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Office of Inspector General
Audit Report
RCRA
RCRA FINANCIAL ASSURANCE FOR
CLOSURE AND POST-CLOSURE
2001-P-007
March 30, 2001

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Inspector General Division(s)
Conducting the Audit
Headquarters Audit Division
Washington, DC
Virginia Roll
Barry Parker
Cathleen Meeks
Susan Barvenik
Josephine Smidt
Mike Prater
Region(s) covered
Region 1
Region 2
Region 3
Region 4
Region 5
Region 6
Region 7
Region 9
Region 10
(Connecticut)
(New York)
(Virginia)
(Alabama)
(Ohio)
(Texas)
(Missouri)
(California)
(Washington)
Program Office(s) Involved
Office of Solid Waste and Emergency Response
Office of Solid Waste

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MEMORANDUM
SUBJECT: RCRA Financial Assurance for Closure and Post-Closure
Audit Report No. 2001 -P-007
from: M E Prater
Mike Prater, Audit Manager
Headquarters Audit Division
TO:	Michael H. Shapiro, Acting Assistant Administrator
Office of Solid Waste and Emergency Response
Attached is the subject report for our review of RCRA financial assurance for closure and
post-closure care. This report contains findings that describe problems the Office of Inspector
General (OIG) has identified and corrective actions the OIG recommends. This audit report
represents the opinion of the OIG and the findings contained in this audit report do not necessarily
represent the final EPA position. Final determinations on matters in this audit report will be made
by the EPA managers in accordance with established audit resolution procedures. Accordingly,
the findings described in the audit report are not binding upon EPA in any enforcement
proceeding brought by EPA or the Department of Justice.
During the exit conference, and in your response to the draft report for this review, your
office provided corrective actions, with milestone dates where applicable, for most of the
recommendations. Your response, which is included as Appendix V, also indicates that
ASTSWMO has requested that EPA discuss the report and your response to our
recommendations at their April 18 and 19 mid-year meeting. For any planned actions and
milestones that are developed as a result of the meeting, we would appreciate an updated
response within 90 days of the report date. When we receive the updated information, we will
determine whether to close this report in our tracking system.
Appendix VI of this report identifies the report distribution. We have no objections to the
further release of this report to the public. Should you or your staff have any questions about this
report, please contact Virginia Roll of my staff on (202) 260-5101, or Carol Jacobson, Audit
Liaison, on (202) 260-7604.
Attachment

