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Financial Assurance Mechanisms for Local Government Owners and Operators of Municipal Solid Waste Landfill Facilities
Note: EPA no longer updates this information, but it may be useful as a reference or resource.
[Federal Register: November 27, 1996 (Volume 61, Number 230)]
[Rules and Regulations]
[Page 60327-60339]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
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ENVIRONMENTAL PROTECTION AGENCY
40 CFR Part 258
[FRL-5654-3]
RIN 2050-AD04
Financial Assurance Mechanisms for Local Government Owners and
Operators of Municipal Solid Waste Landfill Facilities
AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
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SUMMARY: As part of the President's regulatory reform initiative, the
Environmental Protection Agency (EPA) is amending the financial
assurance provisions of the Municipal Solid Waste Landfill Criteria,
under subtitle D of the Resource Conservation and Recovery Act. The
financial assurance provisions require owners and operators of
municipal solid waste landfills (MSWLFs) to demonstrate that adequate
funds will be readily available for the costs of closure, post-closure
care, and corrective action for known releases associated with their
facilities. The existing regulations specify several mechanisms that
owners and operators may use to make that demonstration.
Today's rule increases the flexibility available to owners and
operators by adding two mechanisms to those currently available. The
additional mechanisms, a financial test for use by local government
owners and operators, and a provision for local governments that wish
to guarantee the costs for an owner or operator, are designed to be
self-implementing. Use of the financial test provided in this rule
allows a local government to use its financial strength to avoid
incurring the expenses associated with the use of a third-party
financial instrument. Demonstrating that the costs of closure,
postclosure care, and corrective action for known releases are available
protects the environment by assuring that landfills will be properly
managed at the end of site life when revenues are no longer being
generated and physical structures may begin to break down.
DATES: The effective date for this final rule is April 9, 1997. The
compliance date for MSWLF's is April 9, 1997, except for small, dry or
remote landfills which have until October 9, 1997 to comply.
ADDRESSES: Supporting materials are available for viewing in the RCRA
Information Center (RIC), located at Crystal Gateway I, first Floor,
1235 Jefferson Davis Highway, Arlington, VA. The Docket Identification
Number is F-96-LGFF-FFFFF. The RIC is open from 9 a.m. to 4 p.m.,
Monday through Friday, excluding Federal holidays. To review docket
materials, it is recommended that the public make an appointment by
calling 703 603-9230. The public may copy a maximum of 100 pages from
any regulatory docket at no charge. Additional copies cost $.15/page.
The index and some supporting material is available electronically. See
the Supplementary Information section for information on accessing
them.
FOR FURTHER INFORMATION CONTACT: The RCRA Hotline toll free at (800)
424-9346 or TDD 800 553-7672 (hearing impaired). In the Washington,
D.C. metropolitan area, call 703 412-9810 or TDD 703 412-3323; or
George Garland, Office of Solid Waste (5306W), U.S. Environmental
Protection Agency, 401 M Street SW, Washington, DC 20460 at (703) 308-
7272.
SUPPLEMENTARY INFORMATION: The index and the Comment Response Document
are available on the Internet. Follow these instructions to access the
information electronically:
WWW: http//www.epa.gov/epaoswer
Gopher: gopher.epa.gov
Dial-up: 919 558-0335
If you are using the gopher or direct dialup method, once you are
connected to the EPA Public Access Server, look for this report in the
directory EPA Offices and Regions/Office of Solid Waste and Emergency
Response (OSWER)/Office of Solid Waste (RCRA).
FTP: ftp.epa.gov
Login: anonymous
Password: your internet address
Files are located in /pub/gopher/OSWRCRA.
Preamble Outline
I. Authority
II. Background
III. Summary of Rule
A. Local Government Financial Test
1. Financial Component
a. Bond rating requirement
b. Financial ratio alternative to the bond rating requirement
c. Compliance with GAAP
d. Operating Deficit Limit
e. Adverse or Qualified Auditor's Opinion
2. Public Notice Component
3. Recordkeeping and Reporting Component
4. Calculation Of Costs To Be Assured
B. Local Government Guarantee
C. Discounting
D. Effective Date
IV. Responses to Comments and Analysis of Issues
V. Economic and Regulatory Impacts
A. Executive Order 12866
B. Regulatory Flexibility Act
C. Paperwork Reduction Act
D. Unfunded Mandates Reform Act
E. Submission to Congress and the General Accounting Office
I. Authority
These amendments to Title 40, part 258, of the Code of Federal
Regulations are promulgated under the authority of sections 1008, 4004,
and 4010 of the Resource Conservation and Recovery Act (RCRA), as
amended, 42 U.S.C. 6907, 6944, and 6949a.
II. Background
The Agency proposed revised criteria for municipal solid waste
landfills (MSWLFs), including financial assurance requirements, on
August 30, 1988 (see 53 FR 33314) pursuant to the authority listed
above. The purpose of the financial assurance requirements is to assure
that adequate funds will be readily available to cover the costs of
closure, post-closure care, and corrective action associated with
MSWLFs.
In the August 30, 1988 proposal, rather than proposing specific
financial assurance mechanisms, the Agency proposed a financial
assurance performance standard. The Agency solicited public comment on
this performance standard approach and, at the same time, requested
comment on whether the Agency should develop financial test mechanisms
for use by local governments and corporations. In response to comments
on the August 1988 proposal, the Agency added several specific
financial mechanisms to the financial assurance performance standard of
Sec. 258.74 in promulgating the October 9, 1991 final rule on MSWLF
criteria (56 FR 50978). That provision allows approved States to use
any State-approved mechanism that meets that performance standard.
Commenters on the August 30, 1988 proposal also supported the
development of financial tests for local governments and for
corporations to demonstrate that they meet the financial assurance
performance standard, without the need to produce a third-party
instrument to assure that the obligations associated with their
landfill will be met.1 The Agency agreed with commenters and, in
the October 9, 1991 preamble, announced its intention to develop both a
local government and corporate financial test in advance of the
effective date of the financial assurance provisions.
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\1\ For a description of the third-party instruments available
to MSWLF owners and operators, see 56 FR 50978.
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On April 7, 1995, the Agency delayed the date by which MSWLFs must
comply with RCRA subtitle D financial
[[Page 60329]]
assurance requirements until April 9, 1997 (see 60 FR 17649) (remote,
very small landfills as defined at 40 CFR 258.1(f)(1) must comply by
October 9, 1997). EPA extended the compliance date to provide adequate
time to promulgate financial tests for local governments and for
corporations before the financial assurance provisions take effect. The
delayed effective date also was intended to provide owners and
operators sufficient time to determine whether they satisfy the
applicable financial test criteria for all of the obligations
associated with their facilities, and to obtain a guarantor or an
alternate instrument, if necessary. The Agency proposed a local
government financial test and a corporate financial test on December
27, 1993 (see 58 FR 68353) and October 12, 1994 (see 59 FR 51523),
respectively. The Agency expects to promulgate the final corporate test
in the spring of 1997.
III. Summary of Rule
A. Local Government Financial Test
Today's rule allows local government owners and operators of MSWLFs
that meet certain financial, public notice, and recordkeeping and
reporting requirements to use a financial test to demonstrate financial
assurance for MSWLF closure, post-closure and corrective action costs
up to a specified maximum limit. The financial test allows a local
government to avoid incurring the expenses associated with
demonstrating financial assurance through the use of third-party
financial instruments, such as a trust fund, letter of credit or
insurance policy. Under this approach, a local government must
demonstrate that it is capable of meeting its financial obligations at
its MSWLF through ``self-insurance''.
1. Financial Component
A local government must qualify to use the financial test by
satisfying either the bond rating provision or the financial ratio
alternative. These provisions measure a local government's current
financial condition and, thereby, indicate its ability to pay for
closure, post-closure and corrective action costs.
