Unburying Future Costs - Forester Network

BY ROB ARNER

Factoring the full and long-term cost of waste management is becoming evident as to the consequences of climate change. My father as a legislative lawyer helped write Medicare and other major federal health insurance programs. Environmental and healthcare costs are interconnected. Two decades ago, I extensively researched financial assurances for landfills. I co-wrote a paper with two other experts since this was complicated. Also, I was instrumental in getting the Inspector General of EPA to investigate financial insurance and wrote a Washington Post editorial about this. Waste disposal operations, due to the Resource Conservation and Recovery Act (Environmental Protection Agency, 42 U.S.C. s/s 6901 et seq., 1976), are required to maintain liability cradle-to-grave. The concept that waste generators are liable for their wastestreams from point of generation to disposal is supported by federal, state, and local law. This liability covers all steps including storage, transport, handling, processing, and ultimate disposal. However, if there is poor insurance coverage, we the people pick up the bill. Original waste generators may be held just as culpable for improper handling, illegal disposal, and hazardous ­accidents with their wastestreams. Bottom-line, the generator (who has most to lose) must vigilantly prove, document, and safely process and dispose of their waste, regardless of method or state requirements. If the waste disposal company maintains minimal insurance coverage, they may be involved in the cost of cleanup and additional liabilities (e.g. injuries, remediation, evacuations, etc.) if an accident results. Awarding the cheapest bid from a waste disposal vendor may have unintended consequences if financial assurances are lacking. Wisely evaluating factors, including insurance coverage limits, safety record, and whether other Fortune 500 firms are customers, can be of benefit. If you award a contract to a company with minimal insurance coverage ($1 million or less), you could be taking a huge risk. In theory, landfills are required to have adequate closure funds with the issuance of the RCRA Subtitle D Municipal Solid Waste Landfill Criteria, 4 including financial assurance (FA) criteria. States, in order to avoid federal intervention, have established permit and regulatory programs to meet the federal-issued criteria, including adoption of financial mechanisms to cover closure and long-term care costs. 

Managing municipal solid waste is more than landfilling: publicity, education, engineering, long-term planning, and landfill gas waste-to-energy are specialties needed in today’s complex environment. We’ve created a handy infographic featuring 6 tips to improve landfill management and achieve excellence in operations.  6 Tips for Excellence in Landfill Operations. Download it now! EPA Developments
Below gives a short description and links to four developments regarding FA. EPA regulations have provisions that facilities must demonstrate adequate financial assurance. This amount must at least be as great as the current cost estimate and in one of the allowable prescribed forms. The regulations specify a range of mechanisms by which an owner or operator may demonstrate financial assurance. “Self-assurance” can be either a financial test and/or corporate guarantee. These mechanisms require the owner operator or corporate guarantor to account for the environmental obligations associated with their facility in their financial assurance demonstration. These mechanisms require annual resubmissions to ensure that the financial assurance demonstration is based on current financial information and current cost estimates. The financial assurance program—and those two mechanisms in particular—have been the subject of extensive internal and external scrutiny in recent history including a national enforcement initiative, numerous audits from the Agency’s Inspector General, a Government Accountability Office audit, internal EPA evaluations and, at the request of the Office of Solid Waste (now the Office of Resource Conservation and Recovery or ORCR), examinations of specific issues (e.g., captive insurance, the financial test) by the Environmental Financial Advisory Board. A selection of these reports and evaluations are described in more detail below. Regarding recent developments, the regulations allow for a select number of financial assurance mechanisms—solely, or in some cases, combinations of mechanisms—to demonstrate financial assurance. To ease implementation, the form of the instruments is generally prescribed in great detail. While the mechanisms have remained relatively constant in recent history, EPA has expanded its available resources, trainings, and program management in the recent past—in part in response to some of the reports referenced below. 40 TSD Study: This is a 2007 report that examined if deficiencies in the RCRA Subtitle C program (including financial assurance) may have been responsible for hazardous waste facilities being listed on the Superfunds National Priority List. The report concluded that the listings were not due to a failure of the RCRA hazardous waste regulatory program, be it the financial assurance requirements or some other technical waste management standard. Rather, the analysis showed that the RCRA hazardous waste management requirements generally worked the way they were designed. Of the 40 facilities examined in this analysis, 28 of them were bankrupt and therefore were unable to complete RCRA Corrective Action. OSW determined that the Superfund site-specific expenditures at these 40 facilities totaled $425 million dollars. (https://archive.epa.gov/epawaste/hazard/tsd/td/web/pdf/forty.pdf) RCRA Subtitle C Treatment, Storage, and Disposal facilities (including landfills) have to demonstrate that they have adequate funds by providing evidence of financial assurance. Closure cost estimates and cost estimates associated with provisions of post-closure plans are prepared early in the process, are reviewed during the permit application process, and, for new facilities, the mechanisms are established prior to facility operation. These are updated as necessary—e.g., annual updates to the cost estimate to account for inflation or updates to account for changes in the closure or post-closure plans. 

