58 FR 9026-9060 Thursday, Feb. 18, 1993 Underground Storage Tanks Containing Petroleum; Financial Responsibility Requirements
ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 280
[FRL-4128-9]
RIN 2050-AC67
Underground Storage Tanks Containing Petroleum;
Financial Responsibility Requirements
AGENCY: Environmental
Protection Agency.
ACTION: Final rule.
SUMMARY: The Environmental
Protection Agency (EPA, or the Agency) is promulgating financial
responsibility requirements applicable to local governmental owners
and operators of underground storage tanks containing petroleum.
EPA promulgates these requirements under the authority of section
9003 (c) and (d) of the Resource Conservation and Recovery Act
as amended by the Hazardous and Solid Waste Amendments of 1984
(HSWA) and the Superfund Amendments and Reauthorization Act of
1986 (SARA). This rule establishes four alternative mechanisms
for use by local governments to demonstrate financial responsibility
for taking corrective action and compensating third parties for
bodily injury and property damage caused by sudden and nonsudden
accidental underground storage tank releases. The Agency is adding
these local governmental financial assurance mechanisms to the
existing mechanisms contained in the financial responsibility
rule promulgated October 26, 1988. These additional mechanisms
will allow a greater number of local governmental entities to
comply with the financial assurance requirements and will result
in a net cost savings to local governments estimated at approximately
$32 million over a ton year period.
EFFECTIVE DATE: This rule
becomes effective on March 22, 1993.
FOR FURTHER INFORMATION CONTACT: The RCRA/Superfund
Hotline at (800) 424-9346 (toll free) or (703) 412-9810 in Virginia,
or Sammy Ng in EPA's Office of Underground Storage Tanks at (703)
308-8882.
SUPPLEMENTARY INFORMATION: The contents of today's
preamble are listed in the following outline:
I. Authority
II. Background
A. Legislative and Regulatory Overview
1. RCRA Subtitle I
2. October 26, 1988 Rule
3. Discussion of the Financial Responsibility Requirements for Governments in the October 26, 1988 Rule
4. The Proposed Rule
B. Key Provisions in Today's Rule
C. Rationale for Agency's Approach
D. Description of the Regulated Community
III. Section-by-Section Analysis
A. Applicability
B. Definition of Terms
1. Bond Ratings
2. Investment Grade Bonds
3. General Obligation Bonds
4. Revenue Bonds
5. Substantial Governmental Relationship
C. Amount and Scope
IV. New Mechanisms for Demonstrating Financial Responsibility
A. Description of Mechanisms
1. Bond Rating Test
2. Local Government Financial Test (§ 280.105)
3. Governmental Guarantee (§ 280.106)
4. Maintenance of a Fund Balance (§ 280.107)
5. Combinations of Mechanisms
B. Reporting by Owner or Operator
C. Recordkeeping
D. Bankruptcy or Other Incapacity of the Owner or
Operator
V. Economic Impact Analysis
A. Economic Impact Analysis
1. Compliance with Executive Order 12291
2. The Affected Community
3. Assumptions and Methodology Used in the EIA
4. Cost Impacts
5. Environmental Impacts
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
VI. Supporting Documents
I. Authority
These regulations are issued under the authority
of sections 2002, 9001, 9002, 9003, 9004, 9005, 9006, 9007, and
9009 of the Solid Waste Disposal Act, as amended. The principal
amendments to this Act have been under the Resource Conservation
and Recovery Act of 1976, the Hazardous and Solid Waste Amendments
of 1984 (Pub. L. 98-616) and the Superfund Amendments and Reauthorization
Act of 1986 (Pub. L. 99-499) (42 U.S.C. 6912, 6991, 6991a, 6991b,
6991c, 6991d, 6991e, 6991f, and 6991h).
II. Background
This section provides the legislative and regulatory
background for this rule and summarizes today's additional mechanisms
for financial responsibility for local government entities.
A. Legislative and Regulatory Overview.
This section discusses the statutory authority for
financial responsibility regulations for UST owners and operators,
the provisions of the financial responsibility regulations promulgated
on October 26,1988 and the scope of the financial responsibility
regulations being promulgated today.
1. RCRA Subtitle I
The Hazardous and Solid Waste Amendments of 1984
(HSWA) extended and strengthened the provisions of the Resource
Conservation and Recovery Act (RCRA). HSWA added Subtitle I to
RCRA, establishing provisions for the development and implementation
of a regulatory program for underground storage tanks (USTS) containing
certain substances, including petroleum and other regulated substances
(such nonpetroleum regulated substances are hereinafter referred
to as "hazardous substances"). Section 9003(a) of Subtitle
I requires the EPA Administrator to promulgate requirements for
release detection, prevention, and correction as necessary to
protect human health and the environment. These technical standards
were promulgated at 53 FR 37082 (September 23, 1988).
The Superfund Amendments and Reauthorization Act
of 1986 (SARA) amended sections 9003 (c) and (d) of Subtitle I
to mandate that the Agency establish financial responsibility
requirements for UST owners and operators to assure the costs
of corrective action and third-party liability caused by sudden
and nonsudden accidental releases from USTS. SARA also modified
Subtitle I by specifying the minimum statutory levels of financial
responsibility for petroleum marketers and the factors that EPA
may consider in setting minimum levels for non-marketers. The
objective of the financial responsibility requirements is to ensure
that owners and operators can respond promptly to clean up releases
and to compensate third parties for any injuries or damages associated
with UST releases.
2. October 26, 1988 Rule
The final financial responsibility rule, promulgated
on October 26,1988 applies to owners or operators of "petroleum
UST systems" with the followings, exceptions:
(1) Federal or State entities that own or operate
USTs containing petroleum; and
(2) Owners and operators of tank systems excluded
from the technical standards.
To cover the potential costs of corrective action
and third-party liability claims from sudden and nonsudden accidental
releases from USTS, the rule requires the following parties to
obtain financial assurance of at least $1 million per occurrence:
(1) All owners or operators of petroleum USTs at
facilities engaged in petroleum production, refining, or marketing;
and
(2) Owners or operators of USTs with an average monthly
throughput of more than 10,000 gallons.
Owners or operators of USTs at facilities not engaged
in petroleum production, refining, or marketing with an average
monthly throughput of 10,000 gallons or less must maintain financial
assurance of at least $500,000 per occurrence. All owners or operators
must maintain an annual aggregate of $1 million or $2 million,
depending on the number of USTs assured. The responsibility for
cleanup and thirdparty compensation in the event of UST releases
was established under the technical standards published in September
1988. The October 1988 financial responsibility rule made owners
and operators responsible for complying with the financial responsibility
requirements, but otherwise imposed no new liability; rather,
the rule was intended to verify that local government owners or
operators of USTs would be able to meet their liabilities in the
event of an UST release. It is important to note that exemption
from the financial responsibility requirements would not exempt
an owner or operator from their liabilities in the event of an
UST release.
UST owners or operators may use the following mechanisms
to satisfy the requirements: Insurance or risk retention group
coverage, surety bond, guarantee, letter of credit, financial
test of self-insurance, trust fund, a State required mechanism,
or a State fund or other State assurance. (Under the October 26,
1988 rule, only private companies reporting to credit reporting
agencies, publicly-held companies reporting to the Securities
and Exchange Commission, and public utilities reporting to specified
agencies are eligible to use the financial test of selfinsurance.)
Mechanisms can be used alone or in combination to cover the costs
of taking corrective action and compensating third parties as
long as a mechanism or a combination of mechanisms provides the
full amount of required assurance. The only combination of mechanisms
that is not allowed is the financial test of selfinsurance and
a guarantee where the financial statements of the owner or operator
and the guarantor are consolidated.
The October 26, 1988 final rule requires owners or
operators to submit documentation of financial responsibility
to the implementing agency for three occurrences: (1) After a
known or suspected release occurs, (2) when a provider becomes
incapable of providing assurance, and (3) when a provider revokes
a mechanism and the owner or operator is unable to obtain alternate
coverage. Owners or operators must also submit documentation of
financial responsibility if requested by the implementing agency.
In addition, UST owners or operators must notify the implementing
agency of their methods of demonstrating financial responsibility
upon installation of new tanks. Owners or operators must also
maintain records of the financial assurance mechanisms used to
satisfy these requirements on-site or at their place of business.
The October 26, 1988 rule also contains provisions
that require thirdparty providers of financial assurance (i.e.,
sureties, insurance companies, risk retention groups, guarantors,
and providers of letters of credit) to provide notice of cancellation
with an adequate time period for the UST owners and operators
to seek alternative coverage and to determine whether there has
been a release that would trigger the third-party mechanism. On
November 9, 1989, EPA published an interim final rule that modified
the required language of endorsements required for insurance policies
as they relate to cancellation (54 FR 47077).
The State program approval objective for financial
responsibility of owners and operators of petroleum UST systems
was also promulgated October 26, 1988. This objective outlines
two general provisions: (1) The considerations used to determine
whether States' financial responsibility requirements will be
considered "no less stringent" than the corresponding
Federal requirements standard, and (2) the standards that must
be met to demonstrate adequate enforcement of compliance.
3. Discussion of the Financial Responsibility Requirements
for Governments in the October 26, 1988 Rule
Although the final financial responsibility rule
(53 FR 43322, October 26, 1988) exempts those government entities
whose debts and liabilities are the debts and liabilities of Federal
or State governments, local government entities are required to
provide financial assurance for USTs that they own or operate.
Under the Agency's schedule for phased compliance with the final
rule, local government entities have been given until February
18, 1994, one year from the promulgation of today's rule, to comply.
In the October 1988 final rule, the Agency stated its intention
to develop a financial test in the interim that would allow local
governments to demonstrate that they have the requisite financial
strength and stability to pay the costs associated with UST releases.
After passing this financial self-test, local government entities
will be allowed to demonstrate financial responsibility in a manner
similar to private companies that meet the criteria of the corporate
financial test of selfinsurance.
Under the compliance schedule, Indian tribes are
required to comply with financial responsibility requirements
under the same schedule as local governments; that is, within
one year from the promulgation of today's rule (i.e., before February
18, 1994).
4. The Proposed Rule
The proposed rule was published on June 18, 1990.
The Agency received comments from 23 commenters. Most supported
the development of the new financial responsibility mechanisms,
stating that these additional mechanisms allow more local governments
to comply with the financial assurance requirements, and that
they would be able to do so at lower cost. Some commenters suggested
changes or additions to the mechanisms proposed. Where appropriate,
the Agency has adopted these suggestions. The specific issues
raised and the Agency's responses are addressed in "Summary
of Comments and Responses on Proposed Additional Financial Responsibility
Mechanisms for Local Governments Subject to Subtitle I of the
Resource Conservation and Recovery Act. "
One commenter proposed as a new alternative mechanism
that EPA issue regulations allowing implementing agencies to redirect
funds from Federal or State-funded programs to pay for the expenses
associated with corrective actions. The Agency rejected this suggestion
because it has no statutory authority to redirect funds from other
State or Federal programs.