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EXECUTIVE SUMMARY
INTRODUCTION	Congress enacted the Resource Conservation and Recovery
Act in 1976 to ensure proper management of the huge
quantities of waste generated each year. Hazardous waste
treatment, storage, and disposal facilities regulated under the
Act must develop a plan for closing their facilities when they
no longer treat, store, or dispose of waste. To assure that
funds will be available to pay for the potentially costly facility
closure, facilities are required to meet certain financial
assurance requirements. Regulations also require financial
assurance for post-closure care of hazardous waste landfills,
involving such activities as maintenance and groundwater
monitoring. Similar requirements apply to Municipal Solid
Waste Landfills. Financial assurance regulations were
developed by the U.S. Environmental Protection Agency
(EPA) but are primarily implemented by states.
OBJECTIVES	The overall objective of our audit was to determine whether
financial assurance requirements and the implementation of
those requirements provided adequate funding for facility
closure and post-closure activities. We found many cases
where financial assurance mechanisms appeared to be
working as intended. However, in some cases, financial
assurance might not provide adequate funding to ensure the
facilities will not pose a threat to human health and the
environment. We specifically considered the following four
questions.
	Does captive insurance satisfy requirements for
closure and post-closure financial assurance?
	What are the risks that funds from financial assurance
mechanisms will not be available when needed?
	Are funds being assured to cover the full period of
necessary post-closure monitoring and maintenance?
	What can be done to improve the review process for
closure and post-closure cost estimates?
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We concluded that insurance policies written by captive
insurance companies do not provide an adequate level of
financial assurance for closure and post-closure. Most
captive insurance companies are wholly owned subsidiaries
in the corporation of the company they are insuring, and the
financial strength of the captive is dependent upon the parent
corporation. Therefore, if a parent company experiences
financial difficulties, there is insufficient assurance that the
captive insurance company will be able to provide needed
closure and post-closure funds.
Although the Agency has analyzed potential failure rates for
various financial assurance mechanisms, these analyses did
not include all significant risk factors. Therefore, the risks
that funds will not be available when needed from financial
assurance mechanisms - such as insurance, surety bonds, and
trust funds - may be higher than EPA estimated. Mechanism
failures can result in significant closure and post-closure
delays. And may result in federal or state governments
assuming the financial burden.
There is insufficient assurance that funds will be available in
all cases to cover the full period of landfill post-closure
monitoring and maintenance. Regulations require post-
closure activities and financial assurance for 30 years after
landfill closure, and a state agency may require additional
years of care if needed. We were told by several state
officials that many landfills may need more than 30 years of
post-closure care. However, most of the state agencies in
our sample had not developed a policy and process to
determine whether post-closure care should be extended
beyond 30 years, and there is no EPA guidance on
determining the appropriate length of post-closure care.
Some facilities have submitted cost estimates that were too
low, and state officials have expressed concerns that the cost
estimates are difficult to review. To improve the review
process, software is available that can help state programs
review cost estimates submitted by facilities. Several states
contacted were unaware of the software and relied on
reviewers' judgment to evaluate estimates.
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RECOMMENDATIONS
AGENCY RESPONSE
We recommended that EPA's Acting Assistant
Administrator for Solid Waste and Emergency Response
provide specific guidance regarding insurance matters related
to financial assurance, further develop existing financial
assurance training materials, and facilitate the exchange of
financial assurance information through an Internet bulletin
board. We also recommended that, as resources allow,
criteria be developed for the appropriate post-closure care
time frames. Furthermore, we recommended that EPA help
states obtain software for reviewing closure and post-closure
cost estimates.
We received the Agency's response to our draft report on
March 27, 2001. OSWER agreed with all of our
recommendation.
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY	
ABBREVIATIONS	 v
CHAPTER 1: INTRODUCTION	
Purpose	
Background	
Scope and Methodology 	
Prior Audit Coverage	
CHAPTER 2: EFFECTIVE FINANCIAL ASSURANCE
MECHANISMS ARE NECESSARY 	
Corporate Financial Test Was Designed to Exclude High Risk Firms		1
Independence of Events is Important for Third Party Mechanism Risk		1
Independence of Events is Lacking with Captive Insurance 		12
Regulations Not Met by Captive Insurance Policies 		14
States Are Concerned About the High Risk of Captive Insurance		14
Reinsurance May Involve a Captive Insurance Company 		16
Insurance May Be Difficult to Evaluate and Monitor 		17
Assurance Risk for Some Surety Bonds May Be Higher Than Intended 		18
Trust Funds Present Risks Aside from Bank Failure Risk		21
Some Problems Found with Letters of Credit		21
Complexities in Overseeing the Financial Test 		22
Over One-Third of Sample Used Financial Test/Corporate Guarantee 		24
Nineteen Percent in Sample Had No Financial Assurance		24
Local Government Financial Test Highest Percentage in MSWLF Survey		24
Conclusions		26
Recommendations 		27
CHAPTER 3: FINANCIAL ASSURANCE MAY BE NEEDED BEYOND
THE 30-YEAR POST-CLOSURE PERIOD 		29
RCRA Landfill and Post-Closure Care Requirements		29
Hazardous Waste Treatment Standards 		30
Lack of Criteria for Extending Post-Closure Period 		31
Need for Continuing Post-Closure Care Beyond 30 Years 		33
State Implementation of Post-Closure Requirements 		35
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Significant Expenditures May Be Required for Extended Post-Closure Care 	 39
No Strategy Developed to Address GAO Concerns	 41
Study Conducted on Subtitle D Facilities	 41
Conclusions	 43
Recommendations 	 44
CHAPTER 4: ACCURATE COST ESTIMATES ARE
NECESSARY FOR FINANCIAL ASSURANCE	 45
EPA Region IV Studies Show That Facilities Underestimate Costs 	 46
Region IV's Improvements to the Cost Estimating Process 	 46
Feedback from Users of Cost Estimating Software	 47
States Need to Be Informed About Cost Estimating Software 	 48
Conclusions	 48
Recommendations 	 49
APPENDIX I
SAMPLING METHODS AND DATA 	 51
APPENDIX II
FINANCIAL TEST REQUIREMENTS 	 53
APPENDIX III
DISTRIBUTION OF FINANCIAL ASSURANCE MECHANISMS
FOR HAZARDOUS WASTE LANDFILLS IN POST-CLOSURE 	 57
APPENDIX IV
DISTRIBUTION OF FINANCIAL ASSURANCE MECHANISMS
FOR ACTIVE MUNICIPAL SOLID WASTE LANDFILLS	 59
APPENDIX V
AGENCY RESPONSE 	 61
APPENDIX VI
REPORT DISTRIBUTION	 65
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ABBREVIATIONS
ASTSWMO
Association of State and Territorial Solid Waste Management Officials
EPA or Agency
U. S. Environmental Protection Agency
GAO
General Accounting Office
LDR
Land Disposal Restrictions
MPCA
Minnesota Pollution Control Agency
MSWLF
Municipal Solid Waste Landfill
OSWER
Office of Solid Waste and Emergency Response
RCRA
Resource Conservation and Recovery Act
RCRIS
Resource Conservation and Recovery Information System
TSDF
Treatment, Storage, and Disposal Facility
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CHAPTER 1
INTRODUCTION
Purpose
Before the Resource Conservation and Recovery Act
(RCRA) was enacted in 1976, many cases of environmental
damage occurred when hazardous waste facilities were
abandoned by their owners. In recognition of this problem,
the U. S. Environmental Protection Agency (EPA or
Agency), under its authority granted by RCRA, established
requirements on owners and operators for proper closure
and post-closure care of hazardous waste treatment, storage
and disposal facilities (TSDF). Financial responsibility is one
of the requirements. Therefore, since the early 1980s,
owners and operators of TSDFs have been required to
establish financial assurance that funds will be available to
properly close a TSDF and perform any necessary post-
closure activities in the event that the owner or operator is
unwilling or unable to conduct these activities. Financial
assurance requirements were later extended to owners and
operators of municipal solid waste landfills (MSWLF).
Two Division Directors in EPA's Office of Solid Waste
suggested that the Office of Inspector General conduct an
audit on financial assurance issues. The overall objective of
our audit was to determine whether financial assurance
requirements and the implementation of those requirements
provide adequate funding for facility closure and post-
closure activities. Under the objective, this audit addresses
the following questions.
	Does captive insurance satisfy requirements for
closure and post-closure financial assurance?
	What are the risks that funds from financial assurance
mechanisms will not be available when needed?
	Are funds being assured to cover the full period of
necessary post-closure monitoring and maintenance?
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 What can be done to improve the review process for
closure and post-closure cost estimates?
Background	Congress enacted RCRA to ensure the proper management
of the huge quantities of waste generated in the nation each
year. Under RCRA Subtitle C, EPA promulgated
regulations for managing hazardous wastes from generation
to disposal. Under RCRA Subtitle D, EPA promulgated
regulations that apply to solid wastes that are not defined as
hazardous or are excluded from Subtitle C regulations.
RCRA required EPA to develop standards for new
hazardous waste TSDFs built after RCRA was enacted and
for those TSDFs that were already in operation when RCRA
requirements became effective (interim status facilities). To
handle hazardous waste, a new TSDF must obtain a permit
before it begins operating. Standards for interim status
facilities are often similar to standards for new facilities.
However, there are some circumstances where it would not
be practical for an existing facility to immediately implement
the requirements that a new facility must implement.
Therefore, interim status regulations are designed to allow
TSDFs, already in operation, time to implement requirements
for permitted facilities.
Both interim status and permitted TSDFs are required to
develop a plan for closing their facilities when they no longer
treat, store or dispose of hazardous waste. Facility closure
requirements are potentially costly. To assure that funds are
available to pay for closure, TSDFs are required to meet
certain financial assurance requirements. Owners and
operators of land disposal facilities are also required to
establish a plan and financial assurance for post-closure care.
During the post-closure care period, activities are conducted,
such as maintenance and ground-water monitoring, to
preserve the integrity of the disposal system and detect
releases of hazardous waste.
Owners and operators of TSDFs can demonstrate that funds
are available to pay for closure and post-closure through one
or a combination of the following financial assurance
mechanisms.
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	Trust Fund - If a trust fund is used, owners and
operators are required to deposit money according to
a phased-in schedule (known as a pay-in period). At
the end of the pay-in period, the facility should have
enough money set aside to cover its financial
assurance requirements.
Under some of the other mechanisms (surety bonds and
letters of credit), owners and operators must establish a
standby trust fund. No money is deposited into the standby
trust fund unless funds must be withdrawn from the
mechanism. In that case, funds from the mechanism are
deposited in the standby trust fund and used to cover the
respective costs.
	Surety Bond - A surety bond guarantees that closure
and post-closure obligations will be fulfilled. There
are two types of surety bonds:
Payment Bond - In the event an owner or
operator fails to fulfill closure and post-
closure requirements, a payment bond funds a
standby trust fund in the amount equal to the
face value of the bond.
Performance Bond - A performance bond
guarantees performance of closure and post-
closure requirements. A performance bond
can also be paid into a standby trust fund.
Interim status facilities may not use
performance bonds.
	Letter of Credit - A letter of credit is a credit
document, issued to a TSDF by a financial institution,
covering the costs of closure and post-closure.
	Insurance - The owner or operator of a TSDF may
take out an insurance policy to cover the costs of
closure and post-closure.
	Corporate Financial Test - If a facility meets
corporate financial test criteria, it may satisfy
financial assurance obligations solely on the strength
of its financial condition. (For more information on
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Subtitle C corporate financial test requirements,
please see the following chapter and Appendix II.)
	Corporate Guarantee - A facility which is not able
to meet corporate financial test criteria may arrange a
corporate guarantee by demonstrating that its
corporate parent, sibling corporation, or firm with a
substantial business relationship with the owner or
operator, meets the financial test requirements on its
behalf.
MSWLFs are also required to establish plans and financial
assurance for closure and post-closure care of the landfill.
MSWLFs may establish financial assurance for closure and
post-closure through either one or a combination of the
above mechanisms or through additional mechanisms
allowed under Subtitle D regulations. However,
requirements for the Subtitle D corporate financial test are
somewhat different from Subtitle C requirements. (Please
see Appendix II for more details on Subtitle D corporate
financial test requirements.) Subtitle D regulations also
allow a local government financial test, local government
guarantee, state assumption of responsibility, and additional
state-approved mechanisms. Under some circumstances,
state assumption of responsibility and additional state-
approved mechanisms might also apply to Subtitle C
facilities.
	Local Government Financial Test - As in a corporate
financial test, a MSWLF owned by a local
government can fulfill financial assurance
requirements for some or all of its obligations by
meeting local government financial test requirements.
A local government which satisfies the financial test
requirements may also guarantee financial assurance
for a MSWLF it does not own or operate.
	State Assumption of Responsibility - When the state
assumes responsibility for MSWLF financial
assurance, the State Director either assumes legal
responsibility for closure and post-closure or assures
the availability of funds from state sources for those
requirements.
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 Additional State-Approved Mechanisms - The State
Director of an approved state program may allow
additional mechanisms if they meet performance
criteria specified in the Subtitle D regulations. In
brief, a state-approved mechanism must be legally
valid, binding, and enforceable under state and
federal law and ensure that sufficient funds will be
available in a timely fashion for costs of closure and
post-closure.
TSDFs are also required to establish financial assurance for
bodily injury and property damage liabilities. In addition,
financial assurance may be required when the facility must
clean-up (perform RCRA corrective action) at a
contaminated hazardous waste site.
Financial assurance requirements under Subtitle C and
Subtitle D are primarily implemented by states. A state must
become authorized by EPA to implement RCRA Subtitle C
regulations. In order to become authorized, a state develops
and submits for approval a hazardous waste program which
is equivalent to and consistent with the federal program and
provides adequate enforcement. Under RCRA Subtitle D, as
amended by the Hazardous and Solid Waste Amendments of
1984, states are required to develop permitting programs or
other systems of prior approval to ensure MSWLFs comply
with federal criteria, which include financial assurance
requirements. EPA is required by RCRA to determine
whether the state MSWLF programs comply with the federal
criteria. Currently, most states are authorized for RCRA
Subtitle C financial assurance regulations and approved for
Subtitle D financial assurance programs. Since requirements
for Subtitle C and Subtitle D financial assurance are often
similar, the discussions in this report apply to both Subtitle C
and Subtitle D facilities unless otherwise indicated.
Scope and Methodology	The Office of Inspector General conducted the fieldwork for
this assignment from September 1999 through January 2001.
This audit was performed in accordance with the
Government Auditing Standards (1994 Revision) issued by
the Comptroller General of the United States as they apply to
performance audits. We restricted our scope to financial
assurance for Subtitle C and Subtitle D facility closure and
post-closure. Therefore, we did not do audit work on any
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issues exclusively associated with financial assurance for
corrective action or bodily injury and property damage. We
primarily concentrated audit work on the mechanisms that
Subtitle C and Subtitle D facilities have in common.
