Financial Assurance Requirements

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• Solid Waste Financial Responsibility
• Financial Assurance Mechanisms Available to Owners and Operators
• Rules And Related Laws
• Allowable Mechanisms
• Solid Waste Facilities Requiring Financial Assurance
• Annual Inflation Factors for Financial Assurance

Solid Waste Financial Responsibility

To minimize the threat to public health and the environment, owners and operators of permitted solid waste facilities operating in the State of Arkansas are required to provide financial assurance for closure, post-closure care and corrective action.

The owners and operators must develop and maintain a detailed written estimate, in current dollars, of the cost of hiring a third party to close the largest area of all permitted facilities ever requiring a final cover and to conduct post-closure care for the permitted facility in compliance with the post-closure plan. Cost estimates must be reviewed, approved, and updated annually by completing a new cost estimate with the Annual Engineering Inspection Report. The financial assurance instruments must then be updated to cover the new cost estimates, and both the cost estimate and adjusted instruments submitted to ADEQ.

In addition, facilities required to perform corrective action may be required to post the same sort of financial assurance for any required cleanup as a condition of a permit, remedial action plan, enforcement order, or a voluntary cleanup agreement with ADEQ.

As provided in Regulation 22, Chapter 14, the mechanisms used to demonstrate financial assurance under this Chapter must ensure that the funds necessary to meet the costs of closure, post-closure care, and corrective action for known releases will be available whenever they are needed. Owners and operators must choose from the options specified in paragraphs (a) through (j) of this chapter. Financial assurance required by this chapter should be filed on forms developed and provided by the department.

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Financial Assurance Mechanisms Available to Owners and Operators

ADEQ accepts the following financial instruments to demonstrate financial assurance for closure, post-closure, and/or corrective action.

1. Trust Fund – A trust fund is an agreement between three parties wherein the owner or operator of a facility (the Grantor) sets aside a specific amount of cash or funds, which are held in trust by a third party (the Trustee) for the purpose of paying closure and post-closure expenses. ADEQ is the beneficiary of the trust. In the event of closure, ADEQ uses the funds in the trust to hire a third party to perform closure and post-closure, and to perform post-closure monitoring and maintenance.

What is required, at a minimum:

• The Trustee must be qualified and authorized to act as a trustee. Its trust operations must be regulated and examined by a federal or state agency.
• The text of the trust agreement must be filed on forms developed by ADEQ and provided to the Director for approval.
• The owner/operator must provide ADEQ with an originally signed copy of the trust agreement to the Director for approval.

2. Surety Bond Guaranteeing Payment or Performance – A surety bond is a contract between two parties to benefit a third party. One party (the Surety) guarantees that the obligations of the second party (the Principal) will be met. For purposes of financial assurance, the owner/operator of a permitted solid waste management facility is the Principal. Through a surety bond, the Surety guarantees to ADEQ that it will meet the permitted facility’s closure and/or post-closure obligations if the owner or operator is unable to do so.

There are two types of surety bonds:

a. Performance bonds – the surety guarantees that it will either perform the closure/post-closure activity in accordance with the approved closure plan on behalf of the permitted facility; or pay out the face value of the bond into a standby trust fund.
b. Payment bonds – the surety guarantees that it will pay out the face value of the bond into a standby trust fund in the event that the owner/operator fails to perform as required by the approved closure plan.

What is required, at a minimum:

• The surety must be listed by the U.S. Department of the Treasury on its Circular 570. The Circular can be accessed at: http://fms.treas.gov/c570/index.html.
• The text of the surety bond must be filed on forms developed by ADEQ and provided to the Director for approval.
• A standby trust fund must be established with a qualified financial institution according to the requirements for trust funds stipulated in Reg.22.1405 (a).
• The penal sum of the bond must be equal to the current closure, post-closure care or corrective action cost estimate.
• The owner/operator must provide the Regulator with the surety bond and an originally signed copy of the standby trust agreement.

3. Letter of Credit – a letter of credit is a document issued by a financial institution that guarantees the payment of the permitted facility’s obligations up to a stated amount for a specified period of time. The letter of credit provides assurance to the Regulator that the permitted facility will pay for closure and post-closure when necessary.

