What is 'Financial Responsibility?' - Articles

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Posted by: Lynn Pointer & Robert Dickinson on Jan 22, 2013

Owners and operators of certain businesses, including solid and hazardous waste storage facilities, oil and gas wells, and processors of radioactive materials, are required by Tennessee law to pledge to the state funds sufficient to pay for the clean up of any accidental releases of hazardous materials at their facilities, as well as the ability to compensate third parties for any damage to human health or property. In many cases, they must also demonstrate that they are able to pay for the long-term maintenance and monitoring of closed sites.

These operators, subject to the regulations of their permitting division, have several options for providing this assurance to the citizens of Tennessee, including the following:

•  Performance Bond

•  Cash Bond

•  Irrevocable Standby Letter of Credit

•  Trust Fund

•  Insurance Policy

• Certificate of Deposit

•  Financial Test

The Division of Financial Responsibility was established in 2001 to foster consistency in the evaluation and management of these financial documents across all the state’s environmental programs and to provide the business community with a single point of contact within the department for questions and concerns related to the financial responsibility process.

The staff of the division of financial responsibility works closely with the department’s environmental programs, the office of general counsel, and the regulated community to make sure that all financial instruments meet the regulatory requirements of TDEC and are of an amount sufficient to protect the interests of the people of the state of Tennessee.

How do I know whether my facility is required to demonstrate financial responsibility?

Because the regulations for environmental programs vary, it is best to contact the permitting division itself to find out whether you will be required to demonstrate financial responsibility, as well as the amount required. If you are required to do so, the staff of the Financial Responsibility group will provide guidance on how to obtain an appropriate financial instrument.

What forms of Financial Responsibility are acceptable for my facility?

Instruments Allowed by Environmental Program

LC = Letter of Credit

SB = Surety Bond

PB = Personal Bond Supported by Collateral1

IP = Insurance Policy

CD = Certificate of Deposit

C = Cash or Certified Check

S= Securities

CFT = Corporate Financial Test/Corporate Guarantee

TF = Trust Fund

C/MC = County or Municipal Contract

LGBT = Local Government Bond Test

LGFT = Local Government Financial Test

(NOTE: The following table is provided as a convenience. Please consult any applicable statutes and regulations for full details on allowable instruments for each program.)

1. Forms of acceptable collateral vary by program. Please see the applicable permitting program’s financial responsibility page for further details.

 

2. The Division of Underground Storage Tanks also allows the use of the Tennessee Petroleum Underground Storage Tank Fund. Please contact the division for details on how to become eligible for the fund.

Instrument Definitions:

Irrevocable Standby Letter of Credit (LOC):A letter of credit is a document issued by a financial institution, such as a bank or savings and loan, which guarantees the payment of a customer’s obligation up to a specific amount for a specific period of time. In effect, the LOC substitutes the bank’s credit for the company’s credit.

 

Program

LC

SB

PB

IP

CD

C

S

CFT

TF

C/MC

LGBT

LGFT

Hazardous Waste (Closure/Post-Closure)

X

X

X

X

 

 

 

X

X

 

 

 

Hazardous Waste (Liability)

X

X

 

X

 

 

 

X

X

 

 

 

Solid Waste

X

X

X

X

 

X

 

X

X

X

 

 

Underground Storage Tanks2

X

X

X

X

 

 

 

X

X

 

X

X

Remediation

X

X

X

X

X

X

 

X

X

 

 

 

Sewerage Systems

X

X

X

 

X

X

 

X

X

 

 

 

Surface Mining

 

X

X

 

 

X

 

X

 

 

 

 

Oil and Gas

X

X

 

 

X

X

X

 

 

 

 

 

Underground Injection Control

 

X

 

 

X

X

 

 

 

 

 

 

Radiological Health

 

X

X

 

 

 

 

X

 

 

 

 

Mineral Test Hole

 

X

 

 

 

X

 

 

 

 

 

 



Surety Bonds:A surety bond is a contract between a surety (e.g., an insurer or bank) and the site’s owner/operator (called the “Principal”), in which the surety agrees to be financially responsible for any necessary clean up on the site if the principal defaults on its obligations.

There are two main types of surety bonds: (1) a Payment Bond, by which the surety simply guarantees that it will pay the value of the bond to the state if the principal defaults, or, (2) a Performance Bond, by which the surety guarantees that it will perform any necessary clean up on the site OR pay the value of the bond to the state.

Insurance Policies:An insurance policy is a contract between an insurer and the owner/operator, in which the insurer agrees to pay for any claims made against the policy in exchange for the regular payment of a premium.

Certificate of Deposit:The certificate of deposit (CD) is a financial instrument that certifies that the face amount of the CD is on deposit with the issuing bank. A CD used to fulfill the financial responsibility requirement must be registered to the company and to TDEC, to be redeemed for cash by the department if required.