B. Key Provisions in Rule
In today's rule, the Agency is providing additional
mechanisms that will allow local governments to comply with the
financial responsibility requirements. These mechanisms do not
replace the existing methods; rather, they supplement them. These
mechanisms are similar in intent to the corporate guarantee and
the financial test of self-insurance now allowed as mechanisms
for corporations. Local governments eligible to use the mechanisms
may use them alone or in combination with other mechanisms, as
described below.
One commenter questioned the language indicating
that all local governments "may use" the now financial
assurance mechanisms, since the criteria associated with using
the mechanisms by definition restricts their use by certain entities.
The Agency emphasizes that all local governments may seek to use
all mechanisms, but only those that meet all qualifying criteria
may use a specific mechanism to demonstrate financial responsibility.
EPA is promulgating four additional mechanisms for
use by local government entities to demonstrate financial responsibility:
(1) Bond rating test. Local government entities with
$1 million or more of total outstanding issues of general obligation
bonds (excluding refunded obligations) and having investment-grade
ratings would be eligible to demonstrate financial responsibility.
Non-general purpose local governments (e.g., special districts
and school districts) with $1 million or more of investment-grade
revenue bonds may also use this mechanism if they do not have
the authority to issue general obligation bonds. General obligation
bonds that are backed by credit enhancement mechanisms other than
bond insurance may not be included in the bond rating test. Revenue
bonds that are backed by any type of credit enhancement mechanism
may not be included in the bond rating test. Bonds with investment
grade ratings are defined as those having a Moody's bond rating
of Baa or higher (i.e., Aaa, Aa or A), or a Standard and Poor's
bond rating of BBB or higher (i.e., AAA, AA, or A). Passing the
bond rating test will be considered a sufficient demonstration
of financial responsibility.
(2) Worksheet test. A worksheet test has been developed
for use by local government entities that do not have general
obligation or revenue bond ratings or that have less than $1 million
in outstanding issues of investment-grade-rated general obligation
or revenue bonds. (Governments meeting the requirements of both
the bond rating test and the worksheet test may use either mechanism
but are assumed to use the bond rating test as a matter of administrative
convenience.) Local governmental entities having outstanding issues
of general obligation or revenue bonds that are rated as less
than investment grade are not eligible to use the worksheet test.
The worksheet incorporates several financial criteria designed
to measure a local government entity's financial stability. Passing
the worksheet test will be a sufficient demonstration of financial
responsibility.
(3) Guarantee. A local government entity can demonstrate
financial responsibility by obtaining a binding guarantee from
another governmental entity able to demonstrate financial responsibility
assurance through the alternative mechanisms. The guarantor must
have the authority to provide a guarantee to the local government
entity seeking financial assurance. For example, a town may serve
as the guarantor for a special district, a county may serve as
the guarantor for a school district, a State may serve as the
guarantor for a county, or a city may act as a guarantor to a
special district (e.g., a transportation authority or a government
utility). A guarantee for the entire aggregate limit for which
a local government must demonstrate financial responsibility will
be a sufficient demonstration of financial responsibility. A guarantee
for a lesser amount may be used in combination with one or more
other allowable mechanisms to demonstrate financial responsibility.
(4) Maintenance of a funded balance. Local government
entities may satisfy the financial responsibility regulations
by developing a self-administered emergency response fund to finance
an UST corrective action and pay for thirdparty damages. A fund
balance established for the entire aggregate limit for which a
local government must demonstrate financial responsibility will
be a sufficient demonstration of financial responsibility. A fund
balance established for a lesser amount may be used in combination
with one or more other allowable mechanisms to demonstrate financial
responsibility.
The October 1988 rule -allows the use of combinations
of financial responsibility mechanisms. This feature is extended
to include the financial selftest mechanisms being promulgated
today. For example, a local government entity may use the guarantee
or funded balance mechanisms to satisfy the deductible amounts
of insurance policies. Local governmental entities may use the
mechanisms being promulgated today in addition to the mechanisms
allowed by the October 1988 rule: insurance, risk retention group
(RRG) coverage, surety bond, letter of credit, State-required
mechanisms, or a State fund or other State assumption of responsibility.
In contrast to the specifications for the corporate
self-test, EPA does not believe that local governments will use
consolidated financial statements to support both the worksheet
and the guarantee mechanisms. Local governments are separate legal
and financial entities from States and from each other. The situation
wherein a local government will consolidate its financial statements
with a State, or vice versa, and use the consolidated statements
to support both the worksheet and the guarantee, cannot occur.
In addition, most local governments are independently chartered.
By the nature of the local government charters, local government
operations that are consolidated, such as utility operations accounted
for as enterprise funds, never issue standalone financial statements,
because they have no independent standing. Thus, there is no potential
that the consolidated entities could first use their own financial
statements for the worksheet, and then rely on the consolidated
financial statements for a guarantee, because they have no independent
financial statements. Independent authorities (e.g., independent
school districts) are independent because they have separate charters
and/or articles of incorporation; they operate independently and
their financial statements are never consolidated with the statements
of the nearby general purpose governments. To support this rule,
the Agency has prepared a Background Document, "Background
Document in Support of Financial Self-Test for Local Governments
Subject to the Financial Responsibility Requirements of Subtitle
I of the Resource Conservation and Recovery Act," that describes
in detail the methodology and analyses used to evaluate potential
financial responsibility mechanisms.
C. Rationale for Agency's Approach
The Agency had four main goals in developing the
additional alternatives being promulgated today for local governments
to demonstrate financial responsibility under Subtitle I. First,
the Agency wanted to recognize fundamental differences between
governmental entities and private entities. Second, the Agency
wanted to keep the rule as flexible as possible to allow local
governments a variety of choices in demonstrating financial responsibility.
Thus, the Agency is promulgating several financial assurance mechanisms
for local governments. Third, the Agency wanted to keep the mechanisms
as simple as possible to minimize the administrative burden on
local governments as well as the implementing agency. Thus, the
Agency is promulgating options that use data believed to be readily
available to local governmental entities or that are consistent
with governmental practices and is maintaining the same approach
to reporting requirements adopted in the regulations published
in the October 1988 rule. Fourth, the Agency wanted financial
responsibility mechanisms that could realistically be used by
local governments.
In the October 1988 rule, the Agency provided a mechanism
whereby financially secure corporations can self-insure. The rule
provided two alternatives for corporations. Under Alternative
I, a firm can self-insure if it meets four criteria: (1) Tangible
net worth equal to 10 times the sum of its
financial responsibility amounts for undeground storage tanks, its
closure, post-closure care, liability coverage, and/or
corrective action costs for Subtitle C facilities, and its
plugging and abandonment costs for Class I Hazardous Waste Injection
Wells, (2) tangible net worth equal to at least $10 million, (3)
annual filing of its financial statements with the Securities
and Exchange Commission (SEC), the Rural Electrification Administration
(REA), the Energy Information Administration (EIA), or Dun &
Bradstreet (which must have assigned a financial strength rating
of 4A or 5A), and (4) annual reports which, if independently audited,
did not include an adverse auditor's opinion or a disclaimer of
opinion. Under Alternative II, a corporation can selfinsure if
it meets four criteria: (1) Tangible net worth of at least $10
million, (2) tangible not worth at least six times its UST obligation,
(3) U.S. assets equal to at least 90 percent of total assets,
or at least six times its UST obligations, and (4) net working
capital equal to at least six times the required amount of UST
aggregate coverage, or a current Standard and Poor's bond rating
of AAA, AA, A, or BBB, or a current Moody's bond rating of Aaa,
Aa, A, or Baa. In addition, a firm using Alternative II must either
report its financial information to the SEC, the EIA, or the REA
or obtain a special auditor's report.
Local government entities, however, differ in several
important characteristics from corporations, which makes the application
of the corporate self-test mechanism in the October 1988 rule
impractical for local governments. For example, "general
purpose" local governments (counties, municipalities, and
townships) generally use accounting systems that do not recognize
assets in a manner similar to private companies. For example,
municipal buildings and infrastructure (e.g., streets and utility
lines) are not generally carried as assets on the local government
financial statements. Thus, a test based on "tangible net
worth" is, by definition, unworkable for many local governments.
(It should be noted, however, that government-owned utilities
that provide financial data to the Rural Electrification Administration
or the Energy Information Administration are allowed to use the
corporate financial test under the October 1988 rule.) Also, the
accounting standards used by most local governmental entities
are not the same as the Generally Accepted Accounting Principals
("GAAP") used by private entities. Most local governments
use either cash basis accounting (often mandated by State law)
or "modified" accrual accounting, where the recognition
of revenues may be delayed. Consequently, a test based on "net
working capital" may be unworkable for most local governmental
entities. In addition, local governments are not generally required
to report financial information to a regulatory agency similar
to the Securities and Exchange Commission. Thus, it is impossible
to incorporate mandatory reporting to an independent organization
into a selftest.
Nevertheless, the Agency believes that a mechanism
parallel to self-insurance is particularly appropriate for local
government entities. The Agency has determined that local government
entities are, in general, more financially stable than private
companies. Most local governments, unlike private entities, have
the authority to levy taxes or to independently set rates, which
provide a consistent, reliable source of income. In contrast to
corporations, they are less likely to dissolve or merge with other
entities which means that they are less likely to have abrupt
changes in financial structure. They are, by definition, geographically
fixed, eliminating potential concerns that they may move and abandon
their USTS. They rarely go bankrupt, suggesting that they are,
as a class, more financially stable. As discussed in the background
document, the available literature suggests that even bankruptcy
does not allow local government entities to void their legal obligations.
Additionally, unlike some private companies, local governments
are generally required to make their financial data publicly available.
These factors suggest that a self-test for municipalities
does not necessarily require the same level of built-in safeguards
as required of private entities. Assurance that local government
owners and operators will be financially responsible for their
UST related obligations, therefore, can be demonstrated more easily
than assurance for private entities. Consequently, the primary
concern of the Agency in developing this rule is that local governments
show evidence of financial stability and prudent financial management.
D. Description of the Regulated Community
This section describes the nature of the local governmental
entities that would be regulated under today's rule, including
a description of their UST ownership characteristics, a brief
description of their operation, and an overview of the considerations
the Agency has used in developing today's rule.
The Agency estimates that about 62,000 petroleum
USTs that are subject to Subtitle I jurisdiction are owned or
operated by approximately 25,000 local government entities. Most
of these USTs store petroleum products for purposes other than
retail motor fuel sales. A local government entity may, for example,
own USTs that store gasoline to fill police and fire vehicle tanks.
Local government entities include both general purpose
local governments and special purpose local government entities.
General purpose local government entities include municipalities,
counties, townships, towns, villages, parishes, and New England
towns. Special purpose local governments include entities that
perform a single function or a limited range of functions. Special
purpose local governments are generally designated as either public
authorities or special districts such as school districts, water
and sewer authorities, transit authorities, redevelopment authorities,
irrigation districts, or power authorities. All local governments,
both general and special purpose, are subject to this rule and
are eligible to use the new financial assurance mechanisms described
in today's rule. Several commenters requested an expansion or
clarification of the definition of local government entities to
include local public transit systems and redevelopment authorities.