What is required, at a minimum:

• The issuing institution must be an entity which has the authority to issue letters of credit and whose letter-of-credit operations are regulated and examined by a Federal or State agency.
• A letter from the owner/operator referring to the letter of credit by number, issuing institution, and date, and providing the following: name and address of the facility, and the amount of funds assured.
• The letter of credit must be: 1) irrevocable; 2) issued for a period of at least one year in an amount at least equal to the current cost estimates for closure, post-closure care, or corrective action; 3) provide that the expiration date be automatically extended for a period of at least one year; and 4) contain a one hundred twenty (120) day cancellation notice by certified mail.
• The text of the letter of credit and the company letterhead must be filed on forms developed by ADEQ and provided to the Director for approval.

4. Insurance – an insurance policy is a contract between two parties. One party (the insurer) agrees to pay, on behalf of the second party (the policyholder) for claims made against the policyholder or policy. For purposes of financial assurance, the owner/operator of a permitted solid waste management facility is the policyholder.

What is required, at a minimum:

• The insurer must be licensed to transact the business of insurance, or eligible to provide insurance as an excess or surplus lines insurer, in the State of Arkansas.
• The owner/operator shall provide a certificate of insurance and the insurance policy to the Director for approval.
• The face amount of the policy must be at least equal to the current closure and/or post-closure cost estimates.
• The insurance policy must:
  • Guarantee funds will be available to close the permitted facility whenever final closure occurs or to provide post-closure care for the permitted facility whenever the post-closure care period begins.
  • Contains a provision that allows the policy to be assigned to a successor owner or operator.
  • Stipulate that the insurer may not cancel, terminate or fail to renew the policy except for failure to pay the premium.
  • Be automatically renewable at no less than the face amount of the expiring policy.
  • Guarantee that once closure or post-closure care begins, the insurer will be responsible for paying out funds to the owner or operator, up to an amount equal to the face amount of the policy.

5. Corporate Financial Test – the financial test is a form of self-insurance where the owner or operator is not required to arrange with a third party or set aside cash funds for closure, post-closure, or corrective action costs, provided that the owner or operator can pass one of two financial strength tests. When these costs need to be paid, the owner or operator is solely responsible for paying them.

What is required, at a minimum:

• The facility must satisfy one of three financial component conditions in Reg.22.1405 (e)(1)(i).
• The tangible net worth of the facility must be greater than what is specified in Reg.22.1405 (e)(1)(ii).
• The facility must have assets in the United States amounting to at least equal to the sum of current closure, post-closure care, or corrective action cost estimates.
• The facility’s financial statements must be audited by an independent Certified Public Accountant (CPA).
• The facility must submit the following items to the Director for approval:
  • An original letter signed by the facility’s chief financial officer that lists all the current costs estimates for all covered facilities. Wording of the letter must be filed on forms developed by ADEQ.
  • A copy of the CPA’s audit report of the facility’s financial statements for the most recent fiscal year.
  • A copy of the CPA’s unqualified opinion of the owner’s or operator’s financial statements for the most recent fiscal year.
  • A report from the CPA stipulating no discrepancies between the CFO’s letter and the audited financial statements.

6. Local Government Financial Test – a local government can also self-insure by demonstrating their financial strength, provided the local government can pass one of two financial strength tests. This demonstration can be achieved by showing that it has issued general obligation bonds for which they received investment grade ratings. Alternatively, the local government can pass ratios that address their cash holdings and debt obligations relative to the size of their budget.

What is required, at a minimum:

• The local government must satisfy one of two financial component conditions in Regulation 22.1405 (f).
• The local government must prepare its financial statements in conformity with Generally Accepted Accounting Principles for governments and be audited by an independent certified public accountant or appropriate State agency.
• Cannot be currently in default on any outstanding general obligation bond or have any outstanding general obligation bonds rated lower than Baa as issued by Moody’s or BBB as issued by Standard and Poors.
• Cannot have operated at a deficit equal to five percent (5%) or more of total annual revenue in each of the past two fiscal years.
• Cannot have received an adverse opinion, disclaimer of opinion, or other qualified opinion from the independent certified public accountant or appropriate State agency.
• Local governments must report annually on whether they continue to meet the conditions of the test and inform the public that they are using the test.
• The local government must submit the following items to the Director for approval:
  • An original letter signed by the government’s chief financial officer that lists all the current costs estimates covered by a financial test; provides evidence and certifies that the local government meets the conditions of Reg.22.1405 (f)(1)(i), (f)(1)(ii), and (f)(1)(iii); and certifies that the local government meets the conditions of Reg.22.1405 (f)(2). Wording of the letter must be filed on forms developed by ADEQ.
  • The local governments independently audited year-end financial statements for the latest fiscal year.
  • A report to the local government from the local government’s independent certified public accountant or appropriate State agency based on performing agreed upon procedures relative to the financial ratios required by Reg.22.1405 (f)(1)(i)(B) and the requirements of Reg.22.1405 (f)(1)(ii) and Reg.22.1405 (f)(1)(iii)(C) and (D).
  • A copy of the comprehensive annual financial report (CAFR) used to comply with Reg.22.1405 (f)(2).