Cash:The owner/operator may elect to submit a check for the full amount of the required financial assurance to the state. The check is deposited in the state treasury and the funds returned to the owner/operator when the site no longer requires financial assurance.

Corporate Financial Test:Companies have the option of “self insuring” by demonstrating their ability to pay the full amount the department has estimated it would take to clean up the site if necessary. Alternative one of the financial test requires that the company meet minimum standards for certain financial ratios derived from its latest financial statements, including the ratio of total liabilities to net worth. Alternative two of the financial test relies on the strength of the company’s most recent bond ratings from the major bond-rating agencies. To insure that financial data is kept current, TDEC requires the test to be submitted every year and has the authority to request quarterly statements if adverse news suggests that the company’s financial condition has deteriorated.

(Note: Only companies with a large asset base relative to estimated site clean up costs are likely to pass the Corporate Financial Test.)

Trust Funds:After entering an agreement with TDEC and a financial institution (the trustee), the owner/operator transfers the required amount of financial responsibility funds to the financial institution to be held in trust and used for any expenses related to the clean up of the site. The trustee manages the trust and insures that it is only used for its intended purpose.

Personal Bond backed by Securities:This form allows the owner/operator to file his or her personal performance guarantee accompanied by collateral in the form of securities with a market value that is adequate for meeting the financial assurance requirement. These securities may include United States Treasury Bonds or general obligation municipal or corporate bonds.

County/Municipal Contracts of Obligation:This form is only available to Tennessee municipalities and counties. The contract of obligation is a binding agreement between the municipality or county and the state, allowing the Commissioner to collect the required amount from any funds being disbursed or to be disbursed from the state to the municipality or county.

Local Government Bond Rating Test:A local government tank owner or operator and/or a

guarantor may satisfy its financial assurance requirements by having a currently

outstanding issue of bonds of over $1,000,000 with a bond rating that meets or exceeds the level determined by the Commissioner to indicate a sound financial position.

Local Government Financial test:A local government tank owner may satisfy its financial assurance requirements by passing a financial test that examines total revenues and expenditures, total funds, existing debt service and population.

Legal Basis for Tennessee’s Financial Responsibility Rules

Environmental Program

Statutory Basis

Regulatory Basis

Solid Waste Management

TCA 68-211-116

0400-11-01-.03

Hazardous Waste

TCA 68-212-108

0400-12-01-.06(8)

Radiological Health

TCA 68-202-402

0400-20-10-.12(4)

Remediation

TCA 68-212-201

0400-15-01-.07(3) (delisting)

and 0400-15-01-.12(3) (O&M)

Underground Storage Tanks

TCA 68-212-201

0400-18-01-.08

Oil and Gas

TCA 60-1-202

1040-02-01

Surface Mining (excluding coal)

TCA 59-8-207

0400-42-02-.02

Sewerage Systems

TCA 69-3-101

No current regulations

Mineral Test Hole

TCA 60-1-501-511

0950-01-02

Underground Injection Control

TCA 69-3-105

0400-45-06-.19

 

Frequently Asked Questions:

By when do I have to have a financial assurance instrument in place?

If your permit/license requires you to maintain a financial assurance instrument, the instrument must be obtained and approved by TDEC before you can begin operation. In order to avoid delays, it is a good idea to begin discussing options with your financial institution as early as possible in the process.

I have sold my business. When will the financial assurance instrument on file for that business be returned to me?

State regulations require that the new owner’s financial assurance instrument be filed and approved before the existing instrument can be released. This is also true when an owner/operator changes from one form of financial assurance to another. As soon as the replacement instrument has been filed and approved, the old instrument will be released.

Are business owners in other states required to post financial assurance, or is this requirement unique to Tennessee?

The federal Resource Conversation and Recovery Act (RCRA),which was enacted in 1976, requires the use of financial assurance for certain types of solid waste, hazardous waste, and underground storage tank facilities. RCRA also requires that any state granted authority by the Environmental Protection Agency (EPA) to run its own oversight programs in these areas must establish standards at least as stringent as the federal standards. Therefore, any state that operates such programs must require financial assurance.

For any questions concerning Financial Responsibility, please contact Robert Dickinson, the Director of Financial Responsibility, at Robert.Dickinson@tn.govor 615-532-0877.


Robert Dickinson was named the Director of the Division of Financial Responsibility in July 2011 after previously working in TDEC’s Division of Fiscal Services and for the Tennessee Department of Finance and Administration. Originally from Chattanooga, TN, Robert graduated from the University of Notre Dame and holds masters degrees in English and in Public Administration from the University of Tennessee, Knoxville.