The Agency originally intended these types of local government
entities to be included in the definition, and has clarified the
definition as requested by the commenters.
The Agency's research has shown an extremely low
rate of fiscal emergencies among governmental entities through
the 1970s and 1980s. A 1983 study by the Advisory Council on Intergovernmental
Relations (ACIR) found only three incidents of bankruptcy among
general purpose governments, only one of which caused a general
purpose governmental body to void a legally binding agreement.
In all other cases, even local government entities that entered
bankruptcy were forced to make full restitution, although sometimes
over a stretched-out payment term. Since 1983, only five additional
general purpose governments are known to have declared bankruptcy.
There has been a similarly low rate of bankruptcy among special
purpose districts. Between 1972 and 1989, 29 utility special districts,
two school districts, and six other special purpose districts
and hospitals filed for bankruptcy (out of a total of more than
40,000 school districts and special purpose districts).
Although bankruptcy is an extreme condition, the
Agency believes this very low incidence (0.003 percent per year)
reflects general stability of local government entities. In contrast,
56,423 (1.3 percent) of the 4,256,243 private companies in operation
filed bankruptcy petitions in 1982. ("Statistical Abstract
of the United States," 109th Edition. United States Department
of Commerce, Washington, D.C., 1989; and "General Report
on Industrial Organization," 1982 Enterprise Statistics.
Issued October 1986.) This number increased to 88,278 in 1987.
Combined with the relatively low costs of UST financial responsibility
obligations (relative to other environmental obligations and most
governmental activities in general), the relative stability of
local governments is interpreted by EPA to indicate a general
ability to meet financial obligations under Subtitle I.
In addition, the Agency's research has shown relatively
few cases where releases were known to have come from local government-owned
USTS. For releases that did occur, local government entities were
generally able to clean up and to pay for the costs of corrective
actions associated with the releases. Because of the limited data
regarding local government responses to UST releases, however,
the Agency has relied primarily on data and analyses regarding
the overall financial health of local governments. One commenter
indicated that cleanups of UST releases at airports are generally
funded from operations or funds for construction projects. The
Agency interprets this statement as additional support for allowing
local governments to demonstrate financial responsibility based
on their internal financial condition, rather than requiring the
use of third-party mechanisms.
III. Section-by-Section Analysis
A. Applicability
Today's rule would apply to all non-exempt governmental
owners and operators of underground storage tanks containing petroleum.
40 CFR § 280.90(c) exempted from financial responsibility
requirements State and Federal government entities whose debts
and liabilities are the debts and liabilities of a State or the
United States. Although the October 1988 rule excluded State and
Federal governments, it required local government entities to
demonstrate financial assurance for USTs that are owned or operated
by the government.
Data available to the Agency in preparing the Regulatory
Impact Analysis for the October 1988 rule suggest that local government
entities collectively own approximately 62,000 USTS. Additional
analysis of the New York State tank notification data base suggests
that larger local government entities are more likely to own USTs
and are more likely to own multiple USTS, but a specific breakdown
of how many of each type of local government own USTs is not available
from the data available to EPA. Overall, EPA estimates that about
approximately 25,000 local governments own USTS.
Local government entities are created under State
law, and consequently vary significantly from State to State.
All local government entities recognized under State law may seek
to use the financial assurance mechanisms being promulgated today.
As recognized by the Bureau of the Census, local government entities
generally fall into the following categories:
County Governments: Organized county governments
are found throughout the nation except for Connecticut, Rhode
Island, the District of Columbia, and limited portions of other
States. In Louisiana, the county governments are officially designated
as "parish" governments, and the "borough"
governments of Alaska resemble county governments in other States.
In general, county governments are defined in terms of a geographical
area served, rather than a specific population.
Municipal Governments: Municipal governments include
active government units officially designated as cities, boroughs
(except in Alaska), towns (except in the six New England States
and Minnesota, New York, and Wisconsin), and villages. This concept
corresponds to the "incorporated places" that are recognized
in Census Bureau reporting of population and housing statistics.
Township Governments: Township governments exist
to serve inhabitants of areas without regard to population concentrations.
This category includes governments officially designated as "towns"
in the six Now England States, Now York, and Wisconsin, some i4plantations"
in Maine, and "locations" in New Hampshire, as well
as governments called townships in other areas. In Minnesota,
the terms "town" and "township" are used interchangeably.
School Districts Governments: Fortyfive States have established public school systems with sufficient autonomy and fiscal authority that they can be classified as independent local government entities.
Special Purpose Districts: Special purpose districts
are governmental entities created to perform a single or limited
range of functions (e.g., school districts, park and recreation
districts, libraries, fire protection districts, cemeteries, transit
districts, redevelopment authorities, etc.). These districts may
be subdivided into any of the following distinct categories: (1)
Local or metropolitan districts; (2) districts dependent on or
independent of a municipality for their creation or operation;
and (3) districts created by State enactment or by municipal resolution.
They have sufficient administrative and fiscal autonomy to qualify
as separate governments.
Indian Tribes: Indian Tribes are included in the statutory definition of municipality in RCRA Section 1004(13) and are, therefore, required to comply with the financial responsibility requirements by the same compliance date as other local government entities. This rule treats Indian Lands as local government entities and allows them to use the self-test mechanisms to demonstrate financial responsibility.
Several commenters requested exemptions from the
UST financial responsibility requirements for local governments.
Commenters gave the following reasons for such an exemption: (1)
Local governments, as a class, have sufficient financial strength
and stability to pay for corrective actions without the need to
demonstrate financial responsibility; and (2) the adverse effects
on the ability of local governments to fund emergency services
if required to divert funds to pay for assurance mechanisms. One
commenter, a small rural town, indicated that it cannot qualify
to self-insure and added that the financial responsibility regulations
impose financial burdens with which the town, and presumably other
towns, could not possibly comply.
EPA believes that commenters may have failed to distinguish
between: (1) The need for local governments to pay for costs associated
with UST releases, as required under the technical standards;
and (2) the financial responsibility regulations, which merely
require that UST owners be able to demonstrate that they will
be able to meet such costs if they occur. Even if EPA were to
exempt local governments from the requirement to demonstrate financial
responsibility, such an exemption would not, under Subtitle I,
relieve them from the legal liability to pay for the costs of
UST releases and to compensate third parties for damages caused
by releases.
The Agency agrees that most local government entities
do have the resources and the will to meet financial responsibilities.
This belief underlies the effort to develop mechanisms by which
local governments can demonstrate compliance with the financial
responsibility requirements without the need to obtain insurance
or the use of other third-party mechanisms.
The Agency also agrees with commenters who noted
that some local governments may not have the resources to meet
their UST-related financial obligations. Consequently, it would
not be appropriate to exempt all local governments from the need
to demonstrate financial responsibility. Further, EPA believes
that exempting all local governments from the requirement to demonstrate
financial responsibility would not be consistent with statutory
intent as discussed in 9003(d)(5).
The Agency notes the concern about the potential
impact on local governmental services. The Agency believes, however,
that the mechanisms provided will allow any fiscally solvent local
government to demonstrate financial responsibility and continue
to operate its USTS, and will do so at minimum cost to the affected
local governments. EPA encourages governments unable to demonstrate
financial responsibility using the worksheet, bond rating, or
fund balance mechanisms to seek guarantees from neighboring jurisdictions
or from county governments. EPA believes that such entities are
better able to determine the strengths of the government seeking
the guarantee, and to measure how essential are the services offered,
than the Agency would be in developing a uniform national standard.
B. Definition of Terms
1. Bond Ratings
A bond rating is an "evaluation of the credit
quality of notes and bonds usually made by independent rating
services . . . Ratings generally measure the probability of the
timely repayment of principal and interest of municipal bonds."
[Moody's Investors Service, Inc., "Moody's on Municipals:
An Introduction to Issuing Debt," 1989, p. 75. ] In this
rule, only ratings made by Moody's Investors Service and Standard
& Poor's will be considered eligible for use in demonstrating
financial responsibility.
2. Investment Grade Bonds
As defined by the Comptroller of the Currency, investment
grade bonds are generally regarded as eligible for bank investment.
In addition, the legal investment laws of various States may impose
certain ratings or other standards for obligations eligible for
investment by savings banks, trust companies, and fiduciaries
generally. For purposes of this rule, investment grade bonds are
considered to include bonds rated Aaa, As, A, and Baa by Moody's,
or AAA, AA, A, and BBB by Standard and Poor's. [Both Standard
and Poor's and Moody's recognize groupings within the major bond
rating classes. Moody's signifies higher ranking bonds within
a class with a "1" (e.g., Baa1), while Standard and
Poor's uses a +/ - system to designate higher and lower ranking
bonds. This proposed rule does not consider these groupings. Thus,
a Baal rating is classified as a Baa rating for the purposes of
the test, while an AA+ or AA- rating is classified as an AA rating.
]
3. General Obligation Bonds
General obligation (G.O.) bonds, also known as "full
faith and credit" bonds, are secured by their issuers' ability
to levy ad valorem taxes or to draw from other unrestricted revenue
sources, such as sales or income taxes. These bonds are important
mechanisms for financing municipal capital improvements such as
schools, streets, and municipal buildings. The bond issuer's ability
to generate revenues is evaluated by analyzing factors in four
categories: socioeconomic, finance, debt, and administration.
[Standard & Poor's Corporation, "Standard & Poor's
Debt Ratings Criteria: Municipal Overview," 1986.]
4. Revenue Bonds
A revenue bond is a long-term debt instrument that
is issued to finance a specific public enterprise and that is
payable solely from enterprise earnings or from a dedicated tax.
['Standard & Poor's Corporation, "Standard & Poor's
Municipal Finance Criteria," 1989.] The Agency has determined
that most revenue bonds issued by general purpose governments
(i.e., counties, municipalities, and townships) are issued to
fund specific projects with dedicated revenue streams not necessarily
central to the operations of that government, and that the evaluation
criteria associated with these revenue bonds may not fully reflect
the socioeconomic, financial, and administrative condition of
a general purpose government. Instead, the ratings reflect a more
limited set of criteria pertaining to the specific project financed.
In contrast, the Agency has determined that revenue bonds issued
by special districts are generally used to finance projects central
to the operations of the special districts, so that the ratings
encompass a broader view of the overall financial condition of
the issuing entities. In this rule, the Agency allows only special
districts and school districts that do not have the authority
to issue general obligation debt to use investment-grade ratings
on revenue bonds to demonstrate financial responsibility.
5. Substantial Governmental Relationship
The October 26, 1988 rule authorized owners and operators
to obtain a corporate guarantee to meet their financial responsibility
requirements. The corporate guarantor must: (a) Have a controlling
interest in the owner or operator or in a specified related firm;
or (b) issue the guarantee as an act incident to a "substantial
business relationship" with the owner or operator (§
280.96). The object of the corporate guarantee is a valid and
enforceable contract. Additionally, to insure that State insurance
laws will not impair the enforceability or validity of the mechanism,
a corporate guarantee may be used only if it is certified for
use by the Attorney General of the State in which the USTs are
located.
