This chapter describes the use of state funds to demonstrate UST FR as follows:
A. BACKGROUND . . . 154 A.1 What Is a State Fund? . . . 154 A.2 How Does an UST State Fund Work As a Financial Assurance Mechanism? . . . 154 A.3 What Types of Assurance Funds Can Be Used for UST FR? . . . 155 A.4 What Is the Future of State Funds? . . . 156 B. OWNER OR OPERATOR RESPONSIBILITIES WHEN USING STATE FUNDS . . . 157 B.1 Satisfying State Fund Requirements . . . 157 B.2 Updating Assurance . . . 157 B.3 Recordkeeping . . . 157 B.4 Obtaining Alternate Assurance If the State Fund Becomes Incapable of Providing
Assurance or Decides to Cancel or Terminate . . . 158 B.5 Reporting Failure to Obtain Alternate Assurance or Being Named a Debtor in
Bankruptcy Proceedings . . . 158 B.6 Submitting Financial Responsibility Documents . . . 158 C. EPA RESPONSIBILITIES . . . 159 C.1 Evaluating a State Fund . . . 159 C.2 Issuing Notification About Acceptability of State Fund . . . 160 C.3 Monitoring the Financial Soundness of Approved State Fund . . . 160 D. STATE RESPONSIBILITIES . . . 161 D.1 Submitting Required Information to EPA . . . 161 D.2 Providing Each Owner or Operator for Which It Is Assuming
Financial Responsibility a Letter or Certificate with Required
Information as Evidence of Coverage . . . 161 D.3 Notifying Each Owner or Operator If State Fund Has or Will Become
Incapable of Paying for Assured Costs or Decides to Cancel or
Terminate Coverage . . . 161 D.4 Providing Data on Fund Soundness to EPA . . . 161 E. IMPLEMENTING AGENCY RESPONSIBILITIES AND OVERSIGHT . . . 162
E.1 Responding to Notices That the Owner or Operator Has Failed to Secure Alternate Assurance or That the Owner or Operator Has Been
Named as a Debtor in Bankruptcy Proceedings . . . 162 E.2 Reviewing Financial Responsibility Documents . . . 162 E.3 Directing Payments from the State Fund . . . 163 E.4 Verifying Eligibility, Scope, and Amount of Coverage . . . 163 F. SOURCES OF FURTHER INFORMATION . . . 164
A. BACKGROUND
Typically a state offers a number of options for complying with UST FR requirements, most, if not all, being identical or similar to the other federal options described in this Manual. One exception to this norm is participation in a state fund, which may be mandatory. State funds are discussed in this chapter. Other optional state mechanisms that are not included in the federal options are discussed in Chapter 16.
A.1 What Is a State Fund?
An owner or operator may satisfy the UST FR requirements for underground storage tanks located in a state which assures that monies will be available from a state fund to cover the required amount of costs. State funds are used in some government-mandated financial responsibility programs, both environmental and non-environmental (e.g., workers compensation FR). State funds play a major role in the UST FR program. As of June 1999, most states have developed state financial assurance funds which not only provide a means of complying with FR requirements but also have expended more than $6 billion to clean up leaking UST sites over the prior 10 years. EPA does not require any state to establish or maintain a state fund.
A.2 How Does an UST State Fund Work As a Financial Assurance Mechanism?
Under any state fund, the state must provide reasonable assurance that it will pay full or partial coverage of cleanup and/or third-party compensation costs of an eligible owner or operator. The state can make this assurance in several ways:
C First, the state may undertake corrective action and pay for cleanup and third party costs directly. This is termed a "state-lead" cleanup.
C More frequently, state funds are designed assuming that a responsible party (RP) - lead cleanup will occur, either voluntarily or pursuant to a state administrative or judicial order. Acceptable methods of payment under this fund design include but are not limited to:
~ direct payment to the RP's contractor
~ direct payment to the RP based on invoices received from his contractor ~ joint payment to the RP and his contractor
These payments typically take place periodically as work progresses, based on invoices received. In addition, similar methods of payment are acceptable for satisfying third party claims,
settlements, and judgments. In these situations, the owner or operator takes the lead on the cleanup and/or handling third party claims, but once he has paid any deductible, the state fund becomes the source of further payments, thus providing financial assurance.
