Financial Assurance

Nearly all companies operate with a finite physical life, eventually they will need to close or cease operations. To protect human health and the environment from the negative impacts of abandoned hazardous waste sites, federal and state laws require owners and operators of certain hazardous waste management facilities to provide guarantees for the safe closure of these facilities, with the specific intent to minimize the number of these sites that are abandoned or “orphaned” by their owners or operators, and to ensure that the polluter or responsible party bears the burden and costs of cleanup rather than the general public. These requirements for financial responsibility additionally provide an incentive for operators to locate, design, and operate their facilities in a manner that will minimize closure and cleanup costs and reduce the likelihood of accidents and other incidents that may harm third parties (e.g., their neighboring facilities and members of the surrounding community).

State and federal laws require that the owners and operators of interim status and permitted hazardous waste treatment, storage, and disposal facilities set aside funds or provide assurances that in the event of closure or bankruptcy, funds are available to safely clean up and secure the hazardous waste management facility and if wastes are left in place after the closure of the facility, to provide monitoring and oversight of the facility for at least 30 years to ensure that the cleanup remains safe and effective. Additionally, facilities where hazardous wastes or hazardous substances have been released to the environment may be required to post the same sort of assurances for any required cleanup as a condition of a RCRA permit, remedial action plan, RATFA or other enforcement order, or a voluntary cleanup or elective site cleanup agreement with DEQ.

The owner or operator of these facilities must develop a cost estimate for carrying out all necessary activities to clean up and close their hazardous waste operations, as well as for monitoring and oversight of the closed facility for at least 30 years if the closure plan calls for any waste or other contamination to remain in place. These costs must address the use of a third party to carry out all closure and post-closure activity in the complete absence of the owner or operator. Operators of active hazardous waste management facilities which are subject to RCRA permitting or corrective action must additionally provide for up to $2 million in liability coverage for damages to third parties for sudden accidental occurrences, and if a land treatment or land disposal unit, must provide up to an additional $6 million in coverage for non-sudden accidental occurrences.

These cost estimates must be reviewed and updated annually, either by completing a new cost estimate or by multiplying the previous year’s cost estimate by a specified inflation factor. The financial instruments must then be updated to cover the new cost estimates, and both the cost estimate and adjusted instruments submitted to DEQ.

DEQ’s procedures for demonstrating financial assurance are set out in Regulation 23, Section 264 Subsection H (for facilities holding a RCRA permit) and in Section 265, Subsection H for facilities under RCRA interim status and those parties not subject to a RCRA permit.

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DEQ accepts any of six (6) types of financial instruments or documents to demonstrate financial assurance for closure, post-closure, third party liability, and/or corrective or remedial action costs:

  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. DEQ is named as the beneficiary of the trust. In the event of closure, DEQ uses the funds in the trust to hire a third party remedial contractor to carry out cleanup and closure, and to perform post-closure monitoring and maintenance.
  2. Letter of Credit. A letter of credit (LOC) is a document issued by a bank or other financial institution that guarantees the payment of a customer’s obligation for up to a stated dollar amount for a specified time. The owner or operator of the regulated facility arranges with a financial institution to issue an LOC payable to DEQ, assuring that the owner or operator will pay for closure and post-closure costs when necessary. Essentially, an LOC substitutes the bank’s credit for that of the owner or operator, eliminating the financial risk to the State. An LOC must be accompanied by a standby trust agreement, which creates a trust into which DEQ will deposit the funds from the LOC in the event that it must cash in the LOC in order to carry out the needed cleanup and closure should the owner or operator be unable to do so.
  3. Surety Bond. Like an LOC, a surety bond is an agreement between two parties. One party (the Surety) guarantees that the financial obligations of the second party (the Principal) will be met. For purposes of financial assurance, the owner or operator of the regulated facility is the Principal. By means of the bond, the Surety guarantees to DEQ that it will meet the owner or operator’s closure and post-closure costs if the owner or operator is unable to do so.
  4. Insurance. Facility owners and operators may wish to obtain an insurance policy wherein one party (the Insurer) agrees to pay, on behalf of a second party (the Policyholder) for claims made against the Policyholder or the policy. For the purposes of financial assurance, the facility owner or operator is the Policyholder. Through the policy, the Insurer agrees to reimburse a party upon direction from DEQ for costs incurred for closure and post-closure care, for corrective action, and/or for damages incurred by a third party due to sudden or non-sudden releases or other mishaps. The insurer reimburses parties directly; and a standby trust agreement is not required with this mechanism.
    • DEQ requires that the Insurer be licensed or recognized by the Arkansas Insurance Department to either transact the business of insurance or sell surplus or excess lines of insurance in the State of Arkansas.
    • The Insurer must have a rating of AAA, AA, or A as rated by Standard & Poor’s; Aaa, Aa, or A if rated by Moody’s, or A++, A+, A, or A- if rated by A.M. Best.
    • DEQ does not accept captive insurance policies for the purpose of providing financial assurance.
    • The owner or operator, in addition to providing a Certificate of Insurance, must provide DEQ with a copy of the insurance policy, its declaration page, and all endorsements or exclusions as part of its submittal to demonstrate financial assurance.
    • The policy must pay from the first dollar of loss; no deductibles, retained limits, or self-insured retentions are allowed.
  5. Corporate Financial Test. The financial test is a form of self-insurance where the owner or operator of a facility is not required to arrange with a third party or set aside cash funds for closure, post-closure, corrective action, or liability 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. Only companies with large net worth or assets relative to the costs to be assured are likely to pass either of the two tests.
    • The financial test may be used only to cover the entire cost estimate for a facility; e.g., it must address the total sum of the owner or operator’s environmental and other liabilities and cannot be used in combination with any other financial assurance mechanism.
    • The owner or operator must have audited year-end consolidated financial statements for least one completed fiscal year’s operations under its current corporate structure in order to qualify to use the financial test. Newly-organized or spun-off companies with less than one full year’s independent operations will likely not qualify; and may not combine extracts of their financial operations under previous corporate structures as part of their submittals for financial assurance. These companies must use a cash instrument or insurance policy, or they may be covered by a parent corporation using a corporate guarantee.
    • The company’s financial statements must be audited by an independent certified public accountant (CPA).
    • A copy of the consolidated financial statements must be submitted along with the chief financial officer’s (CFO’s) letter, the independent CPA’s audit report, and a special report from the CPA stipulating no discrepancies between the CFO’s letter and the audited financial statements.
  6. 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, corrective action, and/or third party liability 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 and, in addition to all documentation required for the financial test, must provide a signed, certified copy of a written guarantee between the Guarantor and the owner/operator, and 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.