Local governments, however, do not have "controlling
interests" in one another, and their interactions may not
be of an economic nature constituting a "substantial business
relationship." As with the corporate guarantee, the Agency
is concerned that local governmental guarantees be valid and enforceable,
and that they do not conflict with State insurance laws. Thus,
a municipality using a local governmental guarantee must certify
that there is a "substantial governmental relationship"
underlying the guarantee. Such a relationship must include a clear
commonality of interests, such as common constituencies served,
overlapping geographical jurisdiction, or mutual impact in the
event of an UST release. In addition, a local government acting
as a guarantor must have the authority to enter into such agreements.
Examples of governmental guarantees could include:
(1) A guarantee offered by a county to an incorporated city located
partially or entirely within the limits of the county; (2) a guarantee
offered by one county to another if both counties cover a common
aquifer subject to contamination by UST releases; (3) a guarantee
offered by the State to a local government within the State; or
(4) a guarantee offered by a general purpose local government
to independent school district, water district, utility district,
or other special district serving the guarantor in whole or in
part. One commenter questioned what types of publicly owned utilities
would be eligible to receive a guarantee. Any special district
is eligible to receive a guarantee if it has its own governing
body and an independent accounting system.
Additional examples of appropriate intergovernmental
relationships for a governmental guarantee would be joint operating
agreements for emergency responses across jurisdictional boundaries,
or purchase of non-UST related services such as water or education,
One commenter asked three question pertaining to
activities that constitute a "substantial governmental relationship":
(1) Whether a governmental entity may act as a guarantor for more
than one entity; (2) whether a contractual relationship [under
an intergovernmental pooling arrangement) of a pool to provide
safety and risk management services in addition to risk pooling
will be recognized as a "substantial governmental relationship";
and (3) what criteria determine that a relationship is "sufficiently
non-monetary."
The Agency concludes that a local government may
act as guarantor for multiple entities. A guarantee from a risk
pool, however, is not considered a governmental guarantee for
the purposes of establishing financial responsibility. The role
of a risk pool is almost exclusively monetary, similar to that
of insurance. Issuance of a guarantee would not change the nature
of that relationship. The Agency recognizes that participation
in a risk pool provides a means for local governments to reduce
their liability for large unforeseen events. However, risk pools
have not been approved as a Federal financial responsibility mechanism
because no comprehensive yet manageable set of Federal guidelines
could be developed to ensure that all risk pools would have adequate
oversight to make them comparable to the other financial responsibility
mechanisms allowed.
The Agency notes that, under § 280.100, risk
pools can be adopted Federal financial responsibility mechanisms
by individual States as State-required mechanisms. That is, State
may allow or require local governments to demonstrate financial
responsibility through participation in a risk pool if the State
can demonstrate the Agency that the risk pool would be at least
equivalent to the other financial responsibility mechanisms allowed.
C. Amount and Scope
The amount and scope of financial responsibility
is not being changed from the requirements established in the
October 1988 rule. Governmental entities owning or operating USTs
at facilities with a monthly throughput of less than 10,000 gallons
must demonstrate financial responsibility in the amount of $500,000
per occurrence. Governmental owners and operators owning or operating
one or more USTs at facilities with a monthly throughput of 10,000
gallons or more must demonstrate financial responsibility in the
amount of $1 million. In addition, owners and operators of USTs
must demonstrate financial responsibility in the amount of an
appropriate annual aggregate. Owners and operators of 100 or fewer
USTs must demonstrate financial responsibility in the annual aggregate
amount of $1 million, and owners and operators of more than 100
USTs must demonstrate financial responsibility in the annual aggregate
amount of $2 million.
One commenter suggested incorporating a mechanism
in the rule that would allow for reductions in the required level
of assurance when tanks are replaced with intrinsically safe tank
or upgraded to be intrinsically safe. The commenter believed that
this proposal would result in more equitable and less burdensome
requirements for assurance. The Agency disagrees with the commenter's
suggestion for the reasons cited in the October 1988 final rule
and the June 1990 proposed rule.
Another commenter indicated that disclosing the amount
of money that will be paid per release by an assurance mechanism
may adversely affect a local government's position in litigation
or settlement negotiations. The comments recommended deleting
this provision from the financial officer's letter. EPA believes
that the commenter may have misinterpreted the intent of the financial
officer's letter. The amount assured, as cited in the financial
officer's letter, is not meant to be a minimum amount that must
be paid in the event of a release, but rather the government must
be able to pay if required to meet corrective action cost and
third-party liabilities. EPA assume that governments will use
all defenses and mechanisms to ensure that payments for third-party
liabilities are fair and equitable. Conversely, the amount of
financial assurance to demonstrated does not limit a local government's
potential liability in the event of a release. Local governments
are liable for all costs resulting from a release, regardless
of the amount for which they demonstrate financial responsibility.
EPA requires that an amount be specified in the financial officer's
letter to ensure that senior officials of the government are aware
of their potential obligations as UST owners.
IV. New Mechanisms for Demonstrating Financial Responsibility
A. Description of New Mechanisms
Today's rule promulgates four additional financial
assurance mechanisms for use by local government entities that
own or operate USTs containing petroleum: A bond rating test,
a worksheet test, a governmental guarantee, and maintenance of
a funded balance. The additional mechanisms are described below.
In addition to these mechanism local governments that are owners
and operators of USTs may use any of the financial responsibility
mechanisms authorized under 40 CFR § 280.94 (i.e., insurance,
Risk Retention Group (RRG) coverage, surety bonds, letters of
credit, fully-funded trust funds, State-required mechanisms, a
State fund, or other State assumption of responsibility). The
Background Document prepared in conjunction with this rule explains
in more detail the data and methodology used to develop the new
mechanisms now being finalized.
1. Bond Rating Test (§ 280.104)
In order to pass the bond rating test, local government
entities must have outstanding issues of general obligation bonds
that are currently rated at least "investment grade"
by Moody's or Standard & Poor's. Special districts, such as
school districts or airport authorities, that do not have the
authority to issue general obligation bonds may substitute investment
grade revenue bonds for general obligation debt to satisfy the
bond rating test. In both cases, the municipality's total outstanding
obligation must be $1 million or more, excluding refunded obligations.
Investment grade bonds are those with a current Standard and Poor's
bond ratinfg of AAA, AA, A, or BBB, or a current Moody's bond
rating of Aaa, Aa, A, or Baa. If a local government has multiple
outstanding issues of general obligation or revenue bonds with
different ratings, or if the ratings assigned to a single class
or issue of bonds by different rating agencies differ, the lowest
rating must satisfy the criterion of the test.
If a local government owner or operator using the
bond rating test to provide financial assurance finds that it
no longer meets the bond rating test requirements, the local government
owner or operator must obtain alternative coverage within 150
days of the change in status.
The Agency is aware that municipal bonds are often
insured by third-party insurance companies, and that the rating
assigned to such insured bonds is established primarily by the
creditworthiness of the insurer. After examining the criteria
used by the rating companies to evaluate bond insurance companies,
however, the Agency has concluded that the provisions for ongoing
review and intervention granted to the bond insurance companies
under the insurance agreements provides a level of third-party
oversight comparable to that provided directly by the bond rating
companies. For purposes of this rule, therefore, the Agency is
not distinguishing between general obligation bonds that are uninsured
or insured by a bond insurance company.
EPA has not found evidence that other providers of
other methods of credit enhancement, such as letters of credit,
provide a degree of oversight equivalent to that provided by bond
insurers. Consequently, ratings that are supported by means of
credit enhancement other than bond insurance may not be used to
demonstrate financial responsibility.
The Agency has selected the existence of investment-grade
bond ratings on general obligation debt as an option for demonstrating
financial responsibility for several reasons. First, EPA took
into consideration the use of bond ratings as a standard measure
of risk by banks and other fiduciary entities. As a result of
a 1938 agreement issued jointly by the Comptroller of the Currency,
the Federal Deposit Insurance Corporation, the Board of Governors
of the Federal Reserve System and the Executive Committee of the
National Association of Supervisors of State Banks, these agencies
have given municipal bonds in the first four rating categories
(Aaa through Baa or AAA through BBB) privileged status as investment
securities. Banks are permitted to hold only a certain number
of low or unrated bonds, and they must balance such holdings with
higher rated or more credit-worthy securities. Second, bond ratings
serve as one of the only independent evaluations of local government
entities' financial health. To perform their evaluations, the
bond rating companies must consider a variety of factors that
affect both local government entities' current ability to pay
and the likelihood of continued ability to pay in the future.
In particular, the costs of environmental obligations are included
in the evaluations. Thus, the costs of underground storage tanks,
solid waste landfills, hazardous waste landfills, sewage treatment
plants, and associated environmental liabilities are factored
into the rating analysis. [Linda Reidt Critchfield, EPA Office
of Underground Storage Tanks, memorandum to the record, "Conversation
with Al Medioli, Moody's Investor Services on August 29, 1989,"
September 15, 1989.] Third, general obligation bonds are secured
by the full faith and credit of the borrower, and backed by the
issuers' ability to levy taxes or make legislative appropriations.
The Agency considers this underlying security equivalent to the
requisite level of financial responsibility intended under Subtitle
I. Fourth, bonds are rerated on a periodic basis. Local governments
are required to provide current financial data annually; failure
to do so can result in removal of the bond rating. Also, the rating
agencies receive local newspapers from around the country to monitor
local conditions . [Ibid.]
Today's rule allows the use of insured issues of
general obligation bonds. Information from bond rating companies
indicates that local governments do not purchase insurance as
a means of earning an investment grade rating, but rather to increase
the rating from a lower investment grade (e.g., Baa, Baa1, or
A) to the very highest (Aaa). In exchange for the cost of the
insurance, the local governments obtain a lower interest rate
for the life of the bond, Analysis undertaken by Moody's of four
major bond insurers shows that virtually all of the insured debt
would have earned an investment grade rating without the insurance,
and so would qualify under the bond rating test. [Memorandum from
Kate Donaldson, James Dickson, and Tony Bansal, ICF Incorporated,
to Stephanie Bergman, EPA Office of Underground Storage Tanks,
"Municipal Bond Insurance," May 31.1989; memorandum
from Kate Donaldson, James Dickson, and Tony Bansal, TCF Incorporated,
to Stephanie Bergman, EPA Office of Underground Storage Tanks,
"Municipal Bond Insurance Companies," June 22,1989.]
In addition, bond insurers, unlike bond rating agencies, have
a strong financial interest in the soundness of the local governments.
If a local government defaults on a payment, the bond insurers
must meet the payment. Consequently, bond insurers track the financial
obligations of insured local governments closely and often have
covenants that allow them to intervene in local government operations.
