirements for
underground storage tanks containing petroleum under RCRA Subtitle I (40
CFR Part 280, Subpart I); and the abandonment and plugging irequirements
for underground injection control (UIC) wells under the Safe Drinking
Water Act (40 CFR Part 144). The seven mechanisms include trust funds,
letters of credit, surety, bonds, State assumptions of responsibility,
insurance and risk retention group coverage, financial tests, and
guarantees. Standby trust funds and combinations of mechanisms and
combined coverage are also discussed. For each mechanism, this chapter
describes (1) the features of the mechanism, (2) use of the mechanism in
other EPA prograas and In certain State programs, (3) key provisions of
the aechatll— that the Agency believes are necessary or desirable to
ensure the adequacy of the coverage provided by the mechanism, and (4) the
cost and availability of the mechanism to the regulated community.
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4.1 TKDST FTED
Trust funds are an allowable mechanism under most existing and
proposed EPA financial assurance programs. When fully-funided, trust funds
provide a high level of assurance and are widely available; however, their
high cost to.the regulated community may limit their desirability.
4.1.1 Features of the Mechanise
A trust fund-is an arrangement in which the grantor of the trust
transfers legal title of property to a trustee, who manages the property
for the beneficiary of the trust. The trustor may designate himself or
another party as the beneficiary of the trust. The trustee must manage
the property according to the terms of the trust agreement and in
accordance with applicable state law. The grantor of ,the trust may not
modify or amend the terms of the trust agreement unless he reserves chat
right at its creation. That is, the grantor may create an irrevocable
trust or a revocable trust. In a majority of States, the beneficiaries of
the trust may modify or terminate the trust only, if all beneficiaries
consent and the modification of the trust will not interfere with a
material purpose of the trust.
4.1.2 Km of True Rinds in Other KPA Progress
Under current EPA regulations, owners or opetatou of Subtitle C
facilities may use trust funds to demonstrate financial assurance for
closure and post-closure care. Under proposed regulations, owners or
operators may also use- trust funds to assure the costs of corrective
action for continuing releases at Subtitle C facilities.
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Under Che existing and proposed Subtitle C rules, owners or operators
are allowed Co build*up the closure or post-closure care trust fund over a
specified number of years until the value of the trust is equal to the,
required level of coverage. The purpose of this approach is to minimize
the costs to the owner or operator of a fully-funded upfront trust fund.
The trust fund is built up by making annual payments into the trust over a
period of time called a "pay-in" period. Under Subtitle C regulations for
permitted facilities, annual payments must be made into the trust over the
term of the initial RCRA permit (i.e., 10 years) or over the remaining
operating life of a facility, whichever period is shorter (40 CFR
264.143(a)(3), 264.145(a)(3)). For facilities operating with interim
status prior to receiving a permit, the pay-in period is 20 years or the
remaining operating life of the facility, whichever is shorter.
A pay-in period would also be allowed for trust funds used to assure
corrective action for continuing releases under EPA's proposed, rules.
Although financial assurance is not required until corrective action has
been triggered and funds are needed, a pay-in period is allowed because
corrective actions are typically of long duration. The pay-in period in
the proposed corrective acclon trust fund is twenty years or one-half of
the corrective action period, whichever is shorter. The required trust
fund balaaM At Che end of the pay-in period must equal the coats of
corrective acclon expecced to be incurred after the end of the pay-in
period.
Under the trust agreements specified in the regulations for closure,
post-closure care, and corrective action at Subtitle C facilities, the
Regional Administrator has sole authority to Lnstruct the trustee to
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release funds from the cruse for the purpose of reimbursing the owner or
operator, or other party authorized to conduct closure, post-closure care,
or corrective action, for the particular costs incurred. The Regional
Administrator can withhold reimbursement in part or in full if he
determines that the particular costs are not in accordance with the
qlosure, post-closure care, or corrective action plans, or that the
expected costs will'be significantly greater than the remaining trust fund
balance. The Regional Administrator also has authority to begin
termination of the, trust fund, once he have been assured that all closure,
post-closure care, or corrective action activities have been
satisfactorily completed. Any remaining trust fund balance would then
revert back to the owner or operator or other,authorized party. The UIC'
program gives similar authority to the Regional Administrator.
The existing and proposed Subtitle C rules specify the wording of the
trust agreement, and require that Che trustee muse be regulated and
examined by a Federal or State agency. The trust agreement must be
irrevocable, i.e.,. it cannot be changed or terminated by the owner or
operator without the written agreement of the trustee and the Regional
Administrator. However, the trust agreement provides that the terms of
the agree—nt may be amended if all parties execute a writing amending the
agreement. The proposed Subtitle I rules similarly specify wording of the
trust agreement.
4.1,3 Use of Trust Funds in State Progras Surveyed
In the Agency's survey of selected States, most States surveyed
allowed the use of trust funds. Some States provided the required wording
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for the crust agreement. Most States specified that the trust fund must
be irrevocable.
4.1.4 Key Provisions of the Trust Fund to Ensure Adequacy of
Coverage
If a trust is used as a financial assurance mechanism, the value of
the trust property should be equal to the required amount of coverage as
determined by the facility-specific cost estimate. The trust agreement
could provide for a pay-in period during which the grantor makes payments
of specified amounts into the trust until the trust is .fully funded. The
length of the pay-in period may be designed to ensure that the trust fund
balance equals the required amount of coverage before or as funds are
needed for the assured activity.
To ensure the adequacy of coverage, States may wish to consider
requiring that a trust, fund used to assure the costs of closure and
post-closure care at MSWLFs be structured similarly to trust .funds
established for closure and post-closure care for Subtitle C facilities.
In particular, States may consider basing the length of the pay-in period
on the term of the facility/s permit, if applicable, or the remaining,
operating life of the facility, whichever is shorter, consistent with the
Subtitle C regulations.
A State may also concider requiring specific wording for the trust
agreement In order to eliminate the need for casefby-case review. To
assure that funds will be available when needed, the State may consider
requiring that the trust fund be irrevocable, and provide that the
agreement may be modified only if all parties consent to the modification.
States should check applicable Stace Vaw to ensure chat chis agreement is
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enforceable under State law. The trustee should manage the funds of the
trust under conservative investment policies (e.g., in 40 CFR
264.151(a)(1), the trustee must exercise "care, skill, prudence, and
diligence..."). Furthermore, as in the existing and proposed EPA
requirements, a State may consider requiring the trustee's trust
operations to be regulated and examined by a Federal or State agency.
4.1.5 Cost and Availability of Trust Fund
Owners or operators using a trust fund will be required to pay ah
initial cost to establish the trust, which is normally a set*, low fee.
The annual costs of maintaining a trust fund for closure, post-closure
care, and corrective action will include (1) the fee charged b> tne
trustee for managing the fund, and (2) the annual payments to the trust
itself, if a pay-in period is allowed. Based on surveys of various
financial institutions, EPA.believes the typical costs for administering a
trust will range from 0.1 percent to one percent of the principal in the
trust fund.^ The annual payments to the trust will vary depending on the
length jf the pay*in period, if applicable. The Agency recognizes that
the trust fund option Is likely to be the most costly mechanism because
the assured funds are being sec aside. However, the trust fund is the
most widely available mechanism to. those Entities that can afford the
payments.
® See Memoranda, "Cost and Availability of Letters of Credit and
Trust Funds for Providing Financial Assurance fpr Corrective Measures,"
ICF Incorporated, June 13, 1985, and "Estimates of the Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Waste Landfills Under
the Proposed 40 CFR Part 258 Regulations," iuF Incorporated, July 2, 1987.
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4.2 LSTTBS OP CBEDIT
Statei may consider allowing MSWLF owners or operators to use standby
letters of credit to assure the required costs. This mechanism is widely
used in other EPA and State financial assurance programs.
4.2.1 Features of the Mechanism
A letter of credit is ah instrument issued by a bank or other
financial institution (the issuer) in which the issuer agrees on behalf of
its customer (the.account party) to honor demands for payment to the
beneficiary, usually upon presentation of the documents specified in the
instrument. (In the context of financial assurance for MSWLFs, the
account party would be the owner or operator, while the beneficiary of the
letter of credit would be the State Agency.) Traditionally, letters of
credit primarily have been used to finance foreign shipments of
merchandise: the seller (the beneficiary) draws upon the letter of credit,
for the purchase price of the goods, and the Issuer then collects the
purchase price from the foreign buyer (the account party). Standby
letters of credit differ from the traditional commercial letters of credit
because a beneficiary may not draw upon the letter of credit unless a
specified contingent event occurs. Only standby letters of credit are
appropriate for purposes of assuring tunds- for the costs of closure,
post-closure care, and corrective action.
In a.typical standby letter of credit, the issuer agrees to honor
drafts upon the letter of credit if the account party falls to make' a
payment or perform an obligation for the beneficiary of the letter of
credit. The standby letter of credit specifies the documents necessary to
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establish lha fact of Che account party's default, and the Issuer oust pay
the beneficiary upon presentation of these documents.
Almost all letters of credit are required to conform to Article 5 of
the Uniform Commercial Code (UCC) and the 1983 Revision of the Uniform
Customs and Practice for Documentary Credits (UCP), published by the
International Chamber of Commerce. In addition, the Comptroller of the
Currency .(Department of Treasury) has established safe banking practice
guidelines for the issuance of letters of credit by national banks. (See
12 CFR 7.7016.) The Comptroller's guidelines suggest that: (1) the
letter of'credit must be entitled as such; (2) the letter of credit must
contain a specified expiration date or be for a definite term; (3) the
letter of credit should be limited in amount; (4) the bank's obligation to
pay the beneficiary should arise only upon presentation of a draft or
other documents specified in the letter of credit; (5) the bank must not
be called upon to determine a question of fact or law at issue between the
account party and the beneficiary; and (6) the account party should have
an unqualified obligation to reimburse the bank for payments made under
the letter.of credit. These guidelines have been incorporated into
Subtitle G requirement* and* States may consider incorporating them into
their requirements if they chose to allow MSWLF owners or operators to use
letters of credit.
4.2.2 Uh of Lattara of Credit in Other KPA'Program
Letters of credit are allowable mechanisms for financial assurance
requirements for closure and post-closure care under the Subtitle C
regulations (40 CFR 264.143(d), 264.145(d), 265.143(c), 265.145(c)).
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Under Subtitle G rules, EPA specifies the required language for letters of
credit. The letter of credit names EPA-as che beneficiary, and the owner
or operator as the account party. EPA may draw upon the letter of credit
if the account party does not pay for closure or post-closure care. The
initial period of one year, and must provide for automatic extensions of
at least one year. The owner or operator must establish a standby trust
fund that will serve as a depository for any funds drawn against the
letter of credit (see Section 4.8 for a discussion of the need for a
standby trust fund). Letters «f credit may also be used to demonstrate
financial assurance for plugging and abandonment under the UIC program.
Letters of credit are also proposed as allowable mechanisms for the
financial assurance requirements.for corrective action under Subtitle C
(51 37854, October 24, 1986), and for liability coverage and corrective
action for underground storage tanks containing petroleum under Subtitle I
(52 12786, April 17, 1987). The proposed letter of credit requirements
are very similar to the requirements for letters of credit under the
Subtitle C closure and post-closure care requirements.
4.2.3 Oh of Letters of Credit in State Progress Surveyed
In « survey of selected States conducted by EPA, most States surveyed
allowed the use of letters of credit to satisfy financial assurance
credit, while others did not. Host regulations specified that the letter
of. credit should be Irrevocable. One State required the Issuing
institution to be an institution regulated by the State Commissioner of
.Subtitle C letter of credit must be irrevocable, must be Issued for an
requirements. Some States required particular
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Banks and Trusts, or to be covered by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation.
4.2.4 Key Provisions of Letters of Credit to Ensure Adequacy of
Coverage
States may choose to.allow MSULF owners or operators to use letters
of credit to satisfy their financial assurance obligations under the
revised criteria. The face value of the letter of credit should equal the
amount of the cost estimate. States may also consider requiring that
letters of credit.(1) be executed only by banks or other institutions
qualified to issue letters of credit under Federal or State law and (2)
conform to the requirements of the UCP or applicable Commercial Code and
to the Federal guidelines in 12 CFR 7.7016.
To ensure continuous coverage, the letter of credit should provide
for automatic renewals after ah initial period of coverage. States may
also consider specifying the required language for the letter of credit to
ensure that the instrument correctly describes the circumstances that will
allow the State to draw upon the letter. Specifying the\language of the
letter of credit also eases the administrative burden on the State of
verifying the validity of the instrument. Finally, States may need to
require owners or operators to establish a standby trust to receive any
monies that ere collected under the letter of credit (see Section 4.8 for
a discussion of the need to establish,standby tru^f funds).
4.2.5 Cost end Availability of letters of Credit
Based on a survey of several banks, a typical fee for the issuance of
a letter of credit is about 1.5 percent of the face amount of the letter
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of credit:.*® Many financial institutions, however, require the account
party to post collateral for the amount of the letter of credit.
Moreover, according to the Comptroller's guidelines for safe banking
practices, the account party should have an unqualified obligation to
reimburse the bank for payments made under the letter of credit.
The availability of letters of credit for financial assurance is
uncertain. Banks generally will, provide letters of credit only to
entities that they believe will be able, to pay for the obligation and that
have adequate assets that could be seized if the firm's performance under
the letter of credit is not satisfactory. Therefore, letters of credit
may be available only to entities with the ability to meet large financial
obligations and with strong customer relationships with the ?3su.<-ig
institution.
4.3 SOBER BONDS
Surety bonds are typically included in other EPA and State financial
responsibility programs, although the types of bonds -- performance,
payment, or both-- allowed varied among the programs. The design of the
bonds may vary as vail. States considering allowing MSWLF owners or
operators Co use surety bonds may wish to study the use of the bonds in
other programs. This section highlights spme of the factors States may
consider in designing a surety bond option.
see' Memoranda, "Cost and Availability of Letters of Credit and
Trust Funds for Providing Financial Assurance for Corrective Measures,"
1CF Incorporated, June 13, 1985, and "Estimates of the Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Waste Landfills. Under
the Proposed 40 CFR Part 258 Regulations," ICF Incorporated, July 2, 1987.
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4.3.1 futuiM of Che Mechanin
Surety bonds represent agreements between three parties: the
principal (I.e., the owner or operator of the MSWLF); the obligee, the
party to whom the principal promises to complete a specific act (i.e., the
State agency); and the surety, the party that assures the obligee that the
principal will fulfill his promise and, if the principal fails, that the
surety will fulfill the principal's obligation to the obligee. Surety
bonds that guarantee that the principal will perform a certain act defined
in the bond are referred to as performance bonds. Under a performance
bond, a surety has the option to (1) perform the act or complete the work
necessary to satisfy the terms of the bond or (2) pay for the work to be
done to satisfy the bond. Surety bonds that guarantee payment from one
party to another under the conditions set forth in the. bond, rather than
performance of a specific act, are-known as payment bonds.
The monetary liability of a surety company is defined in the bond as
the "penal sum." Most payment bonds contain a provision that expressly
discharges the surety's liability under the bond once the surety r.as paid
a sum equal to the penal sun of the bond. Under a performance bond, the
surety's obligation Is limited to the penal sua if it chooses to pay under
the bond; however, if the surety chooses to perform to satisfy its
obligation under the bond, the surety is not released from its obligation
until the perfornance is complete.
A surety is "jointly and severally" liable fSr the guaranteed payment
or performance, which means that the surety assumes the principal's
obligation as its own and can be sued jointly with the principal, as a
codefendant, for such obligation. Consequently, most surety bonds include
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an indemnification provision ehae requires Che principal co reimburse Che
surety for coses incurred to satisfy the principal's obligation under the
bond.
States may consider allowing owners or operators of MSWLFs to use
either payment bonds or performance bonds to guarantee that funds will be
available to conduct closure, post-closure care, or corrective action for
known releases, and/or that the required activities will be carried out.
The penal sum would be defined, by the facility-specific cost estimate.
4.3.2 Use of Surety Bonds In Other KPA. Progress
Under the Subtitle C regulations, owners and operators of permitted
hazardous waste management facilities may use a performance bond to assure
that closure and/or post-closure care will be conducted according to an
EPA-approved closure or post-closure plan (40 CFR 264.143(c), 264.145(c)).
Interim status facilities are not offered this option because their
closure/post-closure plans, which specify what activities will be
performed, have not yet been approved by the Agency. The Subtitle C
regulations also allow owners and operators of permitted and certain
status facilities to use surety bonds that guarantee payment into a
standby cruse fund to demonstrate financial responsibility for closure and
post-closun care (40 CI* 264.143(b), 264>145(b), 265.143(b), and
265.145(b)). Paynent is made into the standby trust if the owner or
operator fails to perform final closure or post-closure care activities.
Recently, EPA has proposed to allow performance bonds to be used to
assure the costs of corrective action at hazardous waste management
facilities that have detected a release (51 37854, October 24, 1986),
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but rejected Che use of surety bonds guaranteeing payment into a standby
trust fund as a viable mechanism for corrective action. Because financial
assurance for corrective action for known releases is triggered at the
time that the costs must be incurred, an owner or operator using a payment
bond would have to fund the corrective action standby trust fund
immediately. If the owner or operator did not fund the trust fund, under
the terms of the payment bond, the surety would be liable for fully
funding the standby trust immediately. It is unlikely that a surety would
be willing to issue a bond that would require immediate' payment. Because
it would be less expensive in every case for an owner or operator to use
the corrective action trust fund option (which allows a buildup period)
than the surety bond guaranteeing full payment into a standby trust fund
option, the Agency did not propose to allow bonds guaranteeing payment of
the standby trust fund.
Under the Safe Drinking Water Act (40 CFR 144.63), EPA allows owners
or operators of Class I hazardous waste injection wells to use performance
bonds to assure the costs of plugging and abandonment.
Most recently, the Agency proposed to allow owners and operators of
underground storage tanks containing petroleum to use a performance bond
to demonstrate financial assurance for the costs of corrective action and
third-party liability claims resulting frdm a release during tank
operation (52 £E 12786, April 17, 1987). The proposed performance bond
guarantees that if the owner or operator fails to perform a corrective
action or compensate third-parties injured by a release, the surety either
will (1) perform the corrective action in accordance with the corrective
action regulations or pay the third-party liability claims or (2) fund a
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standby trust, as required by the Regional Administrator, up to the level
of the penal sun.
4.3.3 Use of Surety Bonds.in State Programs Surveyed
Of the nine States surveyed, eight explicitly allow the use of
performance bonds to assure the costs of closure and/or post-closure care.
Of these eight States, five explicitly allow the use of payment bonds to
assure the costs of closure and post-closure care; three require the bonds
to guarantee payment into a standby trust fund and two require the bonds
to guarantee payment to the State treasury. Two of the States surveyed
allowed owners or operators to use mechanisms not specifically iisted in
their regulations and surety bonds may be allowed under such authority.
Some of the State officials interviewed expressed concern that they
have observed a trend whereby surety bonds are becoming unavailable,
specifically to smaller entities. However, other State officials found
that surety bonds are generally available.
4.3.4 Key Provisions of Surety Bonds to Ensure Adequacy of
.Coverage
Certain requirements Imposed on surety companies issuing bonds and on
the manner In which the bonds are written can increase the degree of
assurance provided by surety bonds used to demonstrate financial assurance
for the costs of closure, post-closure care, and forrective action for
known releases at MSWLFs.
States should ensure that the amount of the surety bond equals the
cost estimate. States may also consider requiring surety companies to
meet certain qualification standards. For example, to be acceptable as a
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surety on a surety bond that names a branch or agency of the Federal
government as the beneficiary, sureties could be required to comply with
the lav and regulations of the Treasury Department (as specified in
Sections 9304 and 9308 of Title 31 of thie United States Code). The names
of companies meeting these Treasury requirements are published on July 1
of each year by the Department of the Treasury in»Circular 570: Surety
Companies Acceptable on Federal Bonds. States may publish their own lists
of companies that are registered to do business in the State and that are
acceptable as sureties on bonds naming the State as beneficiary. States
may also wish to establish specific wording for the bonds to minimize the
burden on the State for case-by-case review, and should consider the
requirement of a standby trust fund, if needed by State l&r (.see Section
4i8 for a discussion of the need to establish standby trust funds).
4.3.5 Cost and Availability of Surety. Bonds
The-average annual cost or premium of a surety bond guaranteeing
costs such as closure, post-closure care, and. corrective action for known
release i is expected to be about two percent of the penal sua of the
bond.^ The penal sub should equal the facility-specific cost estimate,
unless tha surety bond Is used in combination with another mechanism.
(See Section 4.9 for a discussion of combining mechanisms.) In addition
to the cost of tha premium, owners or operators using surety bonds may\
H See Memoranda, "Costs and Availability of Surety Bonds for
Providing Financial Responsibility Requirements for Corrective Measures,"
ICF Incorporated, May 17, 1985, and "Estimates of tha Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Vaste Landfills Under
the Proposed 40 CFR Part 258 Regulations," ICF Incorporated, July 2, 1987
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incur costs related to posting collateral co satisfy the surety company's
underwriting requirements. The amount of the value of the collateral
could be as high as 100 percent of the face value of the bond. Generally,
the value of the collateral required is based on the degree of risk the
underwriters perceive the surety company is assuming.
Like letters of credit, the availability of surety bonds is
uncertain. In general, they will only be available to financially strong
firms, including those that can provide collateral for the full amount of
the bond.
4.4 STATE AS SORPTIONS OF RESPONSIBILITY
The Agency believes that State assumption of responsibility .is an
appropriate financial assurance option for the States and may be an
important alternative to other mechanisms. In particular, the various
specific types of State assumption discussed below (i.e., State funds,
State-purchased mechanisms, State guarantees), used singly or in
conjunction with other mechanisms, could reduce the costs of complying
with requirements for closure, post-closure care, and corrective action.
State assumption of responsibility could also be designed specifically £or
certain categories of MSVLFs, such as for municipally-owned or operated
facilities.
State funds, guarantees and other assurances may he particularly
appropriate forms of financial assurance for MSVlfes owned by local
government entities, especially in States that currently do not require
municipalities to demonstrate financial assurance for HSVLFs. By using
some form of State assumption to provide evidence of financial assurance
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for municipalities, assurance of closure, post-closure care, and
corrective action costs could be accomplished without necessarily imposing
a large compliance burden on municipalities that might otherwise be
created by requiring them to make more formal financing arrangements, such
as obtaining a letter of credit or surety bond, or funding a trust.
In addition, State assumption of responsibility for closure and
post-closure care is consistent with current trends toward greater State
involvement in local finances.Greater State involvement has been
characterized by.increases in State aid to local governments,
State-imposed limits on taxation, and State-required expenditures.
4.4.1 Features of the Mechanisa
State assumption of responsibility involves the direct participation
of the State in assuring that funds will be available to cover the cost of
financial assurance for closure, post-closure care, and corrective action.
The three basic avenues through which a State can directly assure the
financial responsibility of a MSVLF are (1) the establishment of a State
fund, (2) the purchase of an allowed financial mechanism for the MSWLF and
(3) the issuance of a Statrf guarantee. Under each of these alternatives,
the State can either assume absolute or contingent responsibility for the
closure, peat-closure care, and corrective action financial assurance
requirements. That is,- the State may either assume the full costs of
these financial assurance requirements (absolute Issumption), or it may
12 Background Document for the Financial Teat and Municipal Revenue
X&2SJ Financial Assurance for Closure and Post-Closure Care. U.S.
Environmental Protection Agencv, Office of Solid Waste, November 30, 1981',
p. 133.,
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assume responsibility only under certain specified conditions or only for
that portion of cost which the owner or operator is unable to cover
(contingent assumption). How the State raises the funds with which to
support these assumed responsibilities, and to what extent the MSWLF owner
or operator is expected to provide funds, are the factors that distinguish
these three forms of State assumption of responsibility.
It should be noted that while "State assumption" is used here to
include State funds, State purchase of a financial assurance mechanism,
and State guarantees, not all of these alternatives necessarily require
the State to bear the cost of closure, post-closure care, or corrective
action. In some cases, such as a State guarantee or a State fund financed
through general State revenues, with no direct municipal contribution, the
State may bear all such costs. In other cases, the State's role may be to
facilitate local assumption of responsibility (e.g., a State fund
capitalized through tipping fees charged by participating MSWLFs).
State Funda
There are many possible approaches that could be used by States to
design financial responsibility funds for closure, post-closure care, and
corrective action. The first step in designing the fund is to determine
how the fund should be used. A "primary" fund would assume absolute
responsibility and would pay for the specified obligations of the owner or
operator regardless of the financial position of the owner or operator or
his willingness to pay; a "back-up" fund would aq£ume contingent
responsibility and would pay only if an owner or operator is unable or
unwilling to pay. Backup funds are generally smaller than primary funds
because they are usually used only to fill gaps in available resources.
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States may also establish funds that cover only part of the regulatory
costs.
The next step is to decide what revenue sources should be used to
finance the fund. Potential sources of revenues Include permit fees,
fines or penalties, tipping fees, and tonnage fees. States may also
exercise their taxing and spending authorities to finance a State fund by
authorizing appropriations from the State treasury or debt issuance in the
form of either general obligation or revenue bonds.
States could also establish a' loan fund to provide financial
assurance coverage for owners or operators of MSULFs. A State could
establish a fund through the financing procedures outlined above, make
loans to entities to cover environmental obligations, and require
repayments of any loans in a timely fashion. To assure that a borrower
repays the loan on time, the State could require collateral or it could
retain the right to capture other State funds allocated to a borrower
(e.g. budgetary allocations to a municipal borrower) if he fails to repay.
State Purchase of Financial Assurance Hwrhml im
States could purchase a financial assurance mechanism from another
party to provide coverage for an entity or group of entities. A purchased
financial assurance mechanism may be less expensive to the State than
establishing * State fund, depending on the features of the fund, since
such mechanisms are normally priced at a percentage of the amount of
coverage provided. Moreover, if an environmental'obligation arises, the
issuer of the mechanism would be liable for the face value of the
instrument.
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Stats Guarantees
Scat# guarantees are a form of assumption of responsibility whereby a
State pledges to provide the funds when they are-needed to cover the costs
of closure, post-closure care, or corrective action if the owner or
operator fails to do so. The State guarantee is a form of
intergovernmental transfer of a specific obligation from one entity to
another (i.e., similar to the guarantees, discussed in Section 4.7). A
guarantee may be less expensive for the State than establishing a State
fund or purchasing a financial assurance mechanism from another party.
It should be noted that a preliminary analysis indicates that State
guarantees may not be an available option for demonstrating financial
assurance in some. States. No States currently provide StCe g"aiantees
under their solid waste programs either due to State constitutional
restrictions (e.g., prohibitions or limits on the pledge of State credit,
with "credit" defined to include State guarantees) or a policy decision
that State guarantees of municipal obligations are not appropriate.13
4.'».2 Use of Stat* Aaswptloos of Responsibility In Other EPA
Program
State funds and other State assurances are allowed or proposed .to be
allowed as mechanisms to provide evidence of financial assurance under
both the RfltA Subtitle C program for hazardous waste treatment, storage,
and disposal facilities and the proposed Subtitle 1 program for
underground storage tanks containing petroleum. The Subtitle C program
13 See Case Studies of State Financial Responsibility Pr»|r>fn.« fnr
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated, pp. 35-36.
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allows States to assume responsibility for the coses of closure, post-
closure care. In addition, both Subtitle C and Subtitle I programs allow
States to assume responsibility for the costs of corrective action and
third-party compensation. Under the Subtitle C regulations, a State
assumption of responsibility is defined as when a State either assumes
legal responsibility for an owner's or operator's compliance with the
closure, post-closure care, or liability requirements, or when the State
assures that funds will be available from State sources to cover those
requirements. Under Subtitle I, a State may satisfy the financial
assurance requirements of an owner or operator by assuring that monies
from a State fund will be available to cover costs of financial assurance
or otherwise assuring that such costs will be paid. Both sets of
regulations require the Regional Administrator to evaluate whether State
funds or other State assurances used for purposes of State assumption of
responsibility are equivalent to Federal financial mechanisms. The
factors to be evaluated in determining equivalency are the certainty that
funds will be available and the amount of funds. States providing State
funds or other State assurances must establish procedural requirements for
allowing State assumptions of responsibility.
4.4.3 On of State Assumptions of Responsibility In State Programs
ilunejwd
The results of an Agency survey of selected ftates indicate that
several State funds have already been established for solid waste disposal
facilities, some specifically for closure, post-closure care and
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corrective action, and others that could be adapted for those costs.14
For exanple, New York has passed a bill and Massachusetts has proposed a
bill authorizing bonds to raise grant and loan funds for publicly-owned
solid waste facilities. The New York law authorizes the State to make
loans for up to 50 percent of the cost of closure, while the Massachusetts
bill would authorize the State to provide loans of up to $2 million for
closing landfills and to award grants of up to 90 percent, of the cost of
cleaning up drinking water supplies contaminated by leachate from solid
waste landfills.. Similarly, Wisconsin has established a Waste Management
Fund capitalized by owners or operators of solid waste disposal facilities
who must pay tonnage fees for closure and post-closure care based on the .
amount of waste at the facility. The Fund is to be used as a back-up fund
to pay for any care that is necessary beyond the 30 years of post-closure
care currently required in Wisconsin, for providing closure or
post-closure care for owners or operators who fail to comply with the
closure or post-closure care requirements, and for compliance action .
necessary to prevent inoilnent or substantial danger to public health or
the environment. Finally, Illinois has passed a law that authorizes the•
State to require solid waste facilities to charge tipping fees and to
forward the proceeds of the fees collected to the State. Although these
tipping f«M will be used for waste recycling development projects,
similar arrangements could be made to provide either primary or backup
funds for closure, extended post-closure care ani corrective/ action.
14 See Case Studlaa of State Financial Responsibility PrftgrftHlff fftr
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated, pp. 35-36.
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Scat* funds for cleanup of contamination caused by underground
storage tanks containing petroleum are in place in several states,
including Florida and Maine. Some States allow.these funds to cover
several different types of environmental problems, including releases of
both petroleum and hazardous wastes. Revenue sources for these funds
include fees, taxes, fines, penalties and/or legislative appropriations.