To accomplish our objectives, we reviewed the applicable
RCRA statute and regulations, as well as guidance and
policy documents issued by EPA. We interviewed EPA
officials in the Office of Solid Waste, the Office of
Enforcement and Compliance Assurance, and EPA Regions.
We reviewed federal and state program internal controls
relative to program operations and compliance with laws and
regulations. We selected nine states for our review:
Alabama, California, Connecticut, Missouri, New York,
Ohio, Texas, Virginia, and Washington. We chose these
states to obtain a broad national understanding of financial
assurance issues. We visited RCRA financial assurance state
programs in California, Connecticut, and Texas, where we
interviewed officials and conducted file reviews. Based on
work conducted in the three states, we developed
questionnaires and spreadsheets to collect opinions and data
from the nine state programs on financial assurance for
Subtitle C and D facilities. We also conducted phone
interviews with officials in the states. Data collected
included information relative to the states' experiences with
financial assurance.
We selected a statistical sample of Subtitle C facilities from a
nine-state subset population in the Resource Conservation
and Recovery Information System (RCRIS) post-closure
universe. The nine states listed above were chosen for the
subset population. Data from these states represented
approximately 40 percent of the RCRIS post-closure
universe. We further restricted the population to privately
owned Subtitle C facilities in post-closure which were
expected to have established financial assurance. Since we
drew the sample from the nine-state subset population, our
projections were made to the population of nine states rather
than to individual states. RCRIS does not contain data on
financial assurance, and we only relied on RCRIS for its list
of facilities in post-closure from which we drew our sample.
We did not conduct a review of RCRIS internal controls.
We also obtained data on active MSWLF in seven of the
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above states. (For further information on sampling methods
and data, please see Appendix I.)
We reviewed the Agency's performance measures
established under the Government Performance and Results
Act of 1993. Financial assurance for closure and post-
closure is required for RCRA-permitted facilities which are
tracked as part of Goal 5, established for Better Waste
Management.
Prior Audit Coverage	There have been no prior Office of Inspector General audits
on RCRA financial assurance. We reviewed the General
Accounting Office (GAO) report, Hazardous Waste:
Funding of Postclosure Liabilities Remains Uncertain, June
1990, which includes discussions of financial assurance and
post-closure care. GAO stated that although EPA was
aware of the potential for future releases from disposal
facilities, it had not yet developed a strategy for addressing
these long-term post-closure concerns. GAO stated that
long delays in the evaluation of the effectiveness of current
waste disposal requirements have the potential to result in
another Superfund situation in future years.
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CHAPTER 2
EFFECTIVE FINANCIAL ASSURANCE
MECHANISMS ARE NECESSARY
Effective financial assurance mechanisms1 are necessary to
ensure that closure and post-closure activities will be
conducted when needed to protect human health and the
environment. We found many cases where RCRA financial
assurance mechanisms appear to be working as intended.
However, we found cause for concern about some
mechanisms. Since there is some risk of failure for any
financial assurance mechanism, the Agency developed
criteria designed to reduce mechanism failure rates to a low
level. While the Agency has analyzed potential failure rates
for various financial assurance mechanisms, the analyses
cannot always be relied on because they did not include all
significant risk factors. Therefore, some financial assurance
mechanisms may have failure risks that are higher than the
Agency finds acceptable. Furthermore, because of
insufficient EPA guidance and the complexities of insurance,
captive insurance policies have not always been sufficiently
evaluated to determine whether they meet regulatory
requirements.
Financial assurance mechanism failures that occur when a
facility owner or operator is insolvent can result in significant
closure and post-closure delays, increasing the likelihood of
environmental contamination and adverse human health
effects. Moreover, when these failures occur, federal or
state funds may have to be diverted from other public
priorities since EPA or the state (and ultimately the general
public) would become financially responsible for closure and
post-closure.
financial assurance requirements for Subtitle C and Subtitle D are often similar. Therefore, in this
report, unless otherwise indicated, the discussion applies to both Subtitle C and Subtitle D mechanisms.
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Corporate Financial Test	RCRA regulations allow a facility which meets corporate
Was Designed to Exclude	financial test requirements to satisfy financial assurance
High Risk Firm	obligations solely on the strength of its financial condition
and without establishing a third party mechanism or trust
fund. Although there is some risk of failure for firms which
pass the corporate financial test, the test is meant to reduce
the risk to a low level by screening out firms with higher
risks of failure. Since the risk of bankruptcy increases when
a firm's net worth decreases, firms are required to have a
minimum of $10 million in tangible net worth to pass the
corporate financial test. The Agency has determined that
firms with less than $10 million in tangible net worth went
bankrupt four times more frequently than firms with tangible
net worth greater than $10 million. Net worth is not the only
corporate financial test requirement. Additional
requirements include financial ratios or bond ratings, which
make the test more difficult to pass than the net worth
requirement alone. (For more details on corporate financial
test requirements for Subtitle C and Subtitle D facilities,
please see Appendix II.)
Regulations also require annual updates of the financial test
to determine whether or not a firm's financial health has
deteriorated because the Agency believes the financial test
might not be a good long-term predictor of solvency. In our
sample of facilities, we found examples of facilities which
had established financial assurance through the corporate
financial test and in a later year no longer qualified. EPA or
a state program may also require reports of financial
condition at any time during the year there is a reasonable
belief that the owner or operator no longer meets financial
test requirements. Federal regulations allow financial test
requirements to be met on behalf of a TSDF or MSWLF
through a corporate guarantee by another firm, such as a
corporate parent, sibling, or one that has a substantial
business relationship with the TSDF or MSWLF. The firm
providing the corporate guarantee becomes responsible for
closure and post-closure in the event of TSDF or MSWLF
financial failure.
A firm using the financial test to satisfy obligations cannot
guarantee it will have funds for closure and post-closure in
the event that it becomes insolvent. For conducting closure
and post-closure, the public bears the risk of the firm's
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insolvency. A facility which cannot pass the corporate
financial test must establish an alternate mechanism because
the facility's risk of financial failure, and therefore the
public's risk, is too high. Since the Agency excludes higher
levels of assurance risk2 through the requirements of the
corporate financial test, this implies that use of an alternate
financial assurance mechanism should present no more risk
to the public than the corporate financial test. However,
there is evidence that some currently allowed alternate
mechanisms may present assurance risks higher than the
corporate financial test risk. (There is further discussion
about the financial test later in this chapter.)
Independence of Events is	For a third party mechanism to be effective in providing
Important for Third Party	financial assurance, there must be independence between
Mechanism Risk	the risk of facility failure and the risk that the company
providing the mechanism will fail. Moreover, Agency
calculations of third party mechanism risks assumed these
risks were independent. However, the Agency did not take
into consideration cases where there is a lack of
independence between risks of facility financial failure and
third-party financial failure.
The risk to the public of the corporate financial test depends
on the financial strength of the firm. When a third party
mechanism is used to establish financial assurance, the risk of
facility failure is transferred to the company providing the
mechanism, and the public risk is that the facility will become
insolvent and the third party mechanism will also fail. If the
risks of failure are independent,3 the risk to the public that a
facility and the company providing the third party mechanism
(such as a bank or insurance company) will be insolvent at
the same time is lower than either the risk of facility
insolvency or the risk of insolvency of the company
providing the third party mechanism. For example, a TSDF
might establish financial assurance with an insurance policy.
The estimated risk, in this case, that the TSDF will become
2	Assurance risk, which is the risk of concern to the Agency, is defined as "the risk of failure of financial
assurance mechanisms to provide funds for environmental obligations in a timely manner."
3	Events are said to be independent if the occurrence of one event does not affect the probability of the
occurrence of the other event. When there is independence of events, the risk of both events occurring at the same
time is calculated by multiplying the separate risks together.
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insolvent and the insurance company will fail at the same
time is significantly lower than either the risk of TSDF
insolvency alone or the risk of insurance company failure
alone if the two risks are independent.
If TSDF insolvency and insurance company failure are not
independent and are positively correlated,4 the overall risk
increases and may be as high as the risk of TSDF insolvency.
If the TSDF does not meet corporate financial test
requirements, this overall risk could be higher than the failure
risk presented by a facility which passes the corporate
financial test.
Independence of Events is	We believe that insurance policies issued by a "captive"
Lacking with Captive Insurance insurance company do not provide an adequate level of
assurance because we found no independence between
facility failure and failure of the mechanism. Most captive
insurance companies are "pure" captives, wholly owned
subsidiaries controlled by the parent company and
established to insure the parent company or its other
subsidiaries. Captive insurance policies have been used to
establish financial assurance for many TSDFs and MSWLFs.
Even though the captive may be a legally separate
corporation, the financial strength of the captive is dependent
upon the parent corporation. Therefore, the requirement
that captives maintain a certain level of assets does not
provide assurance of funds for closure and post-closure. For
example, a significant portion of the assets of one captive,
established by a large waste management firm, was
represented by a note receivable from the parent company.
Because of the financial relationship between a captive
insurance company and its parent corporation, A. M. Best,
which provides ratings of insurance companies, evaluates
captives based on the financial strength of the parent
company.
Therefore, the risk of insolvency of a captive insurance
company and the risk of insolvency of a facility insured by a
captive are not independent but instead are positively
correlated. Since the failure of one is closely tied to the
4 Events are positively correlated when the occurrence of one event increases the probability of the
occurrence of the other event.
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failure of the other, the assurance risk of using a captive
insurance policy would be too high if the insured facility or
the captive cannot pass the financial test. In addition to the
higher potential risk in allowing a firm which cannot initially
meet financial test requirements to use a captive to "self-
insure," there is no annual review of the firm's financial
condition by the state agency as there is for a financial test or
corporate guarantee.
The basic purpose of insurance is to distribute risks among
different parties. Typically an insurance company works to
diversify its risks by insuring many entities. Independence of
events is also important for diversifying insurance risks. For
example, when an insurance company provides fire insurance
for several buildings in one city block, it may be ruined if a
large fire destroys all the buildings on the block. When
captive insurance is used for RCRA financial assurance, there
is no diversification of risks and no independence of the
events of facility insolvencies because the facilities are all
part of the same corporation.
The Internal Revenue Service ruled that the "parent
corporation and its domestic subsidiaries, and the wholly
owned 'insurance' subsidiary [a captive insurance company]
though separate corporate entities, represent one economic
family with the result that those who bear the ultimate
economic burden of loss are the same persons who suffer the
loss...." A report issued by the Minnesota Pollution Control
Agency (MPCA) listed several reasons for concern about
captives. Because "the captive and the parent company are
one of the same" and the "captive insurance company is not
an independent entity or impartial third party," the MPCA's
staff expressed the concern that captive insurance "may be
nothing more than a promise to guarantee future coverage of
financial assurance requirements."
Because the captive and its insured facility are members of
the same economic family, a captive insurance policy
establishes financial assurance in the same manner as the
corporate financial test without safeguards, such as the $10
million net worth and financial ratio or bond rating
requirements. RCRA regulations do not specifically address
the use of captive insurance for closure and post-closure
financial assurance, although there are some regulatory
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requirements for insurance policies in general. We were told
there are few RCRA regulatory requirements on insurance
established for financial assurance because insurance is
primarily regulated by states.
Regulations Not Met by	An insurance policy established for closure and post-
Captive Insurance Policies	closure must contain a provision allowing assignment of the
policy to a successor owner or operator of the facility. The
captive insurance policies in our sample would not meet this
requirement. The policies were issued by a pure captive
which was established to insure the parent company or its
other subsidiaries. The state which licensed the captive
insurance company and other states which license captives,
restrict captive insurance companies from insuring companies
outside of the corporate family. In some states, a captive
might be allowed to insure an unaffiliated company with an
"existing contractual relationship." For example, if the new
owner or operator was involved in a joint venture with the
facility being sold, the state might allow the policy to be
transferred to the new owner or operator. This would have
to be determined by the state on a case-by-case basis when
the facility is sold. However, the policies in our sample
cannot satisfy the provision allowing assignment of the policy
to a successor owner or operator. Therefore, captive
policies do not meet all financial assurance regulations. In
some state programs where captive insurance policies for
closure and post-closure were denied, the issue of
assignment of the policy was one of the reasons for denying
the captive policy. However, other state officials who
expressed concerns about the risks of captive insurance for
closure and post-closure did not seem to be aware of the
assignment problem.
In some states, serious concerns about captive insurance
have resulted in decisions to deny captive insurance policies
for financial assurance on a case-by-case basis. For Subtitle
C facilities, two states said they would allow captive
insurance only if financial test requirements were satisfied.
In addition, one state in our nine state sample, Virginia, has
recently passed legislation which disallows captive insurance
for RCRA financial assurance. In California, a regulation
disallowing captive insurance for MSWLF is being proposed.
In states that allow captive insurance, state program officials
have expressed concerns about the risk of captive insurance
States Are Concerned About the
High Risk of Captive Insurance
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and whether they have the authority to disallow a policy
issued by a captive. Moreover, insurance certificates and
policies do not indicate whether or not the insurance has
been issued by a captive, and there are concerns about the
difficulty of identifying a captive insurance policy. We found
one case where the state program was unaware that
insurance for financial assurance had been issued by a
captive.
The following table summarizes the responses we received
from state officials on captive insurance in their states.
Table 2.1
Captive Insurance for Financial Assurance
State Responses
STATE
Subtitle C
Subtitle D
Allowed
Denied
Allowed
Denied
Alabama*

