[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Rules and Regulations]
[Pages 60328-60339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30038]



[[Page 60327]]

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Part II





Environmental Protection Agency





_______________________________________________________________________



40 CFR Part 258



Financial Assurance Mechanisms for Local Government Owners and 
Operators of Municipal Solid Waste Landfill Facilities; Final Rule

  Federal Register /  Vol. 61, No. 230 / Wednesday, November 27, 1996 / 
Rules and Regulations  

[[Page 60328]]



ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 258

[FRL-5654-3]
RIN 2050-AD04


Financial Assurance Mechanisms for Local Government Owners and 
Operators of Municipal Solid Waste Landfill Facilities

AGENCY: Environmental Protection Agency (EPA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: As part of the President's regulatory reform initiative, the 
Environmental Protection Agency (EPA) is amending the financial 
assurance provisions of the Municipal Solid Waste Landfill Criteria, 
under subtitle D of the Resource Conservation and Recovery Act. The 
financial assurance provisions require owners and operators of 
municipal solid waste landfills (MSWLFs) to demonstrate that adequate 
funds will be readily available for the costs of closure, post-closure 
care, and corrective action for known releases associated with their 
facilities. The existing regulations specify several mechanisms that 
owners and operators may use to make that demonstration.
    Today's rule increases the flexibility available to owners and 
operators by adding two mechanisms to those currently available. The 
additional mechanisms, a financial test for use by local government 
owners and operators, and a provision for local governments that wish 
to guarantee the costs for an owner or operator, are designed to be 
self-implementing. Use of the financial test provided in this rule 
allows a local government to use its financial strength to avoid 
incurring the expenses associated with the use of a third-party 
financial instrument. Demonstrating that the costs of closure, post-
closure care, and corrective action for known releases are available 
protects the environment by assuring that landfills will be properly 
managed at the end of site life when revenues are no longer being 
generated and physical structures may begin to break down.

DATES: The effective date for this final rule is April 9, 1997. The 
compliance date for MSWLF's is April 9, 1997, except for small, dry or 
remote landfills which have until October 9, 1997 to comply.

ADDRESSES: Supporting materials are available for viewing in the RCRA 
Information Center (RIC), located at Crystal Gateway I, first Floor, 
1235 Jefferson Davis Highway, Arlington, VA. The Docket Identification 
Number is F-96-LGFF-FFFFF. The RIC is open from 9 a.m. to 4 p.m., 
Monday through Friday, excluding Federal holidays. To review docket 
materials, it is recommended that the public make an appointment by 
calling 703 603-9230. The public may copy a maximum of 100 pages from 
any regulatory docket at no charge. Additional copies cost $.15/page. 
The index and some supporting material is available electronically. See 
the Supplementary Information section for information on accessing 
them.

FOR FURTHER INFORMATION CONTACT: The RCRA Hotline toll free at (800) 
424-9346 or TDD 800 553-7672 (hearing impaired). In the Washington, 
D.C. metropolitan area, call 703 412-9810 or TDD 703 412-3323; or 
George Garland, Office of Solid Waste (5306W), U.S. Environmental 
Protection Agency, 401 M Street SW, Washington, DC 20460 at (703) 308-
7272.

SUPPLEMENTARY INFORMATION: The index and the Comment Response Document 
are available on the Internet. Follow these instructions to access the 
information electronically:

WWW: http//www.epa.gov/epaoswer
Gopher: gopher.epa.gov
Dial-up: 919 558-0335

    If you are using the gopher or direct dialup method, once you are 
connected to the EPA Public Access Server, look for this report in the 
directory EPA Offices and Regions/Office of Solid Waste and Emergency 
Response (OSWER)/Office of Solid Waste (RCRA).

FTP: ftp.epa.gov
Login: anonymous
Password: your internet address
Files are located in /pub/gopher/OSWRCRA.

Preamble Outline

I. Authority
II. Background
III. Summary of Rule
    A. Local Government Financial Test
    1. Financial Component
    a. Bond rating requirement
    b. Financial ratio alternative to the bond rating requirement
    c. Compliance with GAAP
    d. Operating Deficit Limit
    e. Adverse or Qualified Auditor's Opinion
    2. Public Notice Component
    3. Recordkeeping and Reporting Component
    4. Calculation Of Costs To Be Assured
    B. Local Government Guarantee
    C. Discounting
    D. Effective Date
IV. Responses to Comments and Analysis of Issues
V. Economic and Regulatory Impacts
    A. Executive Order 12866
    B. Regulatory Flexibility Act
    C. Paperwork Reduction Act
    D. Unfunded Mandates Reform Act
    E. Submission to Congress and the General Accounting Office

I. Authority

    These amendments to Title 40, part 258, of the Code of Federal 
Regulations are promulgated under the authority of sections 1008, 4004, 
and 4010 of the Resource Conservation and Recovery Act (RCRA), as 
amended, 42 U.S.C. 6907, 6944, and 6949a.

II. Background

    The Agency proposed revised criteria for municipal solid waste 
landfills (MSWLFs), including financial assurance requirements, on 
August 30, 1988 (see 53 FR 33314) pursuant to the authority listed 
above. The purpose of the financial assurance requirements is to assure 
that adequate funds will be readily available to cover the costs of 
closure, post-closure care, and corrective action associated with 
MSWLFs.
    In the August 30, 1988 proposal, rather than proposing specific 
financial assurance mechanisms, the Agency proposed a financial 
assurance performance standard. The Agency solicited public comment on 
this performance standard approach and, at the same time, requested 
comment on whether the Agency should develop financial test mechanisms 
for use by local governments and corporations. In response to comments 
on the August 1988 proposal, the Agency added several specific 
financial mechanisms to the financial assurance performance standard of 
Sec. 258.74 in promulgating the October 9, 1991 final rule on MSWLF 
criteria (56 FR 50978). That provision allows approved States to use 
any State-approved mechanism that meets that performance standard.
    Commenters on the August 30, 1988 proposal also supported the 
development of financial tests for local governments and for 
corporations to demonstrate that they meet the financial assurance 
performance standard, without the need to produce a third-party 
instrument to assure that the obligations associated with their 
landfill will be met.1 The Agency agreed with commenters and, in 
the October 9, 1991 preamble, announced its intention to develop both a 
local government and corporate financial test in advance of the 
effective date of the financial assurance provisions.
---------------------------------------------------------------------------

    \1\ For a description of the third-party instruments available 
to MSWLF owners and operators, see 56 FR 50978.
---------------------------------------------------------------------------

    On April 7, 1995, the Agency delayed the date by which MSWLFs must 
comply with RCRA subtitle D financial

[[Page 60329]]

assurance requirements until April 9, 1997 (see 60 FR 17649) (remote, 
very small landfills as defined at 40 CFR 258.1(f)(1) must comply by 
October 9, 1997). EPA extended the compliance date to provide adequate 
time to promulgate financial tests for local governments and for 
corporations before the financial assurance provisions take effect. The 
delayed effective date also was intended to provide owners and 
operators sufficient time to determine whether they satisfy the 
applicable financial test criteria for all of the obligations 
associated with their facilities, and to obtain a guarantor or an 
alternate instrument, if necessary. The Agency proposed a local 
government financial test and a corporate financial test on December 
27, 1993 (see 58 FR 68353) and October 12, 1994 (see 59 FR 51523), 
respectively. The Agency expects to promulgate the final corporate test 
in the spring of 1997.