4.4.4 Key Provisions of State Assumptions of Responsibility to
Ensure Adequacy of Coverage
To ensure that State assumptions of responsibility are as effective
as other financial assurance mechanisms, State implementing agencies
should ascertain whether the amount and timeliness of funds will provide
an adequate level of coverage.
If a State establishes a back-up fund or a contingent guarantee, the
implementing Agency will need to specify the circumstances under which
State responsibility is assumed. For example, State expenditures might be
triggered (1) when an owner or operator is unable or unwilling to perform
or pay for closure, post-closure care, or corrective action;
(2) where no responsible owner or operator can be identified; or (3) in
emergency situations where the owner or operator is unable to respond
effectively.
State regulations might also specify additional key provisions
related to State back-up funds or S.ate contingent}, assurances such as (1)
whether the State can recover costs from the responsible owner or
operator, and (2)' whether the State can pay for closure', post-closure care
and corrective action in emergency situations even if the owner or
operator has funds available to pay.
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4.4.5 Cost and Availability of State Asswptlons of Responsibility
The cose of Scate assumptions of responsibility for owners or
operators of MSWLFs could vary depending on the form chosen. For example,
if the State provides a guarantee, the only costs may be for submitting
requests for inclusion in State programs and reporting the assurance
obtained.to the State authority. The costs to owners or operators could
be higher if the State establishes a State fund that requires the owner or
operator to reimburse the State for drawdowns of State funds used to
perforin closure, post-closure care, or corrective action, or if the fund
is capitalized by the owners or operators themselves (e.g., fees based on
tonnage handled). The costs to the State will depend on how funds are
collected and how the fund is used (e.g., cover all costs or only costs if
the owner or operator defaults).
Availability of state assumption mechanisms will depend on the
willingness of the State to enter into such agreements, and on the degree
to which the State is lioited constitutionally, as in the case of
guarantees.
4.5 AHD KISK KREHTIOH G800F COTOAGI
Both Insurance and risk retention group coverage may provide viable
financial assurance options for MSVLF owners and operators for the costs
of closure and post-closure care; however, the Agency, is uncertain of the
viability of such coverage for corrective action Costs. This section
discusses the applicability of insurance and risk retention group coverage
to all of the required types of coverage.
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4.5.1 Features of the Mechanises
Insurance is a contractual arrangement under which an insurer agrees
to compensate an insured for losses. By purchasing insurance, the insured
transfers financial risk to the insurer. An insurer assumes the stated
liability of the insured and thus insurance could be an option to relieve
the owner or operator of the burden of paying the required costs. ' If
insurance is purchased to satisfy a regulatory requirement (i.e., to
provide,evidence of financial assurance for closure, post-closure care, or
corrective action), the regulatory agency is not ,a party to the insurance
contract. In this way, insurance differs from some of the other types of
financial assurance mechanisms mentioned in this background document.
Insurance also differs from these other mechanisms in that its cost is
actuarially based (i.e., the insurer bases premium amounts on the expected
value of the claims the .insurer expects to pay)..
Insurance used for assuming the costs of closure, post-closure care,
and corrective action for known releases could be structured as an
annuity. All three types of the required coverage are certain, non-
contingent costs that are defined by a cost estimate. The timing of these
costs can also be predicted* with some certainty. (In the case of
corrective action, Che timing of the costs is Immediate.) Based on the
cost and ptyasnt schedule information, anvinsurer can determine the amount
of capital that the Insured must pay to the Insurer in order for the
insurer to have sufficient capital and.return on the capital to make the
required payments. In this way, an insurance policy assuring the required
coverage- is similar to a trust fund. The size of the insurance premiums
may be similar to the amount of annual or periodic payments into a
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gradually-funded crust fund. The Agency believes chat insurance premiums
are tax deductible, while trust fund deposits may not be. If chis is
true, although the gross costs of Insurance and trust funds may be
similar, the net cost of insurance may be less as a result of the tax
benefit.
Insurance to cover closure and post-closure care costs may be
provided in one of two ways: in the form of a stand-alone insurance
policy or as part of a larger property and casualty policy including
coverages for other risks (e.g., types of property damage, theft, etc.).
The face value of the policy would be required to* equal the
facility-specific cost estimates for closure and post-closure care, as
applicable. Although insurance is hypothetically available for closure
and post-closure care costs,, in practice insurance may not be available
since insurance, is best suited to provide financial assurance for unknown
obligations.
Insurance to cover corrective action for known releases is unlikely
to be available. In fact, in the proposed rule to require financial
assurance for corrective action for existing releases at hazardous waste
management facilities., the Xgency decided not to allow Insurance as an
option (SI Q 37854, October 24, 1986). Because such coverage would be
analogous to writing fire insurance for a.burning building, the premiums
would have to be greater than the actual cost of corrective action in
order for the Insurance company to profit. Therefore, the Agency
determined that it would be more economical for an owner or operator to
adopt another mechanism. Moreover, the Agency is unaware of any Insurers
willing to provide coverage for corrective action for known releases.
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Although chances are remote that an owner or operator could obtain such
coverage, States may, however, choose to leave this option open in case
insurance for corrective action becomes available in the future.
In general, risk retention groups function in the same manner as
insurance companies: the individual risks of group members are
transferred to a risk pool administered by the group or association.^ In
return, members of the association pay a premium based on the expected
value of their individual losses. The cost of losses is borne by the risk
retention group. The primary difference between an insurance company and
a risk retention group is that insurance companies sell their services to
the public at large, while risk retention groups can sell insurance only
to its members. Thus, risk retention group coverage is a special type of
insurance coverage. A number of risk retention groups have formed since
the enactment of the Risk Retention Act, but none of these groups cover
pollution liabilities. A few firms have been trying to form risk
retention groups that would offer pollution liability coverage but none of
these groups are operational, and it does not appear that any will be
operational in the near future. The Agency is unaware of any efforts to
form a risk retention group* that would cover closure, post-closure care,
or corrective action costs.
On October 27, 1986, President Reagan signed the Risk Retention.
Act of 1986 (Public Law 99-561). This legislation preempts many State
regulatory provisions that would otherwise Impede the establishment of
group risk pooling arrangements to cover individual liability risks.
Under the statute, -terbership in a risk retention group is limited to
persons who are "engaged in businesses or activities similar or related
with respect to the liability to which such members are exposed by virtue
of any related, similar, or common business, trade, product, services,
premises, or operations" (.section 2(a)(4)(F))..
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4.5.2 Um of Insurance and Risk Retention Group Coverage is Other
KPA Prograns
The SubCiele C regulations (40 CFR 264.143(e), 264.145(e),
263.143(d), and 265.145(d)) include insurance as one of the mechanisms
that owners and operators of hazardous waste facilities may use to
establish financial assurance for closure and post-closure care. Risk
retention groups are Interpreted as a form of insurance and thus are
allowed under the Subtitle C rules. Insurance was also one of the
mechanisms authorized by the Agency to provide evidence of financial
assurance for bodily injury and property damage to third parties caused by
sudden and nonsudden accidental occurrences arising from the operations of
hazardous waste management facilities under Subtitle C regulations (40 CFR
264.147 and 265.147). Currently, very few insurers provide coverage for
closure and post-closure care. Insurers are wary of providing such
coverage because of the long term nature of the (potential) exposure and
the difficulty of assessing the risks.
In addition, the proposed Subtitle I financial assurance rule allows
UST owners and operators to demonstrate financial assurance for corrective
action and third party liability through use of Insurance and risk
retention group coverage, among other mechanisms (52 £g 12786, April 17,
1987).
4.5.3 Dm o£ Insurance end Rluk Retention Group Coverage In State
Progress Surveyed .
The Agency's survey of States with existing financial assurance
requirements for solid waste facilities revealed that tone States- do not
allow insurance for closure and post-closure care, some allow it only for
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closure, and some allow It for boch. Some Scate officials seated that
insurance for closure and post-closure care is almost completely
unavailable or available only at a very high cost. The availability of
risk retention groups is uncertain and will depend on States' responses to
the Risk Retention Act of 1986. The Act currently allows risk retention
groups to operate in States in which they are not licensed. States have
traditionally regulated the insurance industry within their States and are
concerned about the impact this Act may have on their authority to
regulate.
4.5.4 Key Provisions of Insurance and Risk Retention Group Coverage
to Ensure Adequacy, of Coverage
If States choose to allow owners and operators to use insurance to
guarantee that closure, post-closure care, and corrective action funds
will be available, there are a number of basic provisions that States
should consider requiring of insurers. For example, States may wish to
require that insurers be licensed to transact the business of Insurance or
be eligible to provide Insurance as an "excess or surplus lines" insurer
in one or more States. These qualifications are currently required under
the Subtitle C liability coverage requirements for owners and operators of
hazardous waste treatment, storage, and disposal facilities to ensure that
insurers are subject to regulatory oversight by State , insurance-
commissions. At the same time, these requirements ^should not prevent
participation in the insurance market for closure and post-closure care,
since most insurers can easily meet the minimum qualifications.
States may also wish to consider requiring risk retention groups
issuing coverage to be chartered and licensed in *t least one State and
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authorized to operate in each State where a covered municipal waste
landfill la located. These minimal qualifications axe designed to conform
to the requirements for risk retention groups included in the Risk
Retention Act of 1986. Some of the controls over risk retention groups
specified in the Risk Retention Act include requirements that each group
submit:
* An operating plan, including a rating
schedule, available coverages, and limits,
to the commissioner in each State where the
group intends to do business before it
begins operation; and
• A copy of the group's annual financial
statement to regulators in every State in
which it operates. The statement would have
to be certified by an independent accountant
and include an opinion on the group's
reserves by a qualified actuary.
In addition, Federal courts have the authority to issue an injunction to
stop a risk retention group from operating in all States if the court
finds that the group's financial condition is precarious.
4.5.5 Cost of Insurance and Risk Retention Group Coverage
As discussed In Section 4.5.1, insurance premiums for policies
assuring the cost* of closure,.post-closure care, or corrective action may
be similar Co periodic payments into a trust fund with a build-up period.
In practicehowever, given Insurers reluctance to offer any type of
pollution coverage - - either for third party liability or for closure and
posc-closure care -- this type of coverage is expected to be costly and
very difficult to obtain.
The Agency j^s unaware of any risk retention groups that provide
coverage for closure, post-closure care, or corrective ^vtlon costs. If
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such coverage vera available from a risk retention group, ehe Agency
expects that the risk ^retention group coverage cost would be similar to
that- of insurance.
4.6 FIHAHCIAL TEST
The purpose of a financial test is to measure the ability of an
entity to fund, out of its own resources, the costs of closure, post-
closure care, and corrective action. As discussed below, States may
consider allowing private firms to use a financial test similar to tho^e
used in other EPA programs and allowing local governments to self-insure
by designing an appropriate "financial test" or other measure of local
governments' ability to fund the required costs in a timely manner.
4.6.1 Features of tbs Mechanism
A financial test is a demonstration that an entity's own resources
I
are adequate to meet its obligations. If an entity can successfully meet
the requirements of a financial test for the amount of required coverage,
the entity is not required to procure another financial assurance
mechanism to deaonacrate that it will be able to fulfill Its environmental
obligations. Because a financial test does not in itself ensure available
funds, a financial test for MSWLFs should-be designed carefully to ensure
that entities paaalng the test will, in fact, be able to meet their
closure, post-closure care, and corrective action obligations. The
criteria must be stringent enough to indicate financial distress that
could result in either a private firm's bankruptcy or a local government's
inability to fund the required activities in a timely manner. If an
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entity pum the financial test, the arrangements for paying the
obligation* are left to the entity to decide.
4.6.2 Use of Financial Tests in Other BPA Prograas
EPA has included a financial test as a method of demonstrating
financial assurance in several regulations proposed and promulgated since.
1982, including: (1) the financial responsibility regulations for
closure, post-closure care, and liability coverage for hazardous waste
treatment, storage,, and disposal facilities under Subtitle C of RCRA; (2)
the proposed financial assurance requirements for corrective action for
knotm releases at Subtitle C facilities; (3) the financial assurance
requirements for plugging and abandoning wells under the UIC program; and
(4) proposed financial assurance requirements for corrective action and
liability coverage for releases from underground storage tanks containing
petroleum (RCRA Subtitle I).
The Subtitle C financial test requires that the firm (1) satisfy two
of three ratios designed to indicate relative financial strength, (2) have
working capital and tangible net worth of at least six times the sum of
the closure and post-closure care cost estimates, (3) have at least $10
million in tangible net worth, and (4) have 95 percent of its assets in
the U.S. In addition, the firm must sub alt a letter from its chief
financial officer, the accounting opinion of an independent certified
public accountant, and a special report from the"firm's certified public
accountant attesting to the accuracy of the data presented in the chief
financial officer's letter. As an alternative to the net working capital
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and ratio requirements, a firm may substitute an investment grade bond
rating (one of the top four ratings) from Standard and Poor's or Moody's.
Under the proposed RCRA Subtitle I requirements, a firm must have
tangible net worth of ten times the required aggregate coverage and a
minimum tangible net worth of $10 million. The firm must also file
financial statements annually with the Securities and Exchange Commission
or receive a 4A or 5A financial strength rating from Dun and Bradstreet.
The firm must also submit a letter from the chief financial officer
certifying that the company has met the requirements of the test.
In each of these cases, the financial test is designed for and
primarily used by private sector firms, these tests may not be directly
applicable to governments that own MSWLFs. For example, each existing
test has a minimum requirement for net worth, an accounting term that is
difficult to determine from the financial statements of government
entities. Section 4.6.4 provides a more complete discussion of the
problems of applying standard private sector indicators of financial
health to local governments.
A financial tesc for municipalities was considered during the
development of the Subtitle*C financial assurance requirements. However,
the April 7, 1982, interim final rule specifying the Subtitle C financial
test did nee Include a financial test for>municipalities. The reasons for
this decision, as described in the preamble (47 Efi 15042, April 7, 1982)
and background document^ were as follows:
16 Background Document for the Financial Teat and Municipal Revenue
Tese: Financial Assurance for Closure and Post-Closure Care. U.S.
Environmental Protection Agency, Office of Solid Waste, November 30, 1981,
p. 134.
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* A financial test based on tax revenues was
considered inappropriate based on evidence
that municipalities would rarely be able to
quickly shift allocated funds to meet the
Subtitle C requirements.
* A financial test that used detailed
financial information (e.g., financial
ratios) was considered inappropriate due to
potential difficulties in interpreting and
verifying municipal accounting information.
* Bond ratings were-also rejected as an
element of a financial test for
municipalities. Agency analysis indicated
that municipal bond ratings may only serve
to confirm, rather than predict, financial
distress.
Thus, the Agency has not, to .date, included a special financial test for
local governments in any of its financial assurance rulemakings. Local
governments are not expressly prohibited from using the existing private
sector tests; however, because of differences in accounting methods, these
tests in practice may not be available to or appropriate for local
governments.^
4.6.3 Use of Financial Teats in State Progress Surveyed
Eight of the nine States surveyed by the Agency with financial
assurance requirements for MSVLFs allow some type Qf financial test.
These testa are in general designed for private firms (many States use the
^ The November 1981 background document for Subtitle C uses the term
"municipality" to describe local government entities that would use a
financial test. Because of possible limitations of the term
"municipalities," this background document uses the broader tern "local
governments" to describe such entities. The question of how to define
local governments for purposes of financial assurance is discussed, in
Section 4.7.-5.
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federal Subtitle C financial requirements) and are often made available
only to private firms.
Some states have developed other low-cost financial assurance opcions
as alternatives to a financial test for local governments. Texas, for
example, allows a municipality to demonstrate financial assurance through
a resolution from a Commissioner's Court or a City Council seating that a
county or a city takes all responsibility for providing adequate funds for
the proper closure and post-closure care of a facility. Tennessee has
recently proposed a rule allowing a municipality to prdvide financial
assurance through a "contract of obligation." The contract permits the
State to. collect funds for closure and post-closure care from any funds
being disbursed from the State to the municipal entity.
4.6.4 Approach to Developing a Financial Test for Local Govertaencs
Options for a financial test for local governments are being reviewed
for MSULFs because, given the high incidence of local government ownership
of MSVLFs, a financial test specifically designed for such entitles could
significantly reduce the costs of financial assurance. Moreover,
financial test options currently allowed by States are in general not
available to local government entities. This section discusses an
approach considered viable by the'Agency for developing a financial test
for local governments. The following section discusses an alternative
financial test approach, using bond ratings, -which was considered and
rejected.
The Agency's suggested approach offers States a relatively simple
means of offering financially secure local governments an alternative to
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che purchase of one or more financial assurance mechanisms. In keeping
with che rest of che proposed Subcicle D rule, this approach is presented
in che form of a framework chac Scaces may wish Co adapc co che
circumscances of cheir local governmencs. The framework is comprised of
chree major pares; che rationale for each of ehese pares is discussed
below.
Definlclon of a local government. Because Che Cerms "local
government" and "municipalicy" do not have sCandard meanings, a definition
is necessary Co specify che encicies chac are allowed- Co use che test.
The definicion will cherefore affect che availabilicy of che cesc co local
governmenc encicies, i.e., if che definition specifies only cercain types
of encicies, ocher encicies will be excluded from using che cesc.
Fiscal measures. Financial tescs under EPA and ocher agency
regulacions are ofcen based on ratios or mulciples involving scandard
financial measures such as nec worch, CoCal liabilicies, and cash flow.
However, designing a similar financial cese for local governmencs is very
difficulc because financial cesc information derived from empirical data
on firms does noC adequately reflect the economic choices, resources, and
constraints of non-profit entities. Whereas the ratios and multiples of
existing financial tests are designed to provide information on che risk
decisions that fins make in seeking returns, municipalities do not invesc
in assets for the purpose of gaining profits. In providing services co
cheir communities, local governments rely.on soufces other thaii che assecs
or resources iceaized on che balance sheet, namely the right to levy
taxes. .Therefore, che standard financial measures using financial
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statement items are unlikely to portray the underlying strength of a
government entity.
Moreover, the accounting methods used by governments make standard
financial'measures difficult to obtain and Interpret. For example, net
worth is a difficult measure to obtain from the financial statements
reported by local governments. The net worth of a private firm represents
the shareholders' investment (equity) in the firm and the reserves over
which management has discretionary control; it is easily obtainable from
the equity section of a private firm's balance sheet. In contrast, the
equity section of a local government's balance sheet often consists of
special fund balances that are already committed to future uses (e.g.,
funds reserved for government employee retirement systems). Because a
local government's equity may not be completely available for
discretionary purposes, it cannot be considered an equivalent measure to
net worth of a private firm. "Unreserved" or "undesignated" funds could
be considered as a net worth equivalent for local governments. An
accurate measure of unreserved discretionary funds available may
nevertheless require a detailed analysis of the legal restrictions on the
uses of such funds.
Finally, financial tests in EPA programs are generally based on the
ability of the test to predict bankruptcy-^ the entity.- However, few
local governments go bankrupt, and if they do, the bankruptcy is treated
differently than for private,firms. Therefore, it would be very difficult
to choose a test based on its ability to predict municipal bankruptcy.
Because standard financial measures are inapplicable to local
governments and do not measure the tax-based wherewithal of such entities,
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the suggested framework introduces a new set of possible measures. These
"fiscal measures" generally assess the financial capability of local
governments in terms of the tax and revenue base that provides the entity
with its ability to pay for environmental obligations. The measures
therefore focus on the ability of the entity to provide funds for
obligations in a timely fashion rather than on bankruptcy prediction.
When combined with measures of the institutional constraints unique to
government entities, fiscal measures may be used to construct a viable
financial test for local governments.
Institutional .requirements, A key precept behind the framework is
that the ability of a local government to provide funds for Subtitle D
purposes is not solely dependent on its financial strength. A State, in
evaluating the financial capability of a local governmentmust look
beyond strictly fiscal Indexes of wealth or theoretical revenue•raising
ability to examine whether legal constraints affect the realization of
theoretical potential. For example, local government ability to tax,
spend, and incur debt is often limited by State constitutions, statutes,
or municipal charters. Such limits can be expressed in absolute dollar
terms, as a per capita'cap, on the basis of the tax rate required to
service eh* debt (the "millage"), or as a percentage of some base (e.g.,
municipal expenditures). Koreovet, local governments may not be able to
reprograa or re-allocate already budgeted fund* for Subtitle D obligations
in a timely fashion. In addition-, political decl/lonmakers may face
conflicting priorities in allocating available funds.
Because of these constraints on local governments, the financial test
framework suggests combining fiscal measures with "institutional
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requirement*" Co ensure chac local governments will not be encumbered by
such constraints in meeting Subtitle 0 obligations in a timely manner.
The specific types of possible institutional requirements are detailed
later in this section.
Although none of the definitional, fiscal or institutional aspects of
the framework discussed here are adequate in themselves to assure local
government financial responsibility, taken together they constitute a set
of factors which, adapted and combined in different ways by States, can
provide a workable financial test for local governments. The specific
measures or indices encompassed within each of these categories can be
combined in ways that provide a relatively straightforward financial test
which, at low cost to local governments, provides adequate assurance to
States that municipalities that pass will meet their HSVLF obligations.
Establishing a "multi-criteria" test using both fiscal and
institutional requirements is not unique to Agency financial tests. For
example, the Subtitle C financial test for private firms uses a series of
financial requirements, including three financial ratios, requirements for
the levels of net worth, net working capital, and U.S. assets, and a bond
rating. These financial requirements are combined with institutional
.requirements to assure that the financial information is accurate,
including an unqualified opinion from an Independent auditor and a special
report froa the auditor verifying the information reported to the Agency.
Moreover, the institutional component of the financial test may be
necessary to add strength to the fiscal component. As'discussed above,
the fiscal measures are focused on broad measures of the economic base,
and thus may not be as stringent as private sector measures in separating
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strong and weak entities. An institutional requirement adds further
assurance that the local government will be able to pay for an obligation
if necessary.
Some of the specific components that a State might include for each
part of a local government financial test are discussed briefly below.
The purpose of this discussion is not to provide a comprehensive treatment
of each component (the details of which may vary according to the
provisions of State law), but rather to provide a framework that a State
may use as a point-of. -departure in formulating its own financial test.
a. Definition of a Local Ciiihii 1111U
the first consideration a State must address in formulating a
financial test for local governments is how to define "local government"
or "municipality." The terms are not exclusive and may include everything
from single-purpose special districts to the general purpose governments
associated with incorporated cities and towns. The definition of'
municipality, however, does not Include counties. Although they are local
in nature, counties in most States are more like administrative arms of
the Sta.e than are Independently chartered "municipalities." Counties are
important to consider in this rulemaking because solid waste disposal
services are often organized on a county basis.
BecMM local governments are creations of State law, the forms of
local governaient will vary from State to State. Typical forms include
counties, cities, towns, villages, townships, special districts, and
public authorities. Special districts and public authorities are distinct
from the other forms with respect to the breadth of their purposes and
powers. Both are established to perform one or a limited number of
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functions and are generally fiscally and administratively independent.
Special districts often overlap municipal or county boundaries. Public
authorities may lack geographic boundaries and are typically formed to
construct and operate revenue-generating public facilities.
Despite the variety in forms of local government., one useful way to
classify the various forms in any; particular State for purposes of
devising a financial test for MSVLFs is in terms of the breadth of powers
exercised. The broader these powers, the more financially stable the
local government is likely to be. Cities, towns, counties, and other
"general purpose" local government units typically have broad powers to
raise taxes and expend funds as well as general corporate and police
powers. These broad powers, and the corresponding broad revenue base,
distinguish general purpose local governments from special purpose units
such as public authorities and special districts.
For the Subtitle D financial test, the definition of "local'
government" will have a significant impact on the availability of the test
to local government entitles. For example, if a State chooses to limit
the availability of the test to general purpose governments, special
purpose units such as publfc authorities will have .to provide other forms
of financial assurance. Therefore, certain definitions will make.the test
more stringent. Alternatively, States may wish to formulate two financial
tests for loc«l governments one applicable to general purpose units and
another, stricter test applicable to special purpose units which are,' for
reasons mentioned above, inherently less fiscally stable.
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b. Vtaeal Ifuaures
The fiscal component of Che local government financial test attempts
to measure in discrete terns the financial capability of the entity to
provide funds for environmental obligations in a timely manner. The
choice of alternative fiscal measures depends fit large part on the
objectives of the particular program for which the test is used and the
desired stringency of the test.
The following are among the suggested alternative components of the
fiscal part of financial test:
* Financial size
* Net fiscal capacity
* Size of contingency funds
• Simple fiscal ratios
• Relative per capita wealth or Income vs. tax
burden
• Bankruptcy/default history
Financial Size. The financial size measure assesses the economic
base of a local government either in terms of annual tax revenues,
population, or assessed value of property. This measure is similar to the
$10 million in net worth requirement in the Subtitle C (private sector)
financial CMC In that it is intended to ensure a certain level of
financial strength. For example, a local government with only $5 million
in revenues would not likely be able to afford a |10 million obligation.
Moreovert the measure is easily obtainable from-government financial
reports. However, an analysis would be needed of the effect of various
levels of revenue requirements on test availability (i.e., the percentage
of local governments able to pass a certain requirement) and the ability
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of che test to screen ouc financially weak entities. This would require
an analysis of Census Bureau tapes or similar data sources.
Net Fiscal Capacity. Net fiscal capacity results when actual/
expenditure, tax, or debt levels are below their legislatively mandated
maximum. Comparing available capacity to the size of.a potential
obligation would Indicate the degree to which a local government could
expand its revenue-raising activity to meet new needs. Although this
measure entails more administrative effort than the financial size
measure, it also provides a higher degree of assurance that funds will be
available. Moreover, the information required should be readily available
to a local government and could be demonstrated on a streamlined form
similar to (but shorter than) the Subtitle C financial test form. Further
analysis is required of the feasibility of this approach. However, this
alternative could be preferable to a simple financial size requirement
because of the additional assurance it provides.
Size of Contingency Funds. Many local governments budget amounts
each year to cover the costs of foreseeable but.unplanned events such as
snowstorms, tornadoes, fires, and other disasters. The costs of
environmental activities could be Included in the category of unplanned
costs that a contingency fund may be used to cover; therefore, the size of
a contingency fund may be a useful measure of financial capacity when
compared to this potential size of the obligation. This alternative is
more stringent than the first two options. By requiring the contingency
fund to cover the obligation, it essentially functions as a fully funded
trust fund in any given year. However, a reduced level of contingency
funding could be used in combination with other fiscal criteria or with
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ocher financial assurance mechanisms. Further analysis Is necessary eo
determine the prevalence and average size of contingency funds. If the
average size of funds is far less than the size of environmental
obligations, then a requirement to provide contingency funding for such
obligations may be infeasible.
Simple Fiscal Ratios. An example of a simple ratio that measures
fiscal capability is the ratio of revenue to budgeted expenses. This
ratio indicates how well the annual budget is being managed, that is,
whether the government is running a deficit. While administratively
simple, this type of ratio may be misleading. For example, local
governments may run a surplus in one year to offset a previous year's
deficits. However, because ratios from several years may Identify
important trends, an option could be to require information on this ratio
for the last five years. This requirement would reveal trends in
budgetary management as well as demonstrate that the entity can weather
changes in its economic base over time, though it may be more
administratively complex than other options.
Relative Per Capita Wealth or Income va. Tax Burden. Relative per
capita wealth or income provides an approximate measure of the "ability to
pay" within a Jurisdiction, since property values and income are the
sources frw which local taxes are paid. *By comparing this measure to per
capita tax burden, the degree to which, wealth and income are already being
tapped could be measured. However, the net fiscaf capacity measure
described above also compares actual and potential revenue, and also takes
into account limits on taxing authority. Therefore, the relative per
capita measure is both duplicative and less accurate.
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Bankruptcy/Default History. Another possible measure Is a
requirement that a local government may not have declared bankruptcy or
defaulted on a debt issue in the last five years. This requirement would
help ensure that the local government is being operated in a fiscally
prudent manner. Moreover, this requirement could easily be combined with
another fiscal measure that assesses financial capability.
In conclusion, the best measures for financial capability focus on
the economic base of the local government. The best choice, may be the
financial.size requirement, which could be combined with the Requirement
not to have declared bankruptcy in the last five years to form a
reasonable and simple fiscal component of the test.
c. Institutional Components
Because of the potential constraints on local governments, the
financial test framework includes a set of, possible institutional
requirements that are intended to assess the ability of local governments
to overcome constraints and to use their financial reserves to meet
Subtitle D obligations, the following are among suggested institutional
requirements:
e Council ordinance or resolution
• Contract of obligation
* Degree of flexibility in raising revenues or
issuing debt
Council Ordinance or Resolution-. A local government could be
required to issue an ordinance or resolution pledging to provide funds for
the required activity. These declarations may not necessarily be binding
across future changes in administrations, and they may not.override taxing
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or expenditure limits. However, obtaining a reliable picture of local
priorities is not easy; such judgments are by nature subjective.
Ordinances and resolutions provide some assurance that an obligation is a
high priority for the entity. This is particularly true if the resolution
is given a public hearing prior to passage.
Further analysis is needed to determine whether an ordinance or
resolution is preferable and to specify the appropriate wording of the
requirement. However, because resolutions and ordinances are commonplace
in local government, implementing such a requirement should be simple.
Moreover, as discussed earlier, some states implementing the Subtitle D
program already use resolutions and ordinances as options for providing
financial assurance.
Contract of Obligation. Recognizing the limitations of resolutions
and ordinances, the financial test-could require local governments to
enter into a formal contract pledging financial responsibility. This
instrument is already used in one state (Tennessee) as a Subtitle D
financial responsibility alternative. The contract could provioe chat the
local government will forfeit allocations from the state or federal
governments if those bodle» have to fund an obligation in lieu of funding
from the local government.
Clearly, this alternative is more stringent than the resolution or
ordinance. However, It may be politically and administratively difficult
to implement. States could be forced into difficult decisions on which
allocations will be forfeited by the local government.
Degree of Flexibility In Raising Revenues or Issuing Debt. If
ceilings exist on specific taxes (e.g., property taxes) or on taxes
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across-the-board, the local government may be unable to raise funds for an
obligation in a timely manner. Therefore, a financial test may include a
provision that use of the test is prohibited if existing taxes are within
(perhaps) 95 percent of the ceiling level. This approach, however, has a
major drawback in that determining the proper percentage of the ceiling
allowed would be very difficult.