(a) Bond Rating Requirement
The financial test's bond rating provision requires a local
government to have a current investment grade bond rating (i.e., Aaa,
Aa, A, or Baa, as issued by Moody's, or AAA, AA, A, or BBB, as issued
by Standard and Poor's) on all outstanding general obligation bonds.
Today's rule provides that a local government with outstanding general
obligation bonds that do not meet the bond rating requirement is not
eligible to use the financial test.
(b) Financial Ratio Alternative to the Bond Rating Requirement
A local government that does not have any outstanding general
obligation bonds, or that only has unrated general obligation bonds,
may qualify to use the financial test if it satisfies both a liquidity
ratio and a debt service ratio.
(c) Compliance with GAAP
A local government that uses the financial ratio alternative to
qualify for the financial test must determine whether it satisfies the
financial ratios on the basis of a financial statement prepared in
accordance with Generally Accepted Accounting Principles (GAAP) for
governments.
(d) Operating Deficit Limit
Notwithstanding whether a local government meets the bond rating
requirement or the financial ratio alternative, a local government is
disqualified from using the financial test if its financial statements
prepared in accordance with GAAP show an operating deficit equal to
five percent or more of its total annual revenue for each of the past
two years.
(e) Adverse or Qualified Auditor's Opinion
A local government is also disqualified from using the financial
test if an audit of its most recent financial statement (prepared in
accordance with GAAP) receives an adverse opinion, disclaimer of
opinion, or other qualified opinion.
2. Public Notice Component
A local government must disclose in its annual budget or financial
report the estimated costs of its closure, post-closure and corrective
action obligations, including the years when such costs are expected to
be incurred. Closure, post-closure, and corrective action costs that
are to be incurred during a local government's current budget period
must be included as line items in that budget; those costs that are to
be incurred in future budget periods need only be disclosed in a
supplemental section to a local government's budget or financial
report.
3. Recordkeeping and Reporting Component
A local government must review its financial situation every year
to determine if it satisfies the requirements of the financial test and
is still eligible to use the financial test. If a local government that
is using the financial test determines that it no longer meets the
financial test, then it must obtain alternate financial assurance
within 210 days of the close of its fiscal year.
If a local government meets the test's financial requirements, it
must also satisfy certain public notice and recordkeeping and reporting
requirements to demonstrate financial assurance for MSWLF closure,
post-closure and corrective action costs. A local government must also
place in a MSWLF's operating record:
(1) A letter from the local government's chief financial officer
that certifies that the local government satisfies the requirements of
the financial test for those costs for which financial assurance is
being demonstrated through the financial test,
(2) A local government's independently audited year-end financial
statement prepared in accordance with GAAP,
(3) The opinion prepared by the auditor of the local government's
year-end financial statement, and
(4) An evaluation by the local government's auditor or by the
appropriate state agency that the information in the chief financial
officer's letter to the operating record is consistent with the local
government's audited year-end financial statement.
4. Calculation of Costs to be Assured
The financial test limits the amount of closure, post-closure and
corrective action costs for which a local government may demonstrate
financial assurance through use of the test, in proportion to a local
government's financial capacity as represented by its annual revenues.
A local government may only use the financial test to demonstrate
financial assurance for the costs of its total environmental
obligations up to a maximum amount that does not exceed 43 percent of
the local government's total annual revenues (see discussion below of
Calculation of Costs to be Assured, Section IV.A.4).
B. Local Government Guarantee
Today's rule allows local governments to guarantee the closure,
post-closure and corrective action costs of other MSWLF owners and
operators through the use of the financial test. Furthermore, local
governments may combine financial mechanisms and use a financial test
or guarantee to cover a portion of the total costs of closure,
postclosure care and corrective action, while the remaining costs are
covered by an alternative financial mechanism. However, financial
mechanisms that guarantee performance of work, instead
[[Page 60330]]
of payment of costs, cannot be combined with other instruments.
C. Discounting
Under today's rule, State Directors may allow discounting at an
essentially risk free rate of interest for closure, post-closure care,
and corrective action cost estimates under certain conditions as
described later in this preamble.
D. Effective Date
Today's rule allows State Directors to waive the financial
assurance requirements for up to one year until April 9, 1998 for good
cause if an owner or operator demonstrates to the Director's
satisfaction that the April 9, 1997 effective date does not provide
sufficient time to comply with these requirements and that such a
waiver will not adversely affect human health and the environment.
IV. Response to Comments and Analysis of Issues
Forty commenters, primarily States, local governments, and their
representative associations, commented on the proposed local government
financial test. A compilation of all public comments and the Agency's
responses is available in the Docket. (See Comment Response Document
for Proposed Rule: Financial Assurance Mechanisms for Local Government
Owners and Operators of Municipal Solid Waste Landfill Facilities (40
CFR Part 258, Docket F-93-LGFP-FFFFF).)
A. Local Government Financial Test
The Proposed Local Government Financial Test included several
components: Financial, public notice, recordkeeping and reporting, and
a limitation on costs to be ensured by the test. (See Comment Response
Document, Sections 3.1, 3.2, and 3.3.)
Comment: Several commenters were concerned that the financial test
is not stringent enough and would not guarantee that the necessary
funds would be available to conduct closure and post-closure care
activities. Some commenters further argued that, to the extent that the
financial test does not guarantee the availability of funds, local
governments using the financial test would be in violation of the
financial assurance requirements set out at 40 CFR 258.71(b) and
258.72(b) that MSWLF owners and operators provide continuous coverage
of the costs of closure and post-closure care.
Response: EPA is adopting the local government financial test
because it believes some local governments possess sufficient financial
capacity and fiscal responsibility to satisfy the objectives of
financial responsibility without the use of a third-party mechanism.
The test's financial ratios and bond rating criterion are intended to
ensure that a local government is financially capable of meeting its
assured obligations. The public notice requirement ensures that the
local governments using the test are committed to planning for the
assured obligations and meeting them in a timely manner. As discussed
in greater detail below, EPA believes that a local government that
meets the financial, public notice, and recordkeeping and reporting
requirements of the financial test will be able to fund the assured
MSWLF closure, post-closure care, or corrective action obligations in a
timely manner. The purpose of the test is not to predict whether a
local government will go bankrupt but rather to indicate whether it
will have adequate funds to establish a trust fund or other allowable
instrument to provide financial assurance for closure, post-closure
care, or corrective action if its financial position deteriorates
beyond acceptable levels.
Comment: Some commenters argued that the financial test is too
stringent and that it could not be used by many local governments,
particularly small local governments.
Response: The purpose of the financial test is not to exempt local
governments from the financial assurance requirements, but to allow
those local governments that possess sufficient financial capacity and
fiscal responsibility to satisfy the objectives of financial
responsibility without the use of a third-party mechanism. Inevitably
some local governments will not have the financial capacity and fiscal
responsibility to benefit from the financial test. Nevertheless, the
Agency estimates that 91 percent of all local governments that own or
operate a MSWLF would be able to use the test for at least some amount
of their subtitle D obligations, while 54 percent of all local
governments would be able to use the financial test for all of their
subtitle D obligations. Accordingly, the Agency believes that the
financial test would allow a reasonable number of local governments to
self-insure their MSWLF obligations and still protect public health and
the environment by assuring that adequate funds are available for
closure, post-closure care, and corrective action.
1. Financial Component (Sec. 258.74(f)(1))
The proposed financial component would require that all outstanding
general obligation bonds be rated investment grade. Alternatively, the
local government could pass three ratios:
--Liquidity Ratio (cash plus marketable securities to total
expenditures) must be less than or equal to .05;
--Debt Service Ratio (annual debt service to total expenditures) must
be less than or equal to .2; and
--Use of Borrowed Funds Ratio (long term debt issued to capital
expenditures) must be less than or equal to 2.
In addition to passing the bond test or the ratio test, the local
government would have to:
--Not have an operating deficit greater than 5 percent of expenditures
for each of the past two years;
--Prepare financial statements in accordance with Generally Accepted
Accounting Principles; and
--Have an unqualified auditor's opinion.