Managing municipal solid waste is more than landfilling: publicity, education, engineering, long-term planning, and landfill gas waste-to-energy are specialties needed in today’s complex environment. We’ve created a handy infographic featuring 6 tips to improve landfill management and achieve excellence in operations. 6 Tips for Excellence in Landfill Operations. Download it now!   EFAB Captive Insurance: The Environmental Financial Advisory Board (EFAB), an advisory committee established in accordance with the Federal Advisory Committee Act (FACA), examined the use of captive insurance as a financial assurance mechanism. The EFAB looked at three questions in particular: Should there be minimum capitalization requirements for captive or other insurers who provide policies for financial assurance and, if so, what requirements would best assure funds are available for protection of the environment, including closure, post-closure, corrective action, and other environmental cleanup? Should policies written by captives and commercial insurers be treated as equally acceptable mechanisms? Should the language of policies written by captives differ in any way from those issued by commercial insurers? (https://nepis.epa.gov/Exe/ZyPDF.cgi/P100E7BR.PDF?Dockey=P100E7BR.PDF) 

EFAB Financial Test: The EFAB also examined the use of the financial test as a financial assurance mechanism. The report includes recommendations and findings regarding the continued use of the financial test. (https://nepis.epa.gov/Exe/ZyPDF.cgi/P100AA6H.PDF?Dockey=P100AA6H.PDF) Self-Insurance for Companies with Multiple Cleanup Liabilities: In December 2017, the Office of Inspector General (OIG) reported on the use of the financial test and corporate guarantee as financial assurance mechanisms. They concluded: The EPA’s ability to oversee self-insurance instruments is impaired, leaving the agency and taxpayers vulnerable to billions of dollars in financial risk and the public vulnerable to environmental risk. Unlike the EPA, some federal agencies do not accept corporate self-insurance… CPA’s audit report cites the complexity of financial Tech past and a lack of resources that verify cost estimates over 33% of the facilities in the sample use of the financial test or corporate guarantee. (https://www.epa.gov/office-inspector-general/report-self-insurance-companies-multiple-cleanup-liabilities-presents)
Credit: iStock/HighLaZ In an internal May 1, 2018, EPA memo from Arthur Elkins Jr. to Barry Breen regarding self insurance—Acceptance of Corrective Actions Plan for Office of Inspector General Report No. 18-P-0059, Self-Insurance for Companies With Multiple Cleanup Liabilities Presents Financial and Risks for EPA and the Public, Issued December 22, 2017: The agency’s planned corrective actions included to qualitatively and quantitatively analyze associated with modifying the existing and evaluate the program effectiveness and resource regulations to include (a) a requirement for full requirements to the EPA of the corporate self-insurance disclosure of all self-insured environmental instruments, including the financial test and corporate liabilities; and (b) eliminating the use of guarantee, in the Resource Conservation and Recovery corporate self-insurance instruments, including Act regulations and Superfund program for current the financial test and corporate guarantee, for settlements and orders. Assess adequacy of self insurance mandated by the Resource Conservation and Recovery Act and insurance instruments for companies with multiple Superfund financial assurance. Over the years, EPA has developed risk management analysis—such as the requirement for full disclosure of all self-insured environmental liabilities over corporate self-insurance if implemented and if corporate self-insurance should continue as an option. Also, they have revised standard operating procedures and updated staff with improved training measures to address FA developments tracking correction action and new potential risks. 