In summary, the resolution or ordinance appears to be the best
requirement addressing potential institutional constraints on local
governments. Although less stringent than a contract, this requirement
provides a degree of assurance that the obligation is a high priority,
particularly if subjected to a public hearing. Moreover, it is a standard
instrument that is simple to administrate.
Combining Components To Develop a Local Goveraent
Financial Teat
Each of the parts of the suggested local government financial test --
definition, fiscal meiasures., institutional requirements -- includes
several principal options. Each of these options, in turn, present
options in terns of the stringency of the test each represents. In
combining components from each of the parts to formulate an overall local
government financial test, therefore, States have numerous options in
terms of the overall'stringency of the test they wish to create.
In choosing from what is in effect a menu of options for constituting
the overall test, States may want to evaluate a niiuber of considerations,
including:
* D-g-ae of assuredness provided:
* Availability to financially strong entitles
* Conceptual and administrative simplicity
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Inherent In Che choice of opclpns for che financial case is the
relationship between stringency of the test and its ability to assure that
funds will be available for the required activities. If a test is ctiosen
that has stringent components (e.g., a test that requires a minimum level
of general revenues, an unused debt capacity exceeding the obligation, and
a binding contract), then it will be more likely to assure the
availability of funds than a test with weaker components (e.g., a test
i
chat requires only a certain level of general revenues and a resolution)
As the stringency of the test increases, however, the ability of local
governments to use the test diminishes. The choices a State makes
regarding the stringency of the test will reflect its efforts to balance
the performance standard objectives of availability and flexibility.
The definition of a local government that is allowed to use the test
is, another way of determining the stringency of the test. If "local
government" is defined as a general purpose government for financial test
purposes, then the definition implicitly excludes special authorities from
(
being able to use the test. However, because special authorities have
financial characteristics similar to private firms (e.g., they have
financial statements with s'lmllar Information including net worth), a
State may apply to them a financial test similar to that used for private
firms undar Subtitle Cv Alternatively, because special-purpose units of
government have a narrower and sometimes less stable base than general
purpose entitles, States may choose to be conservftlve and require them to
acquire a financial assurance mechanism.
Simplicity Is desirable for both local governments, which must
demonstrate they have passed the financial test, and States which must
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exercise judgment in administering the test. The;degree of simplicity may
in face directly correlate with che degree of judgment required to
determine whether specific local governments have passed the test. One
approach to simplicity would be to limit to a few the number of factors
included in the test. Another would be to specify precise performance
thresholds for each factor or, for those factors which do not lend
themselves to quantitative measures, to precisely specify the way in which
a factor is to be addressed (e.g., by specifying a format for local
legislative resolutions).
As discussed earlier, the components that are deemed best for the
time being (acknowledging the need for further analysis) are a combination
of a revenue size requirement, a requirement that the entity has not
defaulted or declared bankruptcy in the last five years, and a political
resolution or ordinance declaring that the obligation will be paid if
encountered. This multi-criteria approach is similar to the approach used
in other Age>ncy financial tests. Moreover, the test could be very
straightforward and easy to implement while still meeting the major
objectives of the test.
4.6.5 Financial Tut Buad on Bond Bating*
The Agency reconsidered investment grade bond ratings on outstanding
debt as a measure of the financial strength of local governments. A bond
rating alternative would provide local governments with a low-cost
financial assurance option and eliminate the need for the State to either
develop a financial test for such entities, or to evaluate a local
government's financial strength in terms of a financial test for private
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firms. Moreover, a bond racing Incorporates many financial and management
variables Chat are analyzed by racing agencies in order to determine the
likelihood chae a debt issue will be repaid. Because an investment grade
rating (BBB or above) indicates that the issuer is likely to repay the
debt, it provides some degree of assurance, in an administratively simple
manner, that a municipality will be able to fund its environmental
obligations.
As discussed earlier, the Agency considered and rejected a bond
rating alternative for municipalities owning or operating'Subtitle C
"facilities.*® The Agency based its decision on a study of bond ratings in
a major default period of 1929 to 1937The study Indicated that 78
percent of all defaulted municipal bonds and 94.4 percent of the dollar
value of, defaulted municipal bonds in the period were rated in the cop cvo
categories by both majoc ratings services (Standard and Poor's, and
Moody's) prior to default. The Agency concluded from this evidence chac
municipal bond ratings tend to confirm financial distress rather than
predict It, and bond ratings, therefore, would not provide assurance thac
a municipality would be able to provide funds for its Subtitle C
obligations.
The AgMiey decided to reexamine municipal bond ratings as an option
for financial assurance for MSVLFs for several reasons. First, since the
1929 to 1937 period examined by the Agency in 1981% government financial
18 Background Document for the Financial Teat and Municipal Revenue
XfiAfcj Financial Assurance for Closure and Poet.Closure Care. U.S.
Environmental Protection Agency, Office of Solid Waste, November 30, 1981,
p. 134.
19 See George Hempel, The Postwar Quality of State and Local Debt.
National Bureau of economic Research, 1971.
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management has become far more sophisticated and government financial
reporting has become more standardized. Therefore, bond ratings based on
improved financial information may be more accurate indicators of
financial viability. Moreover, rating agencies have enhanced the
sophistication of the ratings process to better evaluate municipal issues.
Finally, in the wake of well-publicized bond defaults and municipal
bankruptcies in the 1960's and 1970's (i.e., New York City and Cleveland),
several analytical studies of the ability of bond ratings ta predict
financial distress have,been performed in recent years. The Agency
i
reviewed these studies to develop a better understanding of the degree to
i
which the predictive ability of bond ratings has Improved in the decades
since the Great Depression.
After analyzing the available information, the Agency has decided
that municipal bond ratings still do not provide sufficient assurance that
an entity wiil.be able to provide funds for Subtitle D obligations.
First, recent studies are inconclusive as to whether bond ratings are
accurate indicators of an entity's ability to pay for its environmental
obligations. For exaaple, a recent study compared a large saople> of
general obligation bond ratings with a variety of financial and
demographic variables for each rated municipality.^ The study showed
that aaong Municipalities that received very different bond ratings, only
demographic variables such as employment rate and change in population
were significantly different. Financial variables, including measures of
20 Stephen R. Willson. "Credit Ratings and General Obligation Bonds:
A Statistical Alternative," Government Finance Review. June 1986, pp. 19-22.
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debt burden and level of fund balances, were q&£ significantly different
among differently rated municipal bond issues.
The Willson study indicates chat bond ratings do not necessarily
reflect the relative current financial position of municipalities.
Instead, bond ratings appear to be based on assessments of the long-run
viability ,of municipalities, which may be more relevant in assessing the
likelihood of repayment of long-term bonds than evaluating current
financial position. Demographic variables are important in determining
the long-term viability of a municipalicy, thus they are likely to
correlate better with bond ratings than with financial ratios. Moreover,
che subjective judgments of the raters regarding the management of the
municipality play a larger role in the determination of municipal bond
ratings than in ratings of private firms; judgments regarding future
viability may be unrelated to short-run financial measures.
Although variables such as demographics and management quality play a
strong role in the viability of a municipality in the long-run, chey may
not reflect the ability of a municipality ta provide funds to meet its
obligations in the short-run. Therefore, because bond ratings correlate,
more closely with long-run variables than with short-run financial
measures, Chey may not provide assurance that funds will be available for
closure, ascended post-closure care, or**corrective action.
Other attempts to compare bond ratings and financial measures
include: Carleton and Leraer, "Statistical Credit Scoring of Municipal
Bonds," Journal r* Moray. Cradle and Banking. November 1969, pp. 750-764;
and Joseph T. Horton, Jr., "Statistical Classification of Municipal
Bonds," Journal of Bank Research. Autumn 1970, pp. 29-40, as referenced in
Foster, Ceorge. Financial Statement Analysis. Prentice-Hall, Inc., 1978.
These studies have come up with similii: results to the Vlllson study
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Another reason that bond ratings are not considered appropriate for
financial assurance for MSWLFs is that in recent years many municipal bond
issues have been insured by municipal bond insurance companies.22 These
companies insure investors in the bonds against losses due to insolvency.
Ratings on insured bonds reflect the financial strength of the insurer and
not the municipality issuing the bond; thus an investment grade bond
rating may not indicate the underlying financial viability of the
municipality.
Finally-, because bond ratings are specific to the-terns and
conditions of the particular debt issue, they may not reveal the overall
ability of local governments to meet their environmental obligations in a
timely manner. For example, in the wake of tax revolts and other
political opposition to taxes, voters in many parts of the country have
limited the authority of the local government to issue debt without voter
approval. This trend may limit the ability of local governments to
quickly obtain funds in the capital markets to meet environmental
obligations even if existing debt is highly rated.
4.6.6 Cost and Availability of Financial Testa
The chief advantage of a financial test is that it allows the entity
to demonstrate financial responsibility without having to pay for an
assurance mechanism such1 as a trust fund or a letter of credit. The costs
of a financial test will therefore entail only negligible reporting costs.
22 in 1986, for example, 19 percent of the dollar value of long-term
municipal bonds were Insured, compared to only 3 percent in 1980. See
"$26.2 Billion New Municipals Insured in 1986," The Bond Buver. January 9,
1987, p. 1.
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However, if an entity is required Co obtain an auditor's opinion verifying
che accuracy of financial data, and the entity has not otherwise been
independently audited, the costs of obtaining such an audit could be
substantial.
The availability of the test, as discussed earlier, depends on the
design of the test and the stringency of its components. The test could
be designed so that it is available to most local governments, or it could
be stringent enough to be available to only the largest and financially
strongest of entities.
4.7 GQARAHTEBS
States may consider allowing one entity co guarantee the obligation
of another entity. Options such as guarantees offered by a parent or
related firm, guarantees, offered on the basis of a substantial business
interest, and municipal guarantees may be desirable alternatives.' As this
section describes, States oust ensure consistency with their corporate and
insurance laws to design valid and enforceable mechanisms.
4.7.1 Ftatuns of the'Mechaniaa
A guarantee is a promise by one party (the guarantor) to pay
specified debCa or perform specified obligations of another party (the
principal) in the event the principal fails to satisfy those debts or
obligations. There is a contract between the principal and a third party,
creating the primary obligation, and a contract between the principal and
the guarantor creating the guarantee, which supports the primary
obligation. Generally, in regulatory programs, the primary obligation
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wouiA"bejt:Regulatory requirement or potential tort liability, rather than
a contract. If the principal defaults on the.primary obligation, the
guarantor is liable to the' third party to meet the obligation created by
the guarantee.
If a State allows the'use of a guarantee to provide financial
assurance for closure, post-closure care, and corrective action for known
releases at MSWLFs, the obligation between the principal (the owner or
operator) and the State would be defined by the regulatory requirements.
If the owner or operator of the MSVLF failed to perform the required
activities, the guarantor could perform then or provide a specified dollar
amount from which the State would direct the payment of the costs of
carrying out the activities.
Both related firms and firms engaged in a substantial business
relationship with the owner or.operator of a MSVLF might be willing to
provide guarantees. Related firms may be parent firms that own a
controlling interest in the owner or operator, grandparent firms that own
a controlling interest in a. parent firm of the owner or operator, or
affiliated firms that are controlled by a parent that also owns a
controlling interest in the owner or operator. A "controlling interest"
is usually defined in State corporate lav aa direct ownership of at least
50 percent of the voting stock of the subsidiary.
k firm that la engaged in a "substantial business relationship" with
the owner or operator could provide a guarantee as an act incident to the
business relationship. In general practice, a guarantee would be
considered Incident to a business relationship if it arises from and
depends on existing business transactions between the guarantor firm and
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Che owner or operator. For example, a private company chat uses a
government-owned landfill to dispose of its solid waste may vlsh to
guarantee financial assurance for che facility to ensure that its disposal
needs continue to be met.
4.7.2 Use of Guarantees in Other EPA Programs
Under RCRA Subtitle C financial responsibility regulations (40 CFR
264.143, 264.145, 265.143, and 265.145), a corporate parent, defined as a
corporation that directly owns 50 percent or more of the voting stock of
the owner or operator, may provide a guarantee to EPA or che State as
demonstration of financial assurance for closure and post-closure care of
a hazardous waste management facility. Under 40 CFR 264.147 and 265.147
of the Subtitle C regulations, a guarantee given to any and all third
parties who may suffer bodily injury or property damage from sudden or
nonsudden accidental occurrences arising out of the operations of a
hazardous waste management facility may be used to provide financial
assurance for liability coverage. EPA has also proposed to allow a
guarantee by the parent corporation of a hazardous waste facility, to be
used to provide financial assurance for corrective action (51 37854,
October 24, 1986). The U1C program also allows use of a guarantee for
plugging end abandoning a well.
Most recently, the Agency proposed to allow owners and operators of
underground storage tanks containing petroleum to'use corporate guarantees
/
provided by related firms and firms having a substantial business .
relationship with owners or operators as financial assurance for
corrective action and third party liability (52 12786, April 17, 1987).
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EPA also proposed allowing the use of an indemnity contract, an instrument
very similar to a guarantee, because the Agency believes that indemnities
are presently being used in the petroleum industry for such purposes.
There is little substantive difference, however, between guarantees by
non-related firms and indemnities. The Agency-, therefore, has not
included.a separate discussion of indemnities as instruments to provide
financial assurance for MSWLFs.
4.7.3 Use of Guarantees in State Programs Surveyed
Several of the nine States surveyed allow the use of corporate
guarantees. Louisiana and Illinois alJLow parent guarantees if certain-,
financial criteria are met'by the, potential guarantor. California, under
a regulation that allows the use of irrevocable trusts and other
mechanisms approved by the State Department of Water Resources, has
approved corporate guarantees if the corporation can prove that it is
diversified and financially stable. New York, Oregon, and Wisconsin have
similar provisions that potentially could allow use of a corporate
guarantee if approved by the appropriate State agency on a case-by-case
basis.
4.7.4 fa? Provisions of Guarantees to Ensure Adequacy of Coverage
To ensure adequacy of coverage if guarantees are allowable mechanisms
for demonstrating financial assurance, the State Iwty wish to consider
imposing the following requirements. One would be to require the
corporation, partnership or other firm providing the guarantee to
demonstrate either ownership interest in, or a substantial business
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relationship with, Che owner or operator for which the guarantee is being
provided. I£ such a relationship between the guarantor and the owner or
operator is not established, then the guarantor might be classified by
State insurance regulations as an insurer, and would thus be unqualified
to provide a guarantee unless he met State insurance provider
qualifications. Also, if some business relationship is not established
between the guarantor and the owner or operator, then the validity of the
guarantee contract could be challenged in court in the event of the
guarantor's bankruptcy. Such a challenge could be based on a lack of
"identity of interest" which would suggest thatthe guarantor received no
value for providing the guarantee. Value of the guarantee to the
guarantor would be related to the guarantor's business relationship to the
owner or operator.
To decrease the chance that a guarantor might enter bankruptcy, the
State could also consider requiring a guarantor to demonstrate, through
use of a financial test, that it has financial resources sufficient to
undertake the guarantee of closure, post-closure, and corrective action
costs. To ensure that funds paid by a guarantor go directly to the costs
of the required activities, the State might require that, if an owner or
operator falls to ae«C the obligation, the guarantor will pay the
guaranteed funds Into a standby trust fund. The State can then direct
payment of costs from the trust fund as necessary to meet the regulatory
requirements.
Finally, the State might wish to specify the wording of the guarantee
to be certain that the Instrument is legally binding and that It provides
adequate financial assurance. Specified wording would also be helpful to
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owners and operators who would then have no difficulty ascertaining that
an instruaent provided by a guarantor complies with State requirements.
There are several -factors that a State should evaluate before
allowing the use of a guarantee by municipalities or other local
government entities. The State may wish to determine whether, under its
State law, a city or other general-purpose government could provide a
guarantee for a MSWLF owned by a separate entity such as a "special
district" or "solid waste authority." Also, in the case of municipally-
owned facilities, State law also may be reviewed to determine whether a
local government could accept a guarantee provided by a- customer of its
facility.
4.7.5 Goat and Availability of Guarantees
The Agency believes that the costs associated with a guarantee wjould
be minimal in most circumstances. If the guarantee is provided by a
parent or other related firm oh the basis of the corporate relationship,
it is likely that no fee would be charged for the guarantee. If an
unrelated fira with a substantial business relationship with the owner or
operator is allowed to provide the guarantee., there is likely to be some
required ptyasnt. The costs might be limited to the legal fees paid -for
preparation of the guarantee contract. A "guarantor could require,
however, that the MSWLF owner or operator provide collateral to support
the guarantee. The required value of the collateral might be a percentage
of, or equal to, the face value of the guarantee.
The requirement that the guarantor meet State specified financial
criteria should not add significant costs so long as the criteria require
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submission of readily available financial data. For example, a firm that
submits daca to the Securities Exchange Commission would have ready access
to that information if it were required by a State financial test.
The availability of a guarantee will depend on the stringency of the
requirements it must meet. If the financial criteria for the guarantor is
stringent, availability will be reduced.
4.8 STANDBY TRUST FOND
Standby trust funds are only necessary when an independent depository
is required. For example, under Federal law, all payments to a Federal
agency or official must be deposited with the U.S. Treasury and cannot be
earmarked for a specific use without reallocation (see 31 l.S.c. 3302).
Therefore, to guarantee that the funds assured for a specific facility are
directed to the costs of. closure and post-closure care for that site, the
Agency requires that a standby trust fund be established. If a State
determines that an account can be established within its treasury into
which funds drawn on the financial assurance mechanisms can be deposited
and withdrawn without special action to pay the site-related costs, then
such a State may use its treasury as the depository mechanism. Each State
should eiwlro Its State law on the issue of earmarking funds in and
appropriating funds from its general, treasury.
A standby trust fund serves as a depository for funds collected from
providers of financial assurance. The trust would receive funds from the
financial assurance mechanism in the event that the owner or operator
cannot meet his closure, post-closure care, or corrective action
obligations. Such a trust would be necessary if the regulatory authority
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cannot maintain dlrecC control over the funds if they are deposited
directly Into the State's Treasury. The U.S. EPA requires standby trusts
because funds deposited directly with the U.S. Treasury /(e.g., payments by
an issuer of a letter of credit to a firm that defaults on is obligations)
can not be controlled directly by the EPA Administrator.
4.8.1 Features of the
A standby trust fund is a depository, not assurance, mechanism that
is used in conjunction with assurance mechanisms provided by third-party
institutions, such as surety companies, guarantors, indemnitors, or
issuers of letters of credit. The structure of a standby trust fund is
the same as that of the trust fund (i.e., the grantor deposits funds to be
managed by a trustee for the benefit of a beneficiary). The purpose of a
standby trust fund used to demonstrate financial assurance for KSWLFs
would be to provide a place for funds drawn on third-party assurance
mechanisms to be held and managed by the regulatory authority for a
particular facility's closure, post-closure care, and/or corrective action
costs.
4.8.2 On of Standby Trust Fund* in Other KPA Programs
The standby trust fund mechanism Is vised in other EPA financial
assurance programs where the U.S. EPA Regional Administrator is the
beneficiary of funds drawn on financial Instruments.
The Subtitle C closure and post-closure care assurance regulations
require that a standby trust fund be established when an owner or operator
establishes a surety bond or a letter of credit (40 CFR 264.143(b), (c),
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(d); 264.145(b), (c), (d); 265.143(b), (c); and 265.145(b), (c)).
Similarly, Che proposed Subtitle I corrective action and third-party
liability assurance regulations require an owner or operator to establish
a standby trust fund if he is using a guarantee, indemnity contract,
surety bond, or letter of credit (52 Q 12786, April 17, 1986).
4.8.3 Use of Standby Trust Funds In State Programs Surveyed
Of the nine State programs studied, three require that a standby
trust fund be established and used to accept deposits from providers of
mechanisms such as surety bonds and letters of credit. The remaining
States either require providers of mechanisms to make.deposits into the
State treasury or do not allow mechanisms that require deposits from
third-party providers (e^.g., performance bonds or insurance).
4.8.4 Key Provision* of Standby Trust Funds to Ensure Adequacy of
Coverage
Because the standby trust fund is structurally similar to the trust
fund mechanism, the key provisions of the trust fund mechanism are
applicable to the standby trust as well. For example, the trust agreement
should describe the responsibilities of the parties. In particular, the
trust agre—ant should detail the trustee's responsibilities for trust
fund management.
One feature unique to the standby trust fundhowever, Is the timing
of its establishment. The standby trust fund could be required to be
established elthe- t "he same time the assurance mechanism is established
or not until it is needed as a depository for payments from the
third-party instrument?. Under both the Subtitle C and the proposed
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Subclcle I programs, Che owner or operator must establish the standby
trust fund ac the same time the assurance mechanism is established. The
Agency believes that requiring the standby trust fund to be established
along with the assurance mechanism provides a somewhat greater degree of
assurance since there is no risk that payment under the assurance
mechanism will be delayed due to lack of a depository mechanism.
4.8.5 Cost and Availability of Standby Trust Funds
The costs of standby trust funds are similar to the costs of trust
funds. Typically, a trustee will charge a flat fee to establish the fund.
Maintenance costs to cover the management of the assets of the trust are
related to the balance of the trust fund. Until the standby trust is
funded, the maintenance or management costs should be negligible because
there are no funds to manage. After a standby trust is funded, the
maintenance may range from 0.1 percent to one percent of the. balance of
the trust.
The Agency expects the costs of establishing and maintaining a
standby trust to be minimal because, until the financial assurance
mechanism is drawn on and the standby trust is funded, there wi.ll be no
assets in the standby trust to manage and, therefore, no management
fees.23 States may, however, conclude that the additional assurance
provided by having the trust fund established with the assurance mechanism
is not worth the extra cosc or creating the trust before it is actually
needed. Should States opt in favor of requiring that standby trusts be
Administrative fees for trust funds are visually proportional, to
the value of the crust and are paid at regular'intervals throughout the
life of the trust.
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created only when needed to receive funds, the Agency does not believe
that this should significantly impair the degree of certainty that funds
will be available in a timely manner.
4.9 COMBINATIONS OF MECHANISMS AND COMBINED COVERAGES
In determining which mechanisms to allow for financial assurance for
closure, post-closure care, and corrective action at HSWLFs, States may
also wish to consider (1) whether to allow combinations of mechanisms to
assure either the costs of closure, post-closure care, corrective action,
or all three; and (2) whether to allow one mechanism to be used to assure
closure, post-closure care, and corrective action costs or some
combination of such costs.
Allowing combinations of mechanisms for each or all types of coverage
required could provide flexibility and cost savings to owners and
operators. For instance, there may be times when an owner or operator
must obtain additional coverage as a result of an increase in a facility's
cost estimate, but finds that the provider of his current financial
responsibility instrument will not agree to expand his coverage. In such
a situation, an owner-or operator may wish to use another instrument to
make up th* difference rather than establish assurance for the entire
estimate using another instrument and cancelling the original one.
The use of a single mechanism for all types of coverages may reduce
somewhat the fees and administrative expense of financial assurance to
owners or operators. Furthermore, combining coverage under a single
mechanism should not in any way impair the adequacy of the coverage.
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Under the Subtitle C closure and post-closure care requirements,
crust funds, surety bonds, letters of credit, and insurance may be
combined. Financial tests and corporate guarantees may not be combined
with other mechanisms. For liability coverage, the financial test and the
corporate guarantee may be combined with insurance, but they may not be
combined with each other. The reason for this exclusion is to avoid
double counting of assets. Since Subtitle C does not allow non-parent
guarantees, the assets used by the guarantor (i.e., the corporate ?-z«nt)
to pass the financial test might also have been by the principal
(i.e., the owner or operator) in passing its financial test.
Under SuLcitie I, however, all mechanisms may be combined with each
other. The financial test and a guarantee, however, may orly be combined
if the financial statements of t^ie owner or operator are not consolidated
with the financial statements of the guarantor. Subtitle 1 allows the
combination of the financial test and a guarantee because it allows use of
non-parent guarantees and includes the non-consolidation of financial
statements rule to avoid double counting of assets in the event that the
guaran-jr is a corporate parent. States should consider including
requirements similar to those of Subtitle I to prevent double counting of
assets, If States choose to allow combinations of financial tests and
guarantees.
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PdM'JtfJ- V?Y EPS/530-SW-83-041
DRAFT
BACKGROUND DOCUMENT
AUG I 8 1988
CLOSURE/POST-CLOSURE CARE
AND FINANCIAL RESPONSIBILITY
REQUIREMENTS
(SUBPART C, §§258.30 - 258.32)
"CRITERIA FOR MUNICIPAL SOLID WASTE LANDFILLS"
(40 CFR PART 2 58)
SUBTITLE D OF RESOURCE CONSERVATION AND
RECOVERY ACT (RCRA)
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF SOLID WASTE
JULY 1988
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TABLE OF COHTEHTS
Page
1. BACKGROUND FOR CLOSURE, POST-CLOSURE CARE AND FINANCIAL
ASSURANCE CRITERIA 1-1
1.1 Hazardous and Solid Waste Amendments (HSWA) Provisions
for Municipal Solid Waste Landfills 1-1
1.2 Rationale for Closure, Post-Closure Care and Financial
Assurance Criteria 1-1
1.3 Organization of Document 1-3
2. CLOSURE AND POST-CLOSURE CARE STANDARDS 2-1
2.1 Introduction 2-1
2.2 Closure Performance Standards 2-3
2.2.1 Provisions of Performance Standard 2-3
2.2.2 Triggers for Closure 2-4
2.2.3 Options Considered and Rejected 2-6
2.2.4 Comparison with Subtitle C 2-7
2.2.5 Consistency with State'Requirements 2-8
2.3 Post-Closure Care Standards 2-9
2.3.1 Types of Activities Required ..... 2-9
2.3.2 Length of Post-Closure Care Period 2-12
2.3.3 Comparison with Subtitle C 2-15
2.3.4 Consistency'with State Programs 2-16
2.3.5 Options Considered and Rejected 2-18
2.4 Closure and Post-Closure Plans 2-24
2.4.1 Contents of Plans 2-25
2.4.2 Approval and Modification of Plans 2-26
2.4.3 Options Considered and Rejected 2-27
2.4.4 Comparison with Subtitle C 2-28
2.4.5' Consistency with State Programs 2-28
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ii
tart* OF CONTENTS (continued)
Page
2.5 Closure and Post-Closure Care Certification 2-29
2.5.1 Comparison with Subtitle C \ 2-30
2.5.2 Consistency with State Programs 2-30
2.5.3 Other Options Considered 2-31
3. FINANCIAL ASSURANCE CRITERIA FOR CLOSURE, POST-CLOSURE CARE
AND CORRECTION ACTION 3-1
3.1 Scope of Coverage and Applicability of Criteria 3-2
3.1.1 Scope of Coverage 3-2
3.1.2 Applicability 3-4
3.1.3 Consistentency with State Requirements ; 3-7
3.2 Cost Estimating Criteria for Closure, Post-Closuie
Care and Corrective Action 3-7
3.2.1 Closure Cost Estimates 3-8
3.2.2 Post-Closure Caret Cost Estimates 3-9
3.2.3 Cost Estimates for Corrective Action for
Known Releases 3-10
3.2.4 Consistency with State Requirements 3-12
3.3 Performance Standard Criteria for Financial Mechanisms ... 3-12
3.3.1 Description of Financial Assurance
Performance Standard 3-13
3.3.2 Consistency with State Requirements 3-20
4. FINANCIAL ASSURANCE MECHANISMS THAT MAY BE AVAILABLE TO MSWLF
OWNERS OR OPERATORS 4-1
4.1 Trust Fund 4-2
4.1.1 Features of the Mechanism 4-2
4.1.2 Use of Trust Funds in Other EPA Programs 4-2
4.1.3 Use of Trust Funds In State Programs Surveyed 4-4
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ill
tart J OF CONTENTS (continued)
Pa^e
4.1.4 Key Provisions of the Trust Fund to Ensure
Adequacy of Coverage 4-5
4.1.5 Cost and Availability of Trust Funds 4-6
4.2 Letters of Credit 4-7
4.2.1 Features of the Mechanism 4-7
4.2.2 Use of Letters of Credit in Other EPA Programs .... 4-8
' 4.2.3 Use of Letters of Credit in State Programs
Surveyed 4-9
4.2.4 Key Provisions of Letters of Credit to Ensure
Adequacy of Coverage 4-10
4.2.5 Cost and Availability of Letters, of Credit 4-10
4.3 Surety Bonds 4-11
4.3.1 Features of the Mechanism 4-12
4.3.2 Use of Surety Bonds in other EPA Programs .; 4-13
4.3.3 Use of Surety Bonds in State Programs Surveyed .... 4-15
4.3.4 Key Provisions of Surety Botids to Ensure
Adequacy of Coverage 4-15
4.3.5 Costand Availability of Surety Bonds 4-16
4.4 State Assumptions of Responsibility ..; 4-17
4.4.1 Features of the Mechanism 4-18
4.4.2 Use of State Assumptions of Responsibility
In Other EPA Programs 4-21
4.4.3 Use of State Assumptions of Responsibility
in State Programs Surveyed .: 4-22
4.4.4 Key Provisions of State Assumptions of
Responsibility to Ensure Adequacy of
Coverage 4-24
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iv
TABLE OF CONTESTS (continued)
Pa^e
4.4.5 Cost and Availability of State Assumptions.of
Responsibility 4-25
4.5 Insurance and Risk Retention Group Coverage 4-25
4.5.1 Features of the Mechanism 4-26
4.5.2 Use of Insurance and Risk Retention Group
Coverage in Other EPA Programs 4-29
4.5.3 Use of Insurance and.Risk Retention Group
Coverage in State Programs Surveyed 4-29
4.5.4 Key Provisions of Insurance and Risk Retention
Group Coverage to Ensure Adequacy of Coverage 4-30
4.5.5 Cost of Insurance and Risk Retention Group
Coverage 4-31
4.6 Financial Test 4-32
4.6.1 Features of the Meehanlsm 4-32
4.6.2 Use of Financial Tests in Other EPA Programs 4-33
4.6.3 Use of Financial Tests in State Programs
Surveyed 4-35
4.6.4 Approach to Developing a Financial Test for
Local Governments 4-36
4.6.5 Financial Test Based on Bond Ratings 4-50
4.6.6 Cost and Availability of Financial Tests 4-54
4.7 Guarantees 4-55
4.7.1 Features of the Mechanism 4-55
4.7.2 Use of Guarantees in Other EPA Programs 4-57
4.7.3 Use of Guarantees in the State Programs Surveyed .. 4-58
4.7.4 Kjv Provisions of Guarantees to Ensure
Adequacy of Coverage 4-58
4.7.5 Co:¦ ¦, o" the Guarantees 4-60
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V
TABLE OF G0RI8RIS (continued)
Page
4.8 Standby Trust Fund 4-61
4.8.1 Features of the Mechanism ; 4-62
4.8.2 Use of Standby Trust Funds In Other EPA Programs .. 4-62
4.8.3 Use. of Standby Trust Funds in State Programs
Surveyed'...... 4-63
4.8.4 Key Provisions of Standby Trust Funds to Ensure
Adequacy of Coverage 4-63
4.8.5 Cost and Availability of Standby Trust Funds 4-64
4.9 Combinations of Mechanism? and Combined Coverages 4-65
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1. BACKGROUND FOR CLOSURE AND POST-CLOSURE CARE
AMD FINANCIAL ASSURANCE CRITERIA
1.1 HAZARDOUS AND SOLID HASTE AMENDMENTS (HSVA) PROVISIONS
FOR MUNICIPAL SOLID WASTE LANDFILLS
Under the Hazardous and Solid Waste Amendments of 1984 (HSWA), EPA
must revise the existing Federal criteria for municipal solid waste
landfills (MSWLFs) that may receive hazardous waste from households or
small quantity generators. The Agency has determined that these revised
criteria should include requirements for new and existing MSWLFs,
including closure and post-closure care requirements, and financial
assurance requirements for closure, post-closure care, and corrective
action for known releases.