Insurers, for example, may insist on more conservative fiscal
policies to preserve the financial strength of a community, which
in turn, lowers the risk and cost associated with the bond insurance.
Although the bond rating of insured bonds does not directly indicate
a local government's financial condition, it does demonstrate
both that the government has assured the insurance company of
its ability to meet its debts, and that a third party has a strong
confidence in the financial health of the local government.
Two commenters agreed with and endorsed the methodology
of the bond rating test, stating that the test will serve as a
simple method for demonstrating financial responsibility and will
provide the Agency with the assurance it seeks without imposing
too great a burden on the regulated community.
Several commenters suggested that the Agency expand
the bond rating test to include revenue bonds and other sorts
of debt instruments as well as general obligation bonds. The Agency
has researched the criteria used to assign credit ratings on short-term
notes, certificates of participation, lease rental debt, and revenue
bonds, and examined how well the credit rating addresses the financial
health and fiscal management practices of local governments. The
Agency also reviewed the default rates of these types of securities.
EPA is expanding the bond rating mechanism to allow
non-general purpose governments (i.e., special districts and school
districts) that do not have the authority to issue general obligation
bonds to demonstrate financial responsibility if they have earned
an investment-grade rating on at least $1 million in outstanding
revenue bond issues not backed by any form of credit enhancement.
EPA has determined that revenue bond financing is
central to the operation of most special districts and that the
ratings on revenue bonds issued by special districts therefore
provide an adequate representation of their financial strength.
Special districts are created for a specific purpose, such as
to provide airport services to a community. The revenue stream
underlying the strength of a special district is the same as the
base underlying its associated revenue bonds. Ratings on revenue
bonds are, therefore, appropriate measures of special districts'
financial capabilities. (This is not the case for a general purpose
government that issues revenue bonds, such as a city, because
the revenue stream supporting a specific revenue bond is not equivalent
to the overall tax base supporting the local government.) In addition,
EPA determined that there has been a low incidence of default
of investment-rated revenue bonds not enhanced by thirdparty support
- e.g., bond insurance or a letter of credit. EPA examined information
on revenue bond defaults between January 1989 and May 1991. Over
that time period, approximately 150 issues defaulted. EPA estimates
that no more than five of these issues had unenhanced investment-grade
bond ratings from Moody's at the time of default, representing
a default rate of less than 0.1 percent per year of rated bonds.
Eight of the defaulted issues were backed by letters of credit,
and two were insured by bond insurance companies.
Because the credit rating for revenue bonds issued
by general purpose governments (e.g., townships, cities, and counties)
would not measure the financial health and fiscal management practices
of that type of government as a whole, and because revenue bonds
are not usually used to finance projects central to the operation
of a general purpose government, the Agency has determined that
general purpose governments with the authority to issue general
obligation debt may not use revenue bonds to demonstrate financial
responsibility.
Similarly, because the credit rating for short-term
notes, lease rental debt, and certificates of participation does
not provide sufficient information on the financial strength of
local governments, local governments may not use these instruments
to demonstrate financial responsibility.
Two commenters asserted that the bond rating test
is unavailable to many local governments simply because the amount
of outstanding debt is less than one million dollars and suggested
that the required amount of outstanding debt should be decreased.
EPA intends the bond rating mechanism to be used by local governments
that have shown their capability to sustain debts comparable in
size to the minimum level of financial assurance as determined
by statute. Governments that are not able to demonstrate such
capability may use another mechanism to demonstrate financial
responsibility. Based on the analysis conducted for the proposed
rule, the Agency estimates that approximately 87 percent of general
obligation bonds are issued for aggregate amounts greater than
$1 million.
One commenter endorsed the bond rating test, but
noted that a governmental entity will no longer qualify for the
bond rating test if it reduces its total debt below $1 million.
The commenter suggested that the amount of unused debt capacity
may be more important than the amount of debt. Another commenter
stated that the essential factor in the test should not be the
dollar limit outstanding, but rather the statutory right of the
authority to issue bonds and the credit ratings which have been
established for that particular government entity on debt which
has or could be issued. Because a local government entity does
not have a credit rating from Standard and Poor's or Moody's unless
it has outstanding debt, the commenter urged the Agency to devise
some test, presumably a worksheet test, to measure credit worthiness
if bond ratings have not been issued.
The Agency has determined that it is appropriate
to require $1 million in outstanding debt as part of the bond
rating mechanism. The requirement ensures that the bond rating
used to demonstrate financial responsibility is based on a level
of outstanding debt consistent with the amount of financial responsibility
being demonstrated. Although there may be merit in the argument
that the level of debt capacity is an indicator of potential financial
abilities, EPA does not believe that incorporating available debt
capacity would be feasible. First, calculating levels of available
capacity is more difficult than applying the bond rating test
as written, and is subject to greater uncertainties. Second, the
fact that the local government has available debt capacity does
not ensure that it will be able to issue the debt and maintain
its bond rating, particularly if the amount of outstanding debt
is substantially less than the amount of required financial assurance.
The Agency notes that excess bond authority may be used as one
part of one alternative of the fund balance mechanism.
Because bond rating information is easily obtainable,
the use of bond ratings as a self-test mechanism will impose minimal
administrative burden in determining a local government entity's
eligibility. Many local government entities, however, do not currently
have general obligation bond ratings. As of July, 1991 Moody's
had ratings for a total of 7,653 investment-rated general obligation
bonds issued by local government entities that were "investment
grade" and were not insured. [Brenda Ramos, Moody's Investors
Service, Public Finance Department, letter to Linda Critchrield,
EPA, July, 1991.] (Because some local government entities may
have multiple issues of general obligation bonds, the number of
local governments with rated bonds may be lower.) Although Standard
& Poor's rates additional entities, there is a substantial
overlap - one study found that 94 percent of cities of 2,500 or
more residents with a rating from Standard & Poor's also had
a rating from Moody's. [Cluff, George S., and Farnham, Paul G.,
"Standard & Poor's vs. Moody's: Which City Characteristics
Influence Bond Ratings?", Quarterly Review of Economics and
Business, Board of Trustees of the University of Illinois, Volume
24, No. 3,1984.] In contrast, there are more than 80,000 local
government entities in the United States, of which an estimated
25,000 own USTS. To provide local governments with as many compliance
choices as possible to meet the requirement, the Agency has also
developed additional self-test mechanisms to demonstrate financial
responsibility.
2. Local Government Financial Test (§ 280.105)
As part of the underground storage tank requirements
proposed on June 18, 1990, EPA included a local government financial
test that could be used by local government owners and operators
of USTs to satisfy the financial responsibility requirements of
§ 280.93. The local government financial test, or "worksheet
test", was designed for local governments that cannot use
the bond rating test (§ 280.104) because they have less than
$1 million in outstanding investment grade bonds. As described
in the preamble to the proposed rule, however, local government
entities that have applicable outstanding debt rated lower than
investment grade, even if this amount is less than $1 million,
cannot use the worksheet test. This limitation on the use of the
worksheet test applies, therefore, to the general obligation debt
of general purpose local governments and to outstanding revenue
bonds of those local government entities that are legally restricted
from issuing general obligation bonds.
As described in the preamble to the proposed rule,
the Agency designed and developed the worksheet test to capture
local government variation using an index of financial strength.
The index assigns a rank to each of the general purpose governments
in the Census of Governments. After arraying the governments according
to their rank on the index, the test establishes a cut-off point
that, in the Agency's opinion, excludes that bottom fraction of
local governmental entities that might not be able to meet their
financial obligations in the event of an UST release. The procedures
used to develop the index and establish the threshold cut-off
are discussed in the preamble to the proposed rule, the background
documents to this rulemaking, and in subsequent sections.
The test was designed to isolate the fraction of
governmental entities that are in poor financial condition from
those other governments that, in general, have sufficient resources
and flexibility to respond to an UST release. Consequently, the
Agency is not establishing the worksheet test as a precedent for
other Agency regulations affecting local governments, because
other regulations may require either larger required levels of
funds or more certain cash flows.
Features of the Proposed Local Government Financial
Test
The proposed worksheet test had the following features:
Using a worksheet, an eligible local governmental
entity would calculate nine financial ratios using easily available
financial data. The nine ratios were:
-Debt service to total revenues,
-Total funds to total expenses,
-Total revenues to total expenses,
-Debt service to population,
-Total revenues to population,
-Total expenses to population,
-Total funds to total revenues,
-Total funds to population, and
-Local revenues to current expenditures.
Each of the nine ratios was compared to the national
distribution of that ratio to calculate a z-score, which is a
measure of how far above or below the national average the municipality's
ratio lies.
The individual z-scores for the nine ratios were
then weighted and added to calculate a total score, or index.
Governments with a total score that passed the specified
threshold could use the test as a mechanism for demonstrating
financial responsibility for UST corrective action and thirdparty
liability claims. To simplify the use of the worksheet test, the
threshold value was incorporated into the calculation of the final
score, so that governments achieving a final score greater than
zero passed the worksheet test.
Comments on the Proposed Local Government Financial
Test
EPA received several comments on its proposed financial
test for local governments. The comments focused on (1) the exclusion
of local governments with less than investment grade debt; (2)
use of the term "self-insurance"; (3) updating the worksheet
test using 1987 Census of Governments data; (4) deleting specific
ratios from the test; (5) lowering the threshold level; and (6)
the appropriateness of the worksheet test for non-general purpose
local governments. The substance of the major comments received
is briefly summarized below, followed by the Agency's rationale
for accepting or rejecting the commenters' recommendations in
the final worksheet test requirements.
(1) Exclusion of Local Governments with Less than
Investment Grade Debt. One commenter believed the worksheet test
should be available to all local governments, even those with
outstanding debt rated below investment grade. The commenter reasoned
that bond rating entities are not always accurate and, moreover,
provide ratings that allow investors to assess a potential investment,
a different purpose than assessing financial responsibility to
respond to an UST release. The commenter stated that allowing
use of the worksheet test would recognize these realities without
undercutting the purpose of the test.
For reasons cited in the preamble to the proposed
rule, however, EPA does not agree that local governments with
bond ratings of less than investment grade should be eligible
to use the worksheet test. The Agency notes that (1) failure to
earn an investment rating is costly to local governments, (2)
local governments have the incentive and ability to work with
bond rating agencies to establish policies and procedures that
would raise the bond ratings, and (3) the bond rating process
involves a more detailed examination of local government financial
condition than can be accomplished through a simple worksheet
test.
(2) Use of the Term "Self-insurance." One
commenter stated that State law might prohibit certain otherwise
eligible government entities from using the worksheet test. The
conimenter noted that New York State law authorizes specific programs
for self-insurance and that, because they have not been specially
authorized for this purpose, component school districts cannot
use the worksheet test (or, indeed, the bond rating test) to demonstrate
the ability to self-insure.
EPA understands that the term "selfinsurance"
has specific legal meanings that may be limiting and has, therefore,
modified the rule to delete references to "self-insurance."