(See Comment Response Document, Section 4.1)
Comment: A commenter suggested that local governments should be
able to demonstrate financial assurance for landfill closure, postclosure
and corrective action costs without having to demonstrate their
financial capability. This commenter believed that one may assume that
local governments with taxing authority will be in a position to pay
for closure, post-closure and corrective action costs. The commenter
argued, therefore, that a local government should qualify to use the
financial test, unless there are indications that it is not financially
sound, such as a below investment grade bond rating or being in default
on a bond issue.
Response: The Agency believes that it is essential that a local
government demonstrate its financial capability to qualify for the
financial test, because a local government must have sufficient
financial capacity to be able to obtain the necessary closure and
postclosure funds at the time that the funds are needed. Although most
local governments are able to pay off their financial obligations over
time, conflicting financial demands could cause financially weaker
local governments to delay necessary closure and post-closure
activities at MSWLF's. Any delay in conducting necessary closure and
post-closure activities could jeopardize public health and the
environment as well as significantly increase response costs for
corrective action at a site. In some cases, such increased costs would
ultimately have to be borne by State or federal response authorities.
[[Page 60331]]
Comment: Another commenter argued that only local governments with
a minimum annual revenue of $3 million should qualify for the local
government financial test.
Response: Although the corporate financial test is only available
to corporations with at least $10 million in annual revenues, the
Agency has not adopted a similar minimum size requirement for the local
government financial test because local governments, unlike
corporations, have taxing authority and are, therefore, less likely to
become insolvent. Instead of requiring a minimum size for a local
government to qualify for the financial test, the test establishes a
maximum amount (43 percent of a local government's total annual
revenue) up to which a local government may rely on the test to
demonstrate financial assurance in order to ensure that the costs being
assured are appropriate in relation to the size of a local government.
a. Bond rating requirement (Sec. 258.74(f)(1)(i)(A))
Comment: Some commenters believed that the financial test's
reliance on the ratings of bonds issued by a local government may be an
inappropriate measure of that local government's financial strength.
They argued that general obligation bond ratings are not good
indicators of the financial health of the local government that issues
the bonds, because the ratings indicate the risk associated with the
bonds themselves rather than any risk associated with the financial
capability of the issuing local government. They also argued that
ratings of other kinds of bonds, such as insured bonds or
collateralized bonds, do not reflect the issuing local government's
financial condition and, therefore, do not reflect any changes in a
local government's financial strength over time.
Other commenters argued that the financial test's bond rating
requirement is too restrictive, because it limits the bond ratings
allowed to general obligation bond ratings and does not include other
forms of rated debt, such as revenue bonds.
Response: Today's rule relies on a local government's general
obligation bond ratings as a measure of a local government's financial
capability because such bond ratings are based on a comprehensive
evaluation of a local government's financial condition (See Comment
Response Document, Section 4.1.1 for more detail). Today's rule
disallows the use of insured general obligation bond ratings, because
the rating of such bonds is based on the financial capability of the
insurer and may not reflect a local government's current financial
condition. Today's rule does not allow the use of revenue or
collateralized bond ratings as a measure of a local government's
financial capability because such bond ratings only reflect the
financial risk associated with a particular revenue source or asset and
not the general financial health of the local government.
Comment: A commenter argued that the financial test's bond rating
requirement should be made more stringent by only considering the
ratings of general obligation bonds issued within the previous two
years by a local government in an amount equal to the funds necessary
for closure and post-closure care.
Response: Today's rule does not impose such additional requirements
on qualifying for the financial test: The ratings of outstanding
general obligation bonds are updated periodically to reflect a local
government's current financial condition. In addition,
Sec. 258.74(f)(4) of today's rule already requires proportionality
between the amount of costs that can be assured under the financial
test and a local government's financial capability by limiting the
costs to be assured under the financial test to a maximum of 43 percent
of the local government's total annual revenue.
Comment: Several commenters pointed out that many local governments
may not have ratings on their general obligation debt because it is not
always necessary to obtain a rating to market bonds. They explained
that the language of the proposed rule would preclude local governments
with unrated general obligation bonds from qualifying for the financial
test, because not only would they be unable to satisfy the bond rating
requirement but they also would be ineligible to use one of the
financial ratios to qualify for the financial test; only local
governments with no general obligations bonds, rated or unrated, would
be eligible to use the financial ratios to qualify for the financial
test.
Response: Sections 258.74(f)(1)(i)(A) and (B) of today's rule
clarify that the bond rating requirement only applies to local
governments with ``rated'' outstanding general obligation bonds. This
clarification provides local governments that have unrated general
obligation bonds, and hence that cannot satisfy the bond rating
requirement, the opportunity nevertheless to qualify for the financial
test by meeting one of the financial ratio alternatives to the bond
rating requirement.
b. Financial ratio alternative to the bond rating requirement
(Sec. 258.74(f)(1)(i)(B))
Comment: Some commenters questioned the appropriateness of the
proposed financial ratios. Suggested alternatives include the ratio
between the total assessed value of a local government's taxable real
estate and the actual amount of real estate taxes collected or the
ratio between a local government's total general obligation debt and
its taxable real estate. Another commenter suggested that ratios that
measure a local government's total debt and pension fund obligations
should be added to the proposed financial ratios to provide greater
certainty of a local government's financial ability to satisfy its
closure and post-closure obligations.
Response: EPA considered these and similar measures of a local
government's financial health in the course of developing the local
government financial test proposed on December 27, 1993. As discussed
in the preamble to the proposed rule (58 FR 68353, 68356), EPA analyzed
the different financial ratios and thresholds identified in the
literature on local government finances and eliminated them from
further consideration if they could not be: (A) Calculated easily from
the financial statements of local governments, analyzed based on
available data, or used because they were clearly less supported in the
financial literature relied upon in this rulemaking (See Bibliography
of Financial Sources and References in the Docket) than similar
measures; (B) if the relationship between the measure and financial
health appeared random; (C) if the measures and associated thresholds
could not differentiate among local governments; (D)if the measures
were highly sensitive to small changes in the threshold value; or (E)
if the measures were highly correlated with other measures already in
the test that evaluated the same aspect of local government financial
health. From the remaining measures, EPA selected those ratios and
thresholds that were best substantiated in the public finance
literature.
EPA rejected using the ratio between the total assessed value of a
local government's taxable real estate and the actual amount of real
estate taxes collected because, although the ratio measures a local
government's potential revenue, it does not describe a local
government's willingness to use this source of revenue. Similarly, EPA
rejected using the ratio between a local government's total general
obligation debt and its taxable real estate because, although it
provides a measure of a local government's revenue from property
[[Page 60332]]
taxes, it does not measure willingness to use this revenue source (See
Comment Response Document, Section 4.1.2, for more detail). EPA
rejected ratios evaluating pension funds because there was no data to
allow the Agency to select an appropriate threshold to indicate when
pension funds may be in financial difficulty. Finally, EPA decided that
measures evaluating total debt were unnecessary, because the debt
service ratio already measures a local government's ratio of annual
debt service to total expenditures.
(1) The liquidity ratio (Sec. 258.74(f)(1)(i)(B)(1))
Comment: Several commenters questioned the appropriateness of the
liquidity ratio incorporated into today's rule, because they believe
that a local government's cash balance is a poor indicator of its
financial capability.
Response: Although the liquidity ratio, by itself, may not provide
a conclusive measure of a local government's financial capability to
conduct closure, post-closure care and corrective action at a MSWLF, it
does provide a measure of a local government's ability to meet current
and unexpected obligations. EPA is concerned that a local government
with a cash shortage would have to delay or restrict its services and
would, therefore, be unable to conduct any MSWLF closure, post-closure
care or corrective action activities when necessary.
Comment: Another commenter suggested that a working capital ratio
would be preferable to a liquidity ratio, because liquidity ratios,
which are derived from a local government's balance sheet, can be
manipulated to reach a particular result.