C Many state funds operate primarily as reimbursement funds, paying out costs only after the owner or operator has paid for the cleanup and/or any third party liability claims. The owner or operator then applies to the state for reimbursement of these costs, supported by proof that he has already paid them. Such a fund also must be structured to provide state payment of the costs it purports to assure in the event that the owner or operator is incapable of, or unwilling to, cover these costs prior to being reimbursed. Sometimes state funds have large unfunded liabilities which can result in owners and operators having to wait some period of time before their expenses can be
reimbursed.
State funds might not provide complete financial responsibility for UST owners or operators. For example, funds may not cover third-party compensation or all corrective action costs. Some funds cover releases only after (or before) a certain date. Coverage may be limited based on the number, size, and types of tanks, for example. Therefore, UST owners and operators may need to use other financial assurance mechanisms in combination with these types of state fund programs to demonstrate compliance with the full scope and amount of FR.
As of 1999, EPA has approved 35 state funds and several others have submitted their funds for review.
A.3 What Types of Assurance Funds Can Be Used for UST FR?
Two key features of state funds affect their use by owners and operators to demonstrate UST FR: (1) whether state funds provide either full or partial coverage, and (2) whether state funds automatically cover all owners and operators or only eligible owners or operators. Each of these features is described next.
Full Coverage. A full coverage fund means that the state fund provides an owner or operator in the state with the appropriate scope and amounts of coverage. A full coverage fund assures for eligible owners and operators in the state that money will be available to pay for corrective action and third-party
compensation in the amounts required.
A state fund is a full coverage fund even if it has a deductible amount that the owner or operator is responsible for paying, as long as the fund provides for first dollar coverage by the state. First dollar coverage simply means that if owners and operators do not meet the deductible requirement, the state fund will still pay for corrective action and third party compensation, including the deductible amount. In this instance, the state can pursue cost recovery against the owner or operator for the deductible amount, although that would be at the state's discretion.
Partial Coverage. A state fund provides only partial coverage if the fund covers only a portion of the required dollar amounts or scope of coverage (corrective action and/or third-party liability). When a state offers a partial coverage fund, owners and operators must demonstrate FR for the amounts of corrective action and/or third-party compensation costs that are not covered by the state fund.
For example, a partial coverage fund might cover only from $10,000 to $1 million in corrective action costs without first dollar coverage. Owners and operators must obtain another FR mechanism to demonstrate coverage for the $10,000 deductible for corrective action because the corrective action otherwise might not proceed. In this example, owners and operators also must demonstrate, through another assurance
mechanism, coverage of third-party compensation costs.
To help owners and operators comply with deductible requirements, EPA allows states to establish their own financial tests of self-insurance for deductible amounts. The federal test of self-insurance (either $10 million or $20 million net worth) is inappropriate when assuring deductible amounts, which are often in the $5,000 to $50,000 range. In establishing their tests, states may require simply that the owner's or operator's minimum net worth be a specific multiple of the deductible amount.
Unlimited Eligibility. State funds that cover all owners and operators in the state have unlimited eligibility. Eligibility is considered unlimited even when state funds require that owners and operators pay a yearly tank fee in order to be eligible for fund coverage.
Limited Eligibility. A state could exclude certain categories of owners or operators or USTs from participation, or a state could set "entrance" requirements that limit the eligibility of owners and operators to use the fund. For example, a state may require that owners or operators perform a tank tightness test before being eligible for coverage by the fund. If a state limits the eligibility of owners and operators to use a state fund, non-eligible owners and operators must use other mechanisms to demonstrate financial responsibility for the full amount and scope of required coverage.
A.4 What Is the Future of State Funds?
Despite or as a result of having made substantial progress in UST cleanups, some states are
concluding that the time is right for making the transition from their state funds to private insurance or other FR mechanisms. These states reason that such a transition will be especially appropriate over the next few years, as the preponderance of historic contamination is discovered and tanks are upgraded due to the 1998 deadline. On the other hand, some states may never make a transition, due in part to the support of owners and operators who are satisfied with their state funds.
Although states still have limited experience with fund transitions, it appears that solvency problems are a major impetus to moving a state along the transition route. When state officials, including legislators, face a raft of claims that exceeds their fund's balance and/or income, they may decide that part of the solution lies in setting a sunset date and phasing out of the state fund business. That has been the experience in Texas and Florida, and it may be an approach shared by other states facing an increasing number of claims
associated with stepped-up 1998 compliance activity.