III. Summary of Rule

A. Local Government Financial Test

    Today's rule allows local government owners and operators of MSWLFs 
that meet certain financial, public notice, and recordkeeping and 
reporting requirements to use a financial test to demonstrate financial 
assurance for MSWLF closure, post-closure and corrective action costs 
up to a specified maximum limit. The financial test allows a local 
government to avoid incurring the expenses associated with 
demonstrating financial assurance through the use of third-party 
financial instruments, such as a trust fund, letter of credit or 
insurance policy. Under this approach, a local government must 
demonstrate that it is capable of meeting its financial obligations at 
its MSWLF through ``self-insurance''.
1. Financial Component
    A local government must qualify to use the financial test by 
satisfying either the bond rating provision or the financial ratio 
alternative. These provisions measure a local government's current 
financial condition and, thereby, indicate its ability to pay for 
closure, post-closure and corrective action costs.
(a) Bond Rating Requirement
    The financial test's bond rating provision requires a local 
government to have a current investment grade bond rating (i.e., Aaa, 
Aa, A, or Baa, as issued by Moody's, or AAA, AA, A, or BBB, as issued 
by Standard and Poor's) on all outstanding general obligation bonds. 
Today's rule provides that a local government with outstanding general 
obligation bonds that do not meet the bond rating requirement is not 
eligible to use the financial test.
(b) Financial Ratio Alternative to the Bond Rating Requirement
    A local government that does not have any outstanding general 
obligation bonds, or that only has unrated general obligation bonds, 
may qualify to use the financial test if it satisfies both a liquidity 
ratio and a debt service ratio.
(c) Compliance with GAAP
    A local government that uses the financial ratio alternative to 
qualify for the financial test must determine whether it satisfies the 
financial ratios on the basis of a financial statement prepared in 
accordance with Generally Accepted Accounting Principles (GAAP) for 
governments.
(d) Operating Deficit Limit
    Notwithstanding whether a local government meets the bond rating 
requirement or the financial ratio alternative, a local government is 
disqualified from using the financial test if its financial statements 
prepared in accordance with GAAP show an operating deficit equal to 
five percent or more of its total annual revenue for each of the past 
two years.
(e) Adverse or Qualified Auditor's Opinion
    A local government is also disqualified from using the financial 
test if an audit of its most recent financial statement (prepared in 
accordance with GAAP) receives an adverse opinion, disclaimer of 
opinion, or other qualified opinion.
2. Public Notice Component
    A local government must disclose in its annual budget or financial 
report the estimated costs of its closure, post-closure and corrective 
action obligations, including the years when such costs are expected to 
be incurred. Closure, post-closure, and corrective action costs that 
are to be incurred during a local government's current budget period 
must be included as line items in that budget; those costs that are to 
be incurred in future budget periods need only be disclosed in a 
supplemental section to a local government's budget or financial 
report.
3. Recordkeeping and Reporting Component
    A local government must review its financial situation every year 
to determine if it satisfies the requirements of the financial test and 
is still eligible to use the financial test. If a local government that 
is using the financial test determines that it no longer meets the 
financial test, then it must obtain alternate financial assurance 
within 210 days of the close of its fiscal year.
    If a local government meets the test's financial requirements, it 
must also satisfy certain public notice and recordkeeping and reporting 
requirements to demonstrate financial assurance for MSWLF closure, 
post-closure and corrective action costs. A local government must also 
place in a MSWLF's operating record:
    (1) A letter from the local government's chief financial officer 
that certifies that the local government satisfies the requirements of 
the financial test for those costs for which financial assurance is 
being demonstrated through the financial test,
    (2) A local government's independently audited year-end financial 
statement prepared in accordance with GAAP,
    (3) The opinion prepared by the auditor of the local government's 
year-end financial statement, and
    (4) An evaluation by the local government's auditor or by the 
appropriate state agency that the information in the chief financial 
officer's letter to the operating record is consistent with the local 
government's audited year-end financial statement.
4. Calculation of Costs to be Assured
    The financial test limits the amount of closure, post-closure and 
corrective action costs for which a local government may demonstrate 
financial assurance through use of the test, in proportion to a local 
government's financial capacity as represented by its annual revenues. 
A local government may only use the financial test to demonstrate 
financial assurance for the costs of its total environmental 
obligations up to a maximum amount that does not exceed 43 percent of 
the local government's total annual revenues (see discussion below of 
Calculation of Costs to be Assured, Section IV.A.4).

B. Local Government Guarantee

    Today's rule allows local governments to guarantee the closure, 
post-closure and corrective action costs of other MSWLF owners and 
operators through the use of the financial test. Furthermore, local 
governments may combine financial mechanisms and use a financial test 
or guarantee to cover a portion of the total costs of closure, post-
closure care and corrective action, while the remaining costs are 
covered by an alternative financial mechanism. However, financial 
mechanisms that guarantee performance of work, instead

[[Page 60330]]

of payment of costs, cannot be combined with other instruments.

C. Discounting

    Under today's rule, State Directors may allow discounting at an 
essentially risk free rate of interest for closure, post-closure care, 
and corrective action cost estimates under certain conditions as 
described later in this preamble.

D. Effective Date

    Today's rule allows State Directors to waive the financial 
assurance requirements for up to one year until April 9, 1998 for good 
cause if an owner or operator demonstrates to the Director's 
satisfaction that the April 9, 1997 effective date does not provide 
sufficient time to comply with these requirements and that such a 
waiver will not adversely affect human health and the environment.

IV. Response to Comments and Analysis of Issues

    Forty commenters, primarily States, local governments, and their 
representative associations, commented on the proposed local government 
financial test. A compilation of all public comments and the Agency's 
responses is available in the Docket. (See Comment Response Document 
for Proposed Rule: Financial Assurance Mechanisms for Local Government 
Owners and Operators of Municipal Solid Waste Landfill Facilities (40 
CFR Part 258, Docket F-93-LGFP-FFFFF).)

A. Local Government Financial Test

    The Proposed Local Government Financial Test included several 
components: Financial, public notice, recordkeeping and reporting, and 
a limitation on costs to be ensured by the test. (See Comment Response 
Document, Sections 3.1, 3.2, and 3.3.)
    Comment: Several commenters were concerned that the financial test 
is not stringent enough and would not guarantee that the necessary 
funds would be available to conduct closure and post-closure care 
activities. Some commenters further argued that, to the extent that the 
financial test does not guarantee the availability of funds, local 
governments using the financial test would be in violation of the 
financial assurance requirements set out at 40 CFR 258.71(b) and 
258.72(b) that MSWLF owners and operators provide continuous coverage 
of the costs of closure and post-closure care.
    Response: EPA is adopting the local government financial test 
because it believes some local governments possess sufficient financial 
capacity and fiscal responsibility to satisfy the objectives of 
financial responsibility without the use of a third-party mechanism. 
The test's financial ratios and bond rating criterion are intended to 
ensure that a local government is financially capable of meeting its 
assured obligations. The public notice requirement ensures that the 
local governments using the test are committed to planning for the 
assured obligations and meeting them in a timely manner. As discussed 
in greater detail below, EPA believes that a local government that 
meets the financial, public notice, and recordkeeping and reporting 
requirements of the financial test will be able to fund the assured 
MSWLF closure, post-closure care, or corrective action obligations in a 
timely manner. The purpose of the test is not to predict whether a 
local government will go bankrupt but rather to indicate whether it 
will have adequate funds to establish a trust fund or other allowable 
instrument to provide financial assurance for closure, post-closure 
care, or corrective action if its financial position deteriorates 
beyond acceptable levels.
    Comment: Some commenters argued that the financial test is too 
stringent and that it could not be used by many local governments, 
particularly small local governments.
    Response: The purpose of the financial test is not to exempt local 
governments from the financial assurance requirements, but to allow 
those local governments that possess sufficient financial capacity and 
fiscal responsibility to satisfy the objectives of financial 
responsibility without the use of a third-party mechanism. Inevitably 
some local governments will not have the financial capacity and fiscal 
responsibility to benefit from the financial test. Nevertheless, the 
Agency estimates that 91 percent of all local governments that own or 
operate a MSWLF would be able to use the test for at least some amount 
of their subtitle D obligations, while 54 percent of all local 
governments would be able to use the financial test for all of their 
subtitle D obligations. Accordingly, the Agency believes that the 
financial test would allow a reasonable number of local governments to 
self-insure their MSWLF obligations and still protect public health and 
the environment by assuring that adequate funds are available for 
closure, post-closure care, and corrective action.
1. Financial Component (Sec. 258.74(f)(1))
    The proposed financial component would require that all outstanding 
general obligation bonds be rated investment grade. Alternatively, the 
local government could pass three ratios:

--Liquidity Ratio (cash plus marketable securities to total 
expenditures) must be less than or equal to .05;
--Debt Service Ratio (annual debt service to total expenditures) must 
be less than or equal to .2; and
--Use of Borrowed Funds Ratio (long term debt issued to capital 
expenditures) must be less than or equal to 2.

In addition to passing the bond test or the ratio test, the local 
government would have to:

--Not have an operating deficit greater than 5 percent of expenditures 
for each of the past two years;
--Prepare financial statements in accordance with Generally Accepted 
Accounting Principles; and
--Have an unqualified auditor's opinion.

(See Comment Response Document, Section 4.1)
    Comment: A commenter suggested that local governments should be 
able to demonstrate financial assurance for landfill closure, post-
closure and corrective action costs without having to demonstrate their 
financial capability. This commenter believed that one may assume that 
local governments with taxing authority will be in a position to pay 
for closure, post-closure and corrective action costs. The commenter 
argued, therefore, that a local government should qualify to use the 
financial test, unless there are indications that it is not financially 
sound, such as a below investment grade bond rating or being in default 
on a bond issue.
    Response: The Agency believes that it is essential that a local 
government demonstrate its financial capability to qualify for the 
financial test, because a local government must have sufficient 
financial capacity to be able to obtain the necessary closure and post-
closure funds at the time that the funds are needed. Although most 
local governments are able to pay off their financial obligations over 
time, conflicting financial demands could cause financially weaker 
local governments to delay necessary closure and post-closure 
activities at MSWLF's. Any delay in conducting necessary closure and 
post-closure activities could jeopardize public health and the 
environment as well as significantly increase response costs for 
corrective action at a site. In some cases, such increased costs would 
ultimately have to be borne by State or federal response authorities.

[[Page 60331]]

    Comment: Another commenter argued that only local governments with 
a minimum annual revenue of $3 million should qualify for the local 
government financial test.
    Response: Although the corporate financial test is only available 
to corporations with at least $10 million in annual revenues, the 
Agency has not adopted a similar minimum size requirement for the local 
government financial test because local governments, unlike 
corporations, have taxing authority and are, therefore, less likely to 
become insolvent. Instead of requiring a minimum size for a local 
government to qualify for the financial test, the test establishes a 
maximum amount (43 percent of a local government's total annual 
revenue) up to which a local government may rely on the test to 
demonstrate financial assurance in order to ensure that the costs being 
assured are appropriate in relation to the size of a local government.
a. Bond rating requirement (Sec. 258.74(f)(1)(i)(A))
    Comment: Some commenters believed that the financial test's 
reliance on the ratings of bonds issued by a local government may be an 
inappropriate measure of that local government's financial strength. 
They argued that general obligation bond ratings are not good 
indicators of the financial health of the local government that issues 
the bonds, because the ratings indicate the risk associated with the 
bonds themselves rather than any risk associated with the financial 
capability of the issuing local government. They also argued that 
ratings of other kinds of bonds, such as insured bonds or 
collateralized bonds, do not reflect the issuing local government's 
financial condition and, therefore, do not reflect any changes in a 
local government's financial strength over time.
    Other commenters argued that the financial test's bond rating 
requirement is too restrictive, because it limits the bond ratings 
allowed to general obligation bond ratings and does not include other 
forms of rated debt, such as revenue bonds.
    Response: Today's rule relies on a local government's general 
obligation bond ratings as a measure of a local government's financial 
capability because such bond ratings are based on a comprehensive 
evaluation of a local government's financial condition (See Comment 
Response Document, Section 4.1.1 for more detail). Today's rule 
disallows the use of insured general obligation bond ratings, because 
the rating of such bonds is based on the financial capability of the 
insurer and may not reflect a local government's current financial 
condition. Today's rule does not allow the use of revenue or 
collateralized bond ratings as a measure of a local government's 
financial capability because such bond ratings only reflect the 
financial risk associated with a particular revenue source or asset and 
not the general financial health of the local government.
    Comment: A commenter argued that the financial test's bond rating 
requirement should be made more stringent by only considering the 
ratings of general obligation bonds issued within the previous two 
years by a local government in an amount equal to the funds necessary 
for closure and post-closure care.
    Response: Today's rule does not impose such additional requirements 
on qualifying for the financial test: The ratings of outstanding 
general obligation bonds are updated periodically to reflect a local 
government's current financial condition. In addition, 
Sec. 258.74(f)(4) of today's rule already requires proportionality 
between the amount of costs that can be assured under the financial 
test and a local government's financial capability by limiting the 
costs to be assured under the financial test to a maximum of 43 percent 
of the local government's total annual revenue.
    Comment: Several commenters pointed out that many local governments 
may not have ratings on their general obligation debt because it is not 
always necessary to obtain a rating to market bonds. They explained 
that the language of the proposed rule would preclude local governments 
with unrated general obligation bonds from qualifying for the financial 
test, because not only would they be unable to satisfy the bond rating 
requirement but they also would be ineligible to use one of the 
financial ratios to qualify for the financial test; only local 
governments with no general obligations bonds, rated or unrated, would 
be eligible to use the financial ratios to qualify for the financial 
test.
    Response: Sections 258.74(f)(1)(i)(A) and (B) of today's rule 
clarify that the bond rating requirement only applies to local 
governments with ``rated'' outstanding general obligation bonds. This 
clarification provides local governments that have unrated general 
obligation bonds, and hence that cannot satisfy the bond rating 
requirement, the opportunity nevertheless to qualify for the financial 
test by meeting one of the financial ratio alternatives to the bond 
rating requirement.
b. Financial ratio alternative to the bond rating requirement 
(Sec. 258.74(f)(1)(i)(B))
    Comment: Some commenters questioned the appropriateness of the 
proposed financial ratios. Suggested alternatives include the ratio 
between the total assessed value of a local government's taxable real 
estate and the actual amount of real estate taxes collected or the 
ratio between a local government's total general obligation debt and 
its taxable real estate. Another commenter suggested that ratios that 
measure a local government's total debt and pension fund obligations 
should be added to the proposed financial ratios to provide greater 
certainty of a local government's financial ability to satisfy its 
closure and post-closure obligations.
    Response: EPA considered these and similar measures of a local 
government's financial health in the course of developing the local 
government financial test proposed on December 27, 1993. As discussed 
in the preamble to the proposed rule (58 FR 68353, 68356), EPA analyzed 
the different financial ratios and thresholds identified in the 
literature on local government finances and eliminated them from 
further consideration if they could not be: (A) Calculated easily from 
the financial statements of local governments, analyzed based on 
available data, or used because they were clearly less supported in the 
financial literature relied upon in this rulemaking (See Bibliography 
of Financial Sources and References in the Docket) than similar 
measures; (B) if the relationship between the measure and financial 
health appeared random; (C) if the measures and associated thresholds 
could not differentiate among local governments; (D)if the measures 
were highly sensitive to small changes in the threshold value; or (E) 
if the measures were highly correlated with other measures already in 
the test that evaluated the same aspect of local government financial 
health. From the remaining measures, EPA selected those ratios and 
thresholds that were best substantiated in the public finance 
literature.
    EPA rejected using the ratio between the total assessed value of a 
local government's taxable real estate and the actual amount of real 
estate taxes collected because, although the ratio measures a local 
government's potential revenue, it does not describe a local 
government's willingness to use this source of revenue. Similarly, EPA 
rejected using the ratio between a local government's total general 
obligation debt and its taxable real estate because, although it 
provides a measure of a local government's revenue from property