Response: EPA adopted a liquidity ratio because such a ratio is
appropriate for local governments. A working capital ratio is
appropriate to evaluate corporations. Today's rule also limits the
potential for satisfying a particular financial ratio through the use
of inappropriate accounting practices by requiring that a local
government's financial statement comply with Generally Accepted
Accounting Principles (GAAP).
Comment: Some commenters questioned the appropriateness of the
liquidity ratio threshold that requires that a local government
maintain a minimum five percent cash balance in its budget in order to
satisfy the liquidity ratio. One commenter believed that a five percent
cash balance is too low, another that it is too high, and yet another
that such a minimum cash balance requirement would require local
governments, which must maintain a balanced budget under state law, to
specifically budget a five percent cash balance.
Response: EPA does not believe that it is necessary to require that
a local government maintain more than a five percent cash balance,
because it is unnecessary that a local government maintain a sufficient
cash balance to be able to respond to all of its potential MSWLF
closure, post-closure and corrective action obligations at any one
time. Instead, as discussed above, the purpose of the liquidity ratio
is to ensure that a local government has the financial flexibility to
be able to respond to some unexpected obligations in addition to
fulfilling its planned or anticipated obligations. Not only should a
local government be financially able to meet its planned MSWLF
obligations in the face of other unexpected obligations, but it should
also be able to respond to immediate and unexpected MSWLF obligations.
It is generally accepted in the financial literature (See Bibliography
of Financial Sources and References in the Docket) that a five percent
cash balance is a sufficient financial ``cushion'' for local
governments to be able to meet both current and unexpected obligations
in most situations. On the other hand, EPA does not believe that a
minimum five percent cash balance is too high a cash balance for a
local government to be able to maintain or that such a requirement
would disqualify many local governments from using the financial test
to demonstrate financial assurance. EPA's research shows that over 96
percent of all local governments that own or operate MSWLFS maintain
such a minimum cash balance and would satisfy the liquidity ratio. EPA
also does not expect that local governments, which must maintain a
balanced budget under state law, would have to specifically budget a
five percent cash balance in order to satisfy the liquidity ratio. As
indicated above, EPA's research shows that the vast majority of local
governments already maintain enough of their assets in cash and in
current investments to pass the liquidity ratio.
Comment: A commenter questions whether the financial test's
liquidity ratio is the standard measure of liquidity typically used in
financial analyses and whether it provides a meaningful assessment of a
local government's fiscal responsibility.
Response: The financial test's liquidity ratio is a standard
measure of liquidity employed in financial analyses of municipal
governments (See Bibliography of Financial Sources and References in
the Docket). Additionally, as discussed above, liquidity provides an
important measure of a local government's ability to meet current and
unexpected obligations.
(2) The debt service ratio (Sec. 258.74(f)(1)(i)(B)(2))
Comment: Some commenters question the appropriateness and the value
of a debt service ratio, on the grounds that it is unclear how such a
ratio contributes to an evaluation of a local government's financial
capability and that such a ratio would only apply to other than general
obligation bond debt (only local governments without general
obligations bonds may use the financial ratio alternative).
Response: As discussed in the December 27, 1993 proposal, debt
service represents a fixed expense that limits the flexibility of local
governments. High debt service significantly reduces the resources
available to fund current operating expenses, the flexibility to fund
unexpected needs, and the ability to obtain additional loans or issue
additional debt. The Agency believes that local governments that are
overly burdened by debt service payments may have greater difficulty
paying for assured activities in a timely fashion. Standard & Poors,
for example, employs the debt service ratio in evaluating and rating
municipal bond issues and considers such a ratio to be high, similar to
the threshold percentage in today's rule, when it exceeds 20 percent of
annual expenditures. Although the debt service ratio would not measure
debt service from rated general obligation bonds, it would measure debt
service from unrated or insured general obligation bonds, revenue bonds
and debt service attributable to other government funds, including
special assessment bonds, certificates of participation and bank loans.
(3) The use of borrowed funds ratio (Proposed
Sec. 258.74(f)(1)(i)(B)(2))
Comment: Commenters noted that borrowed funds, especially those
received late in the year, are typically not all spent in that year.
Even when they will eventually be spent on capital improvements, these
unspent borrowed funds will result in failing this ratio.
Response: We agree that this is a problem and found that attempting
to define Current Year Long Term Debt Issued to avoid that problem was
very complicated. Moreover, the requirement that a local government not
have an operating deficit in excess of 5% for each of the last two
years also assures that the local government is not
[[Page 60333]]
substantially relying on long term debt to pay short term expenses.
That is, there is not a large gap between expenses and revenues which
must be filled by long term debt. Since this was the purpose of the use
of borrowed funds ratio and the use of borrowed funds ratio may have
unintended consequences, the Agency decided to drop the use of borrowed
funds ratio.
c. Compliance with GAAP (Sec. 258.74(f)(1)(ii))
Comment: Three commenters from Nebraska, including the State of
Nebraska, argue that requiring local governments to use GAAP would be
unnecessarily burdensome, because most Nebraskan local governments use
cash basis accounting to prepare their financial statements and that
these local governments would have to prepare duplicate financial
statements using GAAP to qualify for the financial test.
Response: The Agency believes that it is necessary for local
governments to prepare an annual financial report in compliance with
GAAP, because the Agency's analysis of the financial test ratios was
predicated on ratios derived from financial statements prepared in
accordance with GAAP. The use of other forms of accounting could alter
the results of the ratios. Indeed, it appears that although Nebraska
state law allows local governments to use cash basis accounting to
prepare financial statements, it recommends that statements be prepared
in accordance with GAAP. Of course, a State could develop its own
financial test pursuant to Sec. 258.74(i) which relied on cash flow
accounting, subject to approval of its State MSWLF permit program.
d. Operating Deficit Limit (Sec. 258.74(f)(1)(iii)(3))
Comment: Commenters noted that the proposal does not define
operating deficit, total revenue, or total expenditures.
Response: Today's rule does define these terms at
Sec. 258.74(f)(1)(iv) in accordance with definitions included in the
Background Document.
Comment: There is an inconsistency between the preamble and the
text of the December 27, 1993 proposed rule, which provided that the
operating deficit limit applied if a local government experienced a
greater than five percent deficit in ``each'', and in ``either'', of
the past two years.
Response: Today's rule clarifies that the operating deficit limit
applies if a local government experiences such a deficit in ``each'' of
the past two years.
2. Public Notice Component (Sec. 258.74(f)(2))
In order to ensure that a local government using the test
acknowledges the obligations it is seeking to assure and that the
community decisionmakers are aware of and agree to the commitment of
future local government funds, the proposed rule would require that a
local government, in each year that the financial test or guarantee is
used, identify assured costs in either its budget or its comprehensive
annual financial report. (See Comment Response Document, Section 4.2)
Comment: Several commenters noted that the public notice
requirement in the proposed rule was inconsistent with the Governmental
Accounting Standards Board (GASB) Statement Number 18, ``Accounting for
Municipal Solid Waste Landfill Closure and Postclosure Care Costs.''
Response: The Agency agrees and has modified the public notice
requirement to be consistent with GASB 18. Accordingly, a local
government in compliance with GASB Statement Number 18, which requires
more information than today's rule, will also meet the public notice
requirement of the financial test.
Comment: One commenter stated that it may not be possible to
include a notice of corrective action in a Comprehensive Annual
Financial Report or annual budget within 120 days after the corrective
action remedy has been selected.
Response: The Agency recognizes the difficulty raised by the
commenter. Today's rule modifies the public notice requirement in the
event that corrective action is necessary. The modification allows a
local government to place a letter in an MSWLF's operating record, if
it is not possible to include a notice of the corrective action in a
Comprehensive Annual Financial Report or annual budget within 120 days
after the remedy has been selected.