7. Corporate Guarantee – a corporate guarantee is a form of the Financial Test in which a third party (either the direct or higher-tier parent corporation of the owner/operator, a firm whose parent corporation is also the parent corporation of the owner/operator, or a firm with a “substantial business relationship” with the owner/operator) “stands in the shoes” of the owner/operator in providing a guarantee that costs of closure, post-closure care, or corrective action will be paid in the event that the owner/operator is unable to do so. The third party (the Guarantor) must be able to pass the Corporate Financial Test.

What is required, at a minimum:

• The Guarantor must meet or exceed the standards of the Corporate Financial Test and provide documentation of all items required by Reg.22.1405 (e)(2).
• Provide a signed, certified copy of a written guarantee between the Guarantor and the owner/operator.
• Provide a letter from the Guarantor’s Chief Financial Officer detailing the value received by the Guarantor from the owner/operator for the guarantee.
• The Guarantor must document that it continues to meet the conditions of the Corporate Financial Test each fiscal year that the guarantee remains in effect.

8. Local Government Guarantee – a local government may guarantee the costs of closure, post-closure and corrective action by another local government or by a private business. The local government or private business guarantor would promise to take responsibility for the obligations of the local government owner or operator if the owner or operator fails to do so and provide proof that it passes the financial test requirements.

What is required, at a minimum:

• The local government guarantor must satisfy all the requirements of Regulation 22.1405 (f)(1) and (2) and provide all documentation required in Reg.22.1405 (f) (3).
• The local government guarantor must comply with the terms of a written guarantee in Regulation 22.1405 (h) and place a certified copy of the guarantee along with the items required under Reg.22.1405 (f)(3) into the facility’s operating record.
• The local government guarantor must establish a fully funded trust fund as specified in Reg.22.1405 (a) in the name of the owner or operator.

9. State Approved Mechanism – an owner or operator may guarantee the costs of closure, post-closure, and corrective action by obtaining any other mechanism that meets the criteria specified in Reg.22.1405 (l) and is approved by the Director.

What is required, at a minimum:

• The financial assurance mechanism must ensure that the amount of funds assured is sufficient to cover the costs of closure, post-closure care, and corrective action when needed.
• The financial assurance mechanism must ensure that funds will be available when needed.
• The financial assurance mechanism must be submitted to the Director for approval.

10. Municipality or County Contract of Obligation – a municipality or county may guarantee the costs of closure and post-closure by executing a contract of obligation with ADEQ. The contract of obligation is a binding and enforceable agreement on the municipality or county which allows ADEQ to collect the required amount from any funds being disbursed to or to be disbursed from the State of Arkansas to the municipality or county.

What is required, at a minimum:

• The financial assurance mechanism must ensure that the amount of funds assured is sufficient to cover the costs of closure, post-closure care, and corrective action when needed.
• The maximum amount pledged under the contract cannot exceed the total amount of general revenue disbursed to the municipality or county in the last fiscal year, or, if approved by the Director, the amount currently projected by the State to be disbursed during the current fiscal year.
• The contract of obligation must be irrevocable and issued for a period of at least one year.
• The owner or operator shall file the contract of obligation on forms developed by ADEQ and provided to the Director for approval.

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Rules And Related Laws

1. Code of Federal Regulations
   Title 40 - Protection of Environment
   Chapter 1 - Environmental Protection Agency
   Subchapter 1 - Solid Wastes
   Part 258 - Criteria for Municipal Solid Waste Landfills
   www.gpoaccess.gov/cfr
    
2. Arkansas Code Anotated §8-6-1002 (e)(1)
   Landfill Post-Closure Trust Fund
    
3. Arkansas Code Anotated §8-6-1601 et. seq.
   Financial Assurance
    
4. Regulation 14 - Chapter 17
   Regulations & Administrative Procedures for the Waste Tire Program
    
5. Regulation 22 - Chapter 14
   Solid Waste Management Rules

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Reg.22.1405 – Allowable Mechanisms

As provided in 40 CFR 258.74 the mechanisms used to demonstrate financial assurance must ensure that the funds necessary to meet the costs of closure, post-closure care, and corrective action for known releases will be available whenever they are needed. Owner and operators must choose from the options below. Financial assurance required by Regulation, Chapter 14 should be filed on forms developed and provided by the Arkansas Department of Environmental Quality.