1.2 RATIONALE FOR CLOSURE, POST-CLOSURE CARE AND FINANCIAL
ASSURANCE CRITERIA
MSWLFs are authorized to receive household hazardous wastes and
hazardous waste ,from small quantity generators. Since many of these
MSWLFs were constructed with minimal consideration of location and
engineering design, there is a risk that a release of hazardous
constituents from these landfills may present a risk of harm to human
health and the envlronaent 'after they have ceased operation, even many
years aftar plosure.
In many areas of the country, for example, unless rainwater
infiltration into a closed landfill is controlled, leachate forms and is
eventually released into the environment. If such a closed landfill is
located in close proximity Co usable groundwater or surface water, the
release of contaminants containing hazardous constituents into these media
is inevitable.
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EPA believes that closure is extremely important in protecting the
public and the environment from contamination by hazardous wastes. The
limited data available indicate that MSWLFs have received hazardous wastes
even though they often were riot designed to manage these wastes in an
environmentally sound manner. Many of the MSWLFs do not have liners or
leachate collection systems, and are located in poor hydrogeological
settings (e.g., shallow ground water, highly permeable soils, high net
water infiltration, and high ground-water flow rates).^
The available information also Indicates that many States already
require some measures to be taken at facility closure to prevent
contaminant escape, though the measures may not have been designed to
prevent releases of hazardous constituents.V Due to poor i«c«t4oi. and
facility design, however, the closure measures performed at MSWLFs were
often not effective in preventing releases of hazardous constituents in
various concentrations, including inorganic and organic compounds. The
Agency therefore believes that stringent closure standards are essential
to ensure that MSWLFs are closed in a manner that minimizes the
post-closure escape of contaminants and protects human health and the
environment. Moreover, the 'Agency believes that standards for maintaining
landfills after closure to prevent deterioration that could lead to
threats to human health and the environment are also important.
The Agency also believes that financial assurance requirements are
necessary to cover the costs of closure, post-closure care,' and corrective
^ See U.S. Environmental Protection Agency, "Subtitle D Study Phase I
Report," Office of Solid Waste, EPA/5310-SW-86-054, October 1986.
^ See ICF Incorporated, "Survey of State Closure and Post-Closure
Care Regulations for Solid Waste Facilities," Dract, May 1987.
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action. Financial assurance requirements ensure that funds will be
available for these activities if an owner or operator of a MSWLF fails to
pay for then due to bankruptcy, abandonment of the facility, or any other
reason. The requirements also encourage owners or operators to properly
plan for the resources needed to perform closure, post-closure care and
corrective action.
1.3 ORGANIZATION OF DOCUMENT
This document supplements the preamble to the proposed Subtitle D
criteria by presenting additional.information used by the Agency in
developing today's proposed closure, post-closure care and financial
responsibility criteria. Chapter 2 addresses in more detail the proposed
closure and post-closure care criteria in §§258.30 and 258.31. Chapters 3
and 4 discuss the financial responsibility criteria proposed in §258.32.
Chapter 3 discusses the proposed cost estimating provisions and criteria
for demonstrating financial responsibility. Chapter 4 discusses financial
assurance mechanisms that may be available to owners or operators of
MSWLFs.
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2. CLOSURE AND POST-CLOSURE CARE STANDARDS
2.1 IHIBOOOCnOH
The primary purpose of the proposed closure and post-closure care
standards under Subtitle D is to establish the minimum Federal standards
necessary to ensure protection of human health and the environment after
operations have ceased at MSWLFs. The closure and post-closure care
criteria in the proposal are designed to achieve that goal by providing
for the minimization of the formation and release of leachate and
explosive gases as. part of the site-specific closure requirements, and by
providing for post-closure monitoring and maintenance requirements to
protect against damages caused by age and deterioration of the MSWLF after
closure. In addition, the proposed closure and post-closure care criteria
require owners or operators of MSWLFs to plan for their future closure and
post-closure care obligations to ensure that adequate preparations and
resources are available when needed.
Because the Subtitle D program is to be implemented by the States, one
objective of these criteria is to minimize inconsistencies between the
Federal closure and post-closure care requirements and State program
requirements that are already in place or are now being developed. In
addition, EPA recognized that requirements under existing State programs
and State laplementation experience would provide useful insight for
developing the Federal Subtitle D program. Therefore, in developing the
revised closure and post-closure care criteria, the Agency reviewed all
State solid waste regulations, and selected nine States for more extensive
review.
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The States selected for case study were California, Florida,
Louisiana, Maryland, New York, Oregon, Texas, Washington, and Wisconsin.3
Officials responsible for implementing the closure and post-closure care
requirements in these States were interviewed by telephone to obtain
additional information on the general scope of their closure and
post-closure programs, the rationale used in developing program
requirements, and their implementation experience. The following
considerations were used to select these States:
* Scope of the closure and post-closure care
requirements. The States chosen generally
have comprehensive programs;
* Length of the post-closure care period.
The case .studies selected represent a
range of post-closure care periods; and
* Number of municipal solid waste landfills
in the State. Five of the States chosen
(California, Louisiana', New York, Texas,
and Wisconsin) represent a relatively
large percentage of the total number of
U.S. landfills.4
Section 2.2 discusses the proposed closure performance standard,
Section 2.3 addresses post-closure care requirements and Sections 2.4 and
2.5 describe the proposed closure and post-closure procedural requirements
(i.e., closure and post-closure plans and certification requirements).
3 See ICF Incorporated, "Survey of State Closure and Post-Closure
Care Regulations for Solid Waste Facilities," Draft, May 1987.
4 See U.S. Environmental Protection Agency, "Census of State and
Territorial Subtitle D Non-Hazardous Waste Prograas," Office of Solid
Waste, EPA/530-SW-86-039, October 1986.
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2.2 CLOSQU PERFOBMAHCE STANDARDS,
The proposed closure performance standard under Subtitle D provides a
general requirement for ensuring that closure is_effectively performed,
similar to the performance standard for closure under Subtitle C for
hazardous waste facilities. The standard specifies the objectives that
closure must achieve, but not the particular activities or methods for
attaining that end.
2.2.1 Provisions of Performance Standard
The closure performance standard proposed in §258.30(a) for MSWLFs
establishes preventative measures designed to minimize threats to human
health and the environment. The MSWLF facility owner or operator must
close the facility in a
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2.2.2 Triggers for Closure
To ensure* that landfill units are closed in a timely manner after
operations at the unit have ceased and to protect, against threats to human
health and the environment posed by open but inactive landfills, the
Agency is requiring in §258.30(d) that owners or operators must begin
closure activities at each unit, in accordance with the approved closure
plan, no later than 30 days after the final receipt of wastes at each
landfill unit. Extensions may be granted at the discretion of the State,
if the owner or operator of the MSWLF demonstrates that the open landfill
unit will not pose a threat to human health or the environment. These
closure trigger provisions in §258.30(d) are consistent with the closure
trigger mechanisms for hazardous waste facilities under Subtil
States may wish to refer to the language in 40 CFR Parts 264 and 265,
Subpart G as guidance for developing more detailed provisions.
The Agency encourages States to define "final receipt of wastes" to
preclude landfill units from remaining inactive for an indefinite period
of time without closing. For example, States may wish to adopt the
provisions applicable to hazardous waste facilities that specify that
closure must begin no later* than 30 days after the final receipt of
hazardous vastes, or no later than one year after the most recent receipt
of hazardous wastes. Furthermore, States are encouraged to establish
specific criteria for granting extensions to the deadline tor beginning
closure. For example, the Subtitle C regulations for hazardous waste
facilities specify that an extension w.ill be granted only if the owner or
operator demonstrates that, among other requirements, the facility has
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remaining capacity, and the owner or operator is operating in compliance
with all applicable regulations and will continue to do so.
As noted above, the Agency is allowing the States to develop their own
procedural requirements, including provisions for owners or operators to
notify the States of their intent to close a landfill unit. States are
encouraged to establish notification requirements that provide them with
sufficient advance notice to inspect the facility and to ensure that the
approved closure plan is still applicable to the facility's current
conditions. States may wish to adopt the notification provisions included
in the Subtitle C regulations, which require advance notice prior to
closure of each unit of the landfill. Particularly if States allow owners
or operators to gradually fund trust funds as demonstration of financial
assurance (See Section 4.1 below), notice of closure is important to
ensure that the trust fund is fully funded at least by the time closure is
triggered. For example, Subtitle C requires an estimate of the expected
year of closure to be included in the closure plan if the owner or
operator expects to close the landfill prior to the end of the required
trust fund pay-in period.
While the proposed crit&ria specify when closure must begin, the
Agency is not proposing deadlines for completing closure of a landfill
unit. However, the Agency is concerned that the completion of closure not
be delayed unnecessarily and is encouraging States to specify deadlines
and interim milestones. For example, the Subtitle C regulations for
hazardous waste facilities specify a 180-day deadline for completing
closure and an interim milestone of 90 days for managing all inventory at
the site. Extensions to these deadlines may be granted if (1) the closure
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activities vill take longer than 180 days to complete, 21 (2) there is a
reasonable likelihood that the owner or operator or a person other than
the owner or operator will recommence operation of the facility, the
landfill has additional capacity to receive waste, and closure would be
incompatible with continued operation of the facility- In all cases, if
an extension for completing closure is granted, the owner or operator of a
Subtitle C facility remains subject to all applicable permit requirements
and must take all the necessary steps to ensure protection of human health
and the environment.
2.2.3 Options Considered and Rejected
The Agency considered two other options when determining what types of
standards should be used to establish the closure standard. One option
was to specify a set of stringent technical closure standards. Technical
standards provide certainty to the regulated community regarding design
requirements and ensure a consistent level of technology. In addition,
there are regulatory precedents in Subtitle C for landfill design
specifications. However, specifying technical closure standards does not
allow for rapid adoption of* innovative technical approaches and may
unnecessarily require installation of designs that go beyond techniques
needed to protect health and the environment. In addition, such a
standard aay not account for design responses to all facility or
environmental conditions and therefore may not adequately protect health
and the environment. Finally, specifying a detailed design standard is
inconsistent with cue overall goal of providing flexibility to the States.
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Second, the Agency considered specifying a more stringent performance
standard that would require owners or operators of a MSWLF to close the
landfill in a manner that prevents all releases from the landfill,
regardless of the potential threat to human health and the environment.
Specifying a stringent performance standard would allow for rapid
incorporation, of technological advances in closure design, would provide
maximum flexibility to the owner or operator and regulators to determine
the most appropriate closure technical design to satisfy the performance
standard based on site-specific conditions, and would ensure a consistent
achievement of a specific level of environmental protection among
landfills undergoing closure. The Agency, however, was concerned that a
closure performance standard requiring prevention of all releases may be
unnecessarily stringent for low-risk facilities. The Agency therefore is
proposing a performance standard designed to minimize threats to human
health and the environment, thereby allowing risk factors to be taken into
account when closing MSWLFs.
2.2.4 Comparison with Subtitle G
Like the closure performance standard specified in the Subtitle C
regulation* (see 40 CFR 264.111 and 265.111), the proposed closure
performance standard for MSWLFs allows owners or operators to incorporate
site-specific considerations in determining the type of closure activities
that will satisfy the standard. Subtitle C, however, also specifies
process-specific technical closure standards (e.g., strict design
standards for the final cover) in addition to a performance standard. The
Agency has decided not to specify technical closure design standards for
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MSWLFs in order to allow States maximum flexibility in developing Subtitle
D programs.
2.2.5 Consistency with State Requirements
Of the nine States surveyed, only Washington includes both a closure
performance standard and design standards in their closure rules. Prior
to 1985, Washington's solid waste regulations specified only a performance
standard. However, due to difficulties in implementing such a standard,
the State revised the regulations to include design standards as well.
Washington's current performance standard also requires the owner or
operator to return the land to the appearance and use of surrounding areas
and to continue monitoring all media as long as necessary for the waste to
stabilize and to protect human health and the environment.
Although the remaining States surveyed do not include design
standards, each of them requires the owner or operator to perform specific
technical activities during the closure process. For example, each of the
States requires at least a final cover and grading, and some also require
revegetation of the cover and drainage of the landfill.' Therefore, the
Agency believes that requiring a performance-based standard and final
cover requireaent will hot be inconsistent with State programs.
2.3 POST-GLDSBBK GABS STANDARDS
The post-closure care activities'under §258.31 of the proposed
criteria are similar in intent to the post-closure care requirements under
the Subtitle C regulations. Post-closure care is intended to control the
formation of leachate containing hazardous constituents and its release
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into the environment after closure of the MSVLF, as well as to minimize
the formation of explosive gases that collect in the landfill system. The
crirerLa propose that post-closure care be carried out in two phases, with
the initial phase lasting for 30 years and a second, lesa intensive phase
to be defined by. the States,
2.3.1 Types of Activities Required
The proposed criteria in §258.31(a) define the minimum activities that
must be performed following the completion of closure during each phase of
post-closure care. Specifically, the proposed criteria require owners or
operators of MSWLFs to perform routine maintenance and monitoring
activities for the final cover, leachate collection system, ground-water
monitoring system, and gas monitoring programs during the first phase of
post-closure care. During the second phase of care, owners or operators
must, at a minimum, continue to operate their ground-water monitoring and
gas monitoring systems in order to detect any contamination that might
occur after the initial post-closure care period. This second phase is
intended to ensure that a minimum level of care ia continued at a MSVLF to
detect any release that miglit occur in the long.tern, while minimizing the
burden on owners or operators of continuing extensive post-closure care
actlvltla* for an extended period of time.
Generally, the post-closure care period at the MSVLF facility is
intended to minimize releases of hazardous constituents from a MSVLF after
closure of the.facility by prescribing routine maintenance and monitoring
activities, and to detect as early as possible any releases that do occur.
For example, maintaining the integrity and effectiveness of the cover may
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include taring and replanting of the vegetative cover, repairing the cap,
and correcting the effects of erosion. These activities are designed to
prevent the net infiltration of rainwater through the final cover and into
the waste after closure of the unit. If the final cover is properly
maintained, evaporation and plant transpiration of the rainwater should
occur before water has the opportunity to infiltrate the waste and cause
leachate formation. Moreover, correction of the effects resulting from
settling, subsidence and erosion will help maintain the integrity of the
final cover, and will provide an incentive to the owner or operator to
properly place and compact the waste during the operation of che MSWLF.
The specific activities that will be necessary to maintain the integrity
of the containment system will depend in part on the site-specific nature
of the final cover material and environmental conditions.
Operating and maintaining the leachate collection system at MStfLFs
with liners until leachate is no longer generated is required to protect
surface water from the "bathtub effect," i.e., leachate collecting on top
of the liner. Routine ground-water monitoring is necessary to detect
ground-water contamination in a timely fashion should the waste
containment structures fail'or a design or operating error occur.
Likewise, the gaa monitoring program serves to ensure that explosive
gases, such as methane gas, generated by the landfill do not accumulate in
landfill structures in concentrations in excess of 25 percent of the lower
explosive limit (LEL) for the gases, as specified in §258.23.
The proposed criteria also restrict the post-closure use of landfill
property by specifying that after closure, the use of the property must
never be allowed to disturb the integrity of the final cover, liner(s),
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any components of the containment system, or the function of the
monitoring system unless it can be demonstrated that these uses will not
pose a potential threat to human health and the environment, or chat such
disturbance is necessary to reduce a threat to human health and the
environment. The objective of the restrictions on the post-closure use of
the property is to ensure that the post-closure care requirements can be
implemented effectively in a manner protective of human health and the
environment. For example, disturbing the integrity of the final cover
could increase potential leachate migration and pose a potential risk of
harm to human health and the environment. Interference wich the operation
of the monitoring systems could prevent timely detection of ground-water
contamination or excessive releases of methane gas. Unmonitored access to
the property after closure also could result in the release of hazardous
constituents or actual exposure of buried wastes as a result of
disturbances of the site.
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2.3.2 Length of the Post-Closure Care Period
Section 258.31(b) proposes to require a two-phase post-closure care
period for all MSWLFs. The initial period must last for a minimum of 30
years and consist of extensive post-closure activities described in the
previous section. The duration of the second phase, which requires less
intensive post-closure activity, must be determined by the States. Based
on limited data on the rate of deterioration of containment systems
coupled with improvements in containment technologies that will delay
their deterioration and thus, delay releases, the Agency believes that this
two-phased post-closure care period is warranted to ensure long-term
protection of human health and the environment.
The rationale for the proposed post-closure care period at MSWLFs is
based in part on the results reported in the Regulatory Impact Analysis
(RIA) conducted by the Agency for the proposed.criteria.3 The RIA
assessed the risk to human health and the environment posed by solid waste
management at MSWLFs. The analysis concluded that post-closure formation
of leachate and its transport in ground water, combined with a lack of
ground-water monitoring, could lead to significant levels of contamination
of drinking water supplies around MSWLFs. This contamination could, in
turn, pose significant risks to human health and the environment. Hence,
the aim of the two-phased post-closure care requirement is to:
(1) maintain the integrity of the landfill's,final cover and other
containment structures to prevent the formation of leachate-for an initial
30-year period, and (2) continue ground-water and gas monitoring during
3 Draft Regulatory Impact Analysis of Proposed Revisions to Subtitle
D Criteria for Municipal Solid Waste Landfills. June 22, 1987. Prepared
for Economic Analysis Staff, Office of Solid Waste/EPA.
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and beyond the initial 30-year period to ensure that migration of leachate
and collection of explosive gases can be detected prior to posing a threat
to human health and the environment.
Once a unit is closed, the bottom liner of the landfill will
deteriorate over time arid, consequently, will not prevent the transport of
leachate out of the unit. Therefore, the only way to prevent leachate
transport is by preventing leachate formation through preservation of the
landfill cover. Although some leachate will be formed during the active
life of a landfill unit, the RIA noted that the design and operating
standards imposed by the proposed criteria will limit the amount of
leachate released from the landfills. However, in the absence of
post-closure care to maintain the cover, the cover will deteriorate and
leachate can form following closure in sufficient quantities to pose a
threat to human health and the environment.
The types of activities required and the duration of these activities
could vary significantly among facilities depending on location and
design. For example, the RIA estimated that a synthetic membrane, which
might be required at some MSWLFs to satisfy the health-based limit
performance standard, will deteriorate in 35 years. Therefore, in the
absence of a long post-closure care period (i.e., significantly beyond 35
years), the laperaeable properties of the membrane can be expected to
decrease, thereby increasing leachate formation and potential threats to
human health and the environment. On the other hand, at a facility
designed with a vegetative cover, the Agency expects that over time the
cover will become more protective as a result of factors such as the solid
establishment of vegetation, the cessation of settling and subsidence, and
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the general stabilization and proven integrity of the cover. For this
type of cover, maintenance activities in the. early years of the post-
closure care period could be extensive, but should become increasingly
less extensive over the duration of the period to achieve the same level
of protection to human health and the environment.
As discussed earlier, the Agency believes that extended ground-water
and gas monitoring are essential complements to the maintenance
requirements for protecting human health and the environment. Final cover
permeability and the need for monitoring, subject to site-specific
conditions, will most-likely have an inverse relationship. That is, the
more impermeable the final cover, the less the need for extensive
monitoring, and conversely, the less impermeable the covet, tl.e mere
monitoring that will be required.
The Agency anticipates that in i:he 'first phase of the post-closure
care period, semiannual monitoring, consistent with the operating life
requirements, and routine cover maintenance (e.g., periodic mowing,
fertilizing, vector control, soil replacement) would be appropriate at
most MSWLFs. In later years, however, the Agency expects that at most
facilities only ainiaal care will be required. Thus, during the second
phase of post-closure care, annual monitoring with reduced cover
maintenance, for example, may be adequate to protect human health and the
environaent. If nore intensive activities are varranteu at a particular
facility during later years, States have the authority to require
extensive care during this second phase as well.
The specific timing and nature of post-closure care activities will
vary on a site-by-site basis. As discussed earlier in this document, the
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Subtitle D program Is designed to be handled by the States. Therefore,
the development and implementation of specific procedures for determining
both the start of the second, less-intensive phase of post-closure care
and the appropriate nature and levels of continuing care during the second
phase will be addressed by each State.
2.3.4 Comparison with Subtitle C
Generally, the post-closure care requirements in today's proposed
criteria -- routine maintenance of the cover, collection of leachate,
ground-water monitoring and restricted land use -• are similar to the
activities required under the Subtitle C requirements for hazardous waste
facilities (40 CFR 264.117 and 265.117). Unlike Subtitle C, however,
today's criteria specifically require gas monitoring because of the
inherent nature of KSWLFs. In addition, unlike Subtitle C, which requires
deed notices and survey plats to be filed after closure of landfills' (see
40 CFR 264.119), the proposed Subtitle D criteria require only a deed
notation to be filed after closure.
The required post-closure care period for Subtitle C facilities is
currently set at 30 years with a provision allowing extensions or
reduction* to the length of the period (see 40 CFR 264.117 and 265.117).
While the requirement for two-phased post-closure care in the proposed
criteria for HSVLFs is more stringent than the Subtitl" C .requirement,
information collected since the promulgation of the Subtitle C
requirements on May 19, 1980 (45 ER 33154) suggests that a longer
post-closure care period may be necessary to protect human health and the
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environment.® The Agency .is also currently considering extending the
post-closure -care requirements for Subtitle C facilities located in
certain environments likely to pose significant threats to human health
and the environment.
2.3.5 Consistency with State Programs
All of the nine States included in the Agency's case studies, except
Maryland, specify the types of activities to be conducted during the
post-closure care period. Under its current rules, Maryland may require
post-closure care through the permit system on a case-by-case basis.
Maryland recently proposed revised solid waste regulations that would
specifically require post-closure care. The discussion of post-closure
care requirements that follows includes Maryland's proposed regulations
rather than its current regulations.
All of the States studied explicitly require either cover or site
maintenance during the post-closure care period (e.g., maintenance to
prevent and repair cracking, erosion, or settling of the cover,
maintenance of the drainage system, and revegetation as needed).
Monitoring requirements vary somewhat across the nine States examined.
Most of tha States reviewed either explicitly require leachate and gas
control for all facilities or require them on a case-by-case basis. All
of the State regulations studied contain some type of provision for
ground-water monitoring. Six of the States studied (California, Florida,
Louisiana, New York, Oregon, and Washington) require ground-water
6 Draft Regulatory Impact Analysis of Proposed Revisions to Subtitle
D Criteria for Municipal Solid Waste Landfills. June 22, 1987. Prepared
for Economic Analysis Staff, Office of Solid Waste/EPA.
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monitoring for all MSWLFs; Wisconsin and Maryland require ground-water
monitoring on a case-by-case basis; Texas requires that any monitoring
programs, such as ground-water monitoring, in effect during the operating
life of the facility shall be continued during post-closure care.
The level of control that the implementing agencies have over the
post-closure use of MSWLFs varies across the nine States that the Agency
reviewed. At a minimum, however, most of the States studied require a
notation to the property deed indicating that the property was used as a
MSVLF, so chat future property owners will be aware of the need to
maintain the structural integrity of the covered landfill. Some States
(California, Florida, Maryland, and Texas) exercise control over che
future land use explicitly by requiring that all proposed activities or
construction be reviewed and approved by the State. The extent to which
these States may effectively interfere with future land use, however,
varies. Other States (Louisiana, New York, Wisconsin) do not include
explicit provisions in their regulations to control post-closure land use
at MSWLFs, but use their general authority to protect human health and the
environment and their authority over post-closure plans to oversee
post-closure land use. Ba4fed on these States, the Agency believes that
the required post-closure care activities under the proposed criteria will
not be inconsistent with existing State programs.
The Agency was particularly interested in how the States selected the
length of the post-closure care period and in data that may be available
to support a specific time period. As a result, the Agency reviewed all
State programs. The results of this review are presented in Exhibit 2-1.
The Agency survey indicated that forty-two States require post-closure
-------
EXHIBIT 2-1
sun wsT-aflHnB ctu m
im-aoHB cm ¦> atcmc tea-
Alibwn X
Alaska
Ax li on a
Arkanaaa 2 yaara
California
Colorado X
Connecticut
Delaware 2 y**™ "" for
naceaaary repalra
Florida
Georgia 1 *ear at u"t
Hawaii 1 y#ar at U"t
Idaho 1
11 Llnola 3 y""
'"tH "" r*tr-nn*mf run, mim
it imw in vmt
ntfiw
X
5 yaara
(or longer as
required by
Board, enforce-
ment agency, or
Water Quality
Control Board)
30 years
(if monitoring la ro
required by Depart- '.
nent; if not. no 00
post-closure care
period)
J years -- for moni-
toring (or longer as
required)
20 years
(Department may
extend period if
necessary; owner or
operator nay apply
for reduced tern)
-------
EXHIBIT 2-1 (cmtiauad)
STATE KBT-OiEDRB CASE
rasi-cueon c«n ¦> sncxric rest-
Indiana
(proposal)
lor*
Kan* mo
Kentucky
Louisiana
Ha in*
Maryland
Massachusetts
Michigan
Hlmasota
Mississippi
2 years
3 yaara
(or longer If deaned
necessary on-a slte-
apaclflc basis)
1 yaar -- Inspec-
tions (and (or
raaaonabla period
thereafter (or
aalntenance)
1 yaar
1 yaar
(additional poat-
cloaura cara
aa datarmlnad
nacasaary by
Department)
Ir*f iosT-ciflB"Mr "aicp
v« TROT IP WS
?.»/*n
5 yaari
(for facilities
closed bafora
affactiva data)
X
(or 5 yaars if
petition by permit -
taa is grantad)
5 yaara
X
(Department may
apaclfy additional
pariods aa deaned
nacasaary to pro-
tact public haalth
or welfare or tha
environaent)
K>
«
5 yiars
-------
EXHIBIT 2*1 (cantlaad)
STAXZ TOBT
Mlaaourl
ttontana
Nabraaka
Bev^n
Nm Hampshire
Haw Jaraay
B WLUIC IDBT-
(•• necaaaary during
mti following active
operation)
(aa necessary during
¦d following actlva
operation)
(•xe^itlana ilioMd for
cattain faclllLlaa)
1-4
LMCIH fw Tncr-rfpaW r^om period
rriBMH
a/30
(a* apacifled
clour a plan)
In
30 years
(variances by deter-
mination of Depart-
ment; anyone may
petition for a
var i ance)
Haw Nasico
Natf York
North Carolina
5 yaara
(or longer aa
apaclflad by
Department)
("future neceasary main-
tenance and water qual-
ity Monitoring shall ba
the raapcnalbl
-------
EXHIBIT 2-1 (ccntlauad)
SIUI POST
5MB
North Dakota
Ohio
SnCXFIC POST
IHHPP
1-4 TOMB
3 yaars
(continued leachate
monitoring bayand
-3 yeara raqulrad
aa determined
nacaaaary by Agency)
Cklahoaa
Oregon
Pennsylvania »
(until vegetetion
aatabliahad to pre-
vant corrosion)
Rhode Ialand *
South Carolina '
(inapectlona for pariod
nacaaaary to aaaura
aatiafactory land
racovary; aonltoring
¦vary 3 ninths it
da Mad nacaaaary by
Board of Baalth)
South Dakota *
(until alta baa aat-
tlad and no filling
or draining probltns
esiat)
Teiinaasea
1 year
uacra Of pnCT-n/MWT runr mipp
VT TffW TO W*
m/30 mas
8 yeara minimm
(Dapartaant inapecta
annually for 6 yaars)
X
(Da par tenant nay extend
or raduca pariod as
needed; permittee may
raquaat extension or
reduction).
ro
fO
-------
EXHIBIT 2-1 (continued)
STATE rasr-OXKOBE CAB —
¦> siKiric nsT-
san
Taxai
JBL
m nr-
Utah
Vanaont
Virginia
Waihington
Mast Virginia
Hlawoi ain
1 yaar
(until alta bacoaaa
atabllisad and mon-
itoring can ba aafaly
diaccntinuad)
Wyaakng
3 yaara -- nacaaaary
covar rapalr
LHC1H (W pnsT¦fliwf iwbjqd
v* rim 10 TMS
20/30 VSMS
5 yurs at ltaat
(it problems persist
beyond S years, the
operator is respon-
sible for correction
until Depar.toont
determines that
probleas ere eda-
qpjately resolved)
ro
•
ro
ro
30 years
(20 yesrs if approved
by Department) '
5 years for &as/
leachate control
-------
2-23
care, but that the length of the period specified by each of the States
varies widely. While four States require post:closure care for up to 30
years, most States require care periods of less than five years.