3. Recordkeeping and Reporting Component (Sec. 258.74(f)(3))
In order to confirm that the self-implementing requirements of the
financial test have been met, the proposed rule would require local
governments to document their use of the test by placing four items in
the facility operating record: (1) A letter signed by the local
government's chief financial officer (CFO), (2) the local government's
independently audited year-end financial statements for the latest
fiscal year, (3) the auditor's unqualified opinion of the year-end
financial statement for the latest fiscal year, and (4) the special
report of the independent certified public accountant or State Agency
upon examination of the CFO's letter. In addition, owners and operators
would be required to update these items annually, and to notify the
State Director and obtain alternative financial assurance if the local
government is no longer able to pass the financial test. (See Comment
Response Document, Section 4.3)
Comment: Commenters suggested several clarifications to the
recordkeeping and reporting requirements. For example, the proposed
rule incorrectly provided that the CFO letter only certify that the
local government meet ``either'' requirement and inadvertently omitted
the operating deficit requirement from the certification requirement in
the local government certification letter.
Response: Today's rule adopts standard language suggested by the
American Institute of Certified Public Accountants to be used in the
report of the independent CPA or State Agency verifying the accuracy of
the information provided by the local government's chief financial
officer pursuant to Sec. 258.74(f)(3)(i)(A) of the rule. Today's rule
also clarifies that the local government CFO letter to be placed in a
facility's operating record must certify that a local government
``both'' meets the bond rating/financial ratio requirement and that it
prepares its financial statements in conformity with Generally Accepted
Accounting Principles and provides that the local government CFO letter
must also certify that the local government has not had an operating
deficit greater than or equal to five percent in each of the past two
years.
Comment: Some commenters believed that 90 days was an insufficient
amount of time to update the records and several noted that their
States allowed 180 days to obtain audited financial reports.
Response: Today's rule doubles the amount of time allowed to update
the records to be maintained in a facility's operating record from 90
to 180 days after the end of a local government's fiscal year. Today's
rule, like the proposed rule, continues to require that a local
government obtain alternate financial insurance--if a local government
determines that it no longer meets the financial test based on the
results of the annual records update--within thirty days of the
deadline by which a local government must update its records; however,
to reflect the additional 90 days provided to local governments to
update their records, today's rule also extends the total time
[[Page 60334]]
from the end of a local government's fiscal year by which a local
government must obtain alternate financial assurance from 120 to 210
days.
4. Calculation Of Costs To Be Assured
Under the proposed rule, a local government would not be able to
use the financial test to assure closure, post-closure care, and
corrective action costs that exceed 43 percent of the local
government's total annual revenue. Additionally, if a local government
assures the costs of other environmental obligations through the use of
other financial tests, then it could use today's financial test for
closure, post-closure care, and corrective action costs only to the
extent that its total environmental obligations assured through the use
of a financial test do not exceed 43 percent of its total annual
revenue. This amount was derived from estimates in the financial
literature (See Bibliography of Financial sources and References in the
Docket) that a local government may typically incur additional
expenditures up to 5 percent of its current annual budget without
unreasonable stress. Discounting a 20 year stream of such payments at
10 percent yields the amount of a bond issue (43 percent of
expenditures) that might be handled by a local government using future
financial flexibility. (See Comment Response Document, Section 4.4.)
Comment: One commenter argued that the financial test should be
made more stringent by disqualifying local governments whose financial
assurance obligations are greater than 43 percent of their total annual
revenues from using the financial test. If only local governments with
financial assurance obligations that are less than 43 percent of the
local government's total annual revenue could use the financial test,
it would, they argue, better ensure that local governments are
financially able to fulfill their closure, post-closure care and
corrective action obligations.
Response: The 43 percent threshold limit on a local government's
ability to ``self-insure'' its environmental obligations ensures that a
local government's environmental obligations, for which a local
government proposes to demonstrate financial assurance on the basis of
its financial ability, are not disproportionate to its relative
financial capability to fulfill those obligations. EPA has determined
that a local government may reasonably be expected to be able to pay
the costs of its environmental obligations that it is ``self-insuring''
at any one time up to 43 percent of its total annual revenues. To the
extent that the anticipated costs of a local government's environmental
obligations that are being deferred at any one time were to exceed 43
percent of its total annual revenues, EPA believes that it would be
substantially less likely that a local government would be financially
able to, in fact, fulfill those obligations at the time that they were
to become due. Since EPA believes that a community may safely
"selfinsure" its environmental obligations up to 43 percent of its total
annual revenues, it is not necessary to disqualify a community from
using the financial test if its total environmental financial assurance
costs are greater than 43 percent of its total annual revenues. In such
a case, a community should be able to realize the same cost savings as
other communities by self-insuring at least a portion of its
environmental obligations and obtaining third-party financial assurance
instruments for any costs that exceed the 43 percent threshold.
Although a requirement that a community be able to self-insure all of
its environmental obligations within the 43 percent threshold would
certainly limit the number of communities that could use the financial
test and, thereby, guarantee that the necessary funds are available in
the future by requiring those communities to obtain third-party
financial assurance instruments, such a requirement would
disproportionately disqualify smaller local governments, which are the
local governments that can least afford the expense of obtaining a
third-party financial instrument.
Comment: Other commenters suggested that the 43 percent threshold
was either too high or too low thereby making the financial test,
respectively, not stringent enough or too stringent.
Response: EPA believes that the 43 percent threshold is
appropriate. As discussed in greater detail in the Comment Response
Document, Section 4.4, the threshold is based on information contained
in the public financial literature (See Bibliography of Financial
Sources and References in the Docket) about the percent of total
revenues that a local government should be able to devote in the course
of a year to meet environmental obligations over a twenty year period
and not experience undue financial difficulty.
B. Local Government Guarantee (Sec. 258.74(h))
Under the proposed rule, a local government could guarantee the
costs of closure, post-closure and corrective action associated with a
MSWLF owner by another local government or by a private business. The
local government guarantor would have to promise to take responsibility
for the obligations of the owner or operator if the owner or operator
fails to do so and provide proof that it passes the financial test
requirements. (See Comment Response Document, Sections 5.1 and 5.2)
Comment: Some commenters opposed allowing a local government to
guarantee the costs of the environmental obligations of other MSWLFs
because MSWLF owners and operators are less likely to manage their
MSWLFs appropriately if they do not have to pay closure, post-closure
or corrective action costs. One commenter was particularly concerned
about the potential for abuse inherent in the use of public funds or
credit to guarantee the closure, post-closure and corrective action
costs of privately-owned MSWLFs and pointed out that such practices are
prohibited in many states.
Response: Today's rule maintains the local governments guarantee as
proposed and does not restrict its use. As discussed above, EPA
believes that a local government that meets the financial, public
notice, and recordkeeping and reporting requirements of the financial
test will be able to fund the assured MSWLF closure, post-closure care
or corrective action obligations in a timely manner. A local government
may, of course, only guarantee the closure, post-closure or corrective
action costs of another MSWLF owner and operator, if such an
arrangement is consistent with state law. Even if a local government
guarantee is not precluded by state law, a state may nevertheless
disallow the use of the guarantee if it determines that there is the
potential for abuse.
Comment: Commenters suggested several clarifications to provisions
of the proposed local government guarantee.
Response: Today's rule clarifies that if a guarantee is cancelled,
then pursuant to Sec. 258.74(h)(1)(iii) the owner or operator of the
MSWLF must obtain alternate financial assurance within 120 days
following ``the guarantor's notice of cancellation'' (not within 120
days following ``the close of the guarantor's fiscal year'').
Similarly, today's rule clarifies that if the local government
guarantor no longer qualifies to use the financial test, then, pursuant
to Sec. 258.74(h)(2)(iii), the owner or operator of the MSWLF must
obtain alternate financial assurance within 90 days following ``the
determination that the guarantor no longer meets the requirements of
paragraph (f)(1) of this section''; not within 90 days following ``the
guarantor's notice of cancellation.''