Thus far, states have designed somewhat different approaches to transition although, in general, some are gradually phasing out their coverage and allowing owners and operators to choose among other financial responsibility options. While some owners and operators are large enough to self-insure and some will choose one of the other financial responsibility mechanisms, most owners and operators are expected to turn to commercial insurance.
B. OWNER OR OPERATOR RESPONSIBILITIES WHEN USING STATE FUNDS
The following checklist summarizes owner or operator responsibilities:
CHECKLIST OF OWNER OR OPERATOR RESPONSIBILITIES WHEN USING STATE FUNDS
G G G G G G
Satisfying State Fund Requirements (see Section B.1) Updating Assurance (see Section B.2)
Recordkeeping (see Section B.3)
Obtaining Alternate Assurance If the State Fund Becomes Incapable of Providing Assurance or Decides to Cancel or Terminate (see Section B.4)
Reporting Failure to Obtain Alternate Assurance or Being Named a Debtor in Bankruptcy Proceedings (see Section B.5)
Submitting Financial Responsibility Documents (see Section B.6)
B.1 Satisfying State Fund Requirements
Eligibility. To use a state fund to demonstrate compliance with FR, an owner or operator must satisfy any state fund eligibility requirements. In some states, owners or operators must notify the implementing agency if they wish to participate in the fund.
Amount of Coverage. A state fund must provide assurance of amounts at least equal to the required level of coverage. The exception to this rule is when a state fund is being combined with another financial mechanism. In the case of a combination of mechanisms, it is the sum of the coverage provided by the mechanisms that must be at least equal to the required amount of coverage.
Scope of Coverage. A state fund may cover all or part of the required scope of coverage (e.g., corrective action, third party compensation, or both). Another mechanism must be used to complement a state fund that covers only part of the full scope of required coverage. For example, if tanks are located in a state with a fund that covers only corrective action and not third-party compensation (or vice versa), another mechanism must be used to cover the other scope area. Both mechanisms, however, must provide the total required amount of coverage (see Chapter 2).
B.2 Updating Assurance
An owner or operator must either pay the fees or taxes required to remain covered by the state fund or arrange for a substitute FR mechanism.
If the amount of required FR coverage increases to a level above the amount assured by the state fund, the owner or operator must obtain another financial assurance mechanism to make up the difference between the new coverage level and the amount of state fund coverage.
B.3 Recordkeeping
An owner or operator who uses the state fund to satisfy UST FR must maintain onsite or at the place of business a copy of the following documents:
C The letter or certificate provided by the state fund
C Updated copy of certification of FR (described in Chapter 2 Section D.5)
B.4 Obtaining Alternate Assurance If the State Fund Becomes Incapable of Providing Assurance or Decides to Cancel or Terminate
An owner or operator must obtain alternate assurance within 30 days of receiving notification that a state fund has become incapable of paying for assured corrective action or third-party compensation costs or within 60 days of receiving notice of cancellation or termination. See 40 CFR 280.109(b) and 280.114(f).
B.5 Reporting Failure to Obtain Alternate Assurance or Being Named a Debtor in Bankruptcy Proceedings
An owner or operator must notify the Director of the implementing agency of the following: C Failure to obtain alternate assurance within 60 days of receipt of notice of
cancellation or termination from the state fund. The notification must include ~ the name and address of the state fund
~ the effective date of termination ~ required records (see B.3 above)
C Failure to obtain alternate assurance within 30 days of receiving notice of the incapacity of the state fund or the suspension or revocation of its authority to provide coverage.
C Being named a debtor following commencement of a voluntary or involuntary proceeding under the U.S. Bankruptcy Code. The owner or operator must notify the Director within 10 days by certified mail.
B.6 Submitting Financial Responsibility Documents
According to the federal regulations, an owner or operator that uses the state fund must submit a
copy of the state fund letter or certificate to the implementing agency only in the following circumstances: C Within 30 days after identifying a reportable release. (See 40 CFR 280.110(a)(1).)
C When the owner or operator fails to obtain alternate coverage. (See 40 CFR 280.110(a)(2) and 280.109(b).)