[[Page 60332]]

taxes, it does not measure willingness to use this revenue source (See 
Comment Response Document, Section 4.1.2, for more detail). EPA 
rejected ratios evaluating pension funds because there was no data to 
allow the Agency to select an appropriate threshold to indicate when 
pension funds may be in financial difficulty. Finally, EPA decided that 
measures evaluating total debt were unnecessary, because the debt 
service ratio already measures a local government's ratio of annual 
debt service to total expenditures.
(1) The liquidity ratio (Sec. 258.74(f)(1)(i)(B)(1))
    Comment: Several commenters questioned the appropriateness of the 
liquidity ratio incorporated into today's rule, because they believe 
that a local government's cash balance is a poor indicator of its 
financial capability.
    Response: Although the liquidity ratio, by itself, may not provide 
a conclusive measure of a local government's financial capability to 
conduct closure, post-closure care and corrective action at a MSWLF, it 
does provide a measure of a local government's ability to meet current 
and unexpected obligations. EPA is concerned that a local government 
with a cash shortage would have to delay or restrict its services and 
would, therefore, be unable to conduct any MSWLF closure, post-closure 
care or corrective action activities when necessary.
    Comment: Another commenter suggested that a working capital ratio 
would be preferable to a liquidity ratio, because liquidity ratios, 
which are derived from a local government's balance sheet, can be 
manipulated to reach a particular result.
    Response: EPA adopted a liquidity ratio because such a ratio is 
appropriate for local governments. A working capital ratio is 
appropriate to evaluate corporations. Today's rule also limits the 
potential for satisfying a particular financial ratio through the use 
of inappropriate accounting practices by requiring that a local 
government's financial statement comply with Generally Accepted 
Accounting Principles (GAAP).
    Comment: Some commenters questioned the appropriateness of the 
liquidity ratio threshold that requires that a local government 
maintain a minimum five percent cash balance in its budget in order to 
satisfy the liquidity ratio. One commenter believed that a five percent 
cash balance is too low, another that it is too high, and yet another 
that such a minimum cash balance requirement would require local 
governments, which must maintain a balanced budget under state law, to 
specifically budget a five percent cash balance.
    Response: EPA does not believe that it is necessary to require that 
a local government maintain more than a five percent cash balance, 
because it is unnecessary that a local government maintain a sufficient 
cash balance to be able to respond to all of its potential MSWLF 
closure, post-closure and corrective action obligations at any one 
time. Instead, as discussed above, the purpose of the liquidity ratio 
is to ensure that a local government has the financial flexibility to 
be able to respond to some unexpected obligations in addition to 
fulfilling its planned or anticipated obligations. Not only should a 
local government be financially able to meet its planned MSWLF 
obligations in the face of other unexpected obligations, but it should 
also be able to respond to immediate and unexpected MSWLF obligations. 
It is generally accepted in the financial literature (See Bibliography 
of Financial Sources and References in the Docket) that a five percent 
cash balance is a sufficient financial ``cushion'' for local 
governments to be able to meet both current and unexpected obligations 
in most situations. On the other hand, EPA does not believe that a 
minimum five percent cash balance is too high a cash balance for a 
local government to be able to maintain or that such a requirement 
would disqualify many local governments from using the financial test 
to demonstrate financial assurance. EPA's research shows that over 96 
percent of all local governments that own or operate MSWLFS maintain 
such a minimum cash balance and would satisfy the liquidity ratio. EPA 
also does not expect that local governments, which must maintain a 
balanced budget under state law, would have to specifically budget a 
five percent cash balance in order to satisfy the liquidity ratio. As 
indicated above, EPA's research shows that the vast majority of local 
governments already maintain enough of their assets in cash and in 
current investments to pass the liquidity ratio.
    Comment: A commenter questions whether the financial test's 
liquidity ratio is the standard measure of liquidity typically used in 
financial analyses and whether it provides a meaningful assessment of a 
local government's fiscal responsibility.
    Response: The financial test's liquidity ratio is a standard 
measure of liquidity employed in financial analyses of municipal 
governments (See Bibliography of Financial Sources and References in 
the Docket). Additionally, as discussed above, liquidity provides an 
important measure of a local government's ability to meet current and 
unexpected obligations.
(2) The debt service ratio (Sec. 258.74(f)(1)(i)(B)(2))
    Comment: Some commenters question the appropriateness and the value 
of a debt service ratio, on the grounds that it is unclear how such a 
ratio contributes to an evaluation of a local government's financial 
capability and that such a ratio would only apply to other than general 
obligation bond debt (only local governments without general 
obligations bonds may use the financial ratio alternative).
    Response: As discussed in the December 27, 1993 proposal, debt 
service represents a fixed expense that limits the flexibility of local 
governments. High debt service significantly reduces the resources 
available to fund current operating expenses, the flexibility to fund 
unexpected needs, and the ability to obtain additional loans or issue 
additional debt. The Agency believes that local governments that are 
overly burdened by debt service payments may have greater difficulty 
paying for assured activities in a timely fashion. Standard & Poors, 
for example, employs the debt service ratio in evaluating and rating 
municipal bond issues and considers such a ratio to be high, similar to 
the threshold percentage in today's rule, when it exceeds 20 percent of 
annual expenditures. Although the debt service ratio would not measure 
debt service from rated general obligation bonds, it would measure debt 
service from unrated or insured general obligation bonds, revenue bonds 
and debt service attributable to other government funds, including 
special assessment bonds, certificates of participation and bank loans.
(3) The use of borrowed funds ratio (Proposed 
Sec. 258.74(f)(1)(i)(B)(2))

    Comment: Commenters noted that borrowed funds, especially those 
received late in the year, are typically not all spent in that year. 
Even when they will eventually be spent on capital improvements, these 
unspent borrowed funds will result in failing this ratio.
    Response: We agree that this is a problem and found that attempting 
to define Current Year Long Term Debt Issued to avoid that problem was 
very complicated. Moreover, the requirement that a local government not 
have an operating deficit in excess of 5% for each of the last two 
years also assures that the local government is not