[[Page 60335]]
C. Discounting of Costs in Calculating Financial Assurance Cost
Estimates
The financial assurance requirements under RCRA subtitle D
currently require owners and operators to calculate cost estimates in
current dollars, and aggregate these estimates (even though these costs
may be incurred many years in the future). Owners must obtain a
financial responsibility instrument for at least the amount of this
aggregated cost estimate. In the preamble to the December 27, 1993
proposed rule (58 FR 68353, 68361), EPA solicited comments on whether
MSWLF owners and operators should be allowed to use a present value
based on a discount rate to estimate certain financial assurance costs.
Cost discounting would allow owners and operators to adjust an
aggregated cost estimate to reflect the fact that activities are
scheduled to occur in the future and to obtain a financial instrument
for less than the aggregate costs (i.e. the ``present value'' of the
aggregated costs). (See Comment Response Document, Section 7)
Comment: A number of commenters opposed allowing MSWLF owners and
operators to discount financial assurance costs because of their belief
that landfill owners and operators often underestimate cost estimates
and that the timing of a closure event is uncertain. One commenter
suggested that the risks of discounting could be minimized with State
oversight if EPA provided specific guidelines.
Response: The Financial Accounting Standards Board (which sets
standards for corporate accounting) allows discounting only when costs
and timing of closure are certain and then only for an essentially risk
free rate, adjusted for inflation. The Agency agrees with commenters
that cost estimates are frequently underestimated and that the closure
date is usually uncertain because sites may fill up more quickly than
expected or they may close because of enforcement actions as a result
of rule violations. We also agree with the Financial Accounting
Standards Board that discounting is only appropriate when cost
estimates and closure dates are certain. For these reasons, the Agency
has decided against allowing discounting without State oversight.
Because the Agency recognizes that there are cases where cost
estimates are accurate and closure dates are certain, we have decided
to allow State Directors to allow discounting for closure, postclosure,
and corrective action costs if they believe that cost
estimates are accurate and the closure date is certain and where the
local government has submitted a finding from a Registered Professional
Engineer that cost estimates are accurate and certifies that there are
no known factors which would change the estimated closure date. The
State must also determine that the facility is in compliance with all
regulations it determines to be applicable and appropriate. Consistent
with other elements of this rule, cost estimates must be adjusted
annually to reflect inflation and remaining site life. The discount
rate used may not be greater than the rate of return for essentially
risk free investments, such as 1 year Treasury bills, net of inflation.
As noted above, discounting at an essentially risk free rate of return
is that allowed by the Financial Accounting Standards Board and was
suggested by several commenters. The Government Accounting Standards
Board notes that EPA is already allowing for discounting for inflation
because it allows annual adjustments of cost estimates for inflation.
For this reason the Agency requires that inflation be deducted from an
essentially risk free rate of return in calculating a discount rate.
The resulting rate allows conservatively invested funds to grow to the
needed amount in the time available. (See Comment Response Document,
Section 7)
D. Different Financial Tests for Local Government Owners and Operators
of MSWLFs and Underground Storage Tanks
The financial test proposed for use by local government owners and
operators of MSWLFs under subtitle D of RCRA was different from the
previously adopted financial test for use by local government owners
and operators of underground storage tanks (USTs) under subtitle I of
RCRA. As discussed in the preamble to the December 27, 1993 proposed
rule (58 FR 68353, 68362), while EPA generally strives to maintain
consistency between programs, EPA believes that there are important
policy reasons to use a different test for the two programs. All
commenters on this issue agreed with EPA that the financial test for
local government owners and operators of USTs would be inappropriate
for use by local government owners and operators of MSWLFs. The Agency
agrees with commenters and has not allowed the UST test to be used for
MSWLF's. (See Comment Response Document, Section 8)
E. Effective Date for Financial Responsibility Requirements for
Municipal Solid Waste Landfills
The effective date for financial responsibility requirements for
MSWLF's is April 9, 1997 except for small, dry or remote landfills
which have until October 9, 1997 to comply (see 60 FR 52337, October 6,
1995). In response to commenters who said that they needed up to 18
months after promulgation of the local government financial test to
comply with the financial responsibility requirements for municipal
solid waste landfills, the Agency has decided to allow State Directors
to waive the financial assurance requirements for up to an additional
12 months as described earlier in section III of this preamble. This
would provide the 18 months requested by certain commenters. (See also
Comment Response Document, Section 12.5)
V. Economic and Regulatory Impacts
A. Executive Order 12866
Under Executive Order 12866, EPA must determine the economic impact
of a rule. The Agency estimates that today's rule will save local
government owners and operators of MSWLFs $105.1 million annually:
$96.6 million attributable to the availability of the local government
financial test and $8.5 million attributable to the availability of the
local government guarantee. A complete discussion of the Agency's
analysis can be found in the docket for today's rule.
To calculate the cost savings associated with today's rule, the
Agency updated the information used to calculate the anticipated cost
savings discussed in the December 27, 1993 proposed rule (58 FR 68353,
68363). The Agency updated the 1987 data on the universe of existing
MSWLF landfills by accounting for the number of MSWLF landfills that
have been closed since then and adjusted accordingly the representative
sample of local government owners and operators of MSWLFs used to
determine how many local governments would meet the financial ratios of
the financial test. The Agency also adjusted the costs of closure and
post-closure care for inflation. Based on this updated information, the
Agency believes that 91 percent of all local governments that own or
operate a MSWLF would be able to use the test for at least some amount
of their Subtitle D obligations, while 54 percent of all local
governments would be able to use the financial test for all their
subtitle D obligations.
[[Page 60336]]
Of approximately 3400 landfills in this analysis, 2700 are publicly
owned, and of those 1500 (54%) were estimated to be able to use the
financial test for all of their Subtitle D obligations. Of the
remaining 1200, about half would be able to satisfy the financial test
on their own and with the guarantee assistance of local governments
that also use their landfill. The other half, about 600, would not be
able to pass the financial test nor get help with the guarantee and so
would need to set up a mechanism for financial assurance. EPA estimated
that the cost to these landfills to obtain letters of credit is about
$18.1 million per year (1.5% annual administrative cost for letters of
credit ``times'' the closure and post-closure costs for these landfills
of about $1.2 billion). These landfills could also assure by
establishing trust funds, entailing the costs of the funds set aside,
the opportunity cost of the funds, and trust fund administrative costs.
EPA believes that the cost if all chose to establish trust funds would
be similar to the cost of using a letter of credit. Of these 600 or so
landfills, 520 are owned by local governments with populations of
10,000 or less.
Today's rule will not result in an adverse impact on the ability of
U.S.-based enterprises to compete with foreign-based enterprises in
domestic or export markets. This rule has been reviewed by the Office
of Management and Budget in accordance with Executive Order 12866.
B. Regulatory Flexibility Act
Under the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. at the
time an Agency publishes a proposed or final rule, it generally must
prepare a Regulatory Flexibility Analysis that describes the impact of
the rule on small entities, unless the Administrator certifies that the
rule will not have a significant economic impact on a substantial
number of small entities. Today's rule adds a local government
financial test and local government guarantee as two additional
mechanisms that can be used to demonstrate financial responsibility for
environmental obligations. Entities able to use these mechanisms will
be allowed to demonstrate financial responsibility for their
environmental obligations without incurring the costs of obtaining a
third-party mechanism. The Agency has allowed local governments of any
size to use up to 43% of their revenues to assure environmental
obligations if they pass the financial test. This contrasts with
suggestions from some commenters that a minimum size requirement should
be part of the test. Because this rule is deregulatory in nature, I
certify pursuant to 5 U.S.C. 605b, that this regulation will not have a
significant impact on a substantial number of small entities.
C. Paperwork Reduction Act
OMB approved the information collection requirements of the MSWLF
criteria, including financial assurance criteria, under the provisions
of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq., and assigned
OMB control number 2050-0122. The burden estimate for the financial
assurance provisions included the burden associated with obtaining and
maintaining any one of the allowable financial assurance instruments,
including a financial test.
D. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.
