By Rob Arner, H. Lanier Hickman, and Cristine Leavitt

• Understanding Financial Assurance
  
• Choosing the Path of Least Resistance
  
• Other Self-Insurance Mechanisms: Financial Tests and Guarantees
  
• Fixing What’s Broken
  
• Conclusion
  
• References

From 1965 until 1985 the federal government assisted states and landfill owners (public and private) to improve siting, design, and operating practices of MSW landfills. Under various legislative authorities (the Solid Waste Disposal Act of 1965¹ and the Resource Conservation and Recovery Act [RCRA] of 1976²), this assistance was in the form of training, technical help, and research. Progress toward improvement, however, was slow. Congressional frustration led to the passage of legislation in 1984 that empowered the federal government to regulate MSW landfills.³ This authority resulted in 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.

This article focuses on the adequacy of captive insurance companies to guarantee coverage of closure, long-term care, and liability costs for mixed MSW landfills. Other "self-assurance" mechanisms (corporate/government financial tests and guarantees) will also be briefly reviewed.

Understanding Financial Assurance

The FA provisions of the Subtitle D rule require landfill owners or operators to demonstrate means to "ensure that the funds necessary to meet the costs of closure, postclosure, and corrective action for known releases will be available whenever they are needed."⁵ The purpose of FA is to guarantee that funds will be available in the event a landfill owner or operator fails to perform needed closure and postclosure 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. The original 1991 Subtitle D rule listed trust funds, surety-bond guarantees, letters of credit, and insurance. USEPA reserved space in the rule for future mechanisms, including corporate and local government tests and corporate and local government guarantees.

In a fiercely competitive environment, many landfill owners have opted for the most flexible and potentially least 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.

Choosing the Path of Least Resistance

A captive insurance company is a wholly owned subsidiary formed exclusively to ensure coverage of worker and/or environmental exposures of the parent organization.⁶ Captive insurers covering FA-related obligations often have minimal capitalization and obligations for reserves. In a 1993 report on FA,⁷ the State of Minnesota identified the following additional concerns regarding the use of captive insurance companies to cover landfill FA liabilities:

• Captive insurers 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.
• A captive may not be adequately diversified, meaning that the company might not be covering a variety of different policy holders against uncorrelated risks. With a captive insurer, the policyholders are usually in the same line of business—land disposal—and the types of liabilities covered are landfill-related.
• A captive's 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.
• There are usually no insulationary measures between the captive and parent companies in the event that the parent company goes bankrupt.
• The captive may not record closure and postclosure-care expenses, which are probable and whose costs are reasonably well known, as a liability on its balance sheet.
• The cash flowing into a captive insurer may be transferred immediately back to the parent company; therefore, the captive may have no assets of its own.

The report also noted concern that a company unable or unwilling to perform those obligations in its capacity as facility owner would be more likely to perform them in its capacity as the company's captive insurer. The report found that a captive insurer operating in this market may meet form requirements but might not meet substance requirements of an insurance provider. In the case of the particular captive insurer that was evaluated, there was no real transfer of risk. In reality, a captive insurer may be nothing more than a promise to guarantee future coverage of FA requirements. Past experience has shown that a promise does not provide any guarantee that landfill liabilities will be covered. The report concluded that it is unlikely that a captive insurer would provide adequate guarantee that closure, postclosure-care, and corrective-action costs will be covered.

currently, no national effort is underway to assess the potential long-term effects of how FA has been implemented. Several states—including Massachusetts, Minnesota, Pennsylvania, Texas, Vermont, and Wisconsin—prevent the use of captive insurance, many others have this mechanism under review (e.g., Georgia and Virginia), and some have recently disqualified insurance from a captive provider. The California Integrated Waste Management Board notified Waste Management that insurance from its captive, National Guaranty Insurance Company, is no longer acceptable for closure and postclosure at its landfills.