The modifications clarify that the use of the worksheet test mechanism
is to demonstrate compliance with the financial responsibility
regulations, and not to "self-insure."
(3) Updating the Worksheet Test Using 1987 Census
of Governments. Although not proposing specific amendments to
the worksheet, two commenters criticized the use of data from
the 1982 Census of Governments in developing the worksheet test.
One commenter believed that use of decade old data could introduce
inaccuracies in the results of the worksheet test. As an example,
the commenter pointed out that changes in the financial practices
of local governments, such as an increase in the size of new debt
issues, could mean that the reality of what makes a local government
financially strong is different now than it was in 1982.
EPA agrees with the commenter and, in response, has
updated the analyses used to develop the worksheet test using
data from the 1987 Census of Governments, which was not available
when this rule was proposed. As further described below and in
the Background Document, the new analyses show that the ratios
included in the proposed worksheet test were highly correlated
with similar factors in the analyses of both the 1982 and 1987
Census of Governments data, and that incorporation of the 1987
data did not significantly alter the structure of the worksheet
test. In particular, EPA confirmed that ratios incorporating population
(for example, total revenues per capita) and fiscal autonomy (e.g.,
local revenues to current expenditures) are important indicators
of the relative financial strengths of governments. In addition,
EPA has updated the worksheet to reflect changes in the means,
standard deviations, and weights associated with each of the ratios.
(4) Deleting Specific Ratios from the Worksheet Test.
One commenter urged the Agency to delete Factor 5, "local
coverage" (local revenue to current expenses), from the worksheet
test as inappropriate for use in assessing a local government's
level of financial responsibility. The commenter argued that Factor
5 disadvantages those local governments that rely more heavily
on State funding than others. While this factor is designed to
measure local autonomy and the ability of local governments to
redirect funds to meet the cost of UST releases, the commenter
argued that a significant proportion of the funds that local governments
receive from States is not tied to specific purposes and may be
used as the local government deems appropriate.
EPA believes that, because local governments do not
control and cannot assure the continuance of State or Federal
aid, local governments with a high dependence on non-local sources
are less assured of the ability to respond to UST releases, whether
the funds are dedicated to specific programs or not. The Agency
notes that a local government may be weak in a particular variable
but still pass the worksheet test. For example, a government with
a high reliance on intergovernmental aid may still pass the worksheet
test if its overall financial situation is predominantly sound
as measured by the remaining variables. The selection of factors
was developed through extensive statistical analysis of local
government financial conditions. For reasons described below,
however, the Agency has modified the proposed worksheet test to
replace the ratio of local revenues to current expenditures with
the ratio of local revenues to total revenues, an alternate ratio
representative of "local coverage".
(5) Lowering the Threshold Level. One commenter recommended
that the threshold value should be reduced from 15 to a maximum
of 10 percent. The commenter argued that EPA's own statements
in the preamble that local governments rarely go bankrupt, are
not permitted to void obligations through bankruptcy, and generally
possess the ability to meet financial obligations through taxation
were inconsistent with the finding that 15 percent of local governments
should be disqualified from using the worksheet test to demonstrate
financial responsibility. In addition, the commenter believed
that the worksheet analysis exaggerated the actual impacts likely
to occur by not including consideration of incidence of UST ownership.
The commenter reasoned that small local governments, the ones
that are most likely to rely on a worksheet test, are much less
likely to own USTs than larger local governments, Thus, the average
impacts assumed exaggerate actual impacts likely to occur. The
commenter concluded that these factors suggested that a 15 percent
failure rate was too stringent, but that a maximum cutoff of 10
percent would recognize the reality of the financial strength
of local governments
The Agency notes that costs associated with clean-ups
can range widely and that different standards cannot be applied
to different owners, In fact, if standards were based on size
of the local government, proportionately fewer smaller governments
would be able to demonstrate financial responsibility because
of the more limited total resources of small local governments.
As shown in the background document, however, EPA believes that
smaller governments are more likely to pass the worksheet test
than are their larger counterparts. Consequently, the Agency believes
its overall approach used to set the threshold is appropriate.
Two commenters pointed out that the difference between
the 10 and 15 percent cutoffs in the Agency's analysis was not
great. Another commenter stated that the threshold should be reconsidered
or justified because the commenter did not believe the preamble
or supporting documents contained evidence that 15 percent of
local government entities are, in fact, financially unstable and,
even if they are generally unstable, that they will be incapable
of meeting their UST obligations.
As described below, the Agency has updated the worksheet
test using the 1987 Census of Governments, including updated means,
standard deviations, and weights for each ratio, as well as a
reevaluation of the threshold level. Based on its review of the
updated information, the Agency has determined that a threshold
level that allows 90 percent of local governments to demonstrate
financial responsibility based on the worksheet test represents
a reasonable balance between the statutory requirement that UST
owners demonstrate financial responsibility and the demonstrated
stability of most local governments. Consequently, the Agency
agrees with the commenters that a 10 percent threshold offers
adequate safeguards.
(6) Appropriateness of the Worksheet Test for Non-general
Purpose Local Governments. Two commenters stated that a financial
test, such as the worksheet, designed to measure the financial
strength of general purpose governments, is unsuitable for special
purpose organizations such as airports, bridge and toll road authorities,
and publicly-owned utilities. Unlike general purpose governments,
one commenter argued, these so-called "proprietary"
government entities conform to generally accepted accounting procedures
similar to accounting systems employed in the private sector,
rather than the modified accrual accounting terms and criteria
appropriate to measure the success of a traditional government.
Because the corporate test is similarly inappropriate for these
special-purpose entities, the commenter requested that the Agency
develop an alternative financial test for government entities
required to use accrual accounting. The commenter suggested that
the corporate test in 40 CFR 280.95, based on the accrual method,
might be modified to take into account the substantially greater
financial stability of publicly-owned utilities.
The Agency recognizes that specific data requirements
preclude most special districts from using the worksheet test.
In limited cases, however, some special districts (e.g., school
districts that serve a specific population) may have the information
necessary to complete the worksheet test (e.g., they can measure
population). EPA believes that the new mechanisms, particularly
with the inclusion of revenue bonds issued by special districts
using the bond rating test, will allow most UST-owning governments
to demonstrate financial responsibility without the need for an
additional financial test targeted specifically at special districts.
Update of Worksheet Test Using 1987 Census of Governments
Although its basic features have not been modified,
the Agency has updated the worksheet test using the 1987 Census
of Governments. The procedures used to conduct the new analyses
were the same as for the proposed rule, as documented in the preamble
to the proposed rule and the background documents to this rulemaking,
and as summarized below.
Starting with 78 different financial ratios and variables
commonly used in financial analysis, the Agency used a statistical
technique called "factor analysis" to group the variables.
Factor analysis serves two purposes. First, it identifies underlying
characteristics, or factors, that differentiate between the members
of a population (in this case, between different counties, municipalities,
and townships). Second, it tells how much of the difference (the
"percent of variance explained") between the members
of the population is accounted for by each factor. The Background
Document contains a more detailed explanation of the statistical
analyses performed, including the factor analysis.
The factor analysis identified a total of 15 factors
that distinguish between local government entities. Based on its
review of the results of the factor analysis, the Agency identified
six factors that (1) captured the variation in financial performance
of local governments and (2) appeared appropriate for the UST
financial test. As with the proposed worksheet test, the final
worksheet test includes the following six factors: (1) Debt burden,
(2) funds coverage, (3) outlays per capita, (4) funds per capita,
(5) local coverage, and (6) revenues to expenses. In selecting
the factors and variables to be included in the worksheet test,
however, the Agency rejected size, because the Agency did not
wish to exclude financially strong smaller local government entities
simply because of size.
After selecting the factors to be represented in
the worksheet, it was necessary to select the specific ratios
to represent the factors. In choosing ratios, the Agency wished
to (1) keep the total number of ratios to a manageable level,
while (2) retaining as large a number of specific indicators as
feasible. The final worksheet uses nine ratios, which include
the variables (1) debt service, (2) total revenues, (3) total
expenditures, (4) population, (5) total funds, and (6) local revenues.
The ratios selected and the factors that they represent are presented
below.
Factor 1-debt burden: debt service to total revenues.
Factor 2-funds coverage: total funds to total revenues; total funds to total expenses.
Factor 3-outlays per capita: total revenues per capita; total expenses per capita.
Factor 4-funds per capita: total funds per capita; debt service per capita. Factor 5-local coverage: local revenues to total revenues.
Factor 6-revenues to expenses: total revenues to
total expenses.
EPA found that, in general, the same ratios included
in the proposed worksheet test were important in the factor analyses
of both the 1982 and 1987 Census of Governments data. There is,
however, one change to the worksheet test ratios as a result of
the updated factor analysis. Factor 5, "local coverage",
is now represented by the ratio of local revenues to total revenues
rather than the ratio of local revenues to current expenses. The
factor analysis of 1987 Census of Governments data found that
the ratio of local revenues to total revenues was very highly
correlated with Factor 5, while the ratio of local revenues to
current expenses was correlated less highly and was also correlated
with several different factors. The preamble to the proposed rule
provides a detailed description of the importance of each of these
factors. One other minor addition to the final test is inclusion
of payments for retirement of debt principal (not just interest
payments) in the calculation of total expenses. This was inadvertently
omitted from the proposed rule. (EPA has modified the parameters
of the test to reflect the revised definition of total expenses.)
Together, these factors provide a balanced view of
the stability and financial strength of a local government entity.
The Agency does not believe that any single factor or variable
can provide a sufficient indication of overall financial stability.
Specifically, EPA does not believe a focus on funds alone, without
adequate safeguards, would provide as good an indication of the
ability of local government entities to provide financial assurance
for an UST release.
These factors serve to achieve the Agency's goal
of identifying and eliminating those local government entities
that have overall financial characteristics that are in the bottom
fraction of all local government entities, and that may, therefore,
be at sufficient risk of experiencing financial distress that
would prevent them from meeting their UST obligations.
As described at proposal, in developing the worksheet the Agency determined that performance on the specific ratios selected to represent the six factors should be standardized so that all ratios are placed on an equal basis. This is done by calculating the "z-score" for each of the ratios in the test. The z-score of an individual ratio is calculated by first subtracting the mean, and then dividing by the standard deviation:
z = (ratio-mean) / (standard deviation)
The distribution of the z-scores will always have
a mean of 0 and a standard deviation of 1, thereby placing each
variable in the index on a common level. To calculate a single
index value, the z-scores are then weighted and added together;
the weights are based on the percentage of variance explained
by the underlying factors.
Selection of the Final Threshold Value
Having updated the financial index, the Agency then
examined different threshold levels to determine a cut-off for
selecting those local governments that have fiscal characteristics
adequate to demonstrate financial responsibility to meet UST obligations.
