Financial Responsibility and the Oversight of State Funds: An EPA Update

1. Financial Responsibility and the Oversight of State Funds:An EPA Update Adam Klinger Office of Underground Storage Tanks U.S. Environmental Protection Agency September 15, 2009

2. Overview • Legal and Programmatic Underpinnings • State Funds as Approved FR Mechanisms • State Fund Experience • Oversight of State Funds • Update on Regional Guidance • Additional Programmatic Support • Graphical Presentation of Indicators and Discussion • Related Activities • Summary

3. Legal and Programmatic Underpinnings • Owners and operators (O/O’s) of petroleum underground storage tanks must demonstrate financial responsibility (FR) for taking corrective action and for compensating third parties (9003(c)(6);(40 CFR 280.93)) • Regulations provide a menu of allowable mechanisms to demonstrate FR (40 CFR 280.94) • O/O’s primarily rely on state funds and private insurance • FR compliance is a component of EPAct mandated on-site inspections (Grant Guidelines for States in Implementing the Inspection Provisions of the Energy Policy Act, April 2007)

4. State Funds as Approved FR Mechanisms • States with State Program Approval (SPA) – All FR Mechanisms • State financial responsibility requirements can be no less stringent than federal requirements • Requirements for each mechanism allowed under State Program described in regulations (40 CFR 281.37(c)) • States without SPA – State Funds • State Funds are the only mechanisms that require explicit approval from EPA • Fund is submitted to EPA for formal approval • 1989 Guidance (9650.11) Provides Criteria for Initial Review Consistent with Regulations (40 CFR 280.101) • Funding Source • …money “reasonably certain and available” • Relying solely on yearly appropriations would not adequately assure funds as certain and available • Amount of Fund • “…reasonably assure that the projected flow of revenues into the fund is sufficient to keep pace with the anticipated rate of expenditures…” • Coverage Provided • Eligibility for Use of the Fund • States without SPA – Other Mechanisms • No formal approval by EPA • More specific language contained in regulations for these mechanisms

5. Status of State Funds Registered Attendees

6. State Funds Provide Practically All Public Dollars for Cleanups EPA and States do not track private funding for cleanups, which is a significant source of cleanup funding. Does not include funding of state programs by state general revenues. * These states are the top 7 states in cleanups completed for the last 3 years **FL amounts are for total cleanups – not specific to USTs

7. But, States Are Experiencing Budget Woes

8. … And Revenue Challenges States rely on gas taxes (and other fees) to finance state cleanup funds Sources: State Fund Administrators Survey, Vermont Department of Environmental Conservation, 2008 Energy Information Administration

9. Decreasing state fund balances Potentially Threaten Cleanup Progress

10. Oversight of State Funds • 1993 Guidance on Monitoring State Funds • To help EPA work with State assurance funds to identify and remedy deficiencies • To foster consistency between Regions in monitoring state funds • “Financial soundness” • “reasonable assurance that funds are available to pay” • Environmental soundness implicit – “If funding levels or claim processing time has a negative impact on the cleanup of releases from USTs…, then EPA is concerned about the financial soundness of the fund.” • Potentially useful measures listed • Fund balance; rate of collection; rate of disbursement; collections projected; disbursement projected; pending claims; timing between claim submittal, approval and payment; major or pending changes to the fund

11. Oversight Experience • Periodic Discussions Between Regions and States • Trend Analysis of Fund Statistics • Examination of Cleanup Progress • Active Engagement on As Needed Basis

12. Motivation for New Guidance • Objectives similar to 1993 guidance • “to identify problems in approved funds…” • “to describe a process which will help resolve those problems” • Signals to Enhance Oversight • GAO Study – Feb. 2007 • “…improve the Agency’s oversight of the solvency of state assurance funds to ensure they continue to provide reliable financial responsibility coverage.” • Consistency issues • EPAct and Fund Withdrawal • Section 9004(c)(6) authorizes EPA to • Identify a financially deficient state fund; • Engage a state in good faith collaborative efforts to remedy its fund’s financial deficiency, and • Withdraw approval of a state fund as an approved FR mechanism (separate from program approval) • Diversions • EPAct Section 9004(f)(2)(B) • Diversions as part of Fund Soundness Review • Additional actions

13. New Guidance for Ongoing Oversight • Criteria and procedures for monitoring and strengthening state funds • To institutionalize: • Annual Review • Focus on Federally-regulated, Fund-eligible universe (FRFE) • Soundness as a function of financial and environmental performance • To clarify applicability and encourage consistency: • Full or partial funds in states with or without SPA Note: New Guidance will supercede 1993 Guidance (9650.14)