[[Page 60333]]

substantially relying on long term debt to pay short term expenses. 
That is, there is not a large gap between expenses and revenues which 
must be filled by long term debt. Since this was the purpose of the use 
of borrowed funds ratio and the use of borrowed funds ratio may have 
unintended consequences, the Agency decided to drop the use of borrowed 
funds ratio.
c. Compliance with GAAP (Sec. 258.74(f)(1)(ii))
    Comment: Three commenters from Nebraska, including the State of 
Nebraska, argue that requiring local governments to use GAAP would be 
unnecessarily burdensome, because most Nebraskan local governments use 
cash basis accounting to prepare their financial statements and that 
these local governments would have to prepare duplicate financial 
statements using GAAP to qualify for the financial test.
    Response: The Agency believes that it is necessary for local 
governments to prepare an annual financial report in compliance with 
GAAP, because the Agency's analysis of the financial test ratios was 
predicated on ratios derived from financial statements prepared in 
accordance with GAAP. The use of other forms of accounting could alter 
the results of the ratios. Indeed, it appears that although Nebraska 
state law allows local governments to use cash basis accounting to 
prepare financial statements, it recommends that statements be prepared 
in accordance with GAAP. Of course, a State could develop its own 
financial test pursuant to Sec. 258.74(i) which relied on cash flow 
accounting, subject to approval of its State MSWLF permit program.
d. Operating Deficit Limit (Sec. 258.74(f)(1)(iii)(3))
    Comment: Commenters noted that the proposal does not define 
operating deficit, total revenue, or total expenditures.
    Response: Today's rule does define these terms at 
Sec. 258.74(f)(1)(iv) in accordance with definitions included in the 
Background Document.
    Comment: There is an inconsistency between the preamble and the 
text of the December 27, 1993 proposed rule, which provided that the 
operating deficit limit applied if a local government experienced a 
greater than five percent deficit in ``each'', and in ``either'', of 
the past two years.
    Response: Today's rule clarifies that the operating deficit limit 
applies if a local government experiences such a deficit in ``each'' of 
the past two years.
2. Public Notice Component (Sec. 258.74(f)(2))
    In order to ensure that a local government using the test 
acknowledges the obligations it is seeking to assure and that the 
community decisionmakers are aware of and agree to the commitment of 
future local government funds, the proposed rule would require that a 
local government, in each year that the financial test or guarantee is 
used, identify assured costs in either its budget or its comprehensive 
annual financial report. (See Comment Response Document, Section 4.2)
    Comment: Several commenters noted that the public notice 
requirement in the proposed rule was inconsistent with the Governmental 
Accounting Standards Board (GASB) Statement Number 18, ``Accounting for 
Municipal Solid Waste Landfill Closure and Postclosure Care Costs.''
    Response: The Agency agrees and has modified the public notice 
requirement to be consistent with GASB 18. Accordingly, a local 
government in compliance with GASB Statement Number 18, which requires 
more information than today's rule, will also meet the public notice 
requirement of the financial test.
    Comment: One commenter stated that it may not be possible to 
include a notice of corrective action in a Comprehensive Annual 
Financial Report or annual budget within 120 days after the corrective 
action remedy has been selected.
    Response: The Agency recognizes the difficulty raised by the 
commenter. Today's rule modifies the public notice requirement in the 
event that corrective action is necessary. The modification allows a 
local government to place a letter in an MSWLF's operating record, if 
it is not possible to include a notice of the corrective action in a 
Comprehensive Annual Financial Report or annual budget within 120 days 
after the remedy has been selected.
3. Recordkeeping and Reporting Component (Sec. 258.74(f)(3))
    In order to confirm that the self-implementing requirements of the 
financial test have been met, the proposed rule would require local 
governments to document their use of the test by placing four items in 
the facility operating record: (1) A letter signed by the local 
government's chief financial officer (CFO), (2) the local government's 
independently audited year-end financial statements for the latest 
fiscal year, (3) the auditor's unqualified opinion of the year-end 
financial statement for the latest fiscal year, and (4) the special 
report of the independent certified public accountant or State Agency 
upon examination of the CFO's letter. In addition, owners and operators 
would be required to update these items annually, and to notify the 
State Director and obtain alternative financial assurance if the local 
government is no longer able to pass the financial test. (See Comment 
Response Document, Section 4.3)
    Comment: Commenters suggested several clarifications to the 
recordkeeping and reporting requirements. For example, the proposed 
rule incorrectly provided that the CFO letter only certify that the 
local government meet ``either'' requirement and inadvertently omitted 
the operating deficit requirement from the certification requirement in 
the local government certification letter.
    Response: Today's rule adopts standard language suggested by the 
American Institute of Certified Public Accountants to be used in the 
report of the independent CPA or State Agency verifying the accuracy of 
the information provided by the local government's chief financial 
officer pursuant to Sec. 258.74(f)(3)(i)(A) of the rule. Today's rule 
also clarifies that the local government CFO letter to be placed in a 
facility's operating record must certify that a local government 
``both'' meets the bond rating/financial ratio requirement and that it 
prepares its financial statements in conformity with Generally Accepted 
Accounting Principles and provides that the local government CFO letter 
must also certify that the local government has not had an operating 
deficit greater than or equal to five percent in each of the past two 
years.
    Comment: Some commenters believed that 90 days was an insufficient 
amount of time to update the records and several noted that their 
States allowed 180 days to obtain audited financial reports.
    Response: Today's rule doubles the amount of time allowed to update 
the records to be maintained in a facility's operating record from 90 
to 180 days after the end of a local government's fiscal year. Today's 
rule, like the proposed rule, continues to require that a local 
government obtain alternate financial insurance--if a local government 
determines that it no longer meets the financial test based on the 
results of the annual records update--within thirty days of the 
deadline by which a local government must update its records; however, 
to reflect the additional 90 days provided to local governments to 
update their records, today's rule also extends the total time

[[Page 60334]]

