Financial Responsibility and the Oversight of

State Funds:An EPA Update

Adam KlingerOffice of Underground Storage Tanks

U.S. Environmental Protection Agency

September 15, 2009

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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

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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)

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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

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Status of State FundsState Funds

States with Active FundsStates with Existing Funds But No Longer Accepting Claims for New Releases

States without Funds

SPA States States w/o SPA

SPA States States w/o SPA

SPA States States w/o SPA

AL, AR, CO, CT, GA, IN, KS, LA, MA, ME, MN, MO, MS, MT, NC, ND, NE, NH, NM, NV, OK, PA, RI, SC, SD, TN, UT, VA, VT

CA, ID, IL, KY, NY, OH, WY

IA, TX, AZ, FL, MI, NJ, WI

DC, DE, PR, HI, MD, WA, WV,

AK, OR, AS, CNMI, GU,VI

29 7 2 5 7 6

36 7 13

Registered Attendees

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State Funds Provide Practically All Public Dollars for Cleanups

State*Total Public Funding

(million dollars)State Funds

(million dollars)Federal Funds

(million dollars)

IL 54.9 53 1.9 (3.4%)

OH 2.1 Not Availabe (N/A) 2.1 (N/A)

CA 211.7 208 3.7 (1.7%)

FL 168.0 168** 0 (0%)

NY 2.3 Not Available (N/A) 2.3 (N/A)

PA 69.7 68 1.7 (2.4%)

TX 31.7 29 2.7 (8.5%)

Total 540.4 526 14.4 (2.6%)

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

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But, States Are Experiencing Budget Woes

StateFY08 Cleanups Budget Commentary

IL 979 (7.7%) States are experiencing significant budget deficits ($11.5 billion in IL; $40 billion in CA; $2.5 billion in FL; et al) and are or have implemented significant spending reductions ($640 million in OH; over $500 million in PA; et al).

In addition, states are availing themselves of temporary tax increases, use of federal stimulus funds, use of reserves and borrowing from future profits.

States are also implementing general hiring freezes, freezing wages, prohibiting purchases and restricting out-of-state travel.

Sources: Press Releases from State Governors and Budget Offices

OH 919 (7.2%)

CA 874 (6.8%)

FL 816 (6.4%)

NY 744 (5.8%)

PA 586 (4.9%)

TX 564 (4.4%)

Top 7 5,482 (43%)

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… And Revenue Challenges

StatePetroleum Fee

(per gallon)

IL 1.1 ¢

OH Not applicable

CA 1.4 ¢

FL 2 ¢

NY Not applicable

PA 1.1 ¢

TX 3 ¢

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

Gasoline Sales

10000

15000

20000

25000

30000

35000

40000

45000

Jun-

06

Aug-0

6

Oct-0

6

Dec-0

6

Feb-

07

Apr-0

7

Jun-

07

Aug-0

7

Oct-0

7

Dec-0

7

Feb-

08

Apr-0

8

Jun-

08

Aug-0

8

Oct-0

8

Dec-0

8

Feb-

09

Apr-0

9

Jun-

09

Th

ou

sa

nd

Ga

l pe

r D

ay

NY

PA

FL

IL

TX

CA

Linear (CA)

Linear (TX)

Linear (FL)

Linear (NY)

Linear (IL)

Linear (PA)

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Decreasing state fund balances

State Fund Balances

0

100

200

300

400

500

600

700

800

2006 2007 2008

Year

Mil

lio

n D

oll

ars

TX

PA

NY

FL

CA

IL

Potentially Threaten Cleanup Progress

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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

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Oversight Experience Periodic Discussions Between Regions and

States

Trend Analysis of Fund Statistics

Examination of Cleanup Progress

Active Engagement on As Needed Basis

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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

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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)

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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

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Identify actions to restore fund soundness

EPA public notice of intent to withdraw FR

approval in state media

Implement actions to address fund deficiencies

EPA notifies state of intent to withdraw

FR-approval

09/16/08a

Annual Fund soundness data

reporting & ongoing EPA monitoring

Fund is unsoundFund needs improvement

EPA withdraws FR approval of state

fund

Determiniation of fund restoration

Annual assessment of fund soundness

Monitoring & Oversight

Withdrawal of State Fund Financial Responsibility

Approval

Annual determination of fund soundness

Monitoring and assessment of state actions and results

Fund is sound

Overseeing Financial Soundness of State Assurance Funds: EPA & State Collaboration

Tier2 Soundness Review

Needs more time formore improvement

Improving State Fund Soundness

Fund is sound

Annual Tier 1 Soundness Review

Overseeing Financial Soundness of State Assurance Funds:

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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

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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

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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

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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)

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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

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Drawing ConclusionsAnalysis 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)

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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

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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)

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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

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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

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Backlog Characterization Study - DRAFTAge of Releases by State Fund Eligibility and Stage of Cleanup

State 1

State 2

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Related Activities (cont’d) Study of Issues Associated with Insurance

Regulatory Consistency

Gaps

Causes of Failure

Oversight

Coverage and Pricing

Impact on Cleanup Progress

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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