2.3.6 Options Considered and Rejected
The Agency considered setting the length of the post-closure care
period at 30 years with the option to reduce or extend the period,
consistent with the approach taken in Subtitle C. As indicated above,
information included in the RIA for the proposed criteria suggests that a
period longer than 30 years is warranted, particularly in light of
improvements in containment technology that have the effect of delaying
releases. The Agency also considered making the post-closure care period
consistent with some of the periods specified in existing State programs
(e.g., 5, 10, or 20 years). Although the Agency acknowledges that no
other State or Federal authority currently requires a two-phased
post-closure care period, the Agency has no data to support these shorter
periods. The results of the survey of State requirements suggest that the
lengths of the State periods were generally set as a result of'political
considerations, economic considerations, or professional judgment. No
State reported using empirical data or predictive models to determine an
appropriate length for the post-closure care period. Therefore, the
Agency does, not believe the existence of shorter post-closure care periods
in the States is a persuasive reason for limiting the requirement in the
proposed male. Moreover, based on the data available, the Agency believes
that a minimum 30-year period and ¦*a second phase specified by the State is
necessary to protect human health and the environment. Finally, the
-------
2-24
Agency considered requiring an extended post-closure care period with an
option to reduce the period only if the owner or operator could
demonstrate that a reduction in the period would not pose any potential
threat to human health and the environment. The Agency determined that
extended care would create an unreasonable burden on the States to
establish criteria for terminating post:closure care and on owners or
operators* to demonstrate that post-closure care activities were no longer
needed.
2.4 CLOSURE AND POST-CLOSURE PLANS
To ensure that the owner or operator has prepared for activities
needed to close a MSWLF facility in accordance with the closure
performance standard, and to ensure that the facility is effectively
maintained following closure, the Agency is proposing that owners or
operators of all new and existing MSWLF facilities prepare written closure
and post-closure plans (§§258.30(c) and 258.31(c)). These written plans
will provide a basis for the implementing-State agency to evaluate the'
adequac- of closure and post-closure care, and will serve as the
instrument for enforcing anfl establishing violations of the Subtitle D
closure and post-closure criteria. In addition, these written plans will
serve as th« basis for developing site-specific cost estimates that in
turn will determine the amount of financial assurance required (see
Chapter 3).
-------
2-25
2.4.1 Contents of Plans
The written closure plans under the proposed Subtitle D criteria must
describe, at a minimum, the methods, procedures and processes necessary to
close each MSWLF unit in accordance with both the closure performance
standard In §258.30(a) and the final cover performance standard in
§258.40. The closure plan must also include estimates of the maximum
extent of operation that will ever be open, the maximum inventory of
wastes that will ever be on-site over the active life of the MSWLF, and a
schedule of closure activities. In order to be prepared to close the
facility at any point during its active life, the description of closure
activities must include the steps necessary to close the facility at its
maximum extent of operation. The maximum extent of operation should
include the maximum area of the MSWLF that contains wastes and has not
been closed in accordance with today's' criteria. The maximum extent of
operation, however, does not include areas of the facility not subject to
these criteria (e.g., areas closed prior to the effective date of these
criteria). The closure plan should also describe, at a minimum,
activities such as removing, treating, or disposing of waste inventory
(based on the maxima inventory of wastes ever on site), decontaminating
the facility, Installing the final cover, monitoring ground-water, and
managing leachate, run-on and run-off, and explosive gases.
The written post-closure plan under today's criteria must include a
description of the post-closure care monitoring and maintenance activities
specified under Section 258.31(a) and (b), and the frequency at which
these activities will be performed. The post-closure plan must also
specify the name, address, and telephone number of the person or office to
-------
2-26
contact about the facility during the post-closure period. In addition,
the post-closure plan must include a description of the planned uses of
the property during the post-closure care period in accordance with the
restrictions on post-closure use specified in Section 258.31(c)(3).
The Agency believes that the regulations specify the minimum
information that must be included in the closure and post-closure plans to
ensure that adequate preparations have been made for closure and
post-closure care activities. The Agency encourages the States to develop
detailed guidelines elaborating on the contents of these plans to ensure
that owners or operators adequately address all necessary activities.
2.4.2 Approval and Modification of Plans
The proposed rule requires closure and post-closure plans to be
prepared by the effective date of the rule or the initial receipt of waste
at the MSVLF, whichever is later. The initial plans and any modifications
must be approved by the State. However, the proposed rule leaves it to
the States' discretion to specify the procedures and deadlines under which
closure and post-closure plans must be submitted or otherwise made
available to the implementing State agency as well as the criteria,
procedures, and deadlines for modifying these plans. EPA believes that
allowing ths States to determine procedural issues offers the States the
necessary flexibility to Incorporate the revised Subtitle D criteria into
their existing State programs. The proposed criteria do require that the
closure plan be maintained at the facility or some other place designated
by the owner or opera.or until final closure of the HSULF. Likewise, the
post-closure plan must be maintained during the post-closure period at the
-------
2-27
facilicy or some other designated location. This requirement imposes
minimal burden on owners or operators of MSWLFs and ensures that
facilities keep records of their plans.
2.4.3 Options Considered and Rejected
The Agency considered waiving the closure and post-closure plan
requirements for MSWLFs located in the lowest risk areas (e.g., locations
where there is deep underlying ground water, highly impermeable soils, low
net water infiltration, and low ground-water flow rates). The Agency
rejected this location-based approach because it believes that planning
for closure and post-closure care is essential at all MSWLFs. Even a
facility in a low-risk area may cause threats to human health and the
environment if improperly closed. Moreover, it will be difficult for the
State to evaluate the adequacy of closure and post-closure care at a MSWLF
without a closure and post-closure plan.
EPA also considered relying on the closure performance standard rather
than a written closure and post-closure plan to ensure that the landfill
is closed and maintained properly after closure. While this option would
*
provide the maximum flexibility to the States to determine the need for
plans on a case-by-case basis, and would reduce costs to owners or
operators, the Agency rejected this option because it does not ensure that
the.MSWLF owner or operator has adequately prepared for closure and post-
closure care. Moreover, this approach would greatly increase the
administrative burden of evaluating the adequacy of closure activities and
post-closure care.
-------
2-28
2.4.4 Comparison with Subtitle C
The proposed requirements under today's Subtitle D criteria to prepare
detailed written closure and post-closure plans are consistent with the
Subtitle C requirements in 40 CFR 264.112, 264.118, 265.112 and 265.118
for hazardous waste facilities. The requirement to submit closure and
post-closure plans to the State for approval and modification is also
consistent with Subtitle C. However, unlike Subtitle C, which specifies
in the regulations the conditions and establishes deadlines and procedures
for submitting and modifying closure and post-closure plans, the proposed
Subtitle D criteria leave these decisions to the States.
2.4.5 Consistency with State Prograas
Based on the results of the Agency's survey of the solid waste
regulations in nine States, the Agency expects that the proposed
requirement to require closure and post-closure plans will not be
inconsistent with most State programs. Of the nine States reviewed, only
Maryland does not require a closure plan; however, closure procedures must
be included in the engineering plans as a condition of receiving a permit.
Each of these nine States also requires either ah additional plan for
post-closure care or requires that post-closure care be addressed in the
closure plan. (Maryland recently proposed revised solid waste regulations
that would specifically require post-closure care.)
Most of the States in the survey already have procedures for approving
and modifying closure and post-closure plans. In a process similar to
Subtitle C, seven of the eight States requiring closure and post-closure
-------
2-29
plans require that these plans be approved as-part of the-permit process,
and require that modifications be approved by .the implementing Agency.-
2.5 CLOSURE AND POST-CLOSURE CARE CERTIFICATION
Today's proposed criteria require owners or operators to submit,
following the completion of closure and post-closure care at each landfill
unit, a certification verifying that closure and post-closure care
activities have been completed at that unit in accordance with the
approved plans (§§258.30(e) and 258.31(f)). These certifications must be
based on a review of the unit by a qualified party and must provide an
objective evaluation of the performance of closure and post-closure care.
The Agency is requiring objective certifications of closu<.s aud
post-closure care in order to provide a mechanism for ensuring that these
activities have been conducted properly and in accordance with State -
approved plans. In addition, a certification requirement provides an
effective trigger mechanism for releasing owners or operators from
financial responsibility requirements for closure and post-closure care
upon corpletion of closure and post-closure activities (see Chapter 3).
Consistent with the overall 'strategy of providing flexibility to the
States and ¦ininizlng the inconsistencies between existing State programs
and the proposed criteria, the Agency is allowing the States to determine
who is qualified to make such certifications. Qualified parties might
include an independent registered professional engineer, an'in-house
registered professional engineer who can make an objective evaluation, or
State Inspection officials.
-------
2-30
2.5.1 Comparison vith Subtitle C
The Subtitle C requirements in 40 CFR 264.115 and 265.115 require
owners or operators of hazardous waste facilities and independent
registered professional engineers to certify that closure of each disposal
unit (i.e., each landfill cell or trench, surface impoundment, waste pile,
and land treatment area) and closure of the entire facility have been in
accordance with the approved closure plan. These certifications must be
submitted to the Regional Administrator for approval. The Subtitle C
regulations specify an analogous certification requirement for the
completion of the post-closure care period at each unit. The proposed
requirements for MSWLFs under the proposed Subtitle D criteria are
consistent in intent to Subtitle C„ but allow States to specify acceptable
certifications in order to provide flexibility in State programs.
2.5.2 Consistency with State Programs
The results of the Agency study of selected State regulations showed
that all of the nine States chosen for case study, except for Wasnington,
require either a certification by the facility owner or operator or
inspections by the State agency or a registered professional engineer at
the time o£ closure to ensure that activities have been conducted
properly. California requires a certification by the facility owner or
operator while the others (Florida, Louisiana, New York, Oregon, and
Texas) require inspections by the implementing agency for closure
approval. Florida also requires a registered professional engineer to
monitor closure activities to ensure that the closure plan is being
carried out as written. Washington and New York are revising their solid
-------
2-31
waste regulations to require that closure be certified by an independent
registered professional engineer. Although Wisconsin and Maryland do not
include inspection or certification requirements in their regulations,
both of these States inspect facilities on a routine basis. Wisconsin
also requires most sites to submit documentation of closure activities,
including .photographs, as a condition of being released from the financial
responsibility requirements.
Procedures for ensuring that post-closure care Is carried out properly
vary among the nine States reviewed. Texas and New York require
inspections at the end of the post-closure care period by the State agency
for approval. In Florida, inspections are made throughout the
post-closure care period; in Louisiana and Wisconsin, reports verifying
that post-closure care is being carried out according to the post-closure
plan must be submitted to the implementing Agency during the post-closure
care period.
2.5.3 Other Options Considered
The Agency considered allowing, the States to develop procedures for
approving completion of closure and post-closure care at MSWLFs rather
than specifying certification requirements. This option would provide
maximum flexibility to the States. However, EPA was concerned that a
minimum requirement for verifying that closure and post-closure care
activities have been adequately completed is necessary to ensure the .
protection of human health and the environment. For this reason, the
proposed rule re^ai^ei objective certifications consistent with Subtitle
-------
2-32
C, but allovs States to specify who may make the certification in order
preserve flexibility.
-------
3. FINANCIAL ASSURANCE CRITERIA FOR CLOSURE,
POST-CLOSURE CARE AND CORRECTIVE ACTION
The proposed criteria require owners or operators of MSWLFs to
demonstrate financial assurance for the costs of conducting closure and
post-closure care and, if applicable, corrective action for known
releases. The purpose of financial assurance is to ensure that if an
owner or operator of a HSWLF declares bankruptcy, abandons the facility,
or otherwise fails to pay for closure, post-closure, or corrective action,
adequate funds will be available to cover these costs. The amount of
financial assurance required is based on site-specific cost estimates of
t
hiring a third party to perform closure, post-closure care, and corrective
action.
This chapter describes in detail the analysis and rationale behind
the proposed financial assurance requirements. It is organized into three
sections. The first section discusses' the scope of required coverage and
the applicability of the requirements. The second section discusses the
cost estimating requirements for ,closure, post-closure care and corrective
action, which establish the amounts for which financial assurance must be
provided. The third section examines the Agency's approach to requiring
financial assurance for the'estimated costs of closure, post-closure care
and corrective action. v To maximize flexibility for States in developing
financial uaurance requirements, the Agency's approach is to specify
performance standards for financial assurance mechanisms rather than
specifying the mechanisms themselves. Chapter 4 provides a detailed
analysis of mechanisms that State may wish to allow for demonstration of
financial assurance.
-------
3-2
3.1 SCOPS OP COVERAGE ADD APPLICABILITY OF CRITERIA
This section discusses two key elements of the proposed financial
assurance criteria: the scope of financial assurance coverage required,
and the entities that are required to provide such coverage. These,
elements are addressed separately because the approaches proposed in the
Subtitle D criteria differ from other EPA financial assurance, programs.
This section also examines the approaches to scope of coverage and
applicability currently used in State financial responsibility programs
for MSWLFs.
3.1.1 Scope of Coverage
As discussed in the previous chapter, the proposed criteria require
owners or operators of MSWLFs to provide financial assurance for closure,
post-closure care and corrective action for known releases. The
provisions for estimating the costs of the activities are discussed in
Section 3.2.
The Agency considered requiring owners and operators of MSWLFs to
demonst /ate that funds would be readily available to compensate injured
third parties. For several reasons, however, the Agency has decided to
defer proposing such liability requirements at this time. First, the
Agency is concerned that it does not have sufficient data at this time to
specify the amount of liability coverage that would be appropriate for an
MSWLF. Unlike Subtitle I of RCRA, which mandates a minimum' level of
coverage for underground storage tanks, Subtitle D of the statute does not
specify any minimum financial assurance requirements for MSWLFs. To date,
little data exist concerning third-party awards resulting from releases at
-------
3-3
MSVLFs. While more data are available to assess potential awards from
Subtitle C facilities,, the Agency is reluctant to extrapolate from these
data or to adopt directly the levels of coverage required for Subtitle C
facilities without further analysis comparing the risks and resultant
third-party claims from MSVLFs and Subtitle C hazardous waste facilities.
Second, RCRA §4010(c) allows the Agency discretion to take into
account the practical capability of MSVLFs when developing the.new
criteria. The proposed criteria apply an extensive set of new regulations
to a new universe of waste facilities, many of which may not otherwise
have been subject to regulation. In light of the costs associated with
imposing today's proposed requirements on a new universe of facilities and
the current constraints.in the insurance .market, the'practical capability
of owners and operators to provide financial assurance for liability
coverage is highly uncertain.
For these reasons; the Agency has chosen to focus on financial
assurance requirements for costs of activities that are certain to be
incurred (i.e., closure, post-closure care, and corrective action for
known releases) with the objective of minimizing potential third-party
exposures. In deferring third-party liability requirements, the Agency
hopes to provide more tine to obtain data on potential coverage levels and
for the liability.Insurance market to adjust to a new potential market.
The Agency adopted a similar approach when promulgating liability coverage
requirements for Subtitle C requirements when it phased in the
.requirements over a three-year period to allow the market to adjust to the
demand for increased capacity.
-------
3-4
Deferring third-party liability coverage requirements at this time,
however, does not preclude the Agency from promulgating such a requirement
for MSWLFs at a later date. Further, the Agency encourages States to
consider requiring such coverage if they choose. This decision to defer
the requirements of course in no way relieves an owner or operator of
liability should injury to third parties be shown to have resulted from
operations of the MSWLF.
The Agency also considered requiring financial assurance for
corrective action for releases that have not yet been detected; however,
this approach was rejected. The Agency based this decision in part on the
absence of data available for predicting future corrective action costs.
For example, to require a facility with a high probability of a release to
demonstrate financial assurance for corrective action costs, the risks
posed by a facility as well as the potential size, impact and costs to
remedy such releases are needed. Such facility risk analyses could
require considerable time.to complete and thus could also delay the
adoption and implementation of regulations by States. Moreover, the
Agency's approach is consistent with EPA corrective action requirements in
Subtitle C.
3.1.2 Applicability
The proposed criteria exempt Federal and State government entities,
defined as those entitles whose debts and liabilities are also those of
the Federal or State government, from the financial responsibility -
requirements for MSWlis. All MSVLFs that are either owned or operated by
a Federal or State government entity are covered by this exemption.
-------
3-5
Because Federal and State government entities are permanent and stable
institutions that exist to safeguard health and welfare, the Agency
recognizes that they have the requisite financial strength and incentives
to cover the costs of closure, post-closure care, and corrective action
1
for known contamination in a timely manner. Moreover, this approach is
consistent with the approach used under Subtitle C. The Agency believes,
therefore, that it is not necessary to impose financial requirements on
Federal and State government entities.
The Agency is considering an explicit exemption from the financial
assurance requirements for Indian Tribes. The rationale for such
exemption is that under the treaties negotiated between the Indian Tribes
and the Federal Government, the Federal Government has a continuing
obligation to protect the health and welfare of the tribes. The Bureau of
Indian Affairs acts as trustee for the Federal Government in these
treaties and the courts have broadly construed this trustee obligation.
This obligation implies Federal support/intervention in the case of Tribal
inability to pay. In the proposal, the Agency requested public comment on
this issue.
The Agency has decided* not to exempt local governments from financial
assurance requirements because, relative to Federal and State government
entitles, they generally (1) have more limited financial resources and
less flexibility in their annual budgets, making reallocation of funds for
a specific purpose in a given year difficult; (2) cannot necessarily avail
themselves of the* traditional sources of municipal' financing (i.e.,
intergovernmental transfers, bond issues, and taxes) quickly enough to
ensure funding in a timely manner; and (3) have been more prone to
-------
3-6
bankruptcy and defaults than Federal and State government entities. The
first two of these considerations are fully discussed in Section 4.7.4.
The third consideration is discussed briefly below.
Comprehensive data on local government financial distress are
difficult to obtain. However, a report prepared by the. Advisory
Commission on Intergovernmental Relations (Bankruptcies. Defaults, and
Other Local Government Financial Emergencies. March 1985), indicates that
(1) three general purpose local governments and 15 other local government
units filed for bankruptcy under Chapter 9 of the Federal Bankruptcy Code
between 1973 and 1983; and (2) 32 local government units defaulted on
government-purpose debt between 1972 and 1983. While these da$a indicate
that local government bankruptcy and default are relatively rare, the
Agency is concerned that financial stress.could delay the timeliness of
meeting the potentially sizeable Subtitle D obligations. Timely funding
of obligations is threatened even if bankrupt or defaulting governments
are eventually able to pay their debts through restructuring of terms or
infusion of funds from other sources. Therefore, today's proposal
requires local governments owning or operating MSWLFs to provide financial
assurance in order to ensure that the Subtitle D obligation will be met in
a timely aaxmer.
3.1.3 Consistency vlth State Requirements
Approximately tventy States currently have financial assurance
requirements for Subtitle D facilities. One of the Agency's major
considerations in designing the proposed rule was to avoid, as far as
practicable, disruption to these existing programs.
-------
3-7
The Agency conducted a study of nine State financial assurance
programs.^ The study found considerable variations among State programs
regarding the applicability of the requirements and the types of
mechanisms allowed to provide financial assurance. For example, some of
the States examined exempt all governmental entities, including
municipalities, from the requirements; others directed their requirements
only to operators rather.than to owners. Given this variation in the
applicability of requirements, it is not possible for the Federal
provisions to be fully consistent with State practices. In deciding on
the applicability of the financial assurance requirements, EPA was
therefore guided principally by its conviction that the rule should bie
broadly applicable in order to provide adequate coverage of cieswe,,post-
closure care and corrective action responsibilities.,
3.2 COST ESTIMATING CRITERIA FOB. CLOSURE, POST-CLOSURE CAER AND
COBRECTIOH ACTION
The proposed Subtitle D criteria specify requirements for estimating
the costs of closure, post-closure care, and corrective action. These
requirements, discussed below, establish the amounts for which Owners or
operators oust demonstrate financial assurance.
3.2.1 Closure Cost Estimates
Financial assurance for closure must be based on a site-specific
estimate of the cost of conducting closure activities that are necessary
7 See Case Studies of State Financial Responsibility Programs for
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated.
-------
3-8
to satisfy the closure performance standard. The proposed criteria
require the closure cost.estimate to equal the maximum cost of closing the
facility at any time during the life of the facility (i.e., at the point
of maximum extent of operation as estimated in the closure plan). This
requirement ensures that adequate funds are available for closure even if
closure takes place earlier than expected. If owners or operators close
units successively as they are filled, rather than operating multiple
units simultaneously, the maximum area of the facility ever open at one
time will be minimized, thus reducing the size of the cost estimate.
The proposed criteria require the closure cost estimate to be updated
annually for inflation and whenever changes to the closure plan or
landfill conditions increase the cost estimate, until the entire MSWLF has
been closed. The Agency is proposing to delegate to the States the
procedures for updating these estimates. The Agency would suggest that
the States rely on inflation factors that are readily available to owners
or operators (e.g., the Implicit Price Deflator for GNP). Owners or
operators may also request a reduction in the closure cost estimate if
changes in plans result in' a reduction in the maximum costs of closure.
Such adjustments would be bade on a case-by-case basis. These provisions
are consistent with requirements under Subtitle C. Finally, the owner or
operator aust keep a record of the most up-to-date cost estimate for
closure at the MSWLF until he is no longer required t~o demonstrate
financial assurance.
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3-9
3.2.2 Post-Closure Care Cost Estimates
Today's proposed criteria require owners or operators of MSWLFs to
demonstrate financial assurance for both phases of post-closure care to
ensure that adequate funds will always be available in the event that the
owner or operator fails to,conduct post-closure care.. The amount of
coverage must be based on the most expensive costs of post-closure care
during each phase, as reflected in the post-closure care cost estimate.
The cost estimate for each phase of post-closure care is calculated by
multiplying the annual cost estimate for each phase by the number of years
of post-closure care required in that phase. The annual costs of
post-closure care are the costs of monitoring and maintaining the MSVLF
after closure in accordance with the post-closure plan. Because not all
post-closure activities are conducted on an annual basis (e.g., cap
replacement and monitoring well replacement may only be required
periodically), the cost estimate should be adjusted to include these
periodic costs as well as routine annual costs. For instance, if a final
cap deteriorates over a 10-year period, the owner or operator would have
to replace the cap three times over the initial 30-year phase of the posc-
closure care period. A share of this expense would be incorporated into
the annual cost estimate for the first phase of post-closure care by
dividing ths total cost of cap replacements (i.e., the cost of cap
replacement x 3) by 30 years.
Like the closure cost estimate, the post-closure care cost estimate
must be adjusted annually for inflation and if changes in the post-closure
plan or landfill conditions increase the cost estimate. Inflation
adjustments are required only during the active life of the HSWLF. This
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is consistent with the requirements in Subtitle C. The owner or operator
also must retain records of the post-closure cost estimate until released
from financial assurance for post-closure care.
The amount of coverage provided under the financial assurance
mechanism(s) must equal the sum of the cost estimates.for each phase of
the post-closure care period. Coverage must be continuously provided
until certification of post-closure care and release from financial
assurance requirements. If the State has any reason to believe that post-
closure care has not been conducted in accordance with the post-closure
plan, it must provide a written statement of reasons to the owner or
operator.
3.2.3 Cost Estimates for Corrective Action for Known Releases
The proposed criteria require 'owners or operators to demonstrate
financial assurance for corrective action for known releases. The amount
of assurance required is based on the corrective action cost estimate,
which must equal the sua of the annual costs of conducting the corrective
action program over the duration of such a program. The State is
authorized to sec th« period over which the corrective action program must
be completed. As with closure and post-closure care, the Agency
anticipate* that all of the mechanisms discussed in Chapter 4 will' be
available for coverage of corrective action costs. Possible exceptions
are insurance and payment bonds (see discussion in Sections 4.4 and 4.6).
The Agency is proposing that financial assurance for corrective
action for known releases be demonstrated after the estimate has been
prepared and approved as required by §258.32(d). Because the cost
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estimate is based on the site-specific corrective action program, there
nay be a significant lag between the detection of a release and final
approval of a corrective action program and cost estimate. For example,
assessments of the extent of contamination and analyses of alternative
remedies may take several years. Prior to the onset of corrective action,
an owner or operator may take1 interim measures, such as replacement of
drinking water, to protect'against immediate damages. Such measures may
delay the commencement of actual corrective action measures. Because
there may be a substantial time lag between discovery of the need for
corrective action and the final preparation of a cost estimate for
corrective action, States may wish to require demonstration of some
financial assurance during this interim period (e.g., financial assurance
for the costs of interim measures, or a flat amount of coverage to cover
minimum costs).
An owner or operator must adjust the corrective action cost estimate
to reflect price increases due to inflation arid whenever the annual costs
for the remaining corrective action period exceed the cost estimate. As
the number of years remaining in the corrective action period declines,
owners or operators may request a reduction in the corrective action cost
estimate sad Che corresponding amount of financial assurance to reflect
the remaining costs to be incurred.
3.2.4 Consistency with State Programs
The Agency's study of nine States revealed that all nine currently
require or intend to require coverage for. the costs of closure, and
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post-closure care based on facility-specific cost estimates. None of the
States had corrective action programs.
3.3 PERFORMANCE STANDARD CRITERIA FOR FINANCIAL ASSURANCE MECHANISMS
Historically, regulation of Subtitle D facilities.has been a
State-run program. One of the considerations guiding the Agency's
approach to the financial assurance rule was to create requirements that
will foster State implementation of the Federal criteria for financial
assurance. For this reason, the proposed criteria make no specification
as to allowable financial assurance mechanisms, but instead establish a
performance standard for financial mechanisms, thus allowing the States
maximum flexibility for determining allowable mechanisms.
States also will be responsible for specifying procedural
requirements necessary to ensure that the performance standard and other
financial responsibility requirements are satisfied, such as procedures
for obtaining, reviewing, cancelling, or substituting mechanisms,
procedures in the event of bankruptcy, and provisions for financial
assurance in the event of transfer of ownership.. Although it is
impossible to foresee all the contingencies that may, arise and affect the
ability of * given mechanism to meet the obligations for which it was
intended, it ahould be possible to develop mechanisms that will perform
under a number of common contingencies.
The remainder of this section describes the performance standard
criteria for financial assurance mechanisms authorized by States' Chapter
Four discusses' mechanisms that States may want to use and the provisions
that may be helpful in meeting the performance standard.
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3.3.1 Description of Financial Assurance Performance Standard
The performance standard in Section 258.32(e) of the proposed,
criteria specifies five provisions that financial assurance mechanisms
must meet to ensure that adequate funds are readily available to cover the
costs of conducting closure, post-closure care, and corrective action for
known releases if the owner or operator fails to do so. The five
provisions, discussed below, are:
(1) Sufficiency -- the mechanism must ensure that the
proper amount of funds will be available;
(2) Availability -- the mechanism must ensure
that funds will be available whenever they
are needed;
(3) Continuity -- the mechanism must guarantee '
the availability of the required amount of
coverage at all times without any gaps in
coverage;
(4) Flexibility -- the mechanisms allowed by the
State must provide flexibility to owners or
operators; and
(5) Enforceability -• the mechanism must be legally
valid and binding, and enforceable under State
and Federal law.
. ' I
Sufficiency of Funds
To ensure that enough funds are available when needed, mechanisms
should generally guarantee the full amount of financial assurance
required, based on the current cost estimate, at the time they are
established. However, because it.may be difficult to fully fund a trust
fund at the time it is established, States that allow trust funds as
financial assurance mechanisms may wish to allow a pay-in period. Many
small owners or operators may not be able to obtain other mechanisms, and
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Co require Imedlate funding of a trust could be overly burdensome.
Subtitle C allows owners or operators to build up the trust over the life
of the facility or 20 years (10 years for permitted facilities), whichever
is shorter. States may wish to adopt similar requirements for MSWLFs. to
meet the performance standard, however, the trust would have to be fully
funded by the end of the MSWLF's active life. States may alternatively
opt to require a shorter build-up period or accelerated payments into the
trust in the earlier years of operation.
Availability of Funds
A mechanism should have clearly specified conditions under which it
will be drawn upon to ensure that procedural challenges do not
unnecessarily restrict the States' prompt access to needed funds to
perform closure, post-closure care or corrective action in a timely
manner.
To satisfy these provisions, States may need to establish standby
trust fund requirements for certain mechanisms (e.g., letters of credit,
surety bonds). The State may not be the appropriate recipient of funds,
since in some states money may be required to be transferred to the State
Treasury, where it becomes'subject to appropriation'by State legislatures.
Because a trust Is a separate' legal entity, the transfer of funds into a
standby trust does not trigger the transfer requirements to a State
Treasury (since the funds are not legally the possession of the State).
However, the State could be given discretion to order the trustee to make
payments as necessary. States could follow Subtitle C standby trust
requirements under 40 CFR 264 and 265.
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Continuity of Coverage
Over time, the original conditions that prevailed when the, financial
assurance mechanism was first established are likely to change, and chese
changes, unless anticipated and planned for, could result in gaps in
coverage for the costs of closure, post-closure care, and corrective
action. For this reason, the Agency requires in the proposed criteria
that the financial mechanism remain reliable over time by guaranteeing the
availability of required coverage until the owner or operator is released
from financial responsibility, or until he obtains an alternate mechanism.
In particular, States should establish provisions to prevent gaps in
coverage that address contingencies such as (1) cancellation or
termination of the mechanism by the provider, and (2) bankruptcy or
incapacity of the financial assurance provider or the MStfLF owner or
operator.
ill Cancellation or Termination of Mechanisms. If a provider of
financial assurance cancels or fails to renew a mechanism, an owner or
operator may not -be able to secure alternative mechanisms immediately,
thereby creating a potential gap in coverage. To avoid this gap, States
may consider requirements g&veming the cancellation of mechanisms.
However, States also should consider that strict cancellation provisions
may limit the availability of mechanisms.