from the end of a local government's fiscal year by which a local 
government must obtain alternate financial assurance from 120 to 210 
days.
4. Calculation Of Costs To Be Assured
    Under the proposed rule, a local government would not be able to 
use the financial test to assure closure, post-closure care, and 
corrective action costs that exceed 43 percent of the local 
government's total annual revenue. Additionally, if a local government 
assures the costs of other environmental obligations through the use of 
other financial tests, then it could use today's financial test for 
closure, post-closure care, and corrective action costs only to the 
extent that its total environmental obligations assured through the use 
of a financial test do not exceed 43 percent of its total annual 
revenue. This amount was derived from estimates in the financial 
literature (See Bibliography of Financial sources and References in the 
Docket) that a local government may typically incur additional 
expenditures up to 5 percent of its current annual budget without 
unreasonable stress. Discounting a 20 year stream of such payments at 
10 percent yields the amount of a bond issue (43 percent of 
expenditures) that might be handled by a local government using future 
financial flexibility. (See Comment Response Document, Section 4.4.)
    Comment: One commenter argued that the financial test should be 
made more stringent by disqualifying local governments whose financial 
assurance obligations are greater than 43 percent of their total annual 
revenues from using the financial test. If only local governments with 
financial assurance obligations that are less than 43 percent of the 
local government's total annual revenue could use the financial test, 
it would, they argue, better ensure that local governments are 
financially able to fulfill their closure, post-closure care and 
corrective action obligations.
    Response: The 43 percent threshold limit on a local government's 
ability to ``self-insure'' its environmental obligations ensures that a 
local government's environmental obligations, for which a local 
government proposes to demonstrate financial assurance on the basis of 
its financial ability, are not disproportionate to its relative 
financial capability to fulfill those obligations. EPA has determined 
that a local government may reasonably be expected to be able to pay 
the costs of its environmental obligations that it is ``self-insuring'' 
at any one time up to 43 percent of its total annual revenues. To the 
extent that the anticipated costs of a local government's environmental 
obligations that are being deferred at any one time were to exceed 43 
percent of its total annual revenues, EPA believes that it would be 
substantially less likely that a local government would be financially 
able to, in fact, fulfill those obligations at the time that they were 
to become due. Since EPA believes that a community may safely ``self-
insure'' its environmental obligations up to 43 percent of its total 
annual revenues, it is not necessary to disqualify a community from 
using the financial test if its total environmental financial assurance 
costs are greater than 43 percent of its total annual revenues. In such 
a case, a community should be able to realize the same cost savings as 
other communities by self-insuring at least a portion of its 
environmental obligations and obtaining third-party financial assurance 
instruments for any costs that exceed the 43 percent threshold. 
Although a requirement that a community be able to self-insure all of 
its environmental obligations within the 43 percent threshold would 
certainly limit the number of communities that could use the financial 
test and, thereby, guarantee that the necessary funds are available in 
the future by requiring those communities to obtain third-party 
financial assurance instruments, such a requirement would 
disproportionately disqualify smaller local governments, which are the 
local governments that can least afford the expense of obtaining a 
third-party financial instrument.
    Comment: Other commenters suggested that the 43 percent threshold 
was either too high or too low thereby making the financial test, 
respectively, not stringent enough or too stringent.
    Response: EPA believes that the 43 percent threshold is 
appropriate. As discussed in greater detail in the Comment Response 
Document, Section 4.4, the threshold is based on information contained 
in the public financial literature (See Bibliography of Financial 
Sources and References in the Docket) about the percent of total 
revenues that a local government should be able to devote in the course 
of a year to meet environmental obligations over a twenty year period 
and not experience undue financial difficulty.

B. Local Government Guarantee (Sec. 258.74(h))

    Under the proposed rule, a local government could guarantee the 
costs of closure, post-closure and corrective action associated with a 
MSWLF owner by another local government or by a private business. The 
local government guarantor would have to promise to take responsibility 
for the obligations of the owner or operator if the owner or operator 
fails to do so and provide proof that it passes the financial test 
requirements. (See Comment Response Document, Sections 5.1 and 5.2)
    Comment: Some commenters opposed allowing a local government to 
guarantee the costs of the environmental obligations of other MSWLFs 
because MSWLF owners and operators are less likely to manage their 
MSWLFs appropriately if they do not have to pay closure, post-closure 
or corrective action costs. One commenter was particularly concerned 
about the potential for abuse inherent in the use of public funds or 
credit to guarantee the closure, post-closure and corrective action 
costs of privately-owned MSWLFs and pointed out that such practices are 
prohibited in many states.
    Response: Today's rule maintains the local governments guarantee as 
proposed and does not restrict its use. As discussed above, EPA 
believes that a local government that meets the financial, public 
notice, and recordkeeping and reporting requirements of the financial 
test will be able to fund the assured MSWLF closure, post-closure care 
or corrective action obligations in a timely manner. A local government 
may, of course, only guarantee the closure, post-closure or corrective 
action costs of another MSWLF owner and operator, if such an 
arrangement is consistent with state law. Even if a local government 
guarantee is not precluded by state law, a state may nevertheless 
disallow the use of the guarantee if it determines that there is the 
potential for abuse.
    Comment: Commenters suggested several clarifications to provisions 
of the proposed local government guarantee.
    Response: Today's rule clarifies that if a guarantee is cancelled, 
then pursuant to Sec. 258.74(h)(1)(iii) the owner or operator of the 
MSWLF must obtain alternate financial assurance within 120 days 
following ``the guarantor's notice of cancellation'' (not within 120 
days following ``the close of the guarantor's fiscal year''). 
Similarly, today's rule clarifies that if the local government 
guarantor no longer qualifies to use the financial test, then, pursuant 
to Sec. 258.74(h)(2)(iii), the owner or operator of the MSWLF must 
obtain alternate financial assurance within 90 days following ``the 
determination that the guarantor no longer meets the requirements of 
paragraph (f)(1) of this section''; not within 90 days following ``the 
guarantor's notice of cancellation.''

[[Page 60335]]

C. Discounting of Costs in Calculating Financial Assurance Cost 
Estimates

    The financial assurance requirements under RCRA subtitle D 
currently require owners and operators to calculate cost estimates in 
current dollars, and aggregate these estimates (even though these costs 
may be incurred many years in the future). Owners must obtain a 
financial responsibility instrument for at least the amount of this 
aggregated cost estimate. In the preamble to the December 27, 1993 
proposed rule (58 FR 68353, 68361), EPA solicited comments on whether 
MSWLF owners and operators should be allowed to use a present value 
based on a discount rate to estimate certain financial assurance costs. 
Cost discounting would allow owners and operators to adjust an 
aggregated cost estimate to reflect the fact that activities are 
scheduled to occur in the future and to obtain a financial instrument 
for less than the aggregate costs (i.e. the ``present value'' of the 
aggregated costs). (See Comment Response Document, Section 7)
    Comment: A number of commenters opposed allowing MSWLF owners and 
operators to discount financial assurance costs because of their belief 
that landfill owners and operators often underestimate cost estimates 
and that the timing of a closure event is uncertain. One commenter 
suggested that the risks of discounting could be minimized with State 
oversight if EPA provided specific guidelines.
    Response: The Financial Accounting Standards Board (which sets 
standards for corporate accounting) allows discounting only when costs 
and timing of closure are certain and then only for an essentially risk 
free rate, adjusted for inflation. The Agency agrees with commenters 
that cost estimates are frequently underestimated and that the closure 
date is usually uncertain because sites may fill up more quickly than 
expected or they may close because of enforcement actions as a result 
of rule violations. We also agree with the Financial Accounting 
Standards Board that discounting is only appropriate when cost 
estimates and closure dates are certain. For these reasons, the Agency 
has decided against allowing discounting without State oversight.
    Because the Agency recognizes that there are cases where cost 
estimates are accurate and closure dates are certain, we have decided 
to allow State Directors to allow discounting for closure, post-
closure, and corrective action costs if they believe that cost 
estimates are accurate and the closure date is certain and where the 
local government has submitted a finding from a Registered Professional 
Engineer that cost estimates are accurate and certifies that there are 
no known factors which would change the estimated closure date. The 
State must also determine that the facility is in compliance with all 
regulations it determines to be applicable and appropriate. Consistent 
with other elements of this rule, cost estimates must be adjusted 
annually to reflect inflation and remaining site life. The discount 
rate used may not be greater than the rate of return for essentially 
risk free investments, such as 1 year Treasury bills, net of inflation. 
As noted above, discounting at an essentially risk free rate of return 
is that allowed by the Financial Accounting Standards Board and was 
suggested by several commenters. The Government Accounting Standards 
Board notes that EPA is already allowing for discounting for inflation 
because it allows annual adjustments of cost estimates for inflation. 
For this reason the Agency requires that inflation be deducted from an 
essentially risk free rate of return in calculating a discount rate. 
The resulting rate allows conservatively invested funds to grow to the 
needed amount in the time available. (See Comment Response Document, 
Section 7)