As described in the preamble to the proposed rule, EPA evaluated
the impacts of a $1 million release to determine an appropriate
threshold for allowing local governments to demonstrate financial
responsibility through the worksheet test. In selecting a threshold,
the Agency was guided by two important considerations: (1) most
local governmental entities are expected to be able to meet their
financial obligations under Subtitle I, so a cut-off threshold
in the lower range (i.e., 1 to 30 percent) is appropriate, and
(2) local governmental entities on the margin of the selected
threshold should clearly be able to pay the emergency response
and corrective action costs of an average UST release.
For purposes of the evaluation, EPA assumed that
the release costs would be financed by a mortgage-type loan over
a 20 year period at an interest rate of 10 percent. This interest
rate is meant to be illustrative; local governments may be able
to borrow at rates lower than 10 percent. Under a mortgage-type
loan, repayment is made in equal annual installments consisting
of both interest payments and principal repayment. The annual
payment of a $1 million loan over 20 years at an interest rate
of 10 percent is $117,459; the first year's payment consists of
$100,000 interest and $17,459 principal repayment.
To evaluate whether a -debt of $1 million would be
too burdensome, the Agency considered the post-release performance
on the nine ratios used to develop the index. The Agency paid
specific attention to two financial parameters that financial
institutions regularly use to evaluate prospective debtors: Debt
service capability and accumulated funds. The Agency felt that
it is important to consider the potential debtor's debt servicing
capability because excessive debt would require excessive funds
for debt servicing, which could result in a negative cash flow
(expenditures greater than revenues) for weak debtors. Continuous
negative cash flows increase the risk of financial instability
in the short run and financial insolvency in the long run. It
is important to consider the amount of accumulated funds available
to a prospective debtor because a reserve of accumulated funds
provides an extra "cushion" for those emergencies when
routine cash flows are disrupted as a result of unforeseen circumstances.
As long as a local government that is on the margin of the cut-off
threshold being evaluated can demonstrate that it can service
its debts and has a "cushion" of accumulated funds for
emergencies, the Agency feels comfortable that it will be able
to perform its routine business when faced with an UST release.
In its evaluation, however, the Agency did not use
a precise yardstick for evaluating the impacts of a $1 million
release. It is the Agency's belief that proposing a cut-off threshold
that is applicable to the majority of local governments with diverse
size, demographic, and financial characteristics is more a matter
of informed judgment than one of precise measurement.
Impacts were evaluated on the bottom 30 percent of
all general purpose local governments in the 1987 Census of Governments
with data sufficient to calculate the index score (11,487 governments).
For each government, the following adjustments were made to 1987
financial performance in accordance with the definitions of terms
used in calculating the index:
Total expenses were increased by $117,459 (total
incremental debt service);
Current expenses were increased by $117,459 (total
incremental debt service);
Total debt was increased by $982,451 (loan amount
of $1 million minus first-vear principal repayment);
Total funds were reduced by $117,459 (total incremental
debt service); and
Debt service was increased by $117,459 (total incremental
debt service).
In essence, the evaluation was made as if the release
had been incurred in 1987 and reflected in end-of-year financial
data, with no adjustments made by the local government to redirect
funds or to increase revenues.
After adjusting the financial values, each of the
nine ratios in the index test was recalculated. Impacts were examined
by looking at the "marginal" local governments at each
threshold in one percent increments. That is, to evaluate the
effects of selecting a threshold of -6.425 (the index value exceeded
by 95 percent of all general purpose local governments), EPA examined
the 383 local governments scoring between -6.425 and -6.043 (the
index value exceeded by 94 percent of all local governments).
The remainder of this discussion presents results of the "post-release"
ratios for each of five different threshold levels: -6.425, -4.937,
-3.990, -3.242,and -2.586. Details of the results are provided
in the Background Document supporting this rule.
It should be noted that no attempt was made to weight
the potential impacts in terms of the likelihood of UST ownership.
That is, although only about 2,764 of the 26,189 general purpose
local governments serving fewer than 2,500 residents are believed
to own USTS, the release costs were imposed on all local governments.
[EPA, "Economic Impact Analysis of Additional Mechanisms
for Local Government Entities to Demonstrate Financial Responsibility
for Underground Storage Tanks," EPA Office of Underground
Storage Tanks, November 1992.] Consequently, the average impacts
shown exaggerate the actual impacts likely to occur. (Nevertheless,
an individual government experiencing an UST release may experience
the full effects assumed in estimating the average impacts.) Also,
the results assume that the local governments make no efforts
to mitigate the financial impacts, either through increasing taxes
and fees or reducing other expenditures.
Because the index ranks local governments in terms
of a smooth array, there is unlikely to be a single value at which
clear differences in performance appear. Instead, an evaluation
of impacts is likely to show increasing performance and ability
to accommodate the costs of an UST release with increasing threshold
value.
Evaluation of Threshold of -6.425.
The marginal local governments meeting a threshold
of -6.425 (those between the fifth and sixth percentiles on the
index test) have an average post release fund balance of about
$3,052,000 and a median post-release fund balance of about - $49,000.
[A threshold value set at the 5 percentile would exclude the local
governments with index values in the lowest five percent and would
include the remaining 95 percent. A threshold value set at the
10 percentile would be more stringent-it would exclude the local
governments with index values in the lowest 10 percent, and allow
only those local governments with index values in the upper 90
percent to pass the worksheet test.] [The median value is the
value for which half of the local governments have a higher value,
and half have a lower value.] About 62 percent of the marginal
local governments have a negative fund balance, with the median
of total funds per capita equal to -$46. The median debt service
per capita is $167. The median ratio of local revenues to total
revenues equals 32 percent. For the median local government, total
revenues are about 47 percent of total expenditures.
Evaluation of Threshold of -4.937.
With an increase in threshold to -4.937 (corresponding
to the 10 percentile value), the average post-release fund balance
of the marginal local governments is $1,673,000 and the median
post-release fund balance increases to -$34,400. The percentage
of local governments with negative cash balances improves to about
56 percent. The median ratio of total funds per capita improves
marginally to -$25. The median annual debt service per capita
decreases to $131. The median ratio of locally derived revenues
to total revenues increases to 40 percent, whereas the median
ratio of total revenues to total expenses increases slightly to
about 49 percent.
Evaluation of Threshold of -3.990.
When the minimum score is changed to -3.990 (corresponding
to the 15 percentile value), the average post release fund balance
is $4,180,000 and the median fund balance decreases slightly to
about -$35,000. The percentage of local governments with negative
fund balances increases slightly, to about 58 percent, while the
median ratio of funds per capita improves slightly to -$24. The
median ratio of debt service per capita decreases to $127. The
median ratio of local revenues to revenues increases to 47 percent,
whereas the median of total revenues to total expenses decreases
slightly to 48 percent.
Evaluation of Threshold of -3.242.
At a threshold of -3.242 (corresponding to the 20
percentile value), the average post-release fund balance is $5,693,000
and the median post-release fund balance increases to about -
$20,000. The percentage of local governments with negative fund
balances decreases to 55 percent, while the median fund balance
per capita increases to - $14. The median ratio of debt service
per capita decreases to $119. The median ratio of local revenues
to total revenues increases to 52 percent, whereas the ratio of
total revenues to total expenses remains steady at 48 percent.
Evaluation of Threshold at -2.586.
At a threshold of -2.586 (corresponding to the 25
percentile value), the average post-release fund balance is $6,651,000
and the median post-release fund balance improves to about - $15
000. The percentage of local governments with negative fund balances
decreases to 52 percent. The median ratio of fund balance to population
improves to $10. The median value of debt service per capita increases
slightly to $123. Local governments show increasing coverage of
their expenses, including an increase in the median ratio of local
revenues to total revenues to 57 percent and in the median ratio
of total revenues to total expenses to about 54 percent.
Analysis of Impacts on Households.
EPA has considered the impacts of tank closures that
may be caused by the inability of local governments to demonstrate
financial responsibility. EPA estimated the impacts on households
of compliance with the financial responsibility requirements for
the median size, marginal government at each threshold examined.
EPA estimates that the median "marginal" general purpose
government (by population) at the 5 percentile threshold serves
approximately 1,011 residents, or 389 households.
EPA's analysis of UST ownership patterns suggests that governments
of this size own an average of 1.1 USTS. Based on an average
present value cost per UST closure of $7,000, the residents would
incur an estimated present value cost of $19.80 per household.
[14 As discos in the EIA, the present value cost of
closure includes the costs of closure associated with the technical
standard3 (e.g., tank excavation and removal, product removal,
and site assessment), plu3 the present value of the incremental
co3t of fuel purchased at retail service stations, minus the present
value of the expected cost of corrective action for UST releases
if the USTs were not closed.] The present value of closure costs are estimated to range from
$18-00 to $54.00 per household for residents served by median
governments owning one to three USTS, respectively.
Based on the average number of USTs owned by the median "marginal" general purpose local government at the 10 percentile, the costs to governments required to close their USTs are estimated to be $15.81 per household. Costs may range from $14.37 to $43.11 per household for residents served by median governments owning one to three USTS, respectively.
Based on the average number of USTs owned by the median "marginal" general purpose local government at the 15 percentile, the costs to governments required to close their USTs are estimated to be $16.81 per household. Costs may range from $15.28 to $45-86 per household for residents served by median governments owning one to three USTS, respectively.
Based on the average number of USTs owned by the median "marginal" general purpose local government at the 20 percentile, the costs to governments required to close their USTs are estimated to be $14.95 per household. Cost may range from $13.59 to $40.78 per household for residents served by median governments owning one to three USTS, respectively.
Based on the average number of USTs owned by the median "marginal" general purpose local government at the 25 percentile, the costs to governments required to close their USTs are estimated to be $13.90 per household. Costs may range from $12.64 to $37.91 per household for residents served by median governments owning one to three USTS, respectively.
These estimates tend to exaggerate the costs per household, because they use the total estimated aggregate cost over a ten-year period. Consequently, they represent the cost to households if the entire cost associated with closing USTs were incurred and levied in a single year, rather than paid out over time.
Summary. Based on its review, the Agency has concluded that there are significant improvements in the "postrelease" financial conditions of governments as the threshold is increased to about the 10 percentile, modest improvements as the threshold is increased from about the 10 percentile to the 20 percentile, and further increases beyond the 20 percentile. Because the extent of the increases from the 10 to the 15 percentile is minor, the Agency has determined that a threshold level of 10 percent provides adequate safeguards, and is consistent with statutory intent.
3. Governmental Guarantee (§ 280.106)
In today's rule, EPA is providing for the use of a guarantee mechanism for governmental entities. This mechanism, although not strictly a "self-test" mechanism, provides local government entities with a financial assurance mechanism comparable to the corporate guarantee allowed for private owners and operators of USTS. To be eligible to act as a guarantor, a local government entity must pass the bond rating or worksheet test.