X


California
X


X
Connecticut
X**

X

Missouri
X**


X
New York

X

g**
Ohio
X

X

Texas

X

X
Virginia

X

X
Washington
X**

X**

S Would be subject to review and probably denied
* Alabama legislature has not passed the necessary legislation and therefore, does not have a
Subtitle D financial assurance program.. However, we were told that EPA Region IV will be
working with the Alabama Department of Environmental Management to facilitate adopting
financial assurance requirements.
** No captive insurance policies for RCRA financial assurance have been identified
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Reinsurance May Involve a	An insurance policy issued by an independent licensed
Captive Insurance Company	insurance company may involve a captive insurance
company through reinsurance. In this type of reinsurance
arrangement there may be a lack of independence between
facility insolvency and insurance company failure.
Reinsurance occurs when the original insurer becomes an
insured (or reinsured) by a contract with another insurance
company (reinsurer). For example, an insurer might want to
reduce or eliminate its current potential liability for losses by
taking out liability insurance with another insurance company
(the reinsurer) to indemnify itself against liability on its own
policies. This may be beneficial when the risk is spread to
another independent licensed insurance company.
However, in one form of reinsurance, known as "fronting" in
the insurance industry, the risk may be spread to a captive
insurance company. Fronting insurance arrangements are
legal in most states. In a fronting arrangement involving a
captive, an independent commercial insurance company
would issue the policy, and the captive would become the
reinsurer and reimburse the independent insurance company
for any claims paid by the independent insurance company.
The fronting insurance company (original insurer) is
ultimately responsible for the liability if the captive cannot
meet its reinsurance obligation. Moreover, the fronting
company can require the captive insurance company to
collateralize the captive's obligation for reinsurance.
However, if the facility and its captive become insolvent and
the collateral does not cover the reinsurance obligation, the
fronting company may experience financial problems
especially if more than one facility in the same corporation is
insured through a fronting arrangement. Since the risk is not
adequately diversified, there is a potential for insurance
company failure, as in the fire insurance block fire example
on page 14. In this case, the risk that the public will have to
fund closure and post-closure may be unacceptably high
because there would not be independence between the risk of
facility insolvency and insurance company insolvency.
Since there is no requirement that fronting arrangements
have to be disclosed in an insurance certificate or policy, a
state agency might not be informed when there are fronting
arrangements used to establish financial assurance. State
officials we contacted did not know whether or not fronting
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arrangements involving captives had been established for
financial assurance for the facilities in our sample. However,
at least one insurance company providing insurance for
RCRA financial assurance advertises on the Internet that it
offers fronting arrangements. Disclosure of fronting
arrangements in insurance certificates and policies could help
state financial assurance programs be more effective in
evaluating assurance risks and whether the policies comply
with regulations. The National Association of Insurance
Commissioners adopted a Model Law in 1993 requiring
disclosure of fronting arrangements and disclosure of the
amount of collateral established for the obligation. However,
to date this legislation has not been adopted by any state.
Insurance May Be Difficult	When insurance is the mechanism, a state program may be
to Evaluate and Monitor	presented with a number of additional complex issues, e.g.,
policy terms and exclusions inconsistent with regulations,
potential litigation, late or missing cancellation notices, and
whether the insurer is qualified to write insurance in the
state. Since insurance is primarily regulated by states,
differences in state insurance regulations contribute to the
complexities in evaluating insurance policies. As a result,
insurance can be difficult to evaluate and monitor. We were
told that the lack of a standardized insurance policy form for
financial assurance adds to the difficulty. One state program
found it necessary to create a team with legal expertise to
evaluate insurance policies for RCRA financial assurance.
Officials from another state told us they rely on the insurance
certificate which must be signed by an authorized
representative of the insurance company. RCRA regulations
require the insurance certificate to state that "any provision
of the policy inconsistent with such regulations is hereby
amended to eliminate such inconsistency."
Some insurance policies, issued for financial assurance,
require the insured facility to reimburse the insurance
company for any claims that are paid by the insurance
company for closure and post-closure. This is also known as
a fronting arrangement. We were told that, in this type of
policy, the insurance company would be liable if the facility
owner or operator became unable to conduct closure or
post-closure. One state commented that failure of an
insurance company to collect deductibles, i.e.,
reimbursements, on a large number of such policies may have
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Assurance Risk for Some
Surety Bonds May Be
Higher Than Intended
an impact on the insurance company's ability to perform.
The risk of insolvency of an insurance company might
increase when it issues this type of policy. If a significant
number of such policies are issued to facilities owned by one
waste management company, the risk of insurance company
failure may not be independent from the risk of insolvency of
the waste management company. Another concern is the
difficulty in evaluating these policies to determine whether
they comply with financial assurance regulations.
In spite of insurance certificates which provide a warrant that
policies conform with regulations, policy terms and
exclusions may make it difficult for states to obtain closure
and post-closure funds from insurance policies without
litigation. Some officials mentioned their concern that
litigation with insurance companies might sometimes be
necessary. Another problem mentioned to us during our
audit was insurance policy cancellations which were not
reported to the state program. We were told by a state
official that in some cases, facilities would obtain insurance
policies for financial assurance and later cancel the policies
without informing the state program. The insurance
companies involved also did not inform the state of the
cancellations.
In August 2000, the Agency submitted a proposed rule to
the Office of Management and Budget which requires
insurance companies issuing policies for RCRA financial
assurance to have a high rating from insurance company
raters. EPA could help states further in developing solutions
to insurance problems. State officials told us they would like
more training and guidance from EPA on insurance and on
other mechanisms as well. They also said that better
communication among states would be helpful. To assure
low assurance risk when insurance is the mechanism and that
policies comply with regulations, EPA should investigate
complex insurance issues with states to determine states'
need for guidance.
Agency calculations of assurance risk for surety bonds were
based on predictions of firm bankruptcies and surety
company insolvencies. However, these calculations did not
take into consideration litigation risk or the potential for lack
of independence of risks. When a surety bond is the
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mechanism for RCRA financial assurance, the state may have
to litigate to obtain the funds. In one case, years of litigation
took place when an insurance company refused to comply
with the terms of a performance bond for facility closure. A
surety bond is usually issued by an insurance company.
However, surety bonds are not insurance, and the surety
company becomes liable for closure and post-closure only
when the owner or operator fails to comply with closure or
post-closure requirements. In this case, the state agency was
finally awarded the full amount of the bond plus interest,
$2,400,000. Delays and resources spent on litigation in
cases like this have negative effects on environmental
programs and results.
There are controls imposed by federal regulations on surety
bonds. The surety company issuing a bond for RCRA
financial assurance must be on the U.S. Treasury Circular
570 list of acceptable sureties. The Surety Bond Branch at
Treasury reviews quarterly and annual financial information
from surety companies on the list, and a surety company has
to meet financial requirements set by Treasury to stay on the
list. Furthermore, Treasury sets a limit on the amount
allowed on a bond issued by an authorized surety. Although
a surety authorized by Treasury can issue a surety bond and
then obtain reinsurance from an unauthorized surety
company, there are restrictions on the amount of reinsurance
allowed from an unauthorized surety. The amount of
reinsurance from an unauthorized surety plus the amount of
obligation retained by the authorized surety cannot go over
the bond limit Treasury sets for the authorized surety.
Although there is a limit set by Treasury on each bond
issued, there is no limit on the overall total amount of surety
bonds issued by a surety to a company. If a surety issues a
large number of bonds to facilities in one corporation, the
surety bond risk might not be adequately diversified. This is
another case where the financial failure of the corporation
might have an impact similar to the block fire described on
page 10 and could cause serious financial problems for the
surety company. There may also be the reverse case where
the financial problems of the surety could contribute to the
financial problems of a corporation using surety bonds for
many facilities. A recent case illustrates this possibility.
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Recently a surety company which had issued bonds at a
competitive rate and with low collateral requirements to
many waste management companies was removed from the
Treasury Circular 570 list because it no longer met
Treasury's financial criteria. A large national waste
management company entered Chapter 11 bankruptcy
shortly after the announcement about the surety company's
removal from the list. The removal of this surety from the
Treasury list forced the waste management company to try
to replace financial assurance surety bonds issued by the
surety removed from the list. These surety bonds
represented approximately two-thirds of the financial
assurance obligation of the waste management company.
Since replacement surety bonds were being offered at
significantly higher rates and required higher
collateralization, the removal of the surety company had a
financial impact on the waste management company and, we
believe, may have been one of the contributing factors to its
bankruptcy. In this case, there may have been insufficient
independence between the financial condition of the surety
company, and the financial condition of the waste
management company.
Furthermore, the assurance risk, calculated by the Agency
for sureties, was based on the risk that a surety on the
Treasury list would become insolvent, rather than the risk
that the surety would be taken off the list. The risk of a
surety being removed from the Treasury list is higher than
the risk of failure calculated for firms with net worth less
than $10 million and seems to be the relevant risk for
financial assurance purposes. One state official suggested
the imposition of additional requirements on surety bonds
used for financial assurance, such as a limit on the total
amount of bonds from one surety issued to a company for
financial assurance. We believe this additional control would
help maintain independence of failure risks when surety
bonds are used for financial assurance. However, an EPA
official informed us that the Treasury Department interprets
its statute as disallowing additional federal requirements on
surety companies. More dialogue among financial assurance
program officials on this problem might be beneficial.
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Trust Funds Present Risks	Regulations require that the trust operations of a trustee be
Aside from Bank Failure Risk	regulated and examined by a federal or state agency. These
banks have a low risk of failure, and, as determined by
Agency analysis, a fully funded trust fund invested
conservatively has virtually no risk of failure. However, the
major risk appears to be that a trust fund will not be fully
funded when the facility becomes insolvent. In our Subtitle
C sample, there were a significant number of facilities that
went out of business or into bankruptcy with partially funded
trust funds. Of the partially funded trust funds in our sample
(please see the table in Appendix III, 25 percent were on
schedule with their funding requirements. However, 75
percent of this group were funded insufficiently when most
of the facilities experienced financial difficulties. Facilities in
interim status in the early 1980s had twenty years to fund a
trust fund. However, under Subtitle C, a permitted facility
must fully fund a trust fund over the remaining operating life
of the facility or over the term of the initial permit which is
limited tolO years, whichever is shorter. Two states, New
York and Missouri, reported they require trust funds to be
funded within 5 years. In addition, New York requires new
firms and revenue oriented facilities to fully fund trust funds
when they are established. However, regulations in New
York allow a pay-in period of up to ten years for MSWLFs.
Another problem sometimes occurs with trust funds.
According to Subtitle C regulations, banks may only release
funds from the trust on approval from EPA or the authorized
state program. However, we were given examples during
our audit where banks had released funds from trust funds to
Subtitle C facility owners without the required approval.
Some Problems Found	We found some problems with letters of credit used to
with Letters of Credit	establish financial assurance for RCRA closure and post-
closure. In one sample case, a bank which had issued a letter
of credit for financial assurance failed. The letter of credit
was no longer in effect because, unlike a savings account, a
letter of credit is not guaranteed by the Federal Deposit
Insurance Corporation when a bank fails. However, this was
a minor problem because the facility, which was not
insolvent, was able to replace it with another letter of credit.
The outcome in this case was the expected outcome when
there is independence of failure risks and illustrates the way
financial assurance should work. When the risks of
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insolvency of the facility and the bank are independent, there
is a low probability that they will both fail at the same time.
The letter of credit operations of a bank issuing a letter of
credit for financial assurance must be regulated and examined
by a federal or state agency. This requirement helps keep the
assurance risk of letters of credit at an acceptably low level.
The MPCA report stated that a letter of credit is a good
financial assurance mechanism because it provides full
coverage and can be drawn on easily. Some disadvantages
mentioned were that the bank may choose not to renew the
letter of credit and the letter of credit is carried on the
facility's financial statements as a liability, which reduces the
facility's borrowing power. Subtitle C regulations allow the
EPA Regional Administrator or authorized state program to
draw on a letter of credit if the bank notifies the facility it
will not renew a letter of credit and the facility does not
obtain alternate financial assurance. There is no similar
provision in the Subtitle D regulations. However, some
states, e.g., New York, may have a similar provision for
Subtitle D facilities.
Timely notifications on decisions not to renew are important.
A state agency did not receive the required 120-day
notification from a bank that it was not renewing a letter of
credit for a Subtitle C facility's financial assurance.
However, the state found out in time before the cancellation
and was able to draw on the letter of credit. A different
problem occurred when another state agency attempted to
draw on a letter of credit established for financial assurance
and the financial institution claimed it had not issued the
letter of credit and refused to pay. This case has been
referred for appropriate legal action.
Complexities in Overseeing
the Financial Test
In addition to the risks of company financial failures, there
are financial assurance risks caused by difficulties in
monitoring financial tests and corporate guarantees. During
our field work, we discussed with state officials the
complexities of overseeing the corporate financial test
mechanism. Some of the complicating factors are economic
changes in the waste management industry, company
mergers and acquisitions, difficulties in predicting the long-
term survivability of individual firms, and evaluating financial
test submissions from firms with facilities in many states.
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Corporate acquisitions may occur without the state program
being notified. Where the original acquired corporation may
have provided a corporate guarantee, the new corporation
might be unqualified or might be unwilling to provide a
corporate guarantee.
A firm using the financial test must supply cost estimates for
all facilities it is covering with the test mechanism. During
our file review, we found correspondence which illustrated
the problem states face in determining the accuracy of cost
estimates submitted for the financial test. The
correspondence described inaccuracies in cost estimates for
out-of-state-facilities. The out-of-state cost estimates were
supplied by a corporation using the financial test for facilities
in several states. To verify cost estimates for facilities in
other states, the state program must contact all other state
programs involved. Significant resources would be required
to do this for every financial test submission.
A state official suggested that a national database with
financial test information would help state programs oversee
the financial test mechanism. We asked other officials from
the nine states in our sample whether they thought this type
of a database would be useful. The majority of officials who
responded to our questionnaire expressed an interest in a
national database with financial assurance data and cited the
benefits of increased communication among state programs.
However, some state officials expressed concerns such as
not having the resources to maintain the data from their
states in a database. Although a national database might not
be currently feasible due to resource constraints, increased
dialogue among states would be possible and beneficial.
Officials from three state programs suggested using the
Internet for communicating financial assurance information
and discussions among states. We agree with this suggestion
and believe an inexpensive bulletin board could be
established on the Internet with access limited to state
financial assurance program officials. This suggestion is a
cost-effective interim solution for improving state
communication of financial assurance information and would
be easy and quick to implement. In addition, an Internet
bulletin board could help states share their solutions to
problems.
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Over One-Third of
Sample Used Financial
Test/Corporate Guarantee
The complexities of the financial test are further magnified
for state programs by the large number of facilities using
this mechanism. In our sample of hazardous waste landfills,
over one-third of the facilities used the financial test or
corporate guarantee. In addition, the financial test had the
highest estimate in the ranges of closure plus post-closure
cost estimates in our sample, more than $107 million.
Therefore, adequate monitoring of financial tests and
corporate guarantees is essential to avoid significant future
financial burdens for state programs or the Agency.
Although captive insurance policies represent the lowest
percent of mechanisms in the sample, they provide very weak
assurance for a high average closure plus post-closure cost
estimate, over $13 million. Furthermore, they are used for
financial assurance by large national waste management
companies, and the probability is high that many facilities will
fail if one facility using captive insurance fails. Surety bonds
also represent a low percent of the sample but provide
assurance for an average cost estimate of more than $13
million.
Nineteen Percent in Sample
Had No Financial Assurance
In our sample of hazardous waste facilities there were 19
percent with no financial assurance. For the majority of
facilities with no financial assurance, the cause appears to
have been facility non-compliance with financial assurance
requirements rather than failure of mechanisms. Facility non-
compliance occurred in spite of enforcement efforts.
Financial difficulties and bankruptcies were significant
contributing factors to facility non-compliance. In some
other cases, facilities had intended to clean close (completely
remove waste in accordance with regulations) but were
found later not to have met all requirements for clean