C Within 10 days after the commencement of a voluntary or involuntary bankruptcy proceeding naming the owner or operator as debtor. (See 40 CFR 280.114(a).)
C At any time if requested by the implementing agency. (See 40 CFR 280.110(c).) State regulations may require more frequent (e.g., annual) reporting.
C. EPA RESPONSIBILITIES
The following checklist summarizes EPA responsibilities for review and oversight of state funds:
CHECKLIST OF EPA RESPONSIBILITIES FOR STATE FUNDS
G G G
Evaluating a State Fund (see Section C.1)
Issuing Notification About Acceptability of State Fund (see Section C.2) Monitoring the Financial Soundness of Approved State Fund (see Section C.3)
C.1 Evaluating a State Fund
The EPA Regional Administrator evaluates a state assurance fund either as a part of state program approval or individually as an FR mechanism:
C A state may be seeking EPA approval to operate a state UST program in lieu of the federal program. In this event the state fund will be part of the state's financial responsibility package which is examined by the EPA Regional Office to determine if it is no less stringent than the federal requirements. (See 40 CFR 281.37)
C A state without state program approval may be seeking an official decision that tank owners and operators in the state may use the fund as a mechanism for complying with the federal financial responsibility requirements. (See 40 CFR 280.101)
During a state program approval process, EPA generally reviews a state's FR regulations to ensure that they are no less stringent than the federal regulations, and a state fund is reviewed to ensure it meets §281.37(c) like any other mechanism. In the rare case where a state does not have FR regulations and is using the state fund as the sole means of providing FR for owners and operators, the fund must provide the full scope and amount of required coverage to ensure that the state's FR program is no less stringent than the federal requirements. For details, see the State Program Approval Handbook and other sources of
information listed at the end of this chapter.
If the review falls under §280.101, the Regional Administrator will evaluate the equivalency of the state fund as an FR mechanism principally in terms of:
C Certainty of the availability of funds for taking corrective action and/or for compensating third parties;
C The amount of funds that will be made available; and The types of costs covered.
The Regional Administrator may also consider other factors as is necessary, such as timeliness and cost of access to funds.
EPA's regulations provide that once a state submits its fund to EPA for approval, pending the EPA Regional Administrator's determination that the fund is acceptable as a compliance mechanism, UST owners and operators are considered to be in compliance with the financial responsibility requirements for the amounts and types of costs covered by the state assurance fund.
November 30, 1999 CHAPTER 9: STATE FUNDS Page 159
C.2 Issuing Notification About Acceptability of State Fund
The Regional Administrator will notify the state about the acceptability of the state's fund for the scope and amount of coverage it provides pursuant to 40 CFR 280.101. Notification regarding state program approval is described in 40 CFR 281 Subpart E.
C.3 Monitoring the Financial Soundness of Approved State Fund
See final EPA guidance Monitoring the Financial Soundness of Approved State Assurance Funds, OSWER Directive 9650.14 (August 1993) for details.
D. STATE RESPONSIBILITIES
The following checklist summarizes a state's FR responsibilities in its role as administrator of a state fund. The state's responsibilities in its role as the implementing agency for the UST FR program are described in Section E.
CHECKLIST OF STATE RESPONSIBILITIES FOR STATE FUNDS
G G G G
Submitting Required Information to EPA (see Section D.1)
Providing Each Owner or Operator for Which It Is Assuming Financial Responsibility a Letter or Certificate with Required Information as Evidence of Coverage (see Section D.2)
Notifying Each Owner or Operator If State Fund Has or Will Become Incapable of Paying for Assured Costs or Decides to Cancel or Terminate Coverage (see Section D.3)
Providing Data on Fund Soundness to EPA (see Section D.4)
D.1 Submitting Required Information to EPA
If a state is seeking state program approval, it must submit the required information about its program. For details see 40 CFR 281.
If a state is seeking a determination under 40 CFR 280.101, the state must submit to the Regional Administrator a description of the state fund to be used for financial assurance, along with a list of the classes of underground storage tanks to which the funds may be applied. The state may need to submit additional information required by the Regional Administrator to make a determination on the acceptability of the state fund. Pending the determination by the Regional Administrator, an owner or operator of a covered class of USTs is deemed to be in compliance with the UST FR requirements for the amounts and types of costs covered by the state fund.