The governmental guarantee differs in several respects from the current corporate guarantee. Under the governmental guarantee, local governments would be allowed to choose between a guarantee with or without a standby trust requirement. Under the corporate guarantee, firms are required to use a standby trust. If a local government chooses the governmental guarantee without the standby trust option, it is required to pay for corrective actions as needed and as directed by the implementing agency. Under the standby trust option, local governments will be required to fund a separate trust fund to the full amount of coverage upon discovery of a release. Again, the Agency's decision to allow local governments the option of a guarantee without the standby trust fund is based on local governments' history of meeting obligations and on their ability to consistently raise revenue through taxation. In addition, the governmental guarantee requires that the local governments entering into the agreement demonstrate a 4 4 substantial governmental relationship." This parallels the requirement in the corporate guarantee for a "substantial business relationship," while recognizing that the types of relationships between governments is fundamentally different than business relationships and that they are primarily based on common or overlapping constituencies.
The requirement of a "substantial governmental relationship" reflects two concerns of the Agency. First, EPA wishes to ensure that the guarantee contract is founded on a sufficient basis to be held valid and enforceable. Second, EPA seeks to avoid conflict with State insurance laws and regulations. The existence of a "substantial governmental relationship" should provide sufficient nonmonetary consideration to address these concerns.
One commenter supported the requirement for a substantial governmental relationship, stating that the governmental guarantee mechanism needs to be based on a substantial governmental relationship, and that the relationship should incorporate the full faith and credit of the guaranteeing agency.
One commenter asked whether, in States that allow intergovernmental risk pooling, the contractual relationship of a pool to provide safety and risk management services in addition to risk pooling would be recognized as a "substantial governmental relationship," thereby allowing existing pools to act as guarantors to their members. EPA does not believe that a risk pool should be allowed to operate as a guarantor, because the nature of the relationship is strictly monetary and does not necessarily involve a substantial governmental relationship. It should also be noted that risk pools can be included as compliance mechanisms on a state-by-state basis as state-required mechanisms.
Another commenter claimed that EPA should explicitly recognize the relationship between a "joint action agency" and its member publicly-owned utilities as a "substantial governmental relationship", thus allowing these entities to qualify for use of the governmental guarantee mechanism. The commenter reasoned that these agencies, not-for-profit entities created by State law to allow publicly-owned utilities to combine resources for various purposes, could include the provision of a guarantee of UST financial responsibility within their operation. EPA has concluded that because joint action agencies are nonprofit organizations and not governmental entities, they are not el ble to act as guarantors.
A guarantee is a promise by one party (the guarantor) to pay specified debts or satisfy the specified obligations of another party (the principal) in the event that the principal fails to satisfy its debts or obligations. In the corporate guarantee, if the owner or operator fails to perform corrective action or satisfy third-party claims, the guarantor agrees to fund a standby trust from which the implementing agency will direct the payment of corrective action costs or third-party claims.
EPA believes that the guarantee mechanism would work well for governments, and is establishing two possible constructions for such a mechanism (discussed below). Using this mechanism, a municipality, for example, might obtain a guarantee from the State, a town might obtain a guarantee from the surrounding county or parish, or a special district might obtain the guarantee of the sponsoring local government entity. Guarantors must demonstrate that they are qualified to provide financial assurance by satisfying the bond rating test under 40 CFR 280.104, the worksheet test under 40 CFR 280.105, or the fully_funded fund balance test under 40 CFR 280.107.
Several commenters supported the inclusion of the governmental guarantee mechanism, although some also noted specific cases where the mechanism might not be applicable. Two commenters did not believe that the mechanism would be used by certain classes of government entities, arguing that special districts would be unable to obtain guarantees from local governments and that local governments would be unable to obtain guarantees from their State governments.
EPA believes that the guarantee is likely to be used primarily by governments with close and long- standing ties. The Agency emphasizes that the guarantee mechanism was developed to allow governments with common interests to cooperate to keep necessary USTs in operation. The mechanism is not intended to require any government to act as a guarantor. Nevertheless, if even a small number of governments are able to qualify using this mechanism, it will serve the purpose intended.
Commenters agreed that the guarantor should not be required to fund a standby trust, arguing that (1) a standby trust is not appropriate for local governments, given their strong history of meeting their financial obligations and their ability to raise revenue consistently, (2) a standby trust was unnecessary for guarantees among governmental entities, and would add unnecessary paperwork and administrative costs that were contrary to the Agency's goal of reducing the burden on local government, and (3) the governmental guarantee would not necessarily be similar to a corporate guarantee because of State-by-State differences in statutory restrictions. EPA agrees with the commenters and has allowed for use of a governmental guarantee with or without a stand-by trust fund.
One commenter stated that certification by a State Attorney General was necessary because some States could presumably prohibit or restrict the ability of of a municipal government to make such a guarantee. Another commenter supported the Agency's decision not to require a State Attorney General's certificate attesting to the legality of the governmental guarantee. The commenter agreed with the Agency that the added degree of certainty provided by this requirement was appropriate in the case of a corporate guarantee, but was unnecessary for guarantees among governmental entities, and would burden local governments with unnecessary paperwork and costs.
The Agency is not requiring certification by the State Attorney General prior to offering the guarantee. Local governments have strictly defined and enforced limitations on abilities to enter into contracts. These limitations are codified in State law and constitution and vary by State. The Agency believes that these restrictions imposed on local government entities should, in general, act as a sufficient check to prevent local governments from entering into invalid guarantees, and that the nature and purpose of local governments will prevent the issuance of guarantees unless there is a clear governmental interest.
Because the Agency wants to avoid unnecessary paperwork and burden on the part of local governments, EPA intends to keep the rule as proposed. EPA encourages governments wishing to use the guarantee to seek clarification of their authority if they are unsure of whether they may issue guarantees.
EPA solicited comments on whether passing the fund balance test should qualify governmental entities to act as guarantors. The sole commenter on this issue stated that a government passing the fund balance test should qualify to act as a guarantor, assuming that State statute permitted a governmental entity to be a guarantor. After further review, EPA has decided that allowing governments using the fund balance mechanism to act as guarantors would be consistent with the overall approach taken in the development of the new e mechanisms. The Agency has, therefore, modified the proposed rule to allow the fully-funded fund balance mechanism to serve as the basis for a governmental guarantee.
Government Guarantee With Standby Trust
The first alternative governmental guarantee parallels the corporate guarantee, in that it must include a pledge to fund a standby trust in the event of failure by the UST owner or operator to pay corrective action or third-party liability claims. In today's rule, the guarantor must have legal authority to issue the guarantee. The Agency anticipates that most guarantees will be based on a clear and significant governmental relationship such as overlapping geographical boundaries, taxing or service constituencies, or shared impact from an UST release.
Government Guarantee Without Standby Trust Requirements
In a governmental guarantee without a standby trust requirement, the guarantor agrees to provide funds for corrective action and third-party compensation as directed by the implementing agency on an on-going basis, up to the limits of the guarantee. Rather than fully funding a standby trust, the guarantor would make the payments directly as funds are required.
The current corporate guarantee requires the establishment of a standby trust, and requires a guarantor to fund the trust (1) after notification that a guarantee will be canceled if a release has been detected and no alternate coverage has been obtained, or (2) when a release has occurred and the owner or operator has failed to perform corrective action or payment of a settlement or judgment for third-party liability. The corporate guarantee requires funding of a standby trust for several reasons. First, the issuance of a guarantee is founded on the existence of a substantial business relationship; such relationships are subject to change over time. Second, the underlying mechanism used by the guarantor depends primarily on the existence of readily liquidated assets, rather than ongoing financial strength. Consequently, the Agency wishes to insure that the funds are made available before adverse events can occur. Third, the Agency wishes to reduce the potential delay involved in enforcing first against the UST owner or operator, and then against the guarantor for payment.
These concerns are mitigated under the governmental guarantee. First the agency believes that the governmental relationships that are likely to lead to the issuance of guarantees will be founded on geographical proximity and service to a common constituency. These relationships are not subject to rapid change. Second, the Agency recognizes in this rule that local government entities, as a class, have greater financial stability than private corporations. It is, therefore, less critical to obtain funds immediately to pay for contingent liabilities (such as payment of third-party claims) that may not occur. Third, the Agency recognizes the difference in purpose between governmental and private organizations, specifically the role of local governments to serve the public. This service orientation may make local governments more likely to fulfill their financial obligations. Consequently, the Agency has less concern that the absence of a standby trust will result in a delay in securing cleanup actions by local government owners or operators. With its modified structure, the mechanism permits a "pay-as-you-go" approach. These provisions allow a guarantor to fund corrective action costs as they are incurred, instead of requiring the guarantor to fund the standby trust fully in advance of anticipated expenditures.
Commenters on this issue agree that the governmental guarantee provides adequate safeguards without the need for creation of a standby trust fund.
4. Maintenance of a Fund Balance (§ 280.107)
Under this option, the UST owner or operator would create a dedicated fund specifically for UST releases or general catastrophic events. The dedicated fund must meet the local Government's aggregate financial responsibility requirements (or such amount needed to fulfill gaps in financial responsibility from other mechanisms used in combination with the funded balance). Use of the fund balance mechanism requires local governmental entities to establish irrevocable trusts pledged to use for UST response or use in responding to catastrophic events, including UST releases.
Control of the fund would continue to rest with the local government entity. Control and accounting for these funds would be administered following the standards appropriate for other insurance trusts already maintained by local government entities, including pension trusts and worker's compensation funds.
The fund balances must be held as cash or investment securities that will be available in the event of an UST release and must be irrevocably dedicated to use for UST response or for responding to catastrophic events, including UST releases. As discussed below, the Agency is providing three alternatives that may be used in establishing the fund.
Based on an analysis of Census data and data on Minnesota cities, the Agency believes that the fund balance mechanism is unlikely to be used widely by general purpose governments, because few who require an alternative mechanism to the bond rating and worksheet tests have adequate funds. [State Auditor of Minnesota, "Report of the State Auditor of Minnesota on the Revenues, Expenditures, and Debt of the Cities in Minnesota for the Fiscal Year Ended December 1987," November 1988.] The fund balance mechanism may prove more useful for special districts and school districts that may not be able to use the worksheet test. The inclusion of a fund balance mechanism as a financial assurance option should increase the flexibility provided owners and operators in demonstrating financial assurance. Today EPA is providing the following three sub-options, any one of which may be used to demonstrate financial responsibility.
Fully-Funded Dedicated Fund
Under this alternative, the local government would establish a separate fund, dedicated to payment of UST corrective actions and third-party liability claims, in the amount of its aggregate financial responsibility requirements. The fund balance must be established as an irrevocable fiduciary or trust account, with proceeds invested in cash or readily marketable securities. This mechanism would be the most similar to the corporate trust fund option (§ 280.102 of subpart H) and is intended to be similar to "trust accounts" and "insurance accounts "held by local governments for pensions and insurance. Although there are currently no restrictions to local governments using the trust fund option under § 280.102, the fully-funded dedicated fund option would not require the local government to establish a third-party trustee for the fund. Instead, the fund would be administered by the treasurer or chief financial officer of the local government entity as a separate trust account.
Catastrophic Events Contingency Fund
Under this option, a municipality would be able to use a dedicated fund used for general emergency response and third-party liability (e.g., flood relief, hurricane relief, or other environmental cleanups) as evid
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