D. Different Financial Tests for Local Government Owners and Operators 
of MSWLFs and Underground Storage Tanks

    The financial test proposed for use by local government owners and 
operators of MSWLFs under subtitle D of RCRA was different from the 
previously adopted financial test for use by local government owners 
and operators of underground storage tanks (USTs) under subtitle I of 
RCRA. As discussed in the preamble to the December 27, 1993 proposed 
rule (58 FR 68353, 68362), while EPA generally strives to maintain 
consistency between programs, EPA believes that there are important 
policy reasons to use a different test for the two programs. All 
commenters on this issue agreed with EPA that the financial test for 
local government owners and operators of USTs would be inappropriate 
for use by local government owners and operators of MSWLFs. The Agency 
agrees with commenters and has not allowed the UST test to be used for 
MSWLF's. (See Comment Response Document, Section 8)

E. Effective Date for Financial Responsibility Requirements for 
Municipal Solid Waste Landfills

    The effective date for financial responsibility requirements for 
MSWLF's is April 9, 1997 except for small, dry or remote landfills 
which have until October 9, 1997 to comply (see 60 FR 52337, October 6, 
1995). In response to commenters who said that they needed up to 18 
months after promulgation of the local government financial test to 
comply with the financial responsibility requirements for municipal 
solid waste landfills, the Agency has decided to allow State Directors 
to waive the financial assurance requirements for up to an additional 
12 months as described earlier in section III of this preamble. This 
would provide the 18 months requested by certain commenters. (See also 
Comment Response Document, Section 12.5)

V. Economic and Regulatory Impacts

A. Executive Order 12866

    Under Executive Order 12866, EPA must determine the economic impact 
of a rule. The Agency estimates that today's rule will save local 
government owners and operators of MSWLFs $105.1 million annually: 
$96.6 million attributable to the availability of the local government 
financial test and $8.5 million attributable to the availability of the 
local government guarantee. A complete discussion of the Agency's 
analysis can be found in the docket for today's rule.
    To calculate the cost savings associated with today's rule, the 
Agency updated the information used to calculate the anticipated cost 
savings discussed in the December 27, 1993 proposed rule (58 FR 68353, 
68363). The Agency updated the 1987 data on the universe of existing 
MSWLF landfills by accounting for the number of MSWLF landfills that 
have been closed since then and adjusted accordingly the representative 
sample of local government owners and operators of MSWLFs used to 
determine how many local governments would meet the financial ratios of 
the financial test. The Agency also adjusted the costs of closure and 
post-closure care for inflation. Based on this updated information, the 
Agency believes that 91 percent of all local governments that own or 
operate a MSWLF would be able to use the test for at least some amount 
of their Subtitle D obligations, while 54 percent of all local 
governments would be able to use the financial test for all their 
subtitle D obligations.

[[Page 60336]]

    Of approximately 3400 landfills in this analysis, 2700 are publicly 
owned, and of those 1500 (54%) were estimated to be able to use the 
financial test for all of their Subtitle D obligations. Of the 
remaining 1200, about half would be able to satisfy the financial test 
on their own and with the guarantee assistance of local governments 
that also use their landfill. The other half, about 600, would not be 
able to pass the financial test nor get help with the guarantee and so 
would need to set up a mechanism for financial assurance. EPA estimated 
that the cost to these landfills to obtain letters of credit is about 
$18.1 million per year (1.5% annual administrative cost for letters of 
credit ``times'' the closure and post-closure costs for these landfills 
of about $1.2 billion). These landfills could also assure by 
establishing trust funds, entailing the costs of the funds set aside, 
the opportunity cost of the funds, and trust fund administrative costs. 
EPA believes that the cost if all chose to establish trust funds would 
be similar to the cost of using a letter of credit. Of these 600 or so 
landfills, 520 are owned by local governments with populations of 
10,000 or less.
    Today's rule will not result in an adverse impact on the ability of 
U.S.-based enterprises to compete with foreign-based enterprises in 
domestic or export markets. This rule has been reviewed by the Office 
of Management and Budget in accordance with Executive Order 12866.

B. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. at the 
time an Agency publishes a proposed or final rule, it generally must 
prepare a Regulatory Flexibility Analysis that describes the impact of 
the rule on small entities, unless the Administrator certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities. Today's rule adds a local government 
financial test and local government guarantee as two additional 
mechanisms that can be used to demonstrate financial responsibility for 
environmental obligations. Entities able to use these mechanisms will 
be allowed to demonstrate financial responsibility for their 
environmental obligations without incurring the costs of obtaining a 
third-party mechanism. The Agency has allowed local governments of any 
size to use up to 43% of their revenues to assure environmental 
obligations if they pass the financial test. This contrasts with 
suggestions from some commenters that a minimum size requirement should 
be part of the test. Because this rule is deregulatory in nature, I 
certify pursuant to 5 U.S.C. 605b, that this regulation will not have a 
significant impact on a substantial number of small entities.

C. Paperwork Reduction Act

    OMB approved the information collection requirements of the MSWLF 
criteria, including financial assurance criteria, under the provisions 
of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq., and assigned 
OMB control number 2050-0122. The burden estimate for the financial 
assurance provisions included the burden associated with obtaining and 
maintaining any one of the allowable financial assurance instruments, 
including a financial test.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, EPA 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, and tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. Before promulgating an EPA rule for which a written statement 
is needed, section 205 of the UMRA generally requires EPA to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the least costly, most cost-effective or least burdensome alternative 
that achieves the objectives of the rule. The provisions of section 205 
do not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows EPA to adopt an alternative other than the least 
costly, most cost-effective or least burdensome alternative if the 
Administrator publishes with the final rule an explanation why that 
alternative was not adopted. Before EPA establishes any regulatory 
requirements that may significantly or uniquely affect small 
governments, including tribal governments, it must have developed under 
section 203 of the UMRA a small government agency plan. The plan must 
provide for notifying potentially affected small governments, enabling 
officials of affected small governments to have meaningful and timely 
input in the development of EPA regulatory proposals with significant 
Federal intergovernmental mandates, and informing, educating, and 
advising small governments on compliance with the regulatory 
requirements.
    Today's rule is not subject to the requirements of sections 202, 
203 and 205 of the UMRA. EPA has determined that this rule does not 
contain a Federal mandate that may result in expenditures of $100 
million or more for State, local, and tribal governments, in the 
aggregate, or the private sector in any one year. On the contrary, as 
described above, the Agency estimates that today's rule will save local 
government owners and operators of MSWLFs $105.1 million annually by 
allowing local governments to use a financial test or a local 
government guarantee to demonstrate financial responsibility for 
environmental obligations without incurring the costs of obtaining a 
third-party mechanism. Although today's rule is specifically intended 
to ``significantly or uniquely affect small governments,'' the Agency 
does not believe that today's rule is subject to section 203 of the 
UMRA to the extent today's rule provides regulatory flexibility for 
local governments and does not to impose additional regulatory 
requirements. Indeed, today's rule is being promulgated in response to 
a long standing request by local governments after substantial input 
from such local governments into the rule's development.