closure. In this group of facilities, we were told that most
have low levels of soil contamination and are currently
performing groundwater monitoring. For more information
on the distribution of mechanisms and ranges, as well as
averages of closure and post-closure cost estimates for
Subtitle C facilities in post-closure, please see the table in
Appendix III.
Local Government Financial
Test Highest Percentage in
MSWLF Survey
In addition to data on hazardous waste facilities in post-
closure, we requested data on active MSWLFs from the
nine states in our survey. More than 30 percent of the
MSWLFs we received data for used the local government
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financial test and an additional 25 percent used a state-
approved mechanism.5 In contrast to hazardous waste
facilities, few MSWLFs we received data for used the
financial test or corporate guarantee. Not only did a high
percentage of these MSWLFs use the local government
financial test, but the highest estimate in the closure plus
post-closure cost estimate range was for the local
government financial test, close to $569 million.
The local government financial test is similar to the corporate
financial test in that a local government owner of a MSWLF
can fulfill financial assurance requirements for some or all of
its obligations by meeting stipulated bond requirements or
financial ratio requirements. However, there is no net worth
requirement as there is for a corporate financial test. The
reason for not imposing a net worth requirement is, due to
their taxing authority, local governments are believed to be
less likely than private corporations to become insolvent. In
contrast to the corporate financial test, which was designed
to reduce the risk of bankruptcy, the local government
financial test was developed to indicate whether there would
be sufficient local government resources to establish another
financial assurance mechanism if the local government
financial condition deteriorates below acceptable levels.
A local government which satisfies the financial test
requirements may also guarantee financial assurance for a
MSWLF it does not own or operate. (For more information
on the local government financial test, please see Appendix
II.) Given the large number of facilities using the local
government financial test and the high estimated closure and
post-closure costs associated with it, effective monitoring by
states of the financial conditions of local governments using
the test is important. Dialogue between states on their
experiences with the local government financial test could
help state programs increase their effectiveness, and an
Internet bulletin board would facilitate the dialogue. (For
5 The local government financial test is not available to hazardous waste facilities for closure and post-
closure. Under certain circumstances, state-approved mechanisms may be available for Subtitle C facilities where
the state is not authorized for financial assurance regulations. However, all states in our sample, and most other
states, are authorized for these regulations.
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more information on the MSWLF data from our survey,
please see Appendix I and the table in Appendix IV.)
Conclusions	There are several actions the Agency should take to ensure
financial assurance mechanism risks are kept at acceptable
levels and to help state programs improve their oversight
capabilities. The strength of third party mechanisms depends
largely on independence between risks of financial failure of
the facility and the third party providing the mechanism.
Policies and guidance need to be developed to eliminate
situations where independence is not maintained and to
ensure compliance with regulations.
Captive insurance policies in our sample do not meet the
intent or requirements of RCRA financial assurance
regulations. The Agency should advise state programs to
determine whether an insurance policy issued for closure and
post-closure meets all requirements, including the
requirement that the policy allows assignment of the policy
to a successor owner or operator of the insured facility. The
state program should obtain verification from the insurance
commissioner, in the state where the insurance company
issuing the policy is licensed, that the policy can be assigned
to a successor owner or operator if the facility is sold outside
of the corporate family of the seller.
To assure low assurance risk when insurance is the
mechanism and that insurance policies comply with
regulations, EPA should investigate complex insurance issues
with states and the need for additional guidance on these
issues.
Most states responding to our questionnaire said they needed
more financial assurance training from EPA. Existing
financial assurance training materials could be developed by
EPA for placement on the Agency's Internet site.
Not only can EPA help states be more effective, but states
can help each other by sharing solutions they have developed
to financial assurance problems. EPA's help in promoting
more communication between states was also requested. In
addition to training sessions, workgroups, and roundtable
discussion, three states suggested using the Internet to
communicate financial assurance information. EPA should
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work with the Association of State and Territorial Solid
Waste Management Officials (ASTSWMO) to develop a
bulletin board on the Internet. A bulletin board could be set
up with access limited to state financial assurance program
officials and would be an easy, economical, and quick
method for improving communication among states.
Recommendations	We recommend that the Acting Assistant Administrator for
Solid Waste and Emergency Response:
2.1	Issue guidance to state financial assurance programs
that when an insurance policy is used for closure or
post-closure financial assurance:
the insurance policy should meet all
requirements; and
the state program should obtain verification
from the insurance commissioner, in the state
where the insurance company issuing the
policy is licensed, that the insurance policy
allows assignment of the policy to the
successor owner or operator of the facility, in
the event that the facility is sold outside of the
corporate family of the seller.
2.2	Investigate complex insurance issues with states and
determine states' need for additional guidance on
these issues.
2.3	Develop existing financial assurance training
materials for placement on the Agency's Internet site
to be downloaded by state programs.
2.4	Work with ASTSWMO to develop an Internet
bulletin board to increase opportunities for
information sharing among financial assurance
program officials.
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CHAPTER 3
FINANCIAL ASSURANCE MAY BE NEEDED BEYOND
THE 30-YEAR POST-CLOSURE PERIOD
Financial assurance funds may not be adequate to protect
human health and the environment through the full period of
post-closure care. Federal regulations require post-closure
activities and financial assurance for 30 years after landfill
closure. However, the 30-year time frame was based on a
compromise and not on scientific research evaluating specific
landfill characteristics. We found there are many examples
of landfills that will need more than 30 years of post-closure
care. The wastes in these landfills pose a threat to human
health and the environment if they are not properly
contained. Potential problems after 30 years that could
disturb the integrity of landfills containing these wastes
include landfill liner leaks, leachate collection system
breakage, and landfill cap erosion or cracks caused by natural
weathering and animal penetration.
According to RCRA regulations, an agency may evaluate a
landfill and require additional years of post-closure care
covered by additional financial assurance. However, we
found that most of the state agencies in our sample, who
have the authority to extend post-closure care, have not yet
developed a policy or process to evaluate these sites.
Furthermore, there is no Agency guidance on how to
determine the length of the post-closure care period. When
it eventually becomes necessary to conduct longer term
monitoring and maintenance for these landfills, financial
assurance funds may not be available for extended post-
closure care if the company responsible for the landfill no
longer has sufficient funds or has gone out of business.
RCRA Landfill and Post-Closure Land disposal facilities are required to meet certain
Care Requirements6	requirements to protect the environment from the migration
of contaminants. Liners and leachate collection systems are
6 For this chapter, we reviewed issues that Subtitle C and Subtitle D facilities have in common.
Statements are meant to apply to both Subtitle C and Subtitle D facilities unless a distinction is made.
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intended to prevent waste migration by collecting and safely
removing leachate before it can migrate into the
groundwater. The landfill cover is designed to prevent the
inflow of liquids, primarily rain, into the waste unit and
thereby reduce the amount of leachate generated. There are
closure and post-closure standards in addition to landfill
design requirements. At closure of a unit, if the owner and
operator leave waste in place, the units must be maintained in
a way that ensures they will not pose a future threat to
human health and the environment. After closure, there is a
post-closure period when owners and operators must
conduct monitoring and maintenance activities to preserve
the integrity of the disposal system and continue to prevent
or control releases from the disposal units. Post-closure care
consists of two primary responsibilities: groundwater
monitoring and maintaining waste containment systems.
Post-closure monitoring and maintenance activities include:
	Maintenance of the integrity of the final cover
	Operation of the leachate collection and removal
system until leachate is no longer detected
	Maintenance and monitoring of the leak detection
system
	Prevention of erosion or damage to the final cover
from run-on or run-off
	Protection and maintenance of surveyed benchmarks
Federal regulation requires a 30-year post-closure period
after the date closure of the disposal facility is completed.
However, the time frame may be amended by the regulating
agency if it can be demonstrated that an extension would be
necessary to protect human health and the environment.
Owners and operators are required to provide for financial
assurance for the estimated cost of post-closure care at a
landfill facility for the post-closure care period.
Hazardous Waste
Treatment Standards
In addition to closure and post-closure requirements for
landfill design, EPA promulgated hazardous waste treatment
standards under Subtitle C. The treatment standards,
expressed as either concentration levels or required
technologies, are designed to substantially diminish the
toxicity of wastes or reduce the likelihood that hazardous
constituents from wastes will migrate from hazardous waste
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disposal sites. The treatment standard rules known as Land
Disposal Restrictions (LDR) were promulgated in stages.
The first LDR rule was published on November 7, 1986.
Therefore, a hazardous waste disposed of before schedule
rule implementation for that specific waste and all wastes
disposed of before November 1986 did not have to meet
treatment standards. Hazardous wastes already disposed of
do not need to meet LDRs unless they are removed from the
disposal unit. Furthermore, since the treatment standards
apply only to hazardous wastes regulated under Subtitle C,
municipal solid wastes are not treated according to these
standards.
Over time, hazardous waste treatment standards promise to
substantially reduce the threat from disposed hazardous
wastes. A new hazardous waste landfill that has only
received treated waste might not need the same post-closure
care as landfills that were in operation earlier and received
untreated waste. However, current active hazardous waste
landfills and those in post-closure have received hazardous
wastes that were not treated. The untreated hazardous
wastes in Subtitle C landfills and municipal solid wastes in
Subtitle D landfills may pose significant threats when they
are not managed correctly.
Lack of Criteria for Extending Landfill design requirements and post-closure maintenance
Post-Closure Period	for both Subtitle C and Subtitle D facilities are expected to
prevent leakage in the short term; however, their long-term
effectiveness in controlling releases of contaminants is
unknown. EPA and others have stated that it is likely that
some disposal facilities will leak at some period after they
close. Even the most technologically advanced landfill
containment systems have a finite life. However, the timing
and magnitude of any resulting post-closure liabilities and
effect on human health and the environment are uncertain.
Many factors affect the degradation of materials, including
their physical and chemical properties, the availability of
oxygen and moisture within the landfill, temperature, and
microbial populations. Because of the complexity and
diversity of waste disposal sites in size and composition and
the lack of data, it is not possible to accurately predict
leakage contaminant quantities and production rates and the
extent and timing of potential leakages.
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EPA officials acknowledge the lack of criteria or scientific
basis for establishing the 30-year post-closure time frame.
Initially, the proposed post-closure care time frame for
Subtitle C hazardous waste disposal facilities had been set
for a period of 20 years. Comments expressed in a 1980
Federal Register Notice asked EPA to extend the time frame
of 20 years of post-closure for Subtitle C facilities to as long
as the wastes remain hazardous, possibly in perpetuity.
However, some who commented were concerned that an
extended time frame would place an economic burden on
smaller businesses. Therefore, EPA made the decision to
establish the time frame at 30 years, seemingly based on a
compromise of these competing interests. EPA officials we
spoke to agreed that the 30-year time frame was not based
on specific scientific criteria or research studies. The 1980
Federal Register notice further stated that a case-by-case
review would be necessary at sites due to the uncertainty
caused by a lack of extensive experience with properly
designed landfill operations. This review would allow for
extension of the post-closure time frame.
In a 1988 Federal Register notice for Subtitle D municipal
solid waste landfills, EPA officials stated that releases may
occur after the 30-year post-closure period ends, and
expressed concern that 30 years may be insufficient to detect
releases at some landfills. The notice states that"... even
the best liner and leachate collection systems will ultimately
fail due to natural deterioration ..." EPA also 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 would not pose any
threat to human health and the environment. However, EPA
decided this approach would be overly burdensome to the
landfill owner and operator. EPA, therefore, set the post-
closure care period at 30 years, but stated that a second
phase of reduced post-closure care beyond 30 years would
be necessary to ensure that releases are detected. The owner
or operator must continue, at a minimum, groundwater
monitoring and gas monitoring beyond the first 30 years, in
order to detect any contamination that might occur. The
1988 notice also discusses the importance of detecting
groundwater contamination in a timely fashion.
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Although Federal Register notices for Subtitles C and D
discuss the need for a case-by-case facility review and a
second phase of monitoring to ensure protection of human
health and the environment, RCRA regulations do not
provide enough criteria for determining this additional review
or monitoring phase. The regulation for Subtitle C facilities
only states that the post-closure care period may be extended
if . . necessary to protect human health and the
environment (e.g., leachate or groundwater monitoring
results indicate a potential for migration of hazardous wastes
at level which may be harmful to human health and the
environment)." The regulation is broad enough to allow
extensions of post-closure care for potential problems.
However, the regulation implies that there should be
indications from leachate or groundwater monitoring that the
facility may present a risk to human health and the
environment. Although there may be no releases or
indications of releases at a landfill for the first 30 years of
post-closure, there may be a potential for releases of
hazardous waste in later years. For example, sites may
contain materials which are highly resistant to decomposition
and metals which remain toxic forever, and, as previously
stated, it is unknown how effective current landfill practices
will be in the long run in preventing these contaminants from
being released. Also, many factors affect the amount and
timing of potential leakages.
Need for Continuing Post-Closure EPA officials have stated that based on current data and
Care Beyond 30 Years	scientific prediction, the release of contaminants may
eventually occur, even with the application of best available
land disposal technology. There is concern that these
barriers will merely postpone the inevitable release of
contaminants until after the 30-year liability has expired. As
previously stated, some sites contain materials which are
highly resistant to decomposition or which remain toxic
forever. There have been several studies to determine the
expected life span of landfill liners, and opinions on this issue
vary widely. The bottom line is that not even the
manufacturers claim that their liners will last forever. Many
liners are only warrantied for a period of 20 years, and
landfill caps are only expected to last for 20 years. Leachate
collection systems have a finite life, as drains clog, and
pumping capacity declines with time. Some of the older
systems, which will be the first sites to end their 30-year
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post-closure care period, were constructed without liners,
double liner protections, or leachate collection systems that
are required under today's regulations. Potential failures at
landfills include:
	leachate collection systems clogging,
	leaks/ pinholes/ seams/ stress cracking/ brittle
fractures/ deterioration/ chemicals passing through
liners,
	erosion of the cap by natural weathering, vegetation
roots penetrating cover, burrowing by soil-dwelling
mammals, cave-ins by settling of wastes,
	seismic and general instability of the landfill, and
	rainfall creating more leachate that migrates into
groundwater (bathtub effect).
In our sample, we found several examples of barriers failing
during the first 30 years. Most of the states in our sample
reported animal or weather-related damage at their sites.
Repairs were required at one facility after wild pigs rooting
in the near surface soil caused erosion of the landfill cap. In
another state, black bears have been a problem. We found
other examples of landfill caps eroding, damage to caps due
to animal burrows, and a drainage channel being destroyed
after heavy downpours. Other sites needed maintenance due
to vegetation growth. Additionally, unexpected events other
than natural erosion occurred at other sites which required
maintenance activities. For example, at one site an
automobile drove through the fence surrounding the facility,
destroying the leachate treatment system. Another landfill
site required repairs after children dug under a fence into the
landfill site in order to skateboard on an old truck ramp.
Officials in one state speculated that all post-closure facilities
will need continuous surface and fence maintenance in
perpetuity.
A study performed by the MPCA's Ground Water and Solid
Waste Division in 1998, came to the conclusion that medium
to large municipal solid waste landfills would need additional
monitoring and maintenance after the initial 30 years of post-
closure care. The report states that continual site
maintenance beyond 30 years should include fencing,
building care, and inspection equipment. Monitoring of gas
and groundwater would also be necessary to ensure
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State Implementation of
Post-Closure Requirements
protection to human health and the environment. Finally,
mowing the cap and preventing uncontrolled rainwater and
snow-melt from entering the stored waste and "reactivating"
the leaching of waste would be required.
Federal regulations require facilities to initially establish
post-closure care for 30 years. For additional post-closure
care, EPA or the state agency must demonstrate that an
extension in the period is necessary to protect human health
and the environment. Although the burden is placed on the
regulating agency to demonstrate the necessity for extending
the post-closure care period, none of the states in our sample
had developed a policy to evaluate the adequacy of 30 years
of post-closure care at specific sites. Only two state
programs had extended the post-closure period beyond 30
years for a total of three hazardous waste facilities in the two
states. The following table summarizes state officials'
responses to our question regarding concerns about the
adequacy of a 30-year post-closure care time frame.
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Table 3.1
Extensions of 30-Year Post-Closure Care
for Hazardous Waste Facilities by State
State
Extensions to 30 Year Post-Closure?
Number of
Facilities Where
Post-Closure Care
Extended
Subtitle C
Subtitle D
Alabama
N*
**