14. What’s New • More Explicit Examination of Soundness through Financial, Environmental and Management Lenses • Tiered review and written assessment • Recommended Indicators Rather Than Choice Among Many – Greater Consistency • Update relative to last year • Draft Circulated for Comment • More indicators; More explicit calculations • Greater infusion of accounting perspective

15. Overseeing Financial Soundness of State Assurance Funds:

16. Annual Review • Tiered review • Tier 1: small set of indicators to distinguish healthy funds from funds needing additional attention • Tier 2: more detailed, custom analysis • Data Needs • Regions will need to collect data from states • Data should support oversight and reviews of state funds • Data collection should minimize burden • Written Assessment • Regions should provide written assessments of each state’s fund based on their review

17. Objectives for Tier 1 Indicators • Select indicators that • Provide meaningful indication of financial and environmental performance • Are simple to calculate • Have accessible data • Consider historical trends • Are consistent with state accounting • Can effectively screen clearly sound funds from others requiring further analysis • Can facilitate detection of funds in financial distress

18. Tier 1 Indicators • Balance Sheet • Assets vs. Liabilities • Cashflow Statement • Revenues vs. Expenditures • Total Liabilities • Expenditures and Liabilities Related to Federally Regulated Fund Eligible USTs (FRFEs) • Relative Proportion of Expenditures and Liabilities for FRFE’s relative to total • Inactive Sites • FRFEs not being funded • Cleanup Progress and Annual Cleanups • Cleanup trends • Internal and External Changes

19. Using the Indicators to Construct a Profile • Passing all Tier 1 indicators individually should provide a conclusion of soundness • Questions about some indicators may be resolved with reference to others • Example: Current year expenditures exceed revenues but fund balance strong • Indeterminate findings prompts additional information collection and discussion(Tier 2)

20. Tier 2 Indicators • Explore tier 1 indicators with troubling outcomes / trends • Collect additional data, as necessary • Examine circumstances and test explanations • Examine fund management, practices and policies, as necessary and appropriate • Focus on the extent to which cleanup progress is effected

21. Drawing Conclusions Analysis should • Use appropriate benchmarks • Avoid unfair or inappropriate comparisons • Be transparent • Be in writing (annual assessment) • Does the fund’s financial condition have a significant impact on cleanup progress? • Negative findings prompts corrective actions and discussion (blue column)

22. Comments on 2008 Draft • Goal of Soundness and the Consideration of Environmental Performance • Concern Regarding the Articulation of Indicators and their Ability to Provide an Effective Screen • Concern about Implementation of New Guidance and Production and Tone of Annual Written Assessment • Alignment of Data Requirements and Fund Soundness Review • Tradeoffs between Consistency and Flexibility

23. Schedule for Guidance • “Field Testing” of Indicators (August – November) • Contractor calculating indicators for about 8 states • Discussions with Regions and States to Follow • Conclusions drawn about appropriateness and tractability of indicators • Finalization of Guidance (December - February) • Regional Training (February - June) • Regional Review Using New Guidance (July – September 2010)

24. Additional Programmatic Support • FY09 Data Request • Training, Tools and Support for State Fund Reviews • Region specific workshops • Spreadsheet and other tools • Access to expertise • National Overview Document • Descriptive reference of State Funds • Reference for Comparisons / Benchmarks

25. Related Activities • Backlog Characterization Study • Examination of open releases with and without state funds as the mechanism of FR • States w/active state funds (CA, IL, MT, NC, NE, NH, NY, PA, SC) • States w/state funds no longer accepting claims (FL, MI, NJ, TX) • States w/o state fund (WA) • Comparison of clean up progress and common attributes of sites

26. Backlog Characterization Study - DRAFTAge of Releases by State Fund Eligibility and Stage of Cleanup State 1 State 2

27. Related Activities (cont’d) • Study of Issues Associated with Insurance • Regulatory Consistency • Gaps • Causes of Failure • Oversight • Coverage and Pricing • Impact on Cleanup Progress

28. Summary • Enhanced Oversight • Opportunities for early collaborative action • Importance of • meaningful indicators, • knowledgeable review, • efficiency of effort and • environmental progress • Constrained State Funds and the Availability of Appropriate “Levers” • Reduced budgets • Diversions • Communicating the Importance of State Funds