L. 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. Under section 202 of the UMRA, EPA
generally must prepare a written statement, including a cost-benefit
analysis, for proposed and final rules with ``Federal mandates'' that
may result in expenditures to State, local, and tribal governments, in
the aggregate, or to the private sector, of $100 million or more in any
one year. Before promulgating an EPA rule for which a written statement
is needed, section 205 of the UMRA generally requires EPA to identify
and consider a reasonable number of regulatory alternatives and adopt
the least costly, most cost-effective or least burdensome alternative
that achieves the objectives of the rule. The provisions of section 205
do not apply when they are inconsistent with applicable law. Moreover,
section 205 allows EPA to adopt an alternative other than the least
costly, most cost-effective or least burdensome alternative if the
Administrator publishes with the final rule an explanation why that
alternative was not adopted. Before EPA establishes any regulatory
requirements that may significantly or uniquely affect small
governments, including tribal governments, it must have developed under
section 203 of the UMRA a small government agency plan. The plan must
provide for notifying potentially affected small governments, enabling
officials of affected small governments to have meaningful and timely
input in the development of EPA regulatory proposals with significant
Federal intergovernmental mandates, and informing, educating, and
advising small governments on compliance with the regulatory
requirements.
Today's rule is not subject to the requirements of sections 202,
203 and 205 of the UMRA. EPA has determined that this rule does not
contain a Federal mandate that may result in expenditures of $100
million or more for State, local, and tribal governments, in the
aggregate, or the private sector in any one year. On the contrary, as
described above, the Agency estimates that today's rule will save local
government owners and operators of MSWLFs $105.1 million annually by
allowing local governments to use a financial test or a local
government guarantee to demonstrate financial responsibility for
environmental obligations without incurring the costs of obtaining a
third-party mechanism. Although today's rule is specifically intended
to ``significantly or uniquely affect small governments,'' the Agency
does not believe that today's rule is subject to section 203 of the
UMRA to the extent today's rule provides regulatory flexibility for
local governments and does not to impose additional regulatory
requirements. Indeed, today's rule is being promulgated in response to
a long standing request by local governments after substantial input
from such local governments into the rule's development.
E. Submission to Congress and the General Accounting Office
Under 5 U.S.C. 801(a)(1)(A) as added by the Small Business
Regulatory Enforcement Fairness Act of 1966, EPA submitted a report
containing this rule and other required information to the U.S. Senate,
the U.S. House of Representatives and the Comptroller General of the
General Accounting Office prior to publication of the rule in today's
Federal Register. This rule is a ``major rule'' as defined by 5 U.S.C.
804(2).
List of Subjects in 40 CFR Part 258
Environmental protection, Closure, Corrective action, Financial
assurance, Waste treatment and disposal, Water pollution control.
Dated: November 15, 1996.
Carol M. Browner,
Administrator.
For the reasons set forth in the preamble, title 40, chapter I of
the Code of Federal Regulations is amended as follows:
PART 258--CRITERIA FOR MUNICIPAL SOLID WASTE LANDFILLS
1. The authority citation for part 258 continues to read as
follows:
[[Page 60337]]
Authority: 42 U.S.C. 6907(a)(3), 6912(a), 6944(a), and 6949a(c);
33 U.S.C. 1345(d) and 1345(e).
2. Section 258.70 is amended by adding paragraph (c) to read as
follows:
Sec. 258.70 Applicability and effective date.
* * * *
(c) The Director of an approved State may waive the requirements of
this section for up to one year until April 9, 1998 for good cause if
an owner or operator demonstrates to the Director's satisfaction that
the April 9, 1997 effective date for the requirements of this section
does not provide sufficient time to comply with these requirements and
that such a waiver will not adversely affect human health and the
environment.
Section 258.74 is amended by adding text to paragraphs (f) and
(h) and by revising paragraph (k) to read as follows:
Sec. 258.74 Allowable mechanisms.
* * * *
(f) Local government financial test. An owner or operator that
satisfies the requirements of paragraphs (f)(1) through (3) of this
section may demonstrate financial assurance up to the amount specified
in paragraph (f)(4) of this section:
(1) Financial component. (i) The owner or operator must satisfy
paragraph (f)(1)(i)(A) or (B) of this section as applicable:
(A) If the owner or operator has outstanding, rated, general
obligation bonds that are not secured by insurance, a letter of credit,
or other collateral or guarantee, it must have a current rating of Aaa,
Aa, A, or Baa, as issued by Moody's, or AAA, AA, A, or BBB, as issued
by Standard and Poor's on all such general obligation bonds; or
(B) The owner or operator must satisfy each of the following
financial ratios based on the owner or operator's most recent audited
annual financial statement:
(1) A ratio of cash plus marketable securities to total
expenditures greater than or equal to 0.05; and
(2) A ratio of annual debt service to total expenditures less than
or equal to 0.20.
(ii) The owner or operator must prepare its financial statements in
conformity with Generally Accepted Accounting Principles for
governments and have its financial statements audited by an independent
certified public accountant (or appropriate State agency).
(iii) A local government is not eligible to assure its obligations
under Sec. 258.74(f) if it:
(A) Is currently in default on any outstanding general obligation
bonds; or
(B) Has any outstanding general obligation bonds rated lower than
Baa as issued by Moody's or BBB as issued by Standard and Poor's; or
(C) Operated at a deficit equal to five percent or more of total
annual revenue in each of the past two fiscal years; or
(D) Receives an adverse opinion, disclaimer of opinion, or other
qualified opinion from the independent certified public accountant (or
appropriate State agency) auditing its financial statement as required
under paragraph (f)(1)(ii) of this section. However, the Director of an
approved State may evaluate qualified opinions on a case-by-case basis
and allow use of the financial test in cases where the Director deems
the qualification insufficient to warrant disallowance of use of the
test.
(iv) The following terms used in this paragraph are defined as
follows:
(A) Deficit equals total annual revenues minus total annual
expenditures;
(B) Total revenues include revenues from all taxes and fees but
does not include the proceeds from borrowing or asset sales, excluding
revenue from funds managed by local government on behalf of a specific
third party;
(C) Total expenditures include all expenditures excluding capital
outlays and debt repayment;
(D) Cash plus marketable securities is all the cash plus marketable
securities held by the local government on the last day of a fiscal
year, excluding cash and marketable securities designated to satisfy
past obligations such as pensions; and
(E) Debt service is the amount of principal and interest due on a
loan in a given time period, typically the current year.
(2) Public notice component. The local government owner or operator
must place a reference to the closure and post-closure care costs
assured through the financial test into its next comprehensive annual
financial report (CAFR) after the effective date of this section or
prior to the initial receipt of waste at the facility, whichever is
later. Disclosure must include the nature and source of closure and
post-closure care requirements, the reported liability at the balance
sheet date, the estimated total closure and post-closure care cost
remaining to be recognized, the percentage of landfill capacity used to
date, and the estimated landfill life in years. A reference to
corrective action costs must be placed in the CAFR not later than 120
days after the corrective action remedy has been selected in accordance
with the requirements of Sec. 258.58. For the first year the financial
test is used to assure costs at a particular facility, the reference
may instead be placed in the operating record until issuance of the
next available CAFR if timing does not permit the reference to be
incorporated into the most recently issued CAFR or budget. For closure
and post-closure costs, conformance with Government Accounting
Standards Board Statement 18 assures compliance with this public notice
component.
(3) Recordkeeping and reporting requirements. (i) The local
government owner or operator must place the following items in the
facility's operating record:
(A) A letter signed by the local government's chief financial
officer that:
(1) Lists all the current cost estimates covered by a financial
test, as described in paragraph (f)(4) of this section;
(2) Provides evidence and certifies that the local government meets
the conditions of paragraphs (f)(1)(i), (f)(1)(ii), and (f)(1)(iii) of
this section; and
(3) Certifies that the local government meets the conditions of
paragraphs (f)(2) and (f)(4) of this section.