States aay consider requiring providers of financial assurance to
give owners or operators adequate notice of cancellation so that the owner
or operator can secure alternative assurance before the current mechanism
is cancelled. For example, Subtitle C and proposed Subtitle I regulations
require notification of cancellation to be provided at least 120 days in
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advance of cancellation. Subticle C rules also require that all
providers, except insurers (who may directly reimburse the insured), fund
a standby trust fund if the owner or operator.is unable to obtain
alternative assurance. The proposed Subtitle I financial assurance rule
also proposes that a provider fund a standby trust fund in the event that
the owner or operator is unable to obtain alternative assurance, but only
if a release from the UST is suspected or confirmed. (Subtitle I, unlike
Subtitle C and the proposed criteria for Subtitle D, requires financial
assurance for contingent costs only.) In addition, when the current
instrument expires, whether or not it has been drawn upon, States may
consider requiring the owner or operator to have an alternative mechanism
in place. In summary, cancellation provisions similar to those on the
Subtitle C and Subtitle I programs can ensure the certainty of funds for
closure, post-closure care, or corrective action for known releases by
requiring that either funds are drawn from the mechanism before it can be
cancelled, or that the owner or operator must secure alternate coverage
before the mechanism may be cancelled.
The disadvantage of imposing strict cancellation provisions is that
there may be a greater likelihood that the mechanism will be drawn upon,
which may discourage providers from offering the mechanism. Vhen
designing financial responsibility programs, States should attempt to
strike a balance between more strict cancellation provisions that may
reduce the availability of the mechanism and less strict cancellation
provisions that may provide less certainty that funds will be available
when needed.
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i21 Bankruptcy or Incapacity. The bankruptcy or,incapacity of a
MSWLF owner or operator or provider of a financial assurance mechanism
could also result in a lack of funds when needed if the State has not
established certain procedural requirements. The Agency believes that it
is Important that the State be notified if any of these parties files for
bankruptcy proceedings because it threatens (1) the continuity of
operations at the landfill and the ability of the owner or operator to
meet the financial obligations of closure, post-closure care, and/or
corrective action or (2) the ability of the provider of financial
assurance to satisfy its obligation. Likewise, the Ager.-y believes that
it is important that an adequate time period be specified to allow owners
or operators time to obtain an alternative mechanism if tne pro/ider of
the instrument is bankrupt.
States may wish to use the procedural requirements of Subtitle C or
Subtitle- I as guidelines. For example, those regulations require an owner
or operator and providers of assurance, such as corporate guarantors or
banks, to notify the Regional Administrator within 10 days after they
enter a bankruptcy proceeding and allow the owner or operator 60 days to
secure alternative assurance. States should consider ways to ensure that
financial assurance contracts will be considered as an obligation of the
bankrupt provider in a court proceeding.
Subtitle I proposes to extend the applicability of the bankruptcy
notification provision to States that provide a State fund as evidence of
financial assurance. If the State fund becomes incapable of providing
financial assurance, the State is required to notify the Regional^
Administrator and owners and operators covered within 10 days of the fund
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becoming incapable of providing required coverage. The incapacity of a
State fund is a concrete, definable event that could occur if monies in
the fund are depleted. In order for States to ensure that owners and
operators of MSWLFs have adequate financial assurances for closure,
post-closure care, and corrective action, the State should recognize the
importance of notifying MSWLFs in the event that the State fund becomes
incapable of providing financial assurance. By providing notice to the
MSVLF of the incapacity of a State fund, the owner or operator has time to
obtain alternative coverage and remain in compliance with the regulations.
Flexibility
States, in authorizing financial assurance mechanisms for
demonstrating financial assurance, should provide a range of mechanisms to
provide owners or operators of MSWLFs with flexibility for demonstrating
compliance' while at the same time ensuring that they meet the regulatory
requirements. For example, the Agency would not consider a program that
restricted owners or operators to using only a financial test or insurance
to be flexible enough because such restrictions would likely impose a
significant burdan on ouch of the regulated community. Small owners or
operators nay not pasa the financial test and may similarly be unable to
obtain insurance for their MSWLF because of constraints in the Insurance
market. lb* objactive of financial assurance requirements is to ensure
that all owners or operators plan and set aside funds for the cost of
closure, post-closure care, and corrective action, if applicable; thus
States should establish a program sufficiently flexible to allow owners or
operators to obtain financial assurance.
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Legal Validity and Enforceability
Allowable mechanisms for financial assurance muse be legally valid
and enforceable in order Co ensure that che required funds will be
available in Che event they are needed. The validity of financial
mechanisms is largely a matter of State lav. However, a mechanism will
generally bewalid if it is issued by an institution that has the legal
authority to issue the mechanism, and that is legally acceptable and/or.
regulated by a Federal or State Agency. In addition, other factors may
affect the validity and enforceability'of a financial mechanism. For
instance, a mechanism should provide a way to resolve disagreements over
interpretation of its contents. Rules of disclaimer in the mechanism
might also be used to prevent delay in the application of the mechanism.
And to determine which claimants will prevail in procedures like
bankruptcy, where more than one claimant asserts a claim to assets, rules
of priority should be established. Some mechanisms, such as cash deposits
or deposits of government securities may not be secure in bankrupt
proceedings, especially if the deposit is viewed as a "pledge" to the
government.^ Other contract clauses, such as those pertaining to changes
in the agreement, may alao "affect the treatment of the mechanism in a
bankruptcy proceeding.
To halp anaure that financial assurance mechanisms are enforceable,
\
States may wish to apecify wording for the mechanisms. Specified wording
would make mechanisms uniformly enforceable and would eliminate the need
for States to review mechanisms on a case-by-case basis. Subtitle C
8 Douglas F. Brenman, "Regulating Financial Responsibility for
Bankrupt Operators, National Environmental Enforcement Journal. November
1987.
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regulations for hazardous waste facilities specify wording for trust
funds, surety bonds, letters of credit, and insurance, and requirements
for the financial test and corporate guarantees. States may wish to refer
to these requirements for guidance, which are found at 40 CFR 264.151.
3.3.2 Consistency vlth State Requirements
The nine States studied differed with respect to the procedures and
types of mechanisms allowed for demonstration of financial assurance. At
one extreme, Massachusetts! currently allows only a performance bond, while
at the other extreme, Wisconsin allows performance or payment bonds,
deposits of cash or other liquid securities, escrow accounts, irrevocable
trust funds, letters of credit, insurance, financial tests, and any other
mechanism found acceptable by the implementing agency. For the proposed
criteria, EPA decided that the most flexible approach would be to allow
the States to determine which mechanisms to allow, rather than attempting
to prescribe either a broader or narrower range of mechanisms than are
currently being used by the States, and to provide a set of performance
standards for the mechanisms chosen.
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4. FINANCIAL ASSURANCE MECHANISMS THAT MAY BE
AVAILABLE TO MSVLF OWNERS OR OPERATORS
In developing their own financial responsibility programs, States
will determine the types of financial assurance mechanisms that will be
allowable under their programs. This chapter provides general information
on seven financial assurance mechanisms that are currently allowed or
proposed for demonstrating financial assurance in various federal EPA
programs, including: closure and post-closure care,,liability coverage,
and corrective action for known releases for hazardous waiste management
facilities under RCRA Subtitle C (40 CFR Parts 264 and 265, Subpart H);
the proposed corrective action and liability coverage requirements for
underground storage tanks containing petroleum under RCRA Subtitle I (40
CFR Part 280, Subpart I); and the abandonment and plugging irequirements
for underground injection control (UIC) wells under the Safe Drinking
Water Act (40 CFR Part 144). The seven mechanisms include trust funds,
letters of credit, surety bonds, State assumptions of responsibility,
insurance and risk retention group coverage, financial tests, and
guarantees. Standby trust funds and combinations of mechanisms and
combineu coverage are also discussed. For each mechanism, this chapter
describes (I) the features of the mechanism, (2) use of the mechanism in
other EPA programs and In certain State programs, (3) key provisions of
the mechaaisa that the Agency believes are necessary or desirable to
ensure the adequacy of the coverage provided by the mechanism, and (4) the
cost and. availability of the mechanism to the regulated community.
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4.1 T8DST IOD
Trust funds are an allowable mechanism under most existing and
proposed EPA financial assurance programs. Vhen fully-funded, trust funds
provide a high level of assurance and are widely available; however, their
high cost to the regulated community may limit their desirability.
4.1.1 Features of the Mechanise
/
A trust fund-is an arrangement in which the grantor of the trust
transfers legal title of property to a trustee', who manages the property
for the beneficiary of the trust. The trustor may designate himself or
another party as the beneficiary of the trust. The trustee must manage
the property according to the terms of the trust agreement and in
accordance with applicable state law. The grantor of the trust may not
modify or amend the terms of the trust agreement unless he reserves that
right at its creation. That is, the grantor may create an irrevocable
trust or a revocable trust. In a majority of States, the beneficiaries of
the trust may modify or terminate the trust only if all beneficiaries
consent and the modification of the' trust will not interfere with a
material purpose of the trust.
4.1.2 Qm of Trust Funds in Other EPA Programs
Under current EPA regulations, owners or operatotj of Subtitle C
facilities may use trust funds to demonstrate financial assurance for
closure and post-closure care. Under proposed regulations, owners or
operators may also use trust funds to assure the costs of corrective
action for continuing releases at Subtitle C facilities.
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Under the existing and proposed Subtitle C rules, owners or-operators
are allowed to build*up the closure or post-closure care trust fund over a
specified number of years until the value of the trust is equal to the
required level of coverage. The purpose of this approach is to minimize
the costs to the owner or operator of a fully-funded upfront trust fund.
The trust fund is built up by making annual payments into the trust over a
period of time called a "pay-in" period. Under Subtitle C regulations for
permitted facilities, annual payments must be made into the trust over the
term of the initial RCRA permit (i.e., 10 years) or over the remaining
operating life of a facility, whichever period is shorter (40 CFR
264.143(a)(3), 264.145(a)(3)). For facilities operating with interim
status prior to receiving a permit, the pay-in period is 20 years or the
remaining operating life of the facility, whichever is shorter.
A pay-in period would also be allowed for trust funds used to assure
corrective action for continuing releases under EPA's proposed rules.
Although financial assurance is not required until corrective action has
been triggered and funds are needed, a pay-in period is allpwed because
corrective actions are typically of long duration. The pay-in period in
the proposed corrective action trust fund is twenty years or one-half of
the corrective' action period, whichever is shorter. The required trust
fund balsae* at the end of the pay-in period must equal the costs of
corrective action expected to be incurred after the end of the pay-in
period.
Under the trust agreements specified in the regulations for closure,
post-closure care, and corrective action at Subtitle C facilities, the
Regional Administrator has sole authority to instruct the trustee to
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release funds from the trust for the purpose of reimbursing the owner or
operator, or other party authorized'to conduct closure, post-closure care,
or corrective action, for the particular costs incurred. The Regional
Administrator can withhold reimbursement in part or in full if he
determines that the particular costs are not in accordance with the
closure, post-closure care, or corrective action plans, or that the
expected costs will-be significantly greater than the remaining trust fund
balance. The Regional Administrator also has authority to begin
termination of the trust fund, once he have been assured that all closure,
post-closure care, or corrective action activities have been
satisfactorily completed. Any remaining trust fund balance would then
revert back to the owner or operator or other authorized party. The UIC
program gives similar authority to the Regional Administrator.
The existing and proposed Subtitle C rules specify the wording of the
trust agreement, and require that the trustee must be regulated and
examined by a Federal or State agency. The trust agreement must be
irrevocable, i.e., it cannot be changed or terminated by the owner or
operator without the written agreement of the trustee and the Regional
Administrator. However, the trust agreement provides that the terms of
the agreeaant nay be amended if all parties execute a writing amending the
agreement. The proposed Subtitle 1 rules similarly specify wording of the
trust agreement.
4.1,3 Use of Trust Funds In State Prograaa Surveyed
In the Agency's survey of selected States, most States surveyed
allowed the use of crust funds. Some States provided the required wording
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for Che crust agreement. Most States specified that the trust fund must
be irrevocable.
4.1.4 Key Provisions of the Trust Fund to Ensure Adequacy of
Coverage
If a trust is used as a financial assurance mechanism, the value of
the trust property should be equal to the required amount of coverage as
determined by the facility-specific cost estimate. The trust agreement
could provide for a pay-in period during which the grantor makes payments
of specified amounts into the trust until the trust is fully funded. The
length of the pay-in period may be designed to ensure that the trust fund
balance equals the required amount of coverage before or as funds are
needed for the assured activity.
To ensure the adequacy of coverage, States may wish to consider
requiring that a trust fund used to assure the costs of closure and
post-closure care at MSWLFs be structured similarly to trust funds
established for closure and post-closure care for Subtitle C facilities.
In particular, States may consider basing the length of the pay-in period
on the tern of the facility's permit, if applicable, or the remaining
operating life of tha facility, whichever is shorter, consistent with the
Subtitle C regulations.
A Seat* amy also consider requiring specific wording for the trust
agreement in order to eliminate the need for case-by-case review. To
assure that funds will be available when needed, the State may consider
requiring that the trust fund be irrevocable, and provide that the
agreement may be modified only if all parties consent to the modification.
States should check applicable State law to ensure that this agreement is
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enforceable under State law. The trustee should manage the funds of the
trust under conservative Investment policies (e.g., in 40 CFR
264:151(a)(1), the trustee must exercise "care, skill, prudence, and
diligence. Furthermore, as in the-existing and proposed EPA
requirements, a State may consider requiring the trustee's trust
operations to be regulated and examined by a Federal or State agency.
4.1.5 Cost and Availability of Trust Fund
Ovners or operators using a trust fund will be required to pay an
initial cost to establish the trust, which is normally a set, low fee.
The annual costs of maintaining a trust fund for closure, post-closure
care, and corrective action will Include (1) the fee charged b> the
trustee for managing the fund, and (2) the annual payments to the trust
itself, if a pay-in period is allowed. Based on surveys of various
financial institutions, EPA believes the typical costs for administering a
trust will range from 0.1 percent to one percent of the principal in the
trust fund.' The annual payments to the trust will vary depending on the
length of the pay-in period, if applicable. The Agency recognizes that
the trust fund opcion is likely to be the most costly mechanism because
the assured funds are being set aside. However, the trust fund is the
most widsly available mechanism to those entities that can afford the
payments.
9 See Memoranda, "Cost and Availability of Letters of Credit and
Trust Funds for Providing Financial Assurance for Corrective Measures,"
ICF Incorporated, June 13, 1985, and "Estimates of the Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Waste Landfills Under
the Proposed 40 CFR Part 258 Regulations," icF Incorporated, July 2, 1987.
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4.2 LKITSS OF C8SDIT
States may consider allowing MSWLF owners or operators to use standby
letters of credit to assure the required costs. This mechanism is widely
used in other EPA and State financial assurance programs.
4.2.1 Features of Che Mechanism
A letter of credit is an instrument issued by a bank or other
financial institution (the issuer) in which the issuer agrees on behalf of
its customer (the account party) to honor demands for payment to the
beneficiary, usually upon presentation of the documents specified in the
instrument. (In the context of financial assurance for MSVLFs, the
account party would be the owner or operator, while the beneficiary of the
letter of credit would be the State Agency.) Traditionally, letters of
credit primarily have been used to finance foreign shipments of
merchandise: the seller (the beneficiary) draws upon the letter of credit
for the purchase price of the goods, and the issuer then collects the
purchase price from the foreign buyer (the account party). Standby
letters of credit differ from the traditional commercial letters of credit
because a beneficiary may not draw upon the letter of credit unless a
specified contingent event occurs. Only standby letters of credit are
appropriate for purposes of assuring funds for the costs of closure,
post-closure care, and corrective action.
In a typical standby letter of credit, the issuer agrees to honor
drafts upon the letter of credit if the account party fails to make a
payment or perform an obligation for the beneficiary of the letter of
credit. The standby letter of credit specifies the documents necessary to
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establish th« fact of the account party's default, and the issuer oust pay
the beneficiary upon presentation of these documents.
Almost all letters of credit are required to conform to Article 5 of
the Uniform Commercial Code (UCC) and the 1983 Revision of the Uniform
Customs and Practice for Documentary Credits (UCP), published by the
International. Chamber of Commerce. In addition, the Comptroller of the
Currency (Department of Treasury) has established safe banking practice
guidelines for the issuance of letters of credit by national banks. (See
12 CFR 7.7016.) The Comptroller's guidelines suggest that: (1) the
letter of credit must be entitled as such; (2) the letter of credit must
contain a specified expiration date or be for a definite term; (3) the
letter of credit should be limited in amount; (4) the bank's obligation to
pay the beneficiary should arise only upon presentation of a draft or
other documents specified in the letter of credit; (5) the bank must not
be called upon to determine a question of fact or law at issue between the
account party and the beneficiary; and (6) the account partyvshould have
an unqualified obligation to reimburse the bank for payments made under
the letter of credit. These guidelines have been incorporated into
Subtitle C requirements and* States may consider incorporating them into
their requirements if they chose to allow MSWLF owners or operators to use
letters of crodit.
4.2.2 Um of Letters of Credit in Other EPA Prograaa
Letters of credit are allowable mechanisms for financial assurance
requirements for closure and post•closure care under the Subtitle C
regulations (40 CFR 264.143(d), 264.145(d), 265.143(c), 265.145(c)).
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Under Subtitle C rules, EPA specifies the required language for letters of
credit. The letter of credit names EPA as the beneficiary, and the owner
or operator as the account party. EPA may draw upon the letter of credit
if the account party does not pay for closure or post-closure care. The
Subtitle C letter of credit must be irrevocable, must be issued for an
initial period of one year, and must provide for automatic extensions of
at least one year. The owner or operator must establish a standby trust
fund that will serve as a depository for any funds drawn against the
letter of credit (see Section 4.8 for a discussion of the need for a.
standby trust fund). Letters .of credit may also be used to demonstrate
financial assurance for plugging and abandonment under the U1C program.
Letters of credit are also proposed as allowable mechanisms for the
financial assurance requirements for corrective action under Subtitle C
(51 £& 37854, October124, 1986), and for liability coverage and corrective
action ,for underground storage tanks containing petroleum under Subtitle I
(52 12786, April 17, 1987). The proposed letter of credit requirements
are very similar to the requirements for letters of credit under the
Subtitle C closure and post-closure care requirements.
4.2.3 Dm of Letters of Credit in State Progroa Surveyed
In a survey of selected States conducted by EPA, most States surveyed
allowed the use of letters of credit to satisfy financial assurance
requirements. Soae States required particular language for the letter of
credit, while others did not. Host regulations specified that the letter
of. credit should be irrevocable. One State required the issuing
institution to be an institution regulated by the State.Commissioner of
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Banks and Trusts, or Co be covered by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation.
4.2.4 Key Provisions of Letters of Credit to Ensure Adequacy of
Coverage
States may choose to allow MSULF owners or operators to use letters
of credit to satisfy their financial assurance obligations under the
revised criteria. The face value of the letter of credit should equal the
amount of the cost estimate. States may also consider requiring that
letters of credit (1) be executed only by banks or other Institutions
qualified to issue letters of credit under Federal or State law and (2)
conform to the requirements of the UCP or applicable Commercial Code and
to the Federal guidelines in 12 CFR 7.7016.
To ensure continuous coverage, the letter of credit should provide
for automatic renewals after ah initial period of coverage. States may
also consider specifying the required language for the letter of credit to
ensure that the instrument correctly describes the circumstances that will
allow the State to draw upon the letter. Specifying the language of the
letter of credit also eases the administrative burden on the State of
verifying the validity of the instrument. Finally, States may need to
require owners or operators to establish a standby trust to receive any
monies that are collected under the letter of credit (see Section 4.8 for
a discussion of the need to establish standby trust funds).
4.2.5 Cost and Availability of Letters of Credit
Based on a survey of several banks, a typical fee for the issuance of
a letter of credit is about 1.5 percent of the face amount of the letter
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of credit.^"® Many financial institutions, however, require the account
party to post collateral for the amount of the letter of credit.
Moreover, according to the Comptroller's guidelines for safe banking
practices, the account party should have an unqualifieid obligation to
reimburse the bank for payments made under the letter of credit.
The availability of letters of credit for financial assurance is
uncertain. Banks generally will provide letters of credit only to
entities that they believe will be able to pay for the obligation and that
have adequate assets that could be seized if the firm's performance under
the letter of credit is not satisfactory. Therefore, letters of credit
may be available only to entities with the ability to meet large financial
obligations and with strong customer relationships with the fssuJ-ig
institution.
4.3 SURETY BONDS
Surety bonds are typically included in other EPA and State financial
responsibility programs, although the types of bonds -- performance,
payment, or both •- allowed varied among the programs. The design of the
bonds nay vary as veil. States considering allowing MSWLF owners or
operators to us* surety bonds may wish to study the use of the bonds in
other progras. This section highlights some of the factors States may
consider In designing a surety bond option.
See Memoranda, "Cost and Availability of Letters of Credit and
Trust Funds for Providing Financial Assurance for Corrective Measures,"
ICF Incorporated, June 13, 1985, and "Estimates.of the Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Waste Landfills Under
the Proposed 40 CFR Part 258 Regulations," ICF Incorporated, July 2, 1987.
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4.3.1 fMturea of the Mechanism
Surety bonds represent agreements between three parties: the
principal (i.e., the owner or operator of the MSWLF); the obligee, the
party to whom the principal promises to complete a specific act (i.e., the
State agency); and the surety, the party that assures the obligee that the
principal will fulfill his promise and, Lf the principal fails, that the
surety will fulfill the principal's obligation to the obligee. Surety
bonds that guarantee that the principal will perform a certain act defined
in the bond are referred to as performance bonds. Under a performance
bond, a surety has the option to (1) perform the act or complete the work
necessary to satisfy the terms of the bond or (2) pay for the work to be
done to satisfy the bond. Surety bonds that guarantee payment from one
party to another under the conditions set forth in the. bond, rather than
performance of a specific act, are-known as payment bonds.
The monetary liability of a surety company is defined in the bond as
the "penal sum." Most payment bonds contain a provision that expressly
discharges the surety's liability under the bond once the surety r.as paid
a sua equal to the penal sun of the bond. Under a performance bond, the
surety's obligation is limited to the penal sua if it chooses to pay under
the bond; however, If the surety chooses to perform to satisfy its
obligation under the bond, the surety is not released from its obligation
until the performance is complete.
A surety is "jointly and severally" liable for the guaranteed payment
or performance, which means that the surety assumes the principal's
obligation as its own and can be sued Jointly with the principal, as a
codefendant, for such obligation. Consequently, most surety bonds include
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an indemnification provision that requires Che principal Co reimburse Che
surecy for coses incurred Co sacisfy che principal's obligacion under the
bond.
SCaces may consider allowing owners or operators of MSWLFs to use
eicher payment bonds or performance bonds Co guarancee that funds will be
available Co conduce closure, post-closure care, or corrective action for
known releases, and/or that che required accivities will be carried ouc.
The penal sum would be defined by the faciliCy-specific cost estimate.
4.3.2 Use of Surety Bonds in Other EPA Prograas
Under che Subcicle C regulaCions, owners and operacors of permicted
hazardous waste management facilities may use a performance bond to assure
that closure and/or post-closure care will be conducted according to an
EFA-approved closure or post-closure plan (40 CFR 264.143(c), 264.145(c)).
Interim status facilities are not offered this option because their
closure/post-closure plans, which specify what activities will be
performed, have not yet been approved by the Agency. The Subtitle C
regulations also allow owners and operators of permitted and certain
status facilities to use surety bonds that guarantee payment into a
standby Cruat fund Co demonstrate financial responsibility for closure and
post-clomm car* (40 cm 264.143(b), 264.145(b), 265.143(b), and
265.145(b)). Payment ls\made into the standby trust if the owner or
operator fails to perform final closure or post-closure care activities.
Recently; EPA has proposed to allow performance bonds to be used to
assure the costs of corrective action at hazardous waste management
facilities that have detected a release (51 E& 37854, October 24, 1986),
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but rejected the use of surety bonds guaranteeing payment into a standby
trust fund as a viable mechanism for corrective action. Because financial
assurance for corrective action for known releases is triggered at the
time that the costs must be incurred, an owner or operator using a payment
bond would have to fund the corrective action standby trust fund
immediately. If the owner or operator did not fund the trust fund, under
the terms of the payment bond, the surety would be liable tor fully
funding the standby trust immediately. It is unlikely that a surety would
be willing to issue a bond that would require immediate payment. Because
it would be less expensive in every case for an owner or operator to use
the corrective action trust fund option (which allows a buildup period)
than the surety bond guaranteeing full payment into a standby trust fund
option, the Agency did not propose to allow bonds guaranteeing payment of
the standby crust fund.
Under the Safe Drinking Water Act (40 CFR 144.63), GFA allows owners
or operators of Class I hazardous waste injection wells to use performance
bonds to assure the costs of plugging and abandonment.
Most recently, the Agency proposed to allow owners and operators of
underground storage tanks containing petroleum to use a performance bond
to demonatrate financial assurance for the costs of corrective action and
third-party liability claims resulting from a release during tank
operation (52 E& 12786, April 17, 1987). The proposed performance bond
guarantees that if the owner or operator fails to perform a corrective
action or compensate third-parties injured by a release, the surety either
will (1) perform the corrective action in accordance with the corrective
action regulations or pay the third-party liability claims or (2) fund a
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standby crust, as required by the Regional Administrator, up to the level
of the penal stun.
4.3.3 Use of Surety Bonds in State Programs Surveyed
Of the nine States surveyed, eight explicitly allow the use of
performance bonds to assure the costs of closure and/or post-closure care.
Of these eight States, five explicitly allow the use of payment bonds to
assure the costs of closure and post-closure care; three require the bonds
to guarantee payment into a standby trust fund and two require the bonds
to guarantiee payment to the State treasury. Two of the States surveyed
allowed owners or operators to use mechanisms not specifically listed in
their regulations and surety bonds may be allowed under such authority.
Some of the State officials interviewed expressed concern that they
have observed a trend whereby surety bonds are becoming unavailable,
specifically to smaller entitles. However, other State officials found
that surety bonds are generally available.
4.3.4 Key Provisions of Surety Bonds to Ensure Adequacy of
Coverage
Certain requirements imposed on surety companies issuing bonds and on
the manner in which the bonds are written can increase the degree of
assurance provided by sure'.y bonds used to demonstrate financial assurance
for the costs of closure, post-closure care, and corrective action for
known releases at MSVLFs.
States should ensure that the amount of the surety bond equals the
cost estimate. States may also consider requiring surety companies to
meet certain qualification standards. For example, to be acceptable as a
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surety on a surety bond that names a branch or agency of the Federal
government as the beneficiary, sureties could be required to comply with
the law and regulations of the Treasury Department (as specified in
Sections 9304 and 9308 of Title 31 of the United States Code). The names
of companies meeting these Treasury requirements are published on July 1
of each year by the Department of the Treasury in«Circular 570: Surety
Companies Acceptable on Federal Bonds. States may publish their own lists
of companies that are registered to do business in the State and that are
acceptable as sureties on bonds naming the State as beneficiary. States
may also wish to establish specific wording for the bonds to minimize the
burden on the State for case-by-case review, and should consider the
requirement of a standby trust fund, if needed by State l&r (see Section
4.8 for a discussion of the need to establish standby trust funds).
4.3.5 Coat and Availability of Surety Bonds
The-average annual cost or premium of a surety bond guaranteeing
costs such as closure, post-closure care, and corrective action for known
release; is expected to be about two percent of the penal sum of the
bond.1* The penal sua should equal the facility-specific cost estimate,
unless tha surety bond is used in combination with another mechanism.
(See Section 4.9 for a discussion of combining mechanisms.) In addition
to the cost of the premium, owners or operators using surety bonds may
^ See Memoranda, "Costs and Availability of Surety Bonds for
Providing Financial Responsibility Requirements for Corrective Measures,"
ICF Incorporated, May 17, 1985, and "Estimates of the Costs of Obtaining
Financial Assurance Mechanisms for Municipal Solid Waste Landfills Under
the Proposed 40 CFR Part 258 Regulations," ICF Incorporated, July 2, 1987
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incur costs related to posting collateral to satisfy the surety company's
underwriting requirements. The amount of the value of the collateral
could be as high as 100 percent of the face value of the bond. Generally,
the value of the collateral required is based on the degree of risk the
underwriters perceive the surety company is assuming.
Like letters of credit, the availability of surety bonds is
uncertain. In general, they will only be available to financially strong
firms, including those that can provide collateral for the full amount of
the bond.
4.4 STATE ASSUMPTIONS OF RESPONSIBILITY
The Agency believes that State assumption of responsibility is an
appropriate financial assurance option for the States and may be an
important alternative to other mechanisms. In particular, the various
specific types of State assumption discussed below (i.e., State funds,
State-purchased mechanisms, State guarantees), used singly or in
conjunction with other mechanisms, could reduce the costs of compiying
with requirements for closure, post-closure care, and corrective action.
State assumption of responsibility could also be designed specifically for
certain categories of MSWLFs, such as for municipally-owned or operated
facilities.
State funds, guarantees and other assurances may he particularly
appropriate forms of financial assurance for MSWLFs owned by local
government entities, especially in States that currently do not require
municipalities to demonstrate financial assurance for HSWLFs. By using
some form of State assumption to provide evidence of financial assurance
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for municipalities, assurance of closure, post-closure care, and
corrective action costs could be accomplished without necessarily imposing
a large compliance burden on municipalities that might otherwise be
created by requiring them to make.more formal financing arrangements, such
as obtaining a letter of credit or surety bond, or funding a trust,.
In addition, State assumption of responsibility for closure and
post-closure care is consistent with current trends toward greater State
involvement in local finances.Greater State involvement has been
characterized by.increases in State aid to local governments,
State-imposed limits on taxation, and State-required expenditures.
4.4.1 Features of the MonhjmJ«¦
State assumption of responsibility involves the direct participation
of the State in assuring that funds will be available to cover the cost of
financial assurance for closure, post-closure care, and corrective action..
The three basic avenues through which a State can directly assure the
financial responsibility of a MSWLF are (1) the establishment of a State
fund, (2) the purchase of an allowed financial mechanism for the MStfLF and
(3) the issuance of a Stater guarantee. Under each of these alternatives,
the State can either -assume absolute or contingent responsibility for the
closure, post-closure care, and corrective action financial assurance
requirements. That is, the State may either assume the full costs of
these financial assurance requirements (absolute assumption), or it may
12 Background Document for the Financial Teat and Municipal Revenue
Iggt; Financial Assurance for Closure and Post-Closure Care. U.S.