The Arkansas Department of Environmental Quality is now the Arkansas Department of Energy and Environment. All financial assurance instruments and forms must be revised to reflect the name change.

If you need a revised template or other assistance, please contact:

Charles Hurt, P.E.
Engineer Supervisor

Subsection H (Financial Assurance) to Sections 264 and 265 of APC&EC Regulation 23 requires facilities which hold a RCRA permit to establish financial assurance for the costs of carrying out closure, post-closure, and corrective action (if applicable) at the facility.

During the active life of the facility, the owner or operator must adjust the closure, post-closure, and corrective action cost estimates for inflation within 60 days prior to the anniversary date of the establishment of the financial instrument(s) used to comply with APC&EC Regulation No. 23, § 264.101(b), 264.143, 264.145, 265.143 and 265.145. For owners and operators who use the financial test or corporate guarantee, the cost estimates must be updated for inflation within 30 days after the close of the firm's fiscal year and before submission of updated information to DEQ as specified in § 264.143 (f)(3) and 265.143(e)(3).

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) and (2) of this section. 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 new year.

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

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

Year Implicit Price Deflators (IPD) - Updated March 31 of each year Inflation Factor
1998 1997 IPD = 101.93 1996 IPD = 100.00 1.930
1999 1998 IPD = 103.19 1997 IPD = 101.93 1.240
2000 1999 IPD = 104.77 1998 IPD = 103.19 1.530
2001 2000 IPD = 106.89 1999 IPD = 104.77 2.020
2002 2001 IPD = 109.21 2000 IPD = 106.89 2.170
2003 2002 IPD = 110.63 2001 IPD = 109.21 1.300
2004 2003 IPD = 105.671 2002 IPD = 103.932 1.670
2005 2004 IPD = 109.099 2003 IPD = 106.516 2.420
2006 2005 IPD = 112.726 2004 IPD = 109.416 3.030
2007 2006 IPD = 116.034 2005 IPD = 112.726 2.930
2008 2007 IPD = 120.613 2006 IPD = 116.034 3.950
2009 2008 IPD = 123.244 2007 IPD = 120.613 2.180
2010 2009 IPD = 134.305 2008 IPD = 133.627 0.510
2011 2010 IPD = 111.140 2009 IPD = 109.664 1.350
2012 2011 IPD = 114.061 2010 IPD = 111.140 2.630
2013 2012 IPD = 116.089 2011 IPD = 114.061 1.770
2014 2013 IPD = 106.588 2012 IPD = 105.002 1.015
2015 2014 IPD = 108.289 2013 IPD = 106.733 1.458
2016 2015 IPD = 109.775 2014 IPD = 108.686 1.002
2017 2016 IPD = 111.416 2015 IPD = 110.012 1.013
2018 2017 IPD = 113.421 2016 IPD = 111.416 1.018
2019 2018 IPD = 111.113 2017 IPD = 113.421 1.022
2020 2019 IPD = 112.953 2018 IPD = 111.154 1.016
2021 2020 IPD = 114.328 2019 IPD = 112.911 1.013
2022 2021 IPD = 121.165 2020 IPD = 114.432 1.058

1In 2009, the Bureau of Economic Analysis revised its indexing and set the baseline index at 100 for the year 2005. Previous implicit price deflators shown here (2008 through 2004) were based on a baseline index of 100 for the year 2000; 2003 and earlier were based on a baseline index of 100 for the year 1996.

Information in this table is obtained from the Federal Reserve Bank of St. Louis

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:

Sample Calculation
Annual sum of closure, post-closure and corrective action cost estimates: $1,500,000.00
Times the inflation factor for this year: X   1.013
Updated cost estimate for this year: $1,519,500.00