(B) The local government's independently audited year-end financial
statements for the latest fiscal year (except for local governments
where audits are required every two years where unaudited statements
may be used in years when audits are not required), including the
unqualified opinion of the auditor who must be an independent,
certified public accountant or an appropriate State agency that
conducts equivalent comprehensive audits;
(C) A report to the local government from the local government's
independent certified public accountant (CPA) or the appropriate State
agency based on performing an agreed upon procedures engagement
relative to the financial ratios required by paragraph (f)(1)(i)(B) of
this section, if applicable, and the requirements of paragraphs
(f)(1)(ii) and (f)(1)(iii) (C) and (D) of this section. The CPA or
State agency's report should state the procedures performed and the CPA
or State agency's findings; and
(D) A copy of the comprehensive annual financial report (CAFR) used
to comply with paragraph (f)(2) of this section or certification that
the requirements of General Accounting Standards Board Statement 18
have been met.
(ii) The items required in paragraph (f)(3)(i) of this section must
be placed in the facility operating record as follows:
(A) In the case of closure and post-closure care, either before the
effective
[[Page 60338]]
date of this section, which is April 9, 1997, or prior to the initial
receipt of waste at the facility, whichever is later, or
(B) In the case of corrective action, not later than 120 days after
the corrective action remedy is selected in accordance with the
requirements of Sec. 258.58.
(iii) After the initial placement of the items in the facility's
operating record, the local government owner or operator must update
the information and place the updated information in the operating
record within 180 days following the close of the owner or operator's
fiscal year.
(iv) The local government owner or operator is no longer required
to meet the requirements of paragraph (f)(3) of this section when:
(A) The owner or operator substitutes alternate financial assurance
as specified in this section; or
(B) The owner or operator is released from the requirements of this
section in accordance with Sec. 258.71(b), 258.72(b), or 258.73(b).
(v) A local government must satisfy the requirements of the
financial test at the close of each fiscal year. If the local
government owner or operator no longer meets the requirements of the
local government financial test it must, within 210 days following the
close of the owner or operator's fiscal year, obtain alternative
financial assurance that meets the requirements of this section, place
the required submissions for that assurance in the operating record,
and notify the State Director that the owner or operator no longer
meets the criteria of the financial test and that alternate assurance
has been obtained.
(vi) The Director of an approved State, based on a reasonable
belief that the local government owner or operator may no longer meet
the requirements of the local government financial test, may require
additional reports of financial condition from the local government at
any time. If the Director of an approved State finds, on the basis of
such reports or other information, that the owner or operator no longer
meets the requirements of the local government financial test, the
local government must provide alternate financial assurance in
accordance with this section.
(4) Calculation of Costs to be Assured. The portion of the closure,
post-closure, and corrective action costs for which an owner or
operator can assure under this paragraph is determined as follows:
(i) If the local government owner or operator does not assure other
environmental obligations through a financial test, it may assure
closure, post-closure, and corrective action costs that equal up to 43
percent of the local government's total annual revenue.
(ii) If the local government assures other environmental
obligations through a financial test, including those associated with
UIC facilities under 40 CFR 144.62, petroleum underground storage tank
facilities under 40 CFR Part 280, PCB storage facilities under 40 CFR
Part 761, and hazardous waste treatment, storage, and disposal
facilities under 40 CFR Parts 264 and 265, it must add those costs to
the closure, post-closure, and corrective action costs it seeks to
assure under this paragraph. The total that may be assured must not
exceed 43 percent of the local government's total annual revenue.
(iii) The owner or operator must obtain an alternate financial
assurance instrument for those costs that exceed the limits set in
paragraphs (f)(4) (i) and (ii) of this section.
* * * *
(h) Local Government Guarantee. An owner or operator may
demonstrate financial assurance for closure, post-closure, and
corrective action, as required by Secs. 258.71, 258.72, and 258.73, by
obtaining a written guarantee provided by a local government. The
guarantor must meet the requirements of the local government financial
test in paragraph (f) of this section, and must comply with the terms
of a written guarantee.
(1) Terms of the written guarantee. The guarantee must be effective
before the initial receipt of waste or before the effective date of
this section, whichever is later, in the case of closure, post-closure
care, or no later than 120 days after the corrective action remedy has
been selected in accordance with the requirements of Sec. 258.58. The
guarantee must provide that:
(i) If the owner or operator fails to perform closure, post-closure
care, and/or corrective action of a facility covered by the guarantee,
the guarantor will:
(A) Perform, or pay a third party to perform, closure, post-closure
care, and/or corrective action as required; or
(B) Establish a fully funded trust fund as specified in paragraph
(a) of this section in the name of the owner or operator.
(ii) The guarantee will remain in force unless the guarantor sends
notice of cancellation by certified mail to the owner or operator and
to the State Director. Cancellation may not occur, however, during the
120 days beginning on the date of receipt of the notice of cancellation
by both the owner or operator and the State Director, as evidenced by
the return receipts.
(iii) If a guarantee is cancelled, the owner or operator must,
within 90 days following receipt of the cancellation notice by the
owner or operator and the State Director, obtain alternate financial
assurance, place evidence of that alternate financial assurance in the
facility operating record, and notify the State Director. If the owner
or operator fails to provide alternate financial assurance within the
90-day period, the guarantor must provide that alternate assurance
within 120 days following the guarantor's notice of cancellation, place
evidence of the alternate assurance in the facility operating record,
and notify the State Director.
(2) Recordkeeping and reporting. (i) The owner or operator must
place a certified copy of the guarantee along with the items required
under paragraph (f)(3) of this section into the facility's operating
record before the initial receipt of waste or before the effective date
of this section, whichever is later, in the case of closure, postclosure
care, or no later than 120 days after the corrective action
remedy has been selected in accordance with the requirements of
Sec. 258.58.
(ii) The owner or operator is no longer required to maintain the
items specified in paragraph (h)(2) of this section when:
(A) The owner or operator substitutes alternate financial assurance
as specified in this section; or
(B) The owner or operator is released from the requirements of this
section in accordance with Sec. 258.71(b), 258.72(b), or 258.73(b).
(iii) If a local government guarantor no longer meets the
requirements of paragraph (f) of this section, the owner or operator
must, within 90 days, obtain alternative assurance, place evidence of
the alternate assurance in the facility operating record, and notify
the State Director. If the owner or operator fails to obtain alternate
financial assurance within that 90-day period, the guarantor must
provide that alternate assurance within the next 30 days.
* * * *
(k) Use of multiple mechanisms. An owner or operator may
demonstrate financial assurance for closure, post-closure, and
corrective action, as required by Secs. 258.71, 258.72, and 258.73, by
establishing more than one financial mechanism per facility, except
that mechanisms guaranteeing performance, rather than payment, may not
be combined with other instruments. The mechanisms must be as specified
in paragraphs (a), (b), (c), (d), (f), (h), (i), and (j) of this
section, except that financial assurance for an amount at least equal
to the current cost estimate for closure, post-closure care and/or
corrective action may be
[[Page 60339]]
provided by a combination of mechanisms, rather than a single
mechanism.
* * * *
Section 258.75 is added to subpart G to read as follows:
Sec. 258.75 Discounting.
The Director of an approved State may allow discounting of closure
cost estimates in Sec. 258.71(a), post-closure cost estimates in
Sec. 258.72(a), and/or corrective action costs in Sec. 258.73(a) up to
the rate of return for essentially risk free investments, net of
inflation, under the following conditions:
(a) The State Director determines that cost estimates are complete
and accurate and the owner or operator has submitted a statement from a
Registered Professional Engineer so stating;
(b) The State finds the facility in compliance with applicable and
appropriate permit conditions;
(c) The State Director determines that the closure date is certain
and the owner or operator certifies that there are no foreseeable
factors that will change the estimate of site life; and
(d) Discounted cost estimates must be adjusted annually to reflect
inflation and years of remaining life.
[FR Doc. 96-30038 Filed 11-26-96; 8:45 am]
BILLING CODE 6560-50-P