Environmental Protection Agencv, Office of Solid Waste, November 30, 1981,
p. 133.
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assume responsibility only under certain specified conditions or only for
that portion of cost which the owner or operator is unable to cover
(contingent assumption). How the State raises the funds with which to
support these assumed responsibilities, and to what extent the MSWLF owner
or operator'is expected to provide funds, are the factors that distinguish
these three forms of State assumption of responsibility.
It should be noted that while "State assumption" is used here to
include State funds, State purchase of a financial assurance mechanism,
and State guarantees, not all of these alternatives necessarily require
the State to bear the cost of closure, post-closure care, or corrective
action. In some cases, such as a State guarantee or a State fund financed
through general State revenues, with no direct municipal contribution, the
State,may bear all such costs. In other cases, the State's role may be to
facilitate local assumption of responsibility (e.g., a State fund
capitalized through tipping fees charged by participating MSWLFs).
State Funds
There are many possible approaches that could be used by States to
design financial responsibility funds for closure, post-closure care, and
corrective action. The first step in designing the fund is to determine
how the fund should be used. A "primary" fund would assume absolute
responsibility and would pay for the specified obligations of the owner or
operator regardless of the financial position of the owner or operator or
his willingness to pay; a "back-up" fund would assume contingent
responsibility and would pay only if an owner or operator is unable or
unwilling to pay. Backup funds are generally smaller than primary funds
because they are usually used only to fill gaps in available resources.
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States may also establish funds that cover only part of the regulatory
costs.
The next step is to decide what revenue sources should be used to
finance the fund. Potential sources of revenues include permit fees,
fines or penalties, tipping fees, and tonnage fees. States may also
exercise their taxing and spending authorities to finance a State fund by
authorizing appropriations from the State treasury or debt issuance in the
form of either general obligation or revenue bonds.
States could also establish a loan fund to provide financial
assurance coverage for owners or operators of MSWLFs. A State could
establish a fund through the financing procedures outlined above, make
loans to entities to cover environmental obligations, and require
repayments of any loans in a timely fashion. To assure that a borrower
repays the loan on time, the State could require collateral or it could
retain the right to capture other State funds allocated to a borrower
(e.g. budgetary allocations to a municipal borrower) if he fails to repay.
State Purchase of Financial Assurance Mechanisas
States could purchase a financial assurance mechanism from another
party to provide coverage for an entity or group of entitles. A purchased
financial assurance mechanism may be less expensive to. the State than
establishing a State fund, depending on the features of the fund, since
such mechanisas are normally priced at a percentage of the amount of
coverage provided. Moreover, if an environmental obligation arises, the
issuer of the mechanism would be liable for the face value of the
instrument.
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Stats Guarantees
State guarantees are a form of assumption pf responsibility whereby a
State pledges to provide the funds when they are needed to coyer the costs
of closure, post-closure care, or corrective action if the owner or
operator1fails to do so. The State guarantee is a form of
intergovernmental transfer of a specific obligation from one entity to
another (i.e., similar to the guarantees., discussed in Section 4.7). A
guarantee may be less expensive for the State than establishing a State
fund or purchasing a financial assurance mechanism from another party.
It should be noted that a preliminary analysis indicates that State
guarantees may not be an available option for demonstrating financial
assurance in some. States. No States currently provide St.ce guarantees'
under their solid waste programs either due to State constitutional,
restrictions (e.g., prohibitions or limits on the pledge of State .credit,
with "credit" defined to include State guarantees) or a policy decision
that State guarantees of municipal obligations are not appropriate.^
4. V 2 Use of State Assiaptlons of Responsibility In Other EPA
Progras
State funds and other State assurances are allowed or proposed .to be
allowed mm aechanlsms to provide evidence of financial assurance under
both the RiCRA Subtitle C program for hazardous waste treatment, storage,
and disposal facilities and the proposed Subtitle I program for
underground storage tanks containing petroleum. The Subtitle C program
13 See Case Studies of State Financial Responsibility PrpgrflTIP fnr
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated, pp. 35-36.
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allows States Co assume responsibility for Che coses of closure, post-
closure care. In addicion, both Subtitle C and SubCiCle I programs allow
States to assume responsibilicy for the coses of correccive action and
third-party compensation. Under the Subtitle C regulations, a State
assumption of responsibility is defined as when a State either assumes
legal responsibility for an owner's or operator's compliance with the
closure, post-closure care, or liability requirements, or when the State
assures that funds will be available from State sources to cover those
requirements. Under Subtitle I, a State may satisfy the financial
assurance requirements of an oyner or operator by assuring that monies
from a State fund will be available to cover costs of financial assurance
or otherwise assuring that such costs will be paid. Both sets of
regulations require the Regional Administrator to evaluate whether State
funds or other State assurances used for purposes of State assumption of
responsibility are equivalent to Federal financial mechanisms. The
factors to be evaluated in determining equivalency are the certainty that
funds will be available and the amount of funds. States providing State
funds or other State assurances must establish procedural requirements for
allowing State assuaptions of responsibility.
4.4.3 Qm o£ State Asswptions of Responsibility in State Programs
Surveyed
The results of an Agency survey of selected States indicate that
several State funds have already been established for solid waste disposal
facilities, some specifically for closure, post-closure care and
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corrective action, and others that could be adapted for those costs.^
For example, New York has passed a bill and Massachusetts has proposed a
bill authorizing bonds to raise grant and loan funds for publicly-owned
solid waste facilities. The New York law authorizes the State to make
loans for up to 50 percent of the cost of closure, while the Massachusetts
bill would authorize the State to provide loans of up to $2 million for
closing landfills and to award grants of up to 90 percent of the cost of
cleaning up drinking water supplies contaminated by leachate from solid
waste landfills.. Similarly, Wisconsin has established a Waste Management
Fund capitalized by owners or operators of solid waste disposal facilities
who must pay tonnage fees for closurie and post-closure care based on the
amount of waste at the facility. The Fund is to be used as a back-up fund
to pay for any care that is necessary beyond the 30 years of post-closure
care currently required in Wisconsin, for providing closure or
post-closure care for owners or operators who fail to comply with the
closure or post-closure care requirements, and for compliance action
necessary to prevent imminent or substantial danger to public health or
thd environment. Finally, Illinois has passed a law that authorizes the
State to require solid waste facilities to charge tipping fees and to
forward th* proceeds of the fees collected to the State. Although these
tipping £—a will be used for waste recycling development projects,
similar arrangements could be made to provide either primary or backup
funds for closure, extended post-closure care and corrective action.
14 See Case Studlea of State Financial Responsibility Prvgrflir" fnT
Subtitle D Solid Waste Disposal Facilities. Draft, March 1987, ICF
Incorporated, pp. 35-36.
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Stats funds for cleanup of contamination caused by underground
storage tanks containing petroleum are in place in several, states,
including Florida and Maine. Some States allow these funds to cover
several different types of environmental problems, including releases'of
both petroleum and hazardous wastes. Revenue sources for these funds
include fees, taxes, fines, penalties and/or legislative appropriations.
4.4.4 Key Provisions of State Assumptions of Responsibility to
Ensure Adequacy of Coverage
To ensure that State assumptions of responsibility are as effective
as other financial assurance mechanisms, State implementing agencies
should ascertain whether the amount and timeliness of funds will provide
an adequate level of coverage.
If a State establishes a back-up fund or a contingent guarantee, the
implementing Agency will need to specify the circumstances under which
State responsibility is assumed. For example, State expenditures might be
triggered (1) when an owner or operator is unable or unwilling to perform
or pay for closure, post-closure care, or corrective action;
(2) where no responsible owner or operator can be identified; or (3) in
emergency situations where the owner or operator is unable to respond
effectively.
Stat* regulations might also specify additional key provisions
related to State back-up funds or S.ate contingent assurances such as (1)
whether the State can recover costs from the responsible owner or
operator, and (2) whether the State can pay for closure, post-closure care
and corrective action in emergency situations even if the owner or
operator has funds available to pay.
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4.4.5 Cost and Availability of State Assumptions of Responsibility
The cost of State assumptions of responsibility for owners or
operators of MSWLFs could ,vary depending on Che form chosen. For example,
if the State provides a guarantee, the only costs may be for submitting
requests for inclusion in State programs and reporting the assurance
obtained to the State authority. The costs to owners or operators couid
be higher if the State establishes a State fund that requires the owner or
operator to reimburse the State for drawdowns of State funds used, to
perform closure, post-closure care, or corrective action, or if the fund
is capitalized by the owners or operators themselves (e.g., fees based on
tonnage handled). The costs to the State will depend on how funds are
collected and how the fund is used (e.g., cover all costs or only costs if
the owner or operator defaults).
Availability of state assumption mechanisms will depend on the
willingness of the State to enter into such agreements, and on the degree
to which the State is limited constitutionally, as in the case of
guarantees.
4.5 THSTTiAITK AHD RISK RETHTTIOH GROUP COVEBAGK
Both Insurance and risk retention group coverage may provide viable
financial assurance options for MSVLF owners and operators for the costs
of closure and post-closure care; however, the Agency is uncertain of the
viability of such coverage for corrective action costs. This section
discusses the applicability of Insurance and risk retention group coverage
to all of the required types of coverage.
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4.5.1 Features of the Mechanisms
Insurance is a contractual arrangement under which an insurer agrees
to compensate an insured for losses. By purchasing insurance, the insured
transfers financial risk to the insurer. An insurer assumes the stated
liability of the insured and thus insurance could be an option to relieve
the owner or operator of the burden of paying the required costs. If
insurance is purchased to satisfy a regulatory requirement (i.e., to
provide evidence of financial assurance for closure, post-closure care, or
corrective action), the regulatory agency is not a party to the insurance
contract. In this way, insurance differs from some of the other types of
financial assurance mechanisms mentioned in this background document.
Insurance also differs from these other mechanisms in that its cost is
actuarially based (i.e., the insurer bases premium amounts on the expected
value of the claims the insurer expects to pay).
Insurance used for assuming the costs of closure, post-closure, care,
and corrective action for known releases could be structured as an
annuity. All three types of the required coverage are certain, non-
contingent costs that are defined by a cost estimate. The timing of these
costs can also be predicted' with some certainty. (In the case of
corrective action, the timing of the costs is immediate.) Based on the
cost and pcyasnt schedule information, an insurer can determine the amount
of capital that the insured oust pay to the insurer in order for the
insurer to have sufficient capital and return on the capital to make the
required payments. In this way, an insurance policy assuring the required
coverage is similar to a trust fund. The size of the insurance premiums
may be similar to the amount of annual or periodic payments into a
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gradually-funded trust fund. The Agency believes that insurance premiums
are tax deductible, while trust fund deposits may not be. If this is
true, although the gross costs of insurance and trust funds may be
similar, the net cost of insurance may be less as a result of the tax
benefit.
Insurance to cover closure and post-closure care costs may be
provided in one of two ways: in the form of a stand-alone insurance
policy or as part of a larger property and casualty policy including
coverages for other risks (e.g., types of property damage, theft, etc.).
The face value of the policy would be required to equal the
facility-specific cost estimates for closure and post-closure care, as
applicable. Although insurance is hypothetically available for closure
and post-closure care costs, in practice insurance may not be available
since insurance is best suited to provide financial assurance for unknown
obligations.
Insurance to cover corrective action for known releases is unlikely
to be available. In fact, in the proposed rule to require financial
assurance for corrective action for existing releases at hazardous waste
management facilities., the Agency decided not to allow insurance as an
option (51 Q 37854, October 24, 1986). Because such coverage would be
analogous Co writing fire insurance for a burning building, the premiums
would have to be greater than the actual cost of corrective action in
order for the insurance company to profit. Therefore, the Agency
determined that it would be more economical for an owner or operator to
adopt another mechanism. Moreover, the Agency is unaware of any insurers
willing to provide coverage for corrective action for known releases.
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Although chances are remote that an owner or operator could obtain such
coverage, States may, however, choose to leave this option open in case
insurance for corrective action becomes available in the future.
In general, risk retention groups function in the same manner as
insurance companies: the individual risks of group members are
transferred to a risk pool administered by the group or association.^ In
return, members of the association .pay a premium based on the expected
value of their individual losses. The cost of losses is borne by the risk
retention group. The primary difference between an insurance company and
a risk retention group is that insurance companies sell their services to
the public at large, while risk retention groups can sell insurance only
to its members. Thus, risk retention group coverage is a special type of
insurance coverage. A number of risk retention groups have formed since
the enactment of the Risk Retention Act, but none of these groups cover
pollution liabilities. A few firms have been trying to form risk
retention groups that would offer pollution liability coverage but none of
these groups are operational, and it does not appear that any will be
operational in the near future. The Agency is unaware of any efforts to
form a risk retention group* that would cover closure, post-closure care,
or correctly* action costs.
On October 27, 1986, President Reagan signed the Risk Retention
Act of 1986 (Public Law 99-563). This legislation preempts many State
regulatory provisions that would otherwise impede the establishment of
group risk pooling arrangements to cover individual liability risks.
Under the statutp, •nerbership in a risk retention group is limited to
persons who are "engaged in businesses or activities similar or related
with respect to the liability to which such members are exposed by virtue
of any related, similar, or common business, trade, product, services,
premises, or operations" (jeotion 2(a)(4)(F)).
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4.5.2 Use of Insurance and Risk Retention Group Coverage In Other
EPA Programs
The Subtitle C regulations (40 CFR 264.143(e), 264.:145(e),
265.143(d), and 265.145(d)) include insurance as one of the mechanisms
that owners and operators of hazardous waste facilities may use to
establish financial assurance for closure and post-closure care. Risk
retention groups are interpreted as a form of insurance and thus are
allowed under the Subtitle C rules. Insurance was also one of the
mechanisms authorized by the Agency to provide evidence of financial
assurance for bodily injury and property damage to third parties caused by
sudden and nonsudden accidental occurrences arising from the operations of
hazardous waste management facilities under Subtitle C regulations (40 CFR
264.147 and 265.147). Currently, very few insurers provide coverage for
closure and post-closure care. Insurers are wary of providing such
coverage because of the long term nature of the (potential) exposure and
the difficulty of assessing the risks.
In addition, the proposed Subtitle I financial assurance rule allows
UST owners and operators to demonstrate financial assurance for corrective
action and third party liability through use of insurance and risk
retention group coverage, among other mechanisms (52 12786, April 17,
1987)..
4.5.3 Use of Insurance and Rluk Retention Group Coverage In State
Programs Surveyed
The Agency's survey of States with existing financial assurance
requirements for solid waste facilities revealed that sone States do not
allow insurance for closure and post-closure care,' some allow it only for
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closure, and some allow it for both. Some State officials stated that
insurance for closure and post-closure care is almost completely
unavailable or available only at a very high cost. The availability of
risk retention groups is uncertain and will depend on States' responses to
the Risk Retention Act of 1986. The Act currently allows risk retention
groups to operate in States in which they are not licensed. States have
traditionally regulated the insurance industry within their States and are
concerned about the impact this Act may have on their authority to
regulate.
4.5.4 Key Provisions of Insurance and Risk Retention Group Coverage
Co Ensure Adequacy of Coverage
If States choose to allow owners and operators to use insurance to
guarantee that closure, post-closure care, and corrective action funds
will be available, there are a number of basic provisions that States
should consider requiring of insurers. Fpr example, States may wish to
require that insurers be licensed to transact the business of insurance or
be eligible to provide insurance as an "excess or surplus lines" insurer
in one or more States. These qualifications are currently required under
the Subtitle C liability coverage requirements for owners and operators of
hazardous vute treatment, storage, and disposal facilities to ensure that
insurers arc subject to regulatory oversight by State insurance
commissions. At the same time, these requirements should not prevent
participation in the insurance market for closure and post-closure care,
since most insurers can easily meet the minimum qualifications.
States may also wish to consider requiring risk retention groups
issuing coverage to be chartered and licensed »t least one State and
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authorized Co operate in each State where a covered municipal waste
landfill is located. These minimal qualifications are designed to conform
to the requirements for risk retention groups included in the Risk
Retention Act of 1986. Some of the controls over risk retention groups
specified in the Risk Retention Act include requirements that each group
submit:
* An operating plan, including a rating
schedule, available coverages, and limits,
to the commissioner in each State where the
group intends to do business before it
begins operation; and
* A copy of the group's annual financial
statement to regulators in every State in
which it operates. The statement would have
to be certified by an independent accountant
and include an opinion on the group's
reserves by a qualified actuary.
In addition, Federal courts have the authority to issue an injunction to
stop a risk retention group from operating in all States if the court
finds that the group's financial condition is precarious.
4.5.5 Cost of Insurance and Risk Retention Group Coverage
As discussed in Section 4.5.1, insurance premiums for policies
assuring the costs of closure, post-closure care, or corrective action may
be similar Co periodic payments into a trust fund with a build-up period.
In practice, however, given Insurers reluctance to offer ary type of
pollution coverage •• either for third party liability or for closure and
post-closure care -- this type of coverage is expected to be costly and
very difficult to obtain.
The Agency 4s unaware of any risk retention groups that provide
coverage for closure, post-closure care, or corrective .ration costs. If
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such coverage vera available from a risk retention group, the Agency
expects chat Che risk retention group coverage cost would be similar to
chat, of insurance.
4.6 FINANCIAL TEST
The purpose of a financial test is to measure the ability of an
entity to fund, out of its own resources, the costs of closure, post-
closure care, and corrective action. As discussed below, States may
consider allowing private firms to use a financial test similar to tho.se
used in other EPA programs and allowing local governments to self-insure
by designing an appropriate "financial test" or other measure of local
governments' ability to fund the required costs in a timely manner.
4.6.1 Features of the Kechanisa
A financial test is a demonstration that an entity's own resources
are adequate to meet its obligations. If an entity can successfully meet
the requirements of a financial test for the amount of required coverage,
the entity is not required to procure another financial assurance
mechanism to denonatrate that it will be able to fulfill its environmental
obligations. Because a financial test does not in itself ensure available
funds, a financial test for KSWLFs should be designed carefully to ensure
that entitles passing the test will, in fact, be able to meet their
closure, post-closure care, and corrective action obligations. The
criteria must be stringent enough to indicate financial distress that
could result in either a private firm's bankruptcy or a local government's
inability to fund the required activities in a timely manner. If an
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entity passes the financial test, the arrangements for paying the
obligations are left to the entity to decide.
4.6.2 Use of Financial Tests In Other EPA Programs
EPA has included a financial test as a method of demonstrating
financial assurance in several regulations proposed and promulgated since.
1982, including: (1) the financial responsibility regulations for
closure, post-closure care, and liability coverage for hazardous waste
treatment, storage,, and disposal facilities under Subtitle C of RCRA; (2)
the proposed financial assurance requirements for corrective action for
known releases at Subtitle C facilities; (3) the financial assurance
requirements for plugging and abandoning wells under the UIC program; and
(4) proposed financial assurance requirements for corrective action and
liability coverage for releases from underground storage tanks containing
petroleum (RCRA Subtitle I).
The Subtitle C financial test requires that the firm (1) satisfy two
of three ratios designed to indicate relative financial strength, (2) have
working capital and tangible net worth of at least six times the sum of
the closure and post-closure care cost estimates, (3) have at least $10
million in tangible net worth, and (4) have 95 percent of its assets in
the U.S. In addition, the firm must submit a letter from its chief
financial officer, the accounting opinion of an independent certified
public accountant, and a special report from the firm's certified public
accountant attesting to the accuracy of the data presented in the chief
financial officer's letter. As an alternative to the net working capital
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and ratio requirements, a firm may substitute an investment grade bond
racing (one of the top four, ratings) from Standard and Poor's or Moody's.
Under the proposed RCRA Subtitle I requirements, a firm must have
tangible net worth of ten times the required aggregate coverage and a
minimum tangible net worth of $10 million. The firm must also file
financial statements annually with the Securities and Exchange Commission
or receive a 4A or 5A financial strength rating from Dun and Bradstreet.
The firm must also submit a letter from the chief financial officer
certifying that the company has met the requirements of the test.
In each of these cases, the financial test is designed for and
primarily used by private sector firms. These tests may not be directly
applicable to governments.that own MSWLFs. For example, each existing
test has a minimum requirement for net worth, an accounting term that is
difficult to determine from the financial statements of government
entities. Section 4.6.4 provides a more complete discussion of the
problems of applying standard private sector indicators of financial
health to local governments.
A financial test for municipalities was considered during the
development of the Subtitle* C financial assurance requirements. However,
the April 7, 1982, interim final rule specifying the Subtitle C financial
test did not include a financial test for municipalities. The reasons for
this decision, as described in the preamble <47 J£ 15042, April 7, 1982)
and background document^ were as follows:
16 Background Document: for the Financial Test and Municipal Revenue
Test: Financial Aaaurance for Closure and Post-Closure Care. U.S.
Environmental Protection Agency, Office of Solid Waste, November 30, 1981,
p. 134.
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• A financial test based on tax revenues was
considered inappropriate based on evidence
that municipalities would rarely be able to
quickly shift allocated funds to meet the
Subtitle C requirements.
• A financial test that used detailed
financial information (e.g., financial
ratios) was considered inappropriate due to
potential difficulties in interpreting and
verifying municipal accounting information.
• Bond ratings were also rejected as an
element of a financial test for
municipalities. Agency analysis indicated
that municipal bond ratings may only serve
to confirm, rather than predict, financial
distress.
Thus, the Agency has not, to date, included a special financial test for
local governments in any of its financial assurance rulemakings. Local
governments are not expressly prohibited from using the existing private
sector tests; however, because of differences in accounting methods, these
tests in practice may not be available to or appropriate for local
governments.^
4.6.3 Use of Financial Tests in State Programs Surveyed
Eight of the nine States surveyed by the Agency with financial
assurance requireaenta for MSWLFs allow some type
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federal Subtitle C financial requirements) and are often made available
only to private firms.
Some states have developed other low-cost financial assurance options
as alternatives to a financial test for local governments. Texas, for
example, allows a municipality to demonstrate financial assurance through
a resolution from a Commissioner's Court or a City Council stating that a
county or a city takes ^all responsibility for providing adequate funds for
the proper closure and post-closure care of a facility. Tennessee has
recently proposed a rule allowing a municipality to provide financial
assurance through a "contract of obligation." The contract permits the
State to collect funds for closure and post-closure care from any funds
being, disbursed from the State to the municipal entity.
4.6.4 Approach to Developing a Financial Test for Local Gove mentis
Options for a financial test for local governments are being reviewed
for MSWLFs because, given the high incidence of local government ownership
of MSWLFs, a financial test specifically designed for such entities could
significantly reduce the costs of financial assurance. Moreover,
financial test options currently allowed by States are in general not
available to local government entities. This section discusses an
approach considered viable by the Agency for.developing a financial test
for local governments. The following section discusses an alternative
financial test approach, using bond ratings, which was considered and
rejected.
The Agency's suggested approach offers States a relatively simple
means of offering financially secure local governments an alternative to
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the purchaae of one or more financial assurance mechanisms. In keeping
with the rest of the proposed Subtitle D rule, this approach is presented
in the form of a framework that States may wish to adapt to the
circumstances of their local governments. The framework is comprised of
three major parts; the rationale for each of these parts is discussed
below.
Definition of a local government. Because the terms "local
government" and "municipality" do not have standard meanings, a definition
is necessary to specify the entities that are allowed to use the test.
The definition will therefore affect the availability of the test to local
government entities, i.e., if the definition specifies only certain types
of entities, other entitles will be excluded from using the test.
Fiscal measures. Financial tests under EPA and other agency
regulations are often based on ratios or multiples involving standard
financial measures such as net worth, total liabilities, and cash flow.
However, designing a similar financial test for local governments is very
difficult because financial test information derived from empirical data
on firms does not adequately reflect the economic choices, resources, and
constraints of non-profit entities. Whereas the ratios and multiples of
existing financial tests are designed to provide information on the risk
decisions dut firms make in seeking returns, municipalities do not invest
in assets for the purpose of gaining profits.. In providing services to
their communities, local governments rely on sources other than the assets
or resources itemized on the balance sheet, namely the right to levy
taxes. Therefore, the standard financial measures using financial
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statement items are unlikely to portray the underlying strength of a
government entity.
Moreover, the accounting methods used by governments make standard
financial measures difficult to obtain and interpret. For example, net
worth is a difficult measure to obtain from the financial statements
reported by local governments. The net worth of a private firm represents
the shareholders investment (equity) in the firm and the reserves over
which management has discretionary control; it is easily obtainable from
the equity section of a private firm's balance sheet. In contrast, the
equity section of a local government's balance sheet often consists of
special fund balances that are already committed to future uses (e.g.,
funds reserved for government employee retirement systems). Because a
local government's equity may not be completely available for
discretionary purposes, it cannot be considered an equivalent measure to
net worth of a private firm. "Unreserved" or "undesignated" funds could
be considered as a net worth equivalent for local governments. An
accurate measure of unreserved discretionary funds available may
nevertheless require a detailed analysis of the legal restrictions on the
uses of such funds.
Finally, financial tests in EPA programs are generally based on the
ability of the test to predict bankruptcy of the entity. However, few
local 'governments go bankrupt, and if they do, the bankruptcy is treated
differently than for private firms. Therefore, it would be very difficult
to choose a test based on its ability to predict municipal bankruptcy.
Because standard financial measures are inapplicable to local
governments and do not measure the tax-based wherewithal of such entities,
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the suggested framework introduces a new set of possible measures. These
"fiscal measures" generally assess the financial capability of local
governments in terms of the tax and revenue base that provides the entity
with its ability to pay for environmental obligations. The measures
therefore focus on the ability of the entity to provide funds for
obligations in a timely fashion rather than on bankruptcy prediction.
When combined with measures of the institutional constraints unique to
government entities, fiscal measures may be used to construct a viable
financial test for local governments.
Institutional -requirements. A key precept behind the framework is
that the ability of a local government to provide funds for Subtitle D
purposes is not solely dependent on its financial strength. A State, in
evaluating the financial capability of a local government, must look
beyond strictly fiscal indexes of wealth or theoretical revenue-raising
ability to examine whether legal constraints affect the realization of
theoretical potential. For example, local government ability to tax,
spend, and incur debt is often limited by State constitutions, statutes,
or municipal charters. Such limits can be expressed in absolute dollar
terms, as a per capita cap, on the basis of the tax rate required to
service the debt (the "mlllage"), or as a percentage of some base (e.g.,
municipal expenditures). Moreover, local governments may not be able to
reprograa or re-allocate already budgeted fund* for Subtitle 0 obligations
in a timely fashion. In addition, political decisionmakers may face
conflicting priorities in allocating available funds.
Because of these constraints on local governments, the financial test
framework suggests combining fiscal measures with "institutional
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requirements" to ensure that local governments will not be encumbered by
such constraints in meeting Subtitle 0 obligations in a timely manner.
The specific types of possible institutional requirements are detailed
later in this section.
Although none of the definitional, fiscal or institutional aspects of
the framework discussed here are adequate in themselves to assure local
government financial responsibility, taken together they constitute a set
of factors which, adapted and combined in different ways by. States, can
provide a workable financial test for local governments. The specific
measures or indices encompassed wichin each of these categories can be
combined in ways that provide a relatively straightforward financial test
which, at low cost to local governments, provides adequate assurance to
States that municipalities that pass will meet their HSVLF obligations.
Establishing a "multi-criteria" test using both fiscal and
institutional requirements is not unique to Agency financial tests. For
example, the Subtitle C financial test for private firms uses a series of
financial requirements, including three financial ratios, requirements for
the levels of net worth, net working Capital, and U.S. assets, and a bond
rating. These financial requirements are combined with institutional
requirements to assure that the financial Information is accurate,
including an unqualified opinion from an independent auditor and a special
report fro* the auditor verifying the information reported to the/ Agency.
Moreover, the institutional component of the financial test may be
necessary to add strength to the fiscal component. As discussed above,
the fiscal measures are focused on broad measures of the economic base,
and thus may not be as stringent as private sector measures in separating
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strong and weak entities. An institutional requirement adds further
assurance Chat the local government will be able to pay for an obligation
if necessary.
Some of the specific components that a State might include for each
part of a local government financial test are discussed briefly below.
The purpose of this discussion is not to provide a comprehensive treatment
of each component (the details of which may vary according to the
provisions of State law), but rather to provide a framework that a State
may ^se as a point-of-departure in formulating its own financial test.
a. Definition of a Local Goveneent
The first consideration a State must address in formulating a
financial test for local governments is how to define "local government"
or "municipality." The terms are not exclusive and may include everything
from single-purpose special districts to the general purpose governments
associated with incorporated cities and towns. The definition of
municipality, however, does not include counties. Although they are local
in nature, counties in most States are more like administrative arms of
the Sta\;e than are independently chartered "municipalities." Counties are
important to consider in this rulemaking because solid waste disposal
services are often organized on a county basis.
Because local governments are creations of State law, the forms of
local government will vary from State to State. Typical forms Include
counties, cities, towns, villages, townships, special districts, and
public authorities. Special districts and public authorities are distinct
from the other forms with respect to the breadth of their purposes and
powers. Both are established to perform one or a limited number of
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functions and ace generally fiscally and administratively independent.
Special districts often overlap municipal or county boundaries. Public
authorities may lack geographic boundaries and are typically formed to
construct.and operate revenue-generating public facilities.
Despite the variety in forms of local government, one useful way to
classify the various forms in any, particular State for purposes of
devising a financial test for MSVLFs is in terms of the breadth of powers
exercised. The broader these powers, the more financially stable the
local government is likely to be. Cities, towns, counties, and other
"general purpose" local government units typically have broad powers to
raise taxes and expend funds as well as general corporate and police
powers. These broad powers, and the corresponding broad revenue base,
distinguish general purpose local governments from special purpose units
such as public authorities and special districts.
For the Subtitle D financial test, the definition of "local
government" will have a significant impact on the availability of the test
to local government entities. For example, if a State chooses to limit
the availability of'the test to general purpose governments, special
purpose units such as publfc authorities will have to provide other forms
of financial assurance. Therefore, certain definitions will make the test
more strlngant. Alternatively, States may wish to formulate' two financial
tests for local governments -• one applicable to general purpose units and
another, stricter test applicable to special purpose units which are, for
reasons mentioned above, inherently less fiscally stable.