Landfill Financial Assurance
The Subtitle D rule requires landfill owners or operators to demonstrate means to “ensure that the funds necessary to meet the costs of closure, post-closure, and corrective action for known releases will be available whenever they are needed.” The purpose of FA is to guarantee that funds will be available in the event that a landfill owner or operator fails to perform needed closure and post-closure and/or address any additional environmental problems that may occur during and after the operating life of the landfill. The Subtitle D rule provides a number of mechanisms to demonstrate FA—trust funds, surety-bond guarantees, letters of credit, insurance, corporate and local government tests, and corporate and local government guarantees. In today’s competitive world, landfill owners/operators gravitate to more flexible and less expensive forms of FA: insurance through a captive corporation, financial tests (both corporate and municipal), and financial guarantees (both corporate and municipal). All three options are forms of self-insurance. Because these mechanisms do not come with an independent third-party guarantee, the question is whether they can provide the level of coverage required in the event that the facility owner fails to address needed FA costs at his facility. In August 2018, I did a survey of State officials on landfill financing thanks to the Association of State and Territorial Solid Waste officials. Colorado updated their Solid Waste Financial Assurance Regulations this year. The main changes included: requirements for pay-in periods to only include landfills; clarification on financial assurance requirements for corrective action sites; and adding further restrictions on captive insurance (the regulations can be found at https://www.colorado.gov/pacific/cdphe/solid-waste-regulations. The financial assurance regulations are in Part 1, Section 4.0 (starts on page 112.) In Indiana, the Office of Land Quality, Permit Branch engineering, and permit management staff work to ensure operating and closed landfills in Indiana (both hazardous waste and solid waste) have accurate closure and post-closure cost estimates and adequate financial assurance to address the requirements for closure and post-closure care. Generally, owners and operators of landfills in Indiana provide financial assurance for closure and post-closure care of their landfills via a third-party (letter-of-credit, bond, or insurance), or they may demonstrate their ability to pay by passing a financial test that analyzes the financial strength and solvency of the owner/operator (solid waste rules restrict the financial test to local governments and restricted waste sites.) Iowa is one of a few states, if not the only state, that requires funding a restricted cash account during the operating life of MSW landfills so that at the time of closure, all funds for closure and post-closure are available. This account is in addition to maintaining a third-party mechanism (surety bond, local government guarantee, etc.). Once all of the cash funds are set aside, the third-party mechanism can be removed. So long as there is a third-party mechanism in place, IA allow landfills to fund their restricted cash accounts over the life of the landfill using the remaining permitted capacity. There are 34 out of 40 landfills that appear to be in non-compliance because their restricted cash amount is less than the total for closure/post closure. However, they are all in compliance and making progress toward fully funding their accounts before the landfill would reach full capacity. Iowa knows they are in compliance because an annual update to their financial assurance reporting is required every year. They review updated engineering costs for closure/post-closure, annual audits, and the financial assurance mechanisms themselves to determine compliance (email from Alex Moon, 11/14/18, Land Bureau Chief, Iowa DNR). In Tennessee, it can be challenging to ensure that landfill facilities are properly funded for closure and post-closure monitoring and maintenance. To address this, TDEC is currently reviewing the financial assurance tools in place. We are updating and improving our methods to ensure adequate funding is available, should the need arise. Agency personnel review proposed financial instruments for each facility to ensure the soundness of these mechanisms. 

Beyond 30 Years’ Coverage?
Several select SWANA members all agreed that closure and post-closure actions may be needed after the 30-year period. Very few if any landfill managers are putting aside funds to cover the long-term custodial care costs following the 30-year PCC period. SWANA’s Long Term Care Committee is working on a policy statement to address this issue. Post-closure care cost estimates provided by an engineer and updates these costs every year using the state’s published inflation factors. It then subtracts the amount accrued to date and divides by the remaining active years of landfill life to develop the annual contribution needed. – Jeremy O’Brien in an email to Sara Bixby What if the PCC term exceeds 30 years? In order to end PCC at or near 30 years, it is likely that a demonstration of functional or organic stability will be required. In order to make this demonstration, data must be collected during the PCC time frame (i.e., survey data to show settlement has stopped). I would assume funding for this additional data collection is not included in most PCC funds. – Anastasia Welch in an email to Sara Bixby In Virginia, many private landfills owners utilize Surety Bonds to cover the closure and post-closure costs. The estimates are updated each year and certified by an engineer, utilizing DEQ worksheets. There is some more latitude available to the engineer to adjust unit costs based on Means Construction Cost data or recent project experience. Many of the facilities I am familiar with have proceeded with final closure on limited areas in order to maintain available airspace for future filling following consolidation and settlement. So there has not been a real test whether the surety amounts are in fact adequate to cover all closure and post closure costs, if they are needed. – Jeremy O’Brien in an email to Sara Bixby (Email to Rob Arner, from Sara Bixby, SWANA, August 29, 2018, with comments from Jeffrey Murray, Anastasia Welch, and Jeremy O’Brien) The three experts above think funds may be needed after 30–40 years. 