All mechanisms used to satisfy financial assurance requirements must be submitted to the Director for approval in their ORIGINAL form, with original signatures and notarized seals (if required). The Department cannot accept e-mail versions, faxed versions, or instruments duplicated by a copy machine.

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Solid Waste Facilities Requiring Financial Assurance

Financial Assurance Regulations apply to owners and operators of all solid waste disposal or processing facilities, except as specifically provided, including but not limited to the following permit categories:

• Class 1 facilities - landfills built to RCRA Subtitle D standards, as incorporated herein for the acceptance of all nonhazardous wastes.
• Class 3 Non-Commercial (3N) - landfills that accept for disposal nonhazardous industrial and commercial wastes generated by the permittee and do not accept waste for disposal from any other source.
• Class 3 Commercial (3C) - landfills that accept for disposal only authorized nonhazardous industrial and commercial wastes generated by the permittee or from other approved facility locations or sources.
• Class 3 Tire (3T) - tire monofills that accept only processed tires or whole baled tires for disposal.
• Class 4 facilities - landfills for the commercial disposal of inert nonputrescible Class 4 wastes, as defined by Regulation 22.
• Composting Facilities (CY) - facilities that accept only vegetative grass, brush and tree yard wastes.
• Composting Facilities (CO) - facilities that accept type Y wastes and approved organic wastes.
• Composting Facilities (CS) - facilities that accept type Y wastes and approved solid wastes.
• Transfer Stations (TS) - facilities that manage the bulking of solid waste for transportation to a point of disposal.
• Solid Waste Recovery Facilities (WRF) - facilities that segregate, recover, otherwise process recyclable materials from Class 4 types of waste streams.

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Annual Inflation Factors for Financial Assurance

A.C.A. § 8-6-1601 et seq. and Chapter 14 of APC&EC Regulation 22 requires all permitted solid waste management facilities to post financial assurance for the costs of closure, post-closure care, and corrective action (if applicable).

During the active life of the facility, the owner or operator must adjust the closure, post-closure care, and corrective action cost estimates for inflation, in accordance with Reg.22.1402 (a)(2), Reg.22.1403 (a)(2), and Reg.22.1404 (a)(1).

For owners and operators who use the corporate financial test or corporate guarantee, the cost estimates must be updated for inflation within 90 days following the close of the facilities’ fiscal year and before submission of updated information to ADEQ as specified in Reg.22.1405 (e)(2)(iii) and Reg.22.1405 (g)(1).

For owners and operators who use the local government financial test or local government guarantee, the cost estimates must be updated for inflation within 180 days following the close of the facilities’ fiscal year and before submission of updated information to ADEQ as specified in Reg.22.1405 (f)(3)(ii) and Reg.22.1405 (g).

This adjustment may be made by recalculating the maximum costs of closure in current dollars, or by using an inflation factor derived from the most recent Implicit Price Deflator for Gross National Product published by the U.S. Department of Commerce in its Survey of Current Business, as specified in paragraphs (b)(1)(2). The inflation factor is the result of dividing the latest published annual Deflator by the Deflator for the previous year. The previous year’s cost estimate is then multiplied by the inflation factor to derive the new cost estimate to be assured for the next year.

The Implicit Price Deflator for the U.S. Gross National Product is published annually on March 31. ADEQ then computes the annual inflation factor and provides this information to each facility required to establish financial assurance for closure, post-closure care, or corrective action.

For reference, the annual inflation factor for recent years is shown as follows:
 

All Closure, Post-Closure, and Corrective Action cost estimates must be updated annually, either by completing a new cost estimate, or by multiplying the previous year’s cost estimate by the Inflation Factor.  For example:

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For Additional Information Contact:

Susan Speake, Programs Branch Manager
Office: (501)-682-0594
Fax: (501)-682-0611
Email:  speake@adeq.state.ar.us