California
N
N

Connecticut
N
N

Missouri
N
N

New York
Y
N
2
Ohio
Y
N
1
Texas
N
N

Virginia
N
N

Washington
N
N

* Alabama Subtitle C program requires the full 30 years of post-closure care to be
financially assured in each post-closure year.
** No information provided from Alabama's Subtitle D program.
Although only two of the state programs we contacted have
extended the post-closure period beyond 30 years, several
state officials from Subtitle C and D programs in our nine
surveyed states expressed concerns that facilities may need
more than 30 years of post-closure care to ensure protection
of human health and the environment. State officials were
concerned that costs are likely to continue well past the
conventional 30-year post-closure care period since these
landfills will still contain contaminants. The Alabama
Subtitle C program requires that funds for the full 30 years of
post-closure be financially assured in each year. However,
Alabama has not yet extended the 30 years of post-closure
care for any Subtitle C facilities. Other state programs
believe that facilities will need extended care beyond 30
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years, but have also not extended care at these facilities
beyond 30 years. Although many state officials are
concerned about the 30-year time frame, they explained that
they are uncertain about how to evaluate the adequacy of the
30-year time frame since there are no federal criteria
developed. Additionally, officials were unaware of any
studies performed in this area that could be used to develop
criteria. Officials stated that it would be useful to their
programs if federal guidelines provided criteria regarding
extending the post-closure period. There is concern that
without criteria to demonstrate that an extension beyond 30
years is necessary, states may be involved in legal battles
with owners and operators if they require post-closure
activities beyond 30 years. Landfills may become the
responsibility of state agencies' in later years. The following
table illustrates state officials' responses to our question
about the adequacy of a 30-year post-closure care period.
Table 3.2
State Responses on the Adequacy of 30 Years of Post-Closure Care
for Hazardous Waste Facilities
State
Program
30 Years -
Not Enough
Time
Not an Issue
Not Yet
Evaluated
Alabama
X