Cheaper is Not Necessarily Best
In the past, firms or local governments opted more for self insurance (a company is a wholly owned subsidiary formed exclusively to ensure coverage of worker and/or environmental exposures of the parent organization). Such FA-related obligations often have minimal capitalization and obligations for reserves. They usually operate as surplus-lines carriers and are therefore not licensed or regulated by the state, and they do not participate in a state’s guarantee fund. Such self insurance, the policyholders are usually in the same line of business—land disposal—and the types of liabilities covered are landfill-related. Their assets are usually in parent company stocks, which would not be worth their stated value in the event that the parent company experiences financial hardship or failure. 

Other Self-Insurance Mechanisms: Financial Tests and Guarantees
Subtitle D rules, which have been adopted by most states, allow both private- and public-landfill owners and operators to commit their financial health to satisfy financial assurance–mechanism requirements. The main difference between financial tests and financial guarantees is that with the financial-test option, the facility owner directly demonstrates and pledges his financial health to satisfy financial assurance–mechanism requirements. With the financial guarantee, a local government or corporate entity (parent company) demonstrates and pledges its financial health on behalf of the facility owner to satisfy financial-assurance mechanism requirements. These options are popular because many larger private-landfill owners and most public-landfill owners can satisfy the financial-test requirements. In addition, they allow the facility owner greater flexibility in determining when, how, and who should pay for landfill costs. However, the more flexible nature of financial tests and financial guarantees, whether used by a public- or private-facility owner, has the following drawbacks: underestimate and discount future liabilities; funds might not be readily available in the future; rely on future customers/taxpayers to make up the difference in costs; and local government not raising taxes to cover bonds to address future landfill costs. 

Unearthing the Costs
If FA requirements fail, then the public pays for corrective action. Unfortunately, without guaranteed coverage of expected landfill costs, taxpayers pick up the bill. Greater transparency and accounting is always needed to rectify if captive insurance, financial tests, and financial guarantees do not cover the potential long-term costs and environmental problem. There are other financial mechanisms, including commercial insurance, trust funds, letters of credit, and surety bonds, that are not addressed in this article but that provide greater assurance that future funds will be available when needed. Strong leadership by the states and EPA is needed to better examine repercussions in the use of self-insurance mechanisms as a means of covering FA obligations. 

Environmental Insurance
The billion-dollar environmental insurance is another option. Key players in this industry are AIG, ECS/XL, Kemper, Ace, and Zurich. Other companies, such as United Coastal, Gulf Travelers, Seneca, and Chubb also offer pollution legal liability and related insurance. Generally, environmental policies offered by these companies fall into the following categories. Such policies cover when firms go bankrupt when they cause environmental disasters so the victims are compensated. Such insurance may also protect against regulatory changes or cost overruns increasing cleanup costs. According to the Cato Institute, legal theories of joint and several liability (e.g. under Superfund) and requirements by courts that insurers pay to help polluters clean up their own property (regardless of the insurance contract) have hurt the pollution insurance industry; however, the basic idea of pollution insurance remains sound. Given time, environmental-liability policies are evolving, giving greater comfort levels and creating benefits in today’s complex business world. It is imperative that we ensure and pay for all solid waste disposal costs. Such market-based measures effectively and equitably allocate the price for these services. Actions to assure full-cost accounting will also benefit environmentally preferred waste management options of reduction, reuse, recycling, composting, waste-to-energy, and other integrated solid waste management methods. Regulators must be vigilant to adapting new FA requirements for landfills. Factoring such minimal costs maximizes future benefits. Creating upfront pricing structures to include an FA “safety-net fund” makes better sense than waiting until after the problem arises. Greater examination of FA requirements will scrutinize soundness of FA mechanisms and ensure that adequate reserves will be readily available especially for self insurance mechanisms.. Factoring other landfill liabilities (e.g., requirements for property damage and bodily injury coverage) safeguards any accidents. Review the coverage of corrective actions or develop a state insurance pool to provide for such contingency events. FA policies require scrutiny and actuarial examination. Wise accounting and financial analysis can determine if sufficient backup reserves or third-party guarantees (e.g., standby letters of credit and surety bonds) will cover future expenses. Environmental cost accounting is needed to assure that all landfill liabilities are being addressed, including assumptions regarding future economic growth. Without such assurances, sound environmental cleanup will be lacking and future generations will be left with this mess.