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b. fiscal Measures
The fiscal component of Che local government financial test attempts
to measure in discrece cecms Che financial capability of the entity to
provide funds for environmental obligations in a timely mantier. The
choice of alternative fiscal measures depends in large part on the
objectives of the particular program for which the test is used and the
desired stringency of the test.
The following are among the suggested alternative components of the
fiscal part of financial test:
• Financial size
• Net fiscal capacity
• Size of contingency funds
• Simple fiscal ratios
• Relative per capita wealth or income vs. tax
burden
• Bankruptcy/default history
Financial Size. The financial size measure assesses the economic
base of a local government either in terms of annual tax revenues,
population, or assessed value of property. This measure is similar to the
$10 million in net worth requirement in the Subtitle C (private sector)
financial test in that it is intended to ensure a certain level of
financial strength. For example, a local government with only $5 million
in revenues would not likely be able to afford a $10 million obligation.
Moreoveri the measure is easily obtainable from government financial
reports. However, an analysis would be needea ox the effect of. various
levels of revenue requirements on test availability (i.e., the percentage
of local governments able to pass a certain requirement) and the ability
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of the test to screen out financially weak entities. This would require
an analysis of Census Bureau tapes or similar data sources.
Net Fiscal Capacity. Net fiscal capacity results when actual
expenditure, tax, or debt levels are below their legislatively mandated
maximum. Comparing available capacity to the size of a potential
obligation would indicate the degree to which a local government could
expand its revenue-raising activity to meet new'needs. Although this
measure entails more administrative effort than the financial size
measure, it also provides a higher degree of assurance that funds will be
available. Moreover, the information required should be readily available
to a local government and could be demonstrated on a streamlined form
similar to (but shorter than) the Subtitle C financial test form. Further
analysis is required of the feasibility of this approach. However, this
alternative could be preferable to a simple financial size requirement
because of the additional assurance it provides.
Size of Contingency Funds. Many local governments budget amounts
each year to cover the costs of foreseeable but unplanned events such as
snowstorms, tornadoes, fires, and other disasters. The costs of
environmental activities could be included in the category of unplanned
costs that « contingency fund may be used to cover; therefore, the size of
a contingency fund nay be a useful measure of financial capacity when
compared to the potential size of the obligation. This alternative is
more stringent than the first two options. By requiring the contingency
fund'to cover the obligation, it essentially functions as a fully funded
trust fund in any given year. However, a reduced level of contingency
funding could be used in combination with other fiscal criteria or with
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other financial assurance mechanisms. Further analysis is necessary to
determine the prevalence and average size of contingency funds. If the
average size of funds is far less than the size of environmental
obligations, then a requirement to provide contingency funding for such
obligations may be infeasible.
Simple Fiscal Ratios. An-example of a simple ratio that measures'
fiscal capability is the ratio of revenue to budgeted expenses. This
ratio indicates how well the annual budget is being managed, that is,
whether the government is running a deficit. While administratively
simple, this type of ratio may be misleading. For example, local
governments may run a surplus in one year to offset a previous year's
deficits. However, because ratios from several years may identify
important trends, an option could be to require information on this ratio
for the last five years. This requirement would reveal trends in
budgetary management as well as demonstrate that the entity can weather
changes in its economic base over time, though it may be more
administratively complex than other options.
Relative Per Capita Wealth or Income vs. Tax Burden. Relative per
capita wealth or incoae provides an approximate measure of the "ability to
pay" within a jurisdiction, since property values and income are the
sources froa which local taxes are paid. By comparing this measure to per
capita tax burden, the degree to which, wealth and income are already being
tapped could be measured. However, the net fiscal capacity measure
described above also compares actual and potential revenue, and also takes
into account limits on taxing authority. Therefore, the relative per
capita measure is both duplicative and less accurate.
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Bankruptcy/Default History. Another possible measure is a
requirement that a local government may not have declared bankruptcy or
defaulted on a debt issue in the last five years. This requirement would
help ensure that the local government is being operated in a fiscally
prudent manner. Moreover, this requirement could easily be combined with
another fiscal measure that assesses financial capability.
In conclusion, the best measures for financial capability.focus on
the economic base of the local government. The best choice, may be the
financial size requirement, which could be combined with the requirement
not to have declared bankruptcy in the last five years to form a
reasonable and simple fiscal component of the test.
c. Institutional Components
Because of the potential constraints on local governments, the
financial test framework includes a set of possible institutional
requirements that are intended to assess the ability of local governments
to overcome constraints and to use their financial reserves to meet
Subtitle 0 obligations. The following are among suggested institutional
requirements:
• Council ordinance or resolution
• Contract of obligation
v* Degree of flexibility in raising revenues or
issuing debt
Council Ordinance or Resolution. A local government could be
required to issue an ordinance or resolution pledging to provide funds for
the required activity. These declarations may not necessarily be binding
across future changes in administrations, and they may not override taxing
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or expenditure limits. However, obtaining a reliable picture of local
priorities is not easy; such judgments are by nature subjective.
Ordinances and resolutions provide some assurance that an obligation is a
high priority for the entity. This is particularly true if the resolution
is given a public hearing prior to passage.
Further analysis is needed to determine whether an ordinance or
resolution is preferable and to specify the appropriate wording of the
requirement. However, because resolutions and ordinances are commonplace
in local government, implementing such a requirement should be simple.
Moreover, as discussed earlier, some states implementing the Subtitle D
program already use resolutions and ordinances as options for providing
financial assurance.
Contract of Obligation. Recognizing %the limitations of resolutions
and ordinance^, the financial test-could require local governments to
enter into a formal contract pledging financial responsibility. This
instrument is already used in one state (Tennessee) as a Subtitle 0
financial responsibility alternative. The contract could provide chat the
local government will forfeit allocations from the state or federal
governments if those bodie» have to fund an obligation in lieu of funding
from the local government.
Clearly, this alternative is more stringent than the resolution or,
ordinance. However, it. may be politically and administratively difficult
to Implement. States could be forced into difficult decisions on which
allocations will be forfeited by the local government.
Degree of Flexibility In Raising Revenues or Issuing Debt. If
ceilings exist on specific taxes (e.g., property taxes) or on taxes
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across-the-board, the local government may be unable to raise funds for an
obligation in a timely manner. Therefore, a financial test may include a
provision that use of the test is prohibited if existing taxes are within
(perhaps) 95 percent of the ceiling level. This approach> however, has a
major drawback in that determining the proper percentage of the ceiling
allowed would be -very difficult.
In summary, the resolution or ordinance appears to be the best
requirement addressing potential institutional constraints on local
governments. Although less stringent than a contract, this requirement
provides a degree of assurance that the obligation is a high priority,
particularly if subjected to a public hearing. Moreover, it is a standard
instrument that is simple to administrate.
Combining Components To Develop a Local Gove men t
Financial Test
Each of the parts of the suggested local government financial test --
definition, fiscal measures., institutional requirements -- includes
several principal options. Each of these options, in turn, present
options in terms of the stringency of the test each represents. In
combining components from each of the parts to formulate an overall local
government financial test, therefore, States have numerous options in
terms o£ the overall stringency of the test they wish to create.
In choosing from what is in effect a menu of options for constituting
the overall test, States may want to evaluate a number of considerations,
including:
• D-g-^e of assuredness provided
• Availability to financially strong entities
• Conceptual and administrative simplicity
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Inherent in Che choice of options for the financial test is the
relationship between stringency of the test and its ability to assure that
funds will be available for the required activities. If a test is chosen
that has. stringent components (e.g., a test that requires a minimum level
of general revenues, an unused debt capacity exceeding the obligation, and
a binding contract), then it will be more likely to assure the
availability of funds than a test with weaker components (e.g., a test
that requires only a certain level of general revenues and a resolution).
As the stringency of the test increases, however, the ability of local
governments to use the test diminishes. The choices a State makes
regarding the stringency of the test will reflect its efforts to balance
the performance standard objectives of availability and flexibility.
The definition of a local government that is allowed to use the test
is another way of determining the stringency of the test. If "local
government" is defined as a general purpose government for financial test
purposes, then the definition implicitly excludes special authorities from
being able to use the test. However, because special authorities have
financial characteristics similar to private firms (e.g., they have
financial stateoents with s'imilar information including net worth), a
State may apply to them a financial test similar to that used for private
firms under Subtitle C. Alternatively, because special-purpose units of
government have a narrower and sometimes less stable base than general
purpose entitles, States may choose to be conservative and require them to
acquire a financial assurance mechanism.
Simplicity is desirable for both local governments, which must
demonstrate they have passed the financial test, and States which must
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exercise judgment in administering the test. The degree of simplicity may
in fact directly correlate with the degree of judgment required to
determine whether specific local governments have passed the test. One
approach to simplicity would be to limit to a few the number of factors
included in the test. Another would be to specify precise performance
thresholds for each factor or, for those factors which do not lend
themselves to quantitative measures, to precisely specify the way in which
a factor is to be addressed (e.g., by specifying a format for local
legislative resolutions).
As discussed earlier, the components that are deemed best for the
time being (acknowledging the need for further analysis) are a combination
of a revenue size requirement, a requirement that the entity has not
defaulted or declared bankruptcy in the last five years, and a political
resolution or ordinance declaring that the obligation will be paid if
encountered. This multi-criteria approach is similar to the approach used
in other Agency financial tests. Moreover, the test could be very
straightforward and easy to implement while still meeting the major
objectives of the test.
4.6.5 Financial Teat Baaed on Bond Ratings
The Agency reconsidered investment grade bond ratings on outstanding
debt as a measure of the financial strength of local governments. A bond
rating alternative would provide local governments with a low-cost
financial assurance option and eliminate the need for the State to either
develop a financial test for such entities, or to evaluate a local
government's financial strength in terms of a financial test for private
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firms. Moreover, a bond racing incorporates many financial and management
variables that are analyzed by rating agencies in order to determine the
likelihood that a debt issue will be repaid. Because an investment grade
rating (BBB or above) Indicates that the Issuer is likely to repay the
debt, it provides some degree of assurance, in an administratively simple
manner, that a municipality will be able to fund its environmental
obligations.
As discussed earlier, the Agency considered and rejected a bond
rating alternative for municipalities owning or operating^Subtitle C
facilities.^-® . The Agency based its decision on a study of bond ratings in
a major default period of 1929 to 1937.^ The study indicated that 78
percent of all defaulted municipal bonds and 94.4 percent of the dollar
value of defaulted municipal bonds in the period were rated in the top two
categories by both major ratings services (Standard and Poor's, and
Moody's) prior to default. The Agency concluded from this evidence that
municipal bond ratings tend to confirm financial distress rather than
predict it, and bond ratings, therefore, would not provide assurance that
a municipality would be able to provide funds for its Subtitle C
obligations.
The Agency decided to reexamine municipal bond ratings as an option
I
for financial assurance for MSVLFs for several reasons. First, since the
1929 to 1937 period examined by the Agency in 1981', government financial
18 Background Document for the Financial Test and Municipal Revenue
Test: Financial Assurance for Closure and Post-Closure Care. U.S.
Environmental Protection Agency, Office of Solid Uaste, November 30, 1981,
p. 134.
19 See George Hempel, The Postwar Quality of State and Local Debt.
National Bureau of economic Research, 1971.
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manageoent has become far more sophisticated and government financial
reporting haa become more standardized. Therefore, bond ratings based on
improved financial information may be more accurate indicators of
financial viability. Moreover, rating agencies have enhanced the
sophistication of the ratings process to better evaluate municipal issues.
Finally, in the wake of well-publicized bond defaults and municipal
bankruptcies in the 1960's and 1970's (i.e., New York City and Cleveland),
several analytical studies of the ability of bond ratings to predict
financial distress have been performed in recent years. The Agency
reviewed these studies to develop a better understanding of the degree to
which the predictive ability of bond ratings has improved in the decades
since the Great Depression..
After analyzing the available information, the Agency has decided
that municipal bond ratings still do not provide sufficient assurance that
an entity will be able to provide funds for Subtitle D obligations.
First, recent studies are inconclusive as to whether bond ratings are
accurate indicators of an entity's ability to pay for its environmental
obligations. For example, a recent study compared a large sample- of
general obligation bond ratings with a variety of financial and
demographic variables for each rated municipality.^ The study showed
that among municipalities that received very different bond ratings, only
demographic variables such as employment rate and change in population
were significantly different. Financial variables, including measures of
20 Stephen R. Willson. "Credit Ratings and General Obligation Bonds:
A Statistical Alternative," Government Finance Review. June 1986, pp. 19-22.
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debt burden and level of fund balances, were naj: significantly different
among differently rated municipal bond issues.
The Uillson study Indicates chat bond ratings do not necessarily
reflect the relative current financial position of municipalities.^
Instead, bond ratings appear to be based on assessments of the long-run
viability of municipalities, which may be more relevant in assessing the
likelihood of repayment of long-term bonds than evaluating current
financial position. Demographic variables are important in determining
the long-term viability of a municipality, thus they are likely to
correlate better with bond ratings than with financial ratios. Moreover,
the subjective judgments of the raters regarding the management of the
municipality play a larger role in the determination of municipal bond
ratings than in ratings of private firms; judgments regarding future
viability may be unrelated to short-run financial measures.
Although variables such as demographics and management quality play a
strong role in the viability of a municipality in the long-run, they may
not reflect the ability of a municipality to provide funds to meet its
obligations in the shore-run. Therefore, because bond ratings correlate .
more closely with long*run variables than with short-run financial
measures, they may not provide assurance that funds will be available for
closure, extended post-closure care, or corrective action.
^ Other attempts to compare bond ratings and financial measures
include: Carleton and Lerner, "Statistical Credit Scoring of Municipal
Bonds," Journal Moray. Credit and Banking. November 1969, pp. 750-764;
and Joseph T. Horton, Jr., "Statistical Classification of Municipal
Bonds." Journal of Bank Research. Autumn 1970, pp. 29-40, as referenced in
Foster, George, Financial Statement Analysis. Prentice-Hall, Inc., 1978.
These studies have come up with similii: results to the Uillson study
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Another reason that bond racings are not considered appropriate for
financial assurance for MSVLFs is that in recent years many municipal bond
issues have been insured by municipal bond insurance companies.^2 These
companies insure investors in the bonds against losses due to insolvency.
Ratings on insured bonds reflect the financial strength of the insurer and
not the municipality issuing the bond; thus ah investment grade bond
rating may not indicate the underlying financial viability of the
municipality.
Finally-, because bond ratings are specific to the terms and
conditions of the particular debt issue, they may not reveal the overall
ability of local governments to meet their environmental obligations in a
timely manner. For example, in the wake of tax revolts and other
political opposition to taxes, voters in many parts of the country have
limited the authority of the local government to issue debt without voter
approval. This trend may limit the ability of local governments to
quickly obtain funds in the capital markets to meet environmental
obligations even if existing debt is highly rated.
4.6.6 Cost and Availability of Financial Tests
The chief advantage of a financial test is that it allows the entity
to demonstrate financial responsibility without having to pay for an
assurance mechanism such as a trust fund or a letter of credit. The costs
of a financial test will therefore entail only negligible reporting costs.
^ In 1986, for example, 19 percent of the dollar value of long-term
municipal bonds were insured, compared to only 3 percent in 1980. See
"$26.2 Billion New Municipals Insured in 1986," The Bond Buyer. January 9,
1987, p. 1.
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However, if an entity is required to obtain an auditor's opinion verifying
the accuracy of. financial data, and the entity has not otherwise been
independently audited, the costs of obtaining such an audit could be
substantial.
The availability of the test, as discussed earlier, depends on the
design of the test and the stringency of its components. The test could
be designed so that it is available to most local governments, or it could
be stringent enough to be available to only the largest and financially
strongest of entities.
4.7 GUARANTEES
States may consider allowing one entity to guarantee the obligation
of another entity. Options such, as guarantees offered by a parent or
related firm, guarantees, offered on the basis of a substantial business
interest, and municipal guarantees may be desirable alternatives. As this
section describes, States must ensure consistency with their corporate and
insurance laws to design valid and enforceable mechanisms.
4.7.1 Faaturas of the"Mechanism
A guarantee is a promise by one party (the guarantor) to pay
specified d*bta or perform specified obligations of another party (the
principal) in the event the principal falls to satisfy those debts or
obligations. There is a contract between the principal and a third party,
creating the primary obligation, and a contract between the principal and
the guarantor creating the guarantee, which supports the primary
obligation. Generally, in regulatory programs, the primary obligation
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woujji'bff a- Regulatory requirement or potential tort liability, rather than
a contract. If the principal defaults on the.primary obligation, Che
guarantor is liable to the third party to meet the obligation created by
the guarantee.
If a State allows the use of a guarantee to provide financial
assurance for closure, post-closure care, and corrective action for known
releases at MSWLFs, the obligation between the principal (the owner or
operator) and the State would be defined by the regulatory requirements.
If the owner or operator of the MSVLF failed to perform the required
activities, the guarantor could perform them or provide a specified dollar
amount from which the State would direct the payment of the costs of
carrying out the activities.
Both related firms and firms engaged in a substantial business
relationship with the owner or.operator of a MSVLF might be willing to
provide guarantees. Related firms may be parent firms that own a
controlling interest in the owner or operator, grandparent firms that own
a controlling Interest in a parent firm of the owner or operator, or
affiliated firms that are controlled by a parent that also owns a
controlling interest in the owner or operator. A "controlling interest"
is usually defined In State corporate law as direct ownership of at least
SO percent of the voting stock of the subsidiary.
A firm that is engaged in a "substantial business relationship" with
the owner or operator could provide a guarantee as an act incident to the
business relationship. In general practice, a guarantee would be
considered incident to a business relationship if it arises, from and
depends on existing business transactions between this guarantor firm and
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the owner or operator. For example, a private company that uses a
government-owned landfill to dispose of its solid waste may wish to
guarantee financial assurance for the facility to ensure that its disposal
needs continue to be met.
4.7.2 Use of Guarantees In Other EPA Prograas
Under RCRA Subtitle C financial responsibility regulations (40 CFR
264.143, 264.145, 265.143, and 265.145), a corporate parent, defined as a
corporation that directly owns 50 percent or more of the voting stock of
the owner or operator, may provide a guarantee to EPA or the State as
demonstration of financial assurance for closure and post-closure care of
a hazardous waste management facility. Under 40 CFR 264.147 and 265.147
of the Subtitle C regulations, a guarantee given to any and all third
parties who may suffer bodily injury or property damage from sudden or
nonsudden accidental occurrences arising out of the operations of a
hazardous waste management facility may be used to provide financial
assurance for liability coverage. EPA has also proposed to allow a
guarantee by the parent corporation of a hazardous waste facility to be
used to provide financial assurance for corrective action.(51 £& 37854,
October 24, 1986). The UIC program also allows use of a guarantee for
plugging and abandoning a veil.
Most recently, the Agency proposed to allow owners and operators of
underground storage tanks containing petroleum to use corporate guarantees
provided by related firms and firms .having a substantial business
relationship with owners or operators as financial assurance for
corrective action and third party liability (52 £R 12786, April 17, 1987).
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EPA also proposed allowing Che use of an indemnity contract, an instrument
very similar to a guarantee, because the Agency believes that indemnities
are presently being used in the petroleum industry for such purposes.
There is little substantive difference; however, between guarantees by
non-related firms and indemnities. The Agency, therefore, has not
included a separate discussion of indemnities as instruments to provide
financial assurance for MSWLFs.
4.7.3 Use of Guarantees in State Programs Surveyed
Several of the nine States surveyed allow the use of corporate
guarantees. Louisiana and Illinois allow parent guarantees if certain
financial criteria are met by the potential guarantor. California, under
a regulation that allows the use of irrevocable trusts and other
mechanisms approved by the State Department of Hater Resources, has
approved corporate guarantees if the corporation can prove that it is
diversified and financially stable. New York, Oregon, and Wisconsin have
similar provisions that potentially could allow use of a corporate
guarantee if approved by the appropriate State agency on a case-by-case
basis.
4.7.4 Kay Provisions of Guarantees to Ensure Adequacy of Coverage
To ensure adequacy of coverage if guarantees are allowable mechanisms
for demonstrating financial assurance, the State may wish to consider
imposing the following requirements. One would be to require the
corporation, partnership or other firm providing the guarantee to
demonstrate either ownership interest in, or a substantial business
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relationship with, the owner or operator for which the guarantee is being
provided. If such a relationship between the guarantor and the owner or
operator is not established, then the guarantor might be classified by
State insurance regulations as an insurer, and would thus be unqualified
to provide a guarantee unless he met State insurance provider
qualifications. Also, if some business relationship is not established
between the guarantor and the owner or operator, then the validity of the
guarantee contract could be challenged in court in the event of the
guarantor's bankruptcy. Such a challenge could be based on a lack of
"identity of interest" which would suggest that the guarantor received no
value for providing the guarantee. Value of the guarantee to the
guarantor would be related to the guarantor's business relationship to the
owner or operator.
To decrease the chance that a guarantor might enter bankruptcy, the
State could also consider requiring a guarantor to demonstrate, through
use of a financial test, that it has financial resources sufficient to
undertake the guarantee of closure, post-closure, and corrective action
costs. To ensure that funds paid by a guarantor go directly to the costs
of the required activities, the State might require that, if an owner or
operator fails to meet the obligation, the guarantor will pay the
guaranteed funds into a standby trust fund. The State can then direct
payment of costs from the trust fund as necessary to meet the regulatory
requirements.
Finally, the State might wish to specify the wording of the guarantee
to be certain that the Instrument is legally binding and that it provides
adequate financial assurance. Specified wording would also be helpful to
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owners and operators who would then have no difficulty ascertaining that
an instrument provided by a guarantor complies with State requirements.
There are several factors that a State Should evaluate before
allowing the use of a guarantee by municipalities or other local
government entities. The State may wish to determine.whether, under its
State law, a city or other general-purpose government could provide a
guarantee for a HSWLF owned by a separate entity such as a "special
district" or "solid waste authority." Also, in the case of municipally-
owned facilities, State law also may be reviewed to determine whether a
Local government could accept a guarantee provided by a- customer of its
facility.
4.7.5 Cost and Availability of Guarantees
The Agency believes that the costs associated with a guarantee would
be minimal in most circumstances. If the guarantee is provided by a
parent or other related firm on the basis of the corporate relationship,
it is likely that no fee would be charged for the guarantee. If an
unrelated firm with a substantial business relationship with the owner or
operator is allowed to provide the guarantee, there is likely to be some
required payaant. The costs might be limited to the legal fees paid for
preparation of the guarantee contract. A guarantor could require,
however, that the MSWLF owner or operator provide collateral to support
the guarantee. The required value of the collateral might be a percentage
of, or equal to, the face value of the guarantee.
The requirement that the guarantor meet State specified financial
criteria should not add significant costs so long as the criteria require
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submission of readily available financial data. For example, a firm that
submits data to the Securities Exchange Commission would have ready access
to that information if it were required by a State financial test.
-The availability of a guarantee will depend on the stringency of the
requirements it must meet. If the financial criteria for the guarantor is
stringent, availability will be reduced.
4.8 STANDBY TRUST FUND
Standby trust funds are only necessary when an independent depository
is required. For example, under Federal law, all payments to a Federal
agency or official must be deposited with the U.S. Treasury and cannot be
earmarked for a specific use without reallocation (see 31 L.S.c. 3302).
Therefore, to guarantee that the funds assured for a specific facility are
directed to the costs of. closure and post-closure care for that site, the
Agency requires that a standby trust fund be established. If a State
determines that an account can be established within its treasury into
which funds drawn on the financial assurance mechanisms can be deposited
and withdrawn without special action to pay the site-related costs, then
such a State may use its treasury as the depository mechanism. Each State
should exaalne its State law on the issue of earmarking funds in and
appropriating funds from its general treasury.
A standby trust fund serves as a depository for funds collected from
providers of financial assurance. The trust would receive funds from the
financial assurance mechanism in the event that the owner or operator .
cannot meet his closure, post-closure care, or corrective action
obligations. Such a trust would be necessary if the regulatory authority
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cannot maintain direct control over the funds if they are deposited
directly into the State's Treasury. The U.S. EPA requires standby trusts
because funds deposited directly with the U.S. Treasury (e.,g. , payments by
an issuer of a letter of credit to a firm that defaults on is obligations)
can not be controlled directly by the EPA Administrator.
4.8.1 Features of the Worhani«¦
A standby trust fund is a depository, not assurance, mechanism that
is used in conjunction with assurance mechanisms provided by third-party
institutions, such as surety companies, guarantors, indemnitors, or
issuers of letters-of credit. The structure of a standby trust fund is
the same as that of the trust fund (i.e., the grantor deposits funds to be
managed by a trustee for the benefit of a beneficiary). The purpose of a
standby trust fund used to demonstrate financial assurance for MSWLFs
would be to provide a place for funds drawn on third-party assurance
mechanisms to be held and managed by the regulatory authority for a
particular facility's closure, post-closure care, and/or corrective action
costs.
4.8.2 Om of Standby Trust Funds In Other EPA Programs
The standby trust fund mechanism is used in other EPA financial
assurance progress where the U.S. EPA Regional Administrator is the
beneficiary of funds drawn on financial instruments.
The Subtitle C closure and post-closure care assurance regulations
require that a standby trust fund be established when an owner or operator
establishes a surety bond or a letter of credit (40 CFR 264.143(b), (c),
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(d); 264.145(b), (c), (d); 265.143(b), (c); and 265.145(b), (c)).
Similarly, the proposed Subtitle I corrective action and third-party
liability assurance regulations require an owner or operator to establish
a standby trust fund if he is using a guarantee, indemnity contract,
surety bond, or letter of credit (52 12786, April 17, 1986).
4.8.3 Use of Standby Trust Funds in State Programs Surveyed
Of the nine State programs studied, three require that a standby
trust fund be established and used to accept deposits from providers of
mechanisms such as surety bonds and letters of credit. The remaining
States either require providers of mechanisms to make deposits into the
State treasury or do not allow mechanisms that require deposits from
third-party providers (e.g., performance bonds or insurance).
4.8.4 Key Provisions of Standby Trust Funds to Ensure Adequacy of
Coverage
Because the standby trust fund is structurally similar to the trust
fund mechanism, the key provisions of the trust fund mechanism are
applicable to the standby trust as well. For example, the trust agreement
should describe the responsibilities of the parties. In particular, the
trust agreeaent should detail the trustee's responsibilities for trust
fund manageaent.
One feature unique to the standby trust fund, however, is the timing
of its establishment. The standby trust fund could be required to be
established eithe- ~t "he same time the assurance mechanism is established
or not until it is needed as a depository for payments from the
third-party instrument?. Under both the Subtitle C and the proposed
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Subtitle I programs, the owner or operator must establish the standby
trust fund at the same time the assurance mechanism is established. The
Agency believes that requiring the standby trust fund to be established
along with the assurance mechanism provides a somewhat greater degree of
assurance since there is no risk that payment under the assurance
mechanism will be delayed due to lack of a depository mechanism.
4.8.5 Cost and Availability of Standby Trust Funds
The costs of standby trust funds are similar to the costs of trust
funds. Typically, a trustee will charge a flat fee to establish the fund.
Maintenance costs to cover the management of the assets of the trust are
related to the balance of the trust fund. Until the standby trust is
funded, the maintenance or management costs should be negligible because
there are no funds to manage. After a standby trust is funded, the
maintenance may range from 0.1 percent to one percent of the balance of
the trust.
The Agency expects the costs of establishing and maintaining a
standby trust to be aininal because, until the financial assurance
mechanism is drawn on and the standby trust is funded, there will be no
assets in Che standby trust to manage and, therefore, no management
fees.23 States nay, however, conclude that the additional assurance
provided by having the trust fund established with the assurance mechanism
is not worth the extra cost of creating the trust before it is actually
needed. Should States opt in favor of requiring that standby trusts be
23 Administrative fees for trust funds are usually proportional to
the value of the trust and are paid at regular intervals throughout the
life of the trust.
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created only when needed Co receive funds, the Agency does not believe
that this should significantly impair the degree of certainty that funds
will be available in a timely manner.
4.9 GOHBIHATIOHS OF MECHANISMS AND COMBINED COVBtAGES
In determining which mechanisms to allow for financial assurance for
closure, post-closure care, and corrective action at MStfLFs, States may
also wish to consider (1) whether to allow combinations of mechanisms to
assure either the costs of closure, post-closure care, corrective action,
or all three; and (2) whether to allow one mechanism to be used to assure
closure, post-closure care, and corrective action costs or some
combination of such costs.
Allowing combinations of mechanisms for each or all types of coverage
required could provide flexibility and cost savings to owners and
operators. For instance, there may be times when an owner or operator
must obtain additional coverage as a result of an increase in a facility's
cost estimate, but finds that the provider of his current financial
responsibility instrument will not agree to expand his coverage. In such
a situation, an owner or operator may wish to use another instrument to
make up th* difference rather than establish assurance for the entire
estimate using another instrument and cancelling the original one.
The use of a single mechanism for all types of coverages may reduce
somewhat the fees and administrative expense of financial assurance to
owners or operators. Furthermore, combining coverage under a single
mechanism should not in any way impair the adequacy of the coverage.
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Under Che Subtitle C closure and post-closure care requirements,
trust funds, surety bonds, letters of credit, and insurance may be
combined. Financial tests and corporate guarantees may not be combined
with other mechanisms. For liability coverage, the financial test and the
corporate guarantee may be combined with insurance, but they may not be
combined with each other. The reason for this exclusion is to avoid
double counting of assets. Since Subtitle C does not allow non-parent
guarantees, the assets used by the guarantor (i.e., the corporate parent)
to pass the financial test might also have been used by the principal
(i.e., the owner or operator) in passing its financial test.
Under Subtitle I, however, all mechanisms may be combined with each
other. The financial test and a guarantee, however, may orly be combined
if the financial statements of the owner or operator are not consolidated
with the financial statements of the guarantor. Subtitle 1 allows the
combination of the financial test and a guarantee because it allows use of
non-parent guarantees and includes the non-consolidation of financial
statements rule to avoid double counting of assets in the event that the
guaran*or is a corporate parent. States should consider including
requirements similar to those of Subtitle I to prevent double counting of
assets, if States choose to allow combinations of financial tests and
guarantees.
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