Underground Storage Tanks

9026 - 9060 Federal Register / Vol. 58, No. 31/ Thursday, February 18, 1993 / Rules and Regulations

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