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:

• Greatest potential to fail, because the tendency of human nature is to underestimate and discount future liabilities (e.g., do you think everyone would set aside funds for retirement if the government didn't require it?).
• Financial strength changes over time. Funds might not be readily available at a future date or the situation might require litigation in order to recover funds for needed site work.
• Greatest potential to be imposed unfairly with respect to who pays for FA liabilities. Because of the strong tendency to underestimate and discount future liability needs, these options will commonly rely on future customers/taxpayers to make up the difference in costs.
• Politics might make it unfavorable for a local government to set aside funds up-front or raise taxes to cover bonding needed down the road to address landfill costs.
  

Fixing What’s Broken

currently many policymakers view FA for landfills from the perspective, "If it ain’t broke, don't fix it." However, the question is not "if" there will be future landfill problems, but "when." Since FA requirements are the last line of defense before the public winds up with the costs for corrective action, it is critical that an FA mechanism be able to guarantee coverage of expected landfill costs. The thin layer of financial coverage that may be provided by captive insurance, financial tests, and financial guarantees might not cover the potential long-term costs and environmental problems. If more stringent requirements are not put into place and the current market fails, a landfill owner simply disappears from business, or costs for corrective action go through the roof, it might again be up to the public to pick up these costs.

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.

Greater examination of FA requirements can:

• Allow landfill owners and operators to be a part of the assessment to scrutinize the extent of their FA mechanisms and ensure that adequate reserves will be readily available.
• Explore the ramifications of additional landfill liabilities (e.g., requirements for property damage and bodily injury coverage) to ensure sufficient safeguards against all types of accidents.
• Review the coverage of corrective actions or develop a state insurance pool to provide for such contingency events.

Taking actions to ensure that what we pay for solid waste management covers all its costs will allow the most fair and economically effective distribution of costs among those who benefit from this necessary service. 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. Revising current FA requirements for landfills can be accomplished at minimal cost compared with its tremendous benefits. Creating up-front pricing structures to include an FA "safety-net fund" makes better sense than waiting until after the problem arises.

Conclusion

By reviewing the current FA policies, necessary revisions can be made to place costs squarely on the shoulders of those who benefit and not leave this as a legacy to our children, future taxpayers, or the environment. Specifically, the authors find that:

• Insurance by a captive provider, self-insurance, and self-guarantees leave future taxpayers vulnerable for landfill liabilities. They should either be eliminated as FA options, be required to demonstrate sufficient backup reserves, or provide a third-party guarantee (e.g., standby letters of credit and surety bonds).

• A new dialogue addressing environmental cost accounting is needed to assure that all landfill liabilities are being addressed, including costs for corrective actions and costs beyond the current 30-year conventional FA period.

• All forms of FA should be based on full-cost accounting.

• States should consider requiring independent third-party assessment and determination of the adequacy of current closure, postclosure, and corrective-action FA accounts, especially if they lack the necessary staff expertise to perform this critical function.
  

References

¹ US Congress, The Solid Waste Disposal Act (PL 89-272, 42 U.S.C. 6901 et seq.), Washington, DC, 1965.

² US Congress, The Resource Conservation and Recovery Act (PL 94-580, 42 U.S.C. 6901 et seq.), Washington, DC, 1976.

³ US Congress, The Hazardous and Solid Waste Amendments (PL 98-616, 42 U.S.C. 6901 et seq.), Washington, DC, 1984.

⁴ US Environmental Protection Agency, Solid Waste Disposal Facility Criteria, 40 CFR Parts 257 & 258, USEPA: Washington, DC, October 1991.

⁵ US Environmental Protection Agency, Financial Assurance Criteria, Solid Waste Disposal Facility Criteria, 40 CFR Parts 257 & 258, Subpart G, Part 258.74, USEPA: Washington, DC, October 1991.

⁶ Goff, Kate, "When a Guarantee Is No Guarantee," MSW Management, Vol. 9, No. 3, May/June 1999.

⁷ Leavitt, Cristine, Financial Assurance Report: Evaluation of Insurance Options and Existing Financial Mechanisms to Meet Municipal Solid Waste Financial Assurance Requirements, Minnesota Pollution Control Agency: St. Paul, MN, November 1999.

⁸ Wiley, Walt, "Not Secure," Waste News, October 11, 1999.

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