California
X


Connecticut
X


Missouri
X


New York
X


Ohio


X
Texas


X
Virginia

X

Washington

X

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According to state officials, many disposal facilities may
require monitoring and maintenance activities in excess of 30
years, possibly in perpetuity. Officials in one state told us
that they believe all closed hazardous waste landfills will
need some type of post-closure care in perpetuity. Another
state program assumes that "virtually all" municipal solid
waste landfills will need to extend the care period beyond 30
years. For our nine-state sample of 178 hazardous waste
disposal facilities in post-closure, state officials said that one
out of five of the facilities in the sample will need care
beyond 30 years and that it is unknown whether almost 75%
of the hazardous waste disposal facilities in our sample will
need care beyond 30 years because the facilities have not
been evaluated. See Figure 3.1.
Figure 3.1
Site Care Beyond 30 Years
d No ~ Yes | Unknown
6.0%
There is concern that states will be left with an unfunded
liability to address any remaining post-closure care necessary
since at the end of the 30-year time period the facilities'
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owners or operators may no longer have sufficient funds or
may be out of business. For example, a corporation in one
state owns a closed hazardous waste landfill that has no
income or assets other than the site itself, and hopes to sell
the landfill for industrial redevelopment prior to running out
of money at the end of its 30-year post-closure period. In
order to provide assurance that funds will be available in the
future to cover long-term care costs at a given facility, it will
be necessary to assess the need for additional post-closure
care while the facility is in an economic position to fund the
additional post-closure care.
Significant Expenditures May	To evaluate the financial impact of not establishing
Be Required for Extended	financial assurance beyond 30 years for post-closure care,
Post-Closure Care	we asked officials from the nine states in our sample to
identify the expected cost of post-closure monitoring and
maintenance in the 30th year of care for the hazardous waste
disposal facilities in our sample. For facilities where funds
had not been established for more than 30 years, post-closure
costs for year 30 ranged from approximately $400 to more
than $1 million, averaging more than $96,000 per facility.
Although significant expenditures are expected at these
facilities in year 30 of post-closure, there is no financial
assurance of funds for post-closure care during year 31 at the
same facilities. The absence of funds for monitoring and
maintenance of landfill facilities in year 31 could have a
significant adverse effect on state programs and the
environment.
Figure 3.2 on the following page illustrates potential
cumulative post-closure costs after the 30th year for
hazardous waste disposal facilities in nine states, assuming
that the post-closure costs in future years remain at the same
level as the costs in year 30 and there is no unexpected clean
up needed at these sites. We based our calculations on
facilities in our sample which were identified by their state
programs as needing more than 30 years of post-closure care
or had not been evaluated to determine whether they would
need additional post-closure care. In addition, all of the
facilities included in the calculation had financial assurance
established for 30 years, but none had financial assurance for
more than 30 years. We did not include the facilities in our
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sample which do not presently have financial assurance. We
also excluded all facilities from Alabama in our calculation
because Alabama requires the full 30 years of funds to be
maintained through year 30.
Of the hazardous waste facilities included in the calculation,
year 2013 will be the first year a facility will reach year 31 of
post-closure care. We assumed that the facilities included in
the calculation will continue to need post-closure care for a
number of years after year 30 and no financial assurance
funds will have been established for the additional period. In
year 2017, the nine states would be required to spend more
than $2.8 million on post-closure care. By year 2030, the
annual burden on states, for this group in post-closure,
would be almost $19 million and growing. We have
assumed all facilities will continue to need the same amount
of care after year 30, and it may turn out that some will need
less care. However, there may be additional costs we have
not included, such as unanticipated clean up costs. See
Figure 3.2.
Figure 3.2
Cumulative Post-Closure Costs
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EPA could have initially written RCRA regulations requiring
post-closure care in perpetuity, placing the burden of proof
on the facilities to demonstrate that a reduction in care would
not pose any threat to human health and the environment.
This issue was discussed in a 1988 Federal Register notice.
If this had been the requirement, the owners and operators
would have had a greater incentive to try to develop better
solutions to contain the waste into the indefinite future. In
addition, the facilities' owners and operators who profited
from the operating landfills would have been required to bear
the costs and responsibilities for monitoring and maintenance
of thousands of closed hazardous and municipal solid waste
landfills for the full period of necessary care. Instead, future
generations may be left with a significant environmental and
financial burden.
No Strategy Developed to	In a June 1990 report, GAO examined land disposal
Address GAP Concerns	practices, and the effectiveness of the funding for these long-
term liabilities. In the report, Hazardous Waste: Funding of
Post-closure Liabilities Remains Uncertain, GAO stated
that although EPA was aware of the potential for future
releases, it had not yet developed a strategy for addressing
these long-term post-closure concerns. EPA responded that
although they shared the concern of the effectiveness of
long-term care, it was not a current priority in 1990. They
also stated that it would take many years to obtain
substantive information to determine the effectiveness of
current hazardous waste requirements in protecting
groundwater from contamination. Ten years have elapsed
since the GAO report was published, and EPA still has not
developed a comprehensive strategy to address these long-
term post-closure concerns. GAO stated that long delays in
the evaluation of the effectiveness of current waste disposal
requirements have the potential to result in another
Superfund situation in future years.
Study Conducted on	As previously stated, it is not possible to accurately predict
Subtitle D Facilities	leakage contaminant quantities and production rates because
of the complexity and diversity of many waste sites, as well
as other factors difficult to control. Therefore, EPA
currently lacks the scientific basis to develop specific criteria
to determine the adequacy of 30 years of post-closure care at
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either Subtitle C or D facilities. Although wastes subject to
Subtitle C regulation have properties making them dangerous
or capable of having a harmful effect on human health the
environment, there have been no studies performed at this
time to evaluate the adequacy of 30 years of post-closure
care for Subtitle C facilities. An official in the Office of Solid
Waste (OSW) told us that studies of Subtitle C landfill
characteristics are resource intensive and OSW is not
currently funding work in this area. However, EPA's Office
of Research and Development recently funded a study
examining the adequacy of 30 years of post-closure
monitoring at Subtitle D landfills.
The objective of the Subtitle D study, which was conducted
at North Carolina State University, was to develop a
scientific basis to determine the appropriate length of time
for post-closure care at Subtitle D landfills to ensure
protection of human health and the environment. Scientists
state that although emissions are likely to continue well
beyond 30 years, EPA lacks criteria to define an appropriate
end point for post-closure monitoring. Without criteria to
demonstrate that an extension to 30 years is necessary,
landfills permitted in the 1990s may be state agencies'
responsibilities in the 2020s. We reviewed a draft of this
study, A Critical Evaluation of Factors Required to
Terminate the Post-Closure Monitoring Period at Solid
Waste Landfills. Draft results indicate that initial criteria
were developed to determine the point at which a landfill
becomes sufficiently stable to terminate the owner's
responsibility to monitor the site. Based on the draft results,
stability at a landfill is dependent on many complex factors.
The study found that a 30-year post-closure period may not
be adequate for a landfill to reach stability, and that
additional technical criteria will need to be established to
define leachate and gas stability. Scientists believe that an
assessment of the first group of landfills to reach the 30-year
post-closure status will need to be performed to further
develop criteria.
Initial feedback on the study indicates that EPA and the
stakeholders agree with the study's preliminary findings, and
the scientist we spoke to believes that criteria developed
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could be incorporated into an EPA policy for Subtitle D
facilities. As previously stated, there are no current studies
being conducted on site characteristics of Subtitle C
hazardous waste landfills. We were told that findings from a
study on Subtitle D facilities would not necessarily be
applicable to Subtitle C landfills. Since a hazardous waste
landfill may pose a significant risk to human health and the
environment, a study of hazardous waste landfills to
determine an appropriate length of time for post-closure care
should be a priority. Also, based on the draft finding of the
Office of Research and Development-funded study, further
research is needed to develop substantive criteria for Subtitle
D facilities. Information from these studies should be
incorporated into standard EPA guidance with specific
criteria so that regulating agencies can consistently evaluate
facilities on a case-by-case basis. Continued delays in
evaluating the effectiveness of current waste disposal
practices may result in harmful effects on human health and
the environment.
Conclusions	The long-term effectiveness of current land disposal practices
in controlling the release of contaminants is unknown. The
extent of potential post-closure liabilities at specific facilities
is unknown because of the current lack of available data.
The consequence of not addressing the problem of post-
closure care may be that the state or federal government will
be left with the financial burden of addressing any remaining
post-closure care necessary at these facilities. It is important
to assess the need for additional post-closure care while the
facility is in an economic position to fund additional post-
closure care. Rather than passing the problem of post-
closure care on to future generations, the problem should be
addressed now, and solutions implemented for each landfill
long before the end of the 30-year period. EPA needs to
assist in ensuring that the long-term stewardship of closed
landfills will provide maximum protection of public health
and the environment.
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Recommendations
We recommend that the Acting Assistant Administrator for
Solid Waste and Emergency Response:
3.1	Discuss with ASTSWMO the development of a
methodology for state programs to use in evaluating
facility post-closure care time frames.
3.2	Conduct further studies, as resources allow, to
develop criteria for the appropriate post-closure care
time frames at Subtitle C and D landfills.
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CHAPTER 4
ACCURATE COST ESTIMATES ARE
NECESSARY FOR FINANCIAL ASSURANCE
Accurate cost estimates are necessary to assure adequate
funding for closure and post-closure activities. However,
there is evidence that some facilities have submitted cost
estimates that were too low. Federal regulations require that
estimates for closure and post-closure care reflect costs of
having a third-party conduct the required activities to ensure
that adequate funds will be available even if the owner or
operator goes bankrupt. State program officials have
expressed concerns that underestimated costs could result in
insufficient funding of financial assurance mechanisms. We
were told that:
	cost estimates are difficult to review and that states
use different methods to review the estimates,
ranging from reviewer judgment to use of a standard
software package;
	monetary incentives exist for facility owners and
operators to underestimate costs for closure and
post-closure activities by lowering the cost of
establishing mechanisms for financial assurance (e.g.,
insurance premiums, surety bonds, and trust funds);
and
	it is easier for facilities to meet the requirements of
the financial test mechanism by underestimating
costs.
Without accurate cost estimates to assure adequate funding
for closure and post-closure activities, there is less assurance
that human health and the environment will be protected if
the owner or operator becomes financially insolvent and
funds are not available for closure and post-closure. In most
states, program officials are responsible for determining
whether or not the cost estimates are adequate based on
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closure and post-closure plans. EPA has helped some states
become more effective in reviewing cost estimates, but other
states could also benefit from similar assistance.
EPA Region IV Studies	EPA Region IV conducted two studies that evaluated
Show That Facilities	facility-submitted financial assurance cost estimates. Both
Underestimate Costs	studies concluded that most of the costs evaluated had been
underestimated. One of the studies included a sampling from
all Region IV states and found that 89 of 100 facilities had
submitted cost estimates that were too low. The total
amount of underestimated costs was approximately $450
million for these 89 facilities. In the other study, 35 facility-
submitted cost estimates were evaluated from one Region IV
state. The study found that the majority of these facilities
had underestimated costs for closure and post-closure
activities. Underestimated closure costs totaled $91 million,
and underestimated post-closure costs totaled $1.7 million.
Both studies found that some facilities had overestimated
costs. However, overestimated costs do not benefit EPA or
state programs since additional funds established by
overestimating costs would not be available to cover closure
and post-closure for facilities that did not provide adequate
financial assurance.
To address the underestimated costs, EPA Region IV
developed a manual entitled "Evaluating Cost Estimates for
Closure and Post-Closure Care of RCRA Hazardous Waste
Management Units." The purpose of the manual was to
provide EPA and RCRA Subtitle C permit writers with a
consistent, accurate, and rapid method for evaluating cost
estimates for closure and post-closure care of RCRA
treatment, storage, and disposal units. The Manual states
that the Region determined that cost estimates for closure
and post-closure care for a number of facilities were
significantly lower than the actual costs incurred. This
indicates that methods used for estimating the costs of
closure and post-closure care may have been inaccurate.
Inaccurate cost estimates may be caused by underestimating
costs of closure and post-closure care activities or by failing
to cost all activities that must be conducted. Region IV also
initiated the development of a software tool to evaluate
Region IV's Improvements to
the Cost Estimating Process
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financial assurance cost estimates for closure and post-
closure care of RCRA Subtitle C facilities. The software
tool incorporated the Manual's methodology saving even
more time over manual methods when evaluating cost
estimates. EPA Region IV officials informed us that all eight
states in their Region had been supplied with this software
tool, and had used it to review facility-submitted cost
estimates.
The Manual and software incorporate Means Cost Guides as
the primary sources of cost information and are recognized
as being reliable and comprehensive sources for construction
cost data. Means data is often specified as the standard for
construction costs both in the private sector and throughout
government, including such agencies as the Federal Housing
Administration, the Department of Defense, and the General
Services Administration. All cost data developed by Means
is supported by a system of indexes that enables clients to
localize output automatically to any one of more than 900
three-digit postal codes in the United States and Canada.
Updates to Means Cost Guides are available on an annual
basis. We also were informed of another software package
on the market, incorporating Means data, which can be used
by states to evaluate closure and post-closure cost estimates.
Feedback from Users of	Officials from four states in our survey reported using cost
Cost Estimating Software	estimating software during their review process. We
solicited feedback from these state program officials and
received positive comments. Listed below is some of the
feedback we received:
Previous to the use of the software, the accuracy of
each cost estimate review was subject to the level of
expertise and knowledge of the individual inspectors
performing the reviews.
Challenging cost estimates in the past was not
commonplace since having to research and look up
costs in different forms of documentation was very
difficult and required a lot of time.
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Prior to the use of the software, documentation and
guidance varied so much that some fuel blender
facilities that were very much alike were submitting
estimates for closure that varied from $100,000 to
$5,000,000. Since documentation for costs at this
time was so inconsistent it was very difficult to even
challenge the wide discrepancies for like facilities.
It's a very good tool for evaluating and comparing
like unit costs from different facilities.
The software saves time and allows the reviewer to
easily detect many deficiencies and discrepancies in
facility-submitted estimates.
States Need to Be Informed	While some states reported using cost estimating software,
About Cost Estimating Software officials in four of the nine states we contacted were unaware
that software existed for reviewing cost estimates. Use of an
automated software tool to review cost estimates would
assist and improve state programs by providing a significant
savings of time over the manual method of reviewing cost
estimates. Also, the software produces a more accurate and
complete method than reliance on the experience and
expertise of the cost estimate reviewer. Finally, an
automated program allows for a more consistent and
objective baseline which can facilitate discussions with
facilities on cost estimates that may need to be revised.
Although the software was developed by Region IV for
evaluating Subtitle C facility cost estimates, with minor
modifications it can also be used to evaluate Subtitle D cost
estimates.
Conclusions	To improve the cost estimating review process, we believe
that EPA should inform state Subtitle C programs and EPA
Regions of the option of using cost estimating software.
Furthermore, for states that request it, EPA could help those
states obtain software for reviewing closure and post-closure
cost estimates and any existing training for using the
software. In addition, EPA should modify the cost
estimating software developed in Region IV for use by state
Subtitle D financial assurance programs.
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Recommendations
We recommend that the Acting Assistant Administrator for
Solid Waste and Emergency Response:
4.1 Inform state Subtitle C and Subtitle D programs, and
EPA Regions of the option of using cost estimating
software. Furthermore, for states that request it, help
states obtain software for reviewing closure and post-
closure cost estimates. Any existing software
training materials should also be made available to
financial assurance programs requesting the software.
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APPENDIX I
SAMPLING METHODS AND DATA
To collect data on facilities regulated under Subtitle C, we selected a statistical sample of Subtitle
C facilities from a nine-state subset population in the RCRIS post-closure universe. The nine
states were Alabama, California, Connecticut, Missouri, New York, Ohio, Texas, Virginia, and
Washington. Data from these states represented approximately 40 percent of the RCRIS post-
closure universe. We further restricted the population to privately owned Subtitle C facilities
which were expected to have established financial assurance. Therefore, we excluded, from the
population government-owned facilities and facilities which were coded as non-notifiers in RCRIS.
Federal and state owned RCRA facilities are not required to establish financial assurance, and non-
notifiers would not be expected to have established financial assurance because they operate
illegally. We also excluded local government Subtitle C facilities. Only one of the nine states in
the population had a significant number of local government Subtitle C landfills in post-closure.
Since we drew the sample from the nine state subset population, our projections were made to the
population of nine states rather than to individual states. RCRIS does not contain data on financial
assurance, and we only relied on RCRIS for its list of facilities in post-closure from which we drew
our sample. We did not conduct a review of RCRIS internal controls.
Initially, there were 482 facilities in our nine state subset population of facilities in post-closure.
We selected a sample of 220 facilities from this population. However, we found when we
collected data that 31 of the facilities in our sample should not have been listed in the RCRIS post-
closure universe, and two more facilities were government owned and should have been excluded
from the subset population. Therefore, our sample size was reduced to 187. Based on our sample
results, we projected the subset population size for the nine states to be 410. Please see the table
in Appendix III for the distribution of mechanisms for hazardous waste facilities in post-closure
and closure and post-closure cost ranges and averages.
Since facilities listed in RCRIS are regulated under RCRA Subtitle C and there is no EPA database
for MSWLFs regulated under Subtitle D, we asked each of the nine states to supply us with a list
of their active MSWLFs. Of the nine states, we received data from seven. We did not receive
MSWLF data from Alabama or Washington State. Alabama does not have a financial assurance
program for MSWLFs, primarily because the Alabama legislature has not passed the necessary
legislation. Washington State was in the process of collecting the data when we made our request
and had not yet completed the task when we finished our fieldwork. Therefore, the table in
Appendix IV does not include data from Alabama or Washington State. Federal regulations do
not require MSWLFs to send copies of financial assurance records to the state agency. However,
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some states, such as New York, require MSWLFs to send in financial assurance documentation to
the state program.
We selected statistical samples of MSWLFs in California, Ohio, and Texas, and those states
provided MSWLF data for the sample facilities. Four states- Connecticut, Missouri, New York,
and Virginia- sent us data on the universe of active MSWLFs in the state. Connecticut only had
one active MSWLF. Data sent by Virginia included estimated closure and post-closure costs for
less than half of their MSWLFs. However, Virginia identified mechanisms for all of their
MSWLFs. We decided to include Virginia MSWLF data in the table in Appendix IV after we
compared the differences in calculations when we included and excluded the Virginia data. There
were no changes in the ranges of closure and post-closure costs. The only significant change in
weighted average costs was in the local government financial test, which decreased by
approximately 10 percent when Virginia data were included. The most significant change in
mechanisms was in the number of facilities using the local government financial test, which
increased by approximately 60 percent when Virginia data were included. Please see the table in
Appendix IV for the distribution of mechanisms for active municipal solid waste landfills and
closure and post-closure cost ranges and averages.
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APPENDIX II
FINANCIAL TEST REQUIREMENTS
Note - Following are summaries of some of the financial test requirements. These are included for
report discussion purposes only. This information cannot be used to determine compliance with
financial test requirements. There are additional financial test requirements for reporting which
are not listed.
Corporate Financial Test - Subtitle C Requirements
To pass the financial test the owner or operator of a permitted or interim status TSDF must
satisfy the following criteria.
Two of following three ratios -
	total liabilities to net worth less than 2.0
	sum of net income plus depreciation, depletion, and amortization to total liabilities
greater than 0.1
	current assets to current liabilities greater than 1.5;
Net working capital and tangible net worth each at least six times the sum of the current
closure and post-closure cost estimates and the current plugging and abandonment cost
estimates;
Tangible net worth of at least $10 million; and
Assets located in the United States amounting to at least 90 percent of total assets or at
least six times the sum of the current closure and post-closure cost estimates and the
current plugging and abandonment cost estimates.
Or, the owner or operator must satisfy the following alternate criteria.
A current rating for his most recent bond issuance of AAA, AA, A, or BBB as issued by
Standard and Poor's or Aaa, Aa, A, or Baa as issued by Moody's;
Tangible net worth at least six times the sum of the current closure and post-closure cost
estimates and the current plugging and abandonment cost estimates;
Tangible net worth of at least $10 million; and
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Assets located in the United States amounting to at least 90 percent of total assets or at
least six times the sum of the current closure and post-closure cost estimates and the
current plugging and abandonment cost estimates.
Corporate Financial Test - Subtitle D Requirements
The owner or operator of a MSWLF must satisfy one of the following three conditions:
1.	A current rating for its senior unsubordinated debt of AAA, AA, A, or BBB as issued by
Standard and Poor's or Aaa, Aa, A, or Baa as issued by Moody's;
2.	A ratio of less than 1.5 comparing total liabilities to net worth; or
3.	A ratio of greater than 0.10 comparing the sum of net income plus depreciation, depletion,
and amortization, minus $10 million, to total liabilities.
In addition, the tangible net worth of the owner or operator must be greater than:
A.	The sum of the current closure, post-closure care, corrective action cost estimates and any
other environmental obligations, including guarantees, covered by a financial test plus $10
million except as provided in paragraph B following.
B.	$10 million in net worth plus the amount of any guarantees that have not been recognized
as liabilities on the financial statements provided all of the current closure, post-closure
care, and corrective action costs and any other environmental obligations covered by a
financial test are recognized as liabilities on the owner's or operator's audited financial
statements, and subject to the approval of the State Director.
In addition, the owner or operator must have assets located in the United States amounting to at
least the sum of current closure, post-closure care, corrective action cost estimates and any other
environmental obligations covered by a financial test.
Local Government Financial Test - Subtitle D Requirements
The owner or operator of a local government MSWLF must satisfy either A or B as applicable:
(A) If the owner or operator has outstanding, rated, general obligation bonds that are not
secured by insurance, a letter of credit, or other collateral or guarantee, it must have a
current rating of Aaa, Aa, A, or Baa, as issued by Moody's or AAA, AA, A, or BBB as
issued by Standard and Poor's on all such general obligation bonds; or
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(B) The owner or operator must satisfy each of the following financial ratios based on the
owner's or operator's most recent audited annual financial statement:
(1)	A ratio of cash plus marketable securities to total expenditures greater than or
equal to 0.05; and
(2)	A ratio of annual debt service to total expenditures less than or equal to 0.20
The owner or operator must also prepare its financial statements in conformity with Generally
Accepted Accounting Principles for governments and have its financial statements audited by an
independent certified public accountant (or appropriate State agency).
In addition, a local government is not eligible to assure its obligations under CFR 40 Sec.
258.74(f) if it:
(A)	Is currently in default on any outstanding general obligation bonds;
(B)	Has any outstanding general obligation bonds rated lower than Baa as issued by
Moody's or BBB as issued by Standard and Poor's;
(C)	Operated at a deficit equal to five percent or more of total annual revenue in each of
the past two fiscal years: or
(D)	Receives an adverse opinion, disclaimer of opinion, or other qualified opinion from the
independent certified public accountant (or appropriate State agency) auditing its financial
statement as required. However, the Director of an approved State may evaluate qualified
opinions on a case-by-case basis and allow use of the financial test in cases where the
Director deems the qualification insufficient to warrant disallowance of use of the test.
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APPENDIX III
DISTRIBUTION OF FINANCIAL ASSURANCE MECHANISMS
FOR HAZARDOUS WASTE LANDFILLS IN POST-CLOSURE*
Financial Assurance
Mechanism
%of
Sample
Projected #
in
Population
Range of Closure and
Post-Closure Estimated
Costs Combined
Average of Closure
and Post-Closure
Estimated Costs
Financial Test/
Corporate Guarantee
34%
140
$45,290 -$107,909,032
$6,640,715
Captive Insurance
3%
11
$1,781,797 -$40,574,914
$13,307,166
Insurance
5%
20
$320,558 -$37,142,139
$12,799,589
Surety Bond
4%
18
$489,517 -$68,520,883
$13,266,513
Fully Funded Trust
Fund
5%
22
$66,780 -$1,032,411
$457,820
Partially Funded Trust
Fund
9%
35
$55,926 - $3,047,000
$913,872
Letter of Credit
21%
86
$88,757 -$67,621,604
$3,389,952
None Established
19%
79
Data Not Available
Data Not
Available
* Data for this table were obtained from nine states. Please see Appendix I for more details on
sampling methods and data.
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APPENDIX IV
DISTRIBUTION OF FINANCIAL ASSURANCE MECHANISMS
FOR ACTIVE MUNICIPAL SOLID WASTE LANDFILLS*
Financial Assurance
Mechanism
%of
Population
Projected #
in
Population
Range of Closure and Post-
Closure Estimated Costs
Combined
Weighted
Average of
Closure and
Post-Closure
Estimated
Costs
Financial Test/
Corporate Guarantee
0.6%
3
$ 3,371,140 - 13,317,263
$7,990,982
Captive Insurance
1.4%
7
$ 4,388,539 - 13,712,781
$9,857,193
Insurance
6.9%
35
$ 676,487 - 20,700,960
$8,115,694
Surety Bond
18.9%
96
$ 27,940 - 46,483,632
$7,887,404
Trust Fund
6.9%
35
$ 174,000 -22,310,485
$8,485,309
Letter of Credit
4.9%
25
$ 85,340 - 13,249,291
$2,401,695
Local Government
Financial Test
31.6%
160
$ 46,786 - 568,998,563
$10,556,183
State Approved
25.4%
129
$498,211 -76,944,080
$11,283,544
Combined
2.6%
13
$2,431,600 -31,721,165
$14,961,777
None Established
0.8%
4
Data Not Available
Data Not
Available
* Data were obtained from seven states for this table. Please see Appendix I for more details on
methods and data.
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APPENDIX V
AGENCY RESPONSE
March 27, 2001
MEMORANDUM
Subject: Response to OIG Draft Audit Report: "RCRA Financial Assurance for
Closure and Post-Closure"
From:
Michael H. Shapiro, Acting Assistant Administrator/s/
Office of Solid Waste and Emergency Response (5101)
To:
Mike Prater, Audit Manager
Headquarters Audit Division (2443)
The purpose of this memorandum is to transmit the Office of Solid Waste and Emergency
Response's response to the subject Office of Inspector General (OIG) draft audit report. Thank
you for the opportunity to comment on this draft report. As you are aware, we suggested this
subject area as a topic for your investigation. In addition to these comments, the Office of Solid
Waste (OSW) has commented on previous working drafts of the report. However, those drafts
did not include recommendations or Chapter 1. Following are our specific comments to the OIG
draft recommendations.
OIG Recommendations
Issue guidance to state financial assurance programs that when an insurance policy is used
for closure and post-closure financial assurance,
	the insurance policy should meet all requirements; and
	the state program should obtain verification from the insurance commissioner, in the state
where the insurance company issuing the policy is licensed, that the insurance policy
allows assignment of the policy to a successor owner or operator of the facility, in the
event the facility is sold outside of the corporate family of the seller.
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OSWER Response
OSW will work with the Office of General Counsel and key state insurance commissioners
to determine which insurance policies allow assignment. Depending upon the outcome of these
discussions, OSW will work with interested parties, and, if appropriate, will prepare draft
guidance for comment. If you have correspondence from state insurance commissioners on the
issue of assignment that we could include in this guidance, we would appreciate receiving a copy
of it. We would also like to receive the names and domiciles of the insurers you have identified
and the owners and operators who use them. This will assist us in our communications with state
solid and hazardous waste officials, insurance commissioners, and waste companies. Depending
upon whether and when such correspondence is available, we expect that this process could take
to the end of this calendar year to determine the need for and to prepare draft guidance for
comment.
OIG Recommendations
Investigate complex insurance issues with states and determine states' need for additional
guidance on these issues.
Work with the Association of State and Territorial Solid Waste Management Officials
(ASTSWMO) to develop an Internet bulletin board to increase opportunities for information
sharing among financial assurance program officials.
Discuss with ASTSWMO the development of a methodology for state programs to use in
evaluating facility post-closure time frames.
OSWER Response
ASTSWMO has requested that EPA discuss your report and our response to your
recommendations at their April 18th and 19th mid-year meeting. At that meeting, we intend to
request that they provide information to us about needs for additional guidance in the area of
insurance, whether they wish to implement a bulletin board, and ideas for developing
methodologies for evaluating post-closure time frames.
OIG Recommendation
Develop existing financial assurance training materials for placement on the Agency's
Internet site to be downloaded by state programs.
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OSWER Response
RCRA Hotline training material for the hazardous waste financial assurance requirements
is located at http://www.epa.gov/epaoswer/hotline/rmods.htm. This material provides an
introduction to the topic, but States sometimes request more detailed information. EPA has
responded to these requests in basically two ways. First, EPA has provided twelve hours of
satellite training on municipal financial assurance (except for the corporate test and guarantee),
that would involve conversion to files that would be too large for use on the Internet. The second
and more adaptable training materials, which EPA has presented to states in interested regions,
have been based upon overheads. The overheads generally limit the amount of information on
each screen because they are supplemented by the instructor. This also may not provide an
effective format for web based training. Before putting information on the web, OSW will ask
ASTSWMO for recommendations on the type of material, the primary audience (e.g. regulators
or owners and operators, and the presumed familiarity with the material), and the level of detail
that would be appropriate. Once we have ASTSWMO's feedback, and as resources allow, we
will develop material for the Internet.
OIG Recommendation
As resources allow, conduct further studies to develop criteria for the appropriate post-
closure time frames at Subtitle C and D facilities.
OSWER Response
Currently, the OSW is reviewing information from studies funded by the Office of
Research and Development on the stability of municipal landfills and their production of leachate
and gas. We are sharing this information with the states to help inform their decisions about the
length of the post-closure period. As noted in your report, we currently have no additional
research available on hazardous waste landfills and it is difficult to predict when funding for such
studies will become available.
We also intend to seek state help in identifying municipal solid waste landfills (MSWLFs)
that collect and analyze leachate for hazardous constituents. The goal would be to analyze long-
term data on leachate quality to help determine the time frame at which leachate no longer poses a
threat to human health and the environment. Assuming that the states decide to work with us, we
would begin work later this fiscal year, and hope to complete the analysis next fiscal year.
OIG Recommendations
Inform state Subtitle C programs and EPA regions of the option of using cost estimating
software and help states, that request it, obtain software for reviewing closure and post-closure
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cost estimates. Any existing software training materials should also be made available to financial
assurance programs requesting the software.
Modify the cost estimating software developed for Region IV so that it can be distributed
to states that request the software, for reviewing Subtitle D landfill cost estimates.
OSWER Response
We will request that ASTSWMO ask which of their members desire copies of the
software, and we will make copies available to those states. Our understanding is that the most
recent version of the software includes information that can be used for estimating costs for
municipal solid waste landfills. Therefore, we should be able to provide this information when
states request copies.
Other Comments on the Report
We had some comments on the other portions of the report and appreciate your
addressing those concerns at our March 22nd meeting. Accordingly, I have not included those
comments in this memorandum.
As you may be aware, the Agency has been directed in its 2001 appropriation to conduct a
study of existing financial assurance agreements to determine if sufficient safeguards have been
properly maintained and future liabilities minimized for municipal solid waste landfills. Your
report will assist us in responding to this request. We thank you for this study.
I would like to acknowledge the excellent cooperation we experienced working with OIG
staff during this audit. If you have any questions, please contact Dale Ruhter at (703) 308-8192.
cc: Steve Luftig
Elizabeth Costworth
Dale Ruhter
Sonya Sasseville
Bob Hall
Bob Dellinger
Anne Andrews
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APPENDIX VI
REPORT DISTRIBUTION
Inspector General
Assistant Inspector General for Office of Program Evaluation
Headquarters Audit Liaison (Carol Jacobson)
Divisional Inspectors General for Audit (and sub-offices)
Acting Assistant Administrator for Solid Waste and Emergency Response
Acting Assistant Administrator for Enforcement and Compliance Assurance
Comptroller
Agency Follow-up Official
Agency Follow-up Coordinator
Assistant Administrator for Congressional and Intergovernmental Relations (1301 A)
Elizabeth Cotsworth (5301W)
Johnsie Webster (5103)
Gregory Marion (2201 A)
Anne Andrews (5305W)
Stephen Heare (5303W)
Robert Dellinger (5306W)
Deborah Hani on (5306W)
Sony a Sasseville (5303W)
Dale Ruhter (5303W)
Nina Rivera (23 66A)
Betsy Smidinger (2246A)
Christine McCulloch (2246A)
Peter Neves (2273A)
Mary Bell (2273A)
Robert Hall (5303W)
Eileen Larence
Abe Oberkor, Alabama
Russell Kelly, Alabama
Sue Laney, California
Richard Castle, California
Wade Cornwell, California
David Nash, Connecticut
Kevin Sullivan, Connecticut
Inga Rubeca, Connecticut
Cindy Kemper, Missouri
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Jim Hull, Missouri
Henry Hamilton, New York
Amy Feiden, New York
Pam Allen, Ohio
Sharon Gbur, Ohio
Fanny Haritos, Ohio
Matt Boyer, Ohio
Dale Burnett, Texas
John Racanelli, Texas
Darin Rice, Washington
Randy Martin, Washington
Mary Ellen Kendall, Virginia
Virginia Butler, Virginia
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