E. Submission to Congress and the General Accounting Office

    Under 5 U.S.C. 801(a)(1)(A) as added by the Small Business 
Regulatory Enforcement Fairness Act of 1966, EPA submitted a report 
containing this rule and other required information to the U.S. Senate, 
the U.S. House of Representatives and the Comptroller General of the 
General Accounting Office prior to publication of the rule in today's 
Federal Register. This rule is a ``major rule'' as defined by 5 U.S.C. 
804(2).

List of Subjects in 40 CFR Part 258

    Environmental protection, Closure, Corrective action, Financial 
assurance, Waste treatment and disposal, Water pollution control.

    Dated: November 15, 1996.
Carol M. Browner,
Administrator.
    For the reasons set forth in the preamble, title 40, chapter I of 
the Code of Federal Regulations is amended as follows:

PART 258--CRITERIA FOR MUNICIPAL SOLID WASTE LANDFILLS

    1. The authority citation for part 258 continues to read as 
follows:


[[Page 60337]]


    Authority: 42 U.S.C. 6907(a)(3), 6912(a), 6944(a), and 6949a(c); 
33 U.S.C. 1345(d) and 1345(e).

    2. Section 258.70 is amended by adding paragraph (c) to read as 
follows:


Sec. 258.70   Applicability and effective date.

* * * * *
    (c) The Director of an approved State may waive the requirements of 
this section for up to one year until April 9, 1998 for good cause if 
an owner or operator demonstrates to the Director's satisfaction that 
the April 9, 1997 effective date for the requirements of this section 
does not provide sufficient time to comply with these requirements and 
that such a waiver will not adversely affect human health and the 
environment.
    3. Section 258.74 is amended by adding text to paragraphs (f) and 
(h) and by revising paragraph (k) to read as follows:


Sec. 258.74   Allowable mechanisms.

* * * * *
    (f) Local government financial test. An owner or operator that 
satisfies the requirements of paragraphs (f)(1) through (3) of this 
section may demonstrate financial assurance up to the amount specified 
in paragraph (f)(4) of this section:
    (1) Financial component. (i) The owner or operator must satisfy 
paragraph (f)(1)(i)(A) or (B) of this section as applicable:
    (A) If the owner or operator has outstanding, rated, general 
obligation bonds that are not secured by insurance, a letter of credit, 
or other collateral or guarantee, it must have a current rating of Aaa, 
Aa, A, or Baa, as issued by Moody's, or AAA, AA, A, or BBB, as issued 
by Standard and Poor's on all such general obligation bonds; or
    (B) The owner or operator must satisfy each of the following 
financial ratios based on the owner or operator's most recent audited 
annual financial statement:
    (1) A ratio of cash plus marketable securities to total 
expenditures greater than or equal to 0.05; and
    (2) A ratio of annual debt service to total expenditures less than 
or equal to 0.20.
    (ii) The owner or operator must prepare its financial statements in 
conformity with Generally Accepted Accounting Principles for 
governments and have its financial statements audited by an independent 
certified public accountant (or appropriate State agency).
    (iii) A local government is not eligible to assure its obligations 
under Sec. 258.74(f) if it:
    (A) Is currently in default on any outstanding general obligation 
bonds; or
    (B) Has any outstanding general obligation bonds rated lower than 
Baa as issued by Moody's or BBB as issued by Standard and Poor's; or
    (C) Operated at a deficit equal to five percent or more of total 
annual revenue in each of the past two fiscal years; or
    (D) Receives an adverse opinion, disclaimer of opinion, or other 
qualified opinion from the independent certified public accountant (or 
appropriate State agency) auditing its financial statement as required 
under paragraph (f)(1)(ii) of this section. However, the Director of an 
approved State may evaluate qualified opinions on a case-by-case basis 
and allow use of the financial test in cases where the Director deems 
the qualification insufficient to warrant disallowance of use of the 
test.
    (iv) The following terms used in this paragraph are defined as 
follows:
    (A) Deficit equals total annual revenues minus total annual 
expenditures;
    (B) Total revenues include revenues from all taxes and fees but 
does not include the proceeds from borrowing or asset sales, excluding 
revenue from funds managed by local government on behalf of a specific 
third party;
    (C) Total expenditures include all expenditures excluding capital 
outlays and debt repayment;
    (D) Cash plus marketable securities is all the cash plus marketable 
securities held by the local government on the last day of a fiscal 
year, excluding cash and marketable securities designated to satisfy 
past obligations such as pensions; and
    (E) Debt service is the amount of principal and interest due on a 
loan in a given time period, typically the current year.
    (2) Public notice component. The local government owner or operator 
must place a reference to the closure and post-closure care costs 
assured through the financial test into its next comprehensive annual 
financial report (CAFR) after the effective date of this section or 
prior to the initial receipt of waste at the facility, whichever is 
later. Disclosure must include the nature and source of closure and 
post-closure care requirements, the reported liability at the balance 
sheet date, the estimated total closure and post-closure care cost 
remaining to be recognized, the percentage of landfill capacity used to 
date, and the estimated landfill life in years. A reference to 
corrective action costs must be placed in the CAFR not later than 120 
days after the corrective action remedy has been selected in accordance 
with the requirements of Sec. 258.58. For the first year the financial 
test is used to assure costs at a particular facility, the reference 
may instead be placed in the operating record until issuance of the 
next available CAFR if timing does not permit the reference to be 
incorporated into the most recently issued CAFR or budget. For closure 
and post-closure costs, conformance with Government Accounting 
Standards Board Statement 18 assures compliance with this public notice 
component.
    (3) Recordkeeping and reporting requirements. (i) The local 
government owner or operator must place the following items in the 
facility's operating record:
    (A) A letter signed by the local government's chief financial 
officer that:
    (1) Lists all the current cost estimates covered by a financial 
test, as described in paragraph (f)(4) of this section;
    (2) Provides evidence and certifies that the local government meets 
the conditions of paragraphs (f)(1)(i), (f)(1)(ii), and (f)(1)(iii) of 
this section; and
    (3) Certifies that the local government meets the conditions of 
paragraphs (f)(2) and (f)(4) of this section.
    (B) The local government's independently audited year-end financial 
statements for the latest fiscal year (except for local governments 
where audits are required every two years where unaudited statements 
may be used in years when audits are not required), including the 
unqualified opinion of the auditor who must be an independent, 
certified public accountant or an appropriate State agency that 
conducts equivalent comprehensive audits;
    (C) A report to the local government from the local government's 
independent certified public accountant (CPA) or the appropriate State 
agency based on performing an agreed upon procedures engagement 
relative to the financial ratios required by paragraph (f)(1)(i)(B) of 
this section, if applicable, and the requirements of paragraphs 
(f)(1)(ii) and (f)(1)(iii) (C) and (D) of this section. The CPA or 
State agency's report should state the procedures performed and the CPA 
or State agency's findings; and
    (D) A copy of the comprehensive annual financial report (CAFR) used 
to comply with paragraph (f)(2) of this section or certification that 
the requirements of General Accounting Standards Board Statement 18 
have been met.
    (ii) The items required in paragraph (f)(3)(i) of this section must 
be placed in the facility operating record as follows:
    (A) In the case of closure and post-closure care, either before the 
effective

[[Page 60338]]

date of this section, which is April 9, 1997, or prior to the initial 
receipt of waste at the facility, whichever is later, or
    (B) In the case of corrective action, not later than 120 days after 
the corrective action remedy is selected in accordance with the 
requirements of Sec. 258.58.
    (iii) After the initial placement of the items in the facility's 
operating record, the local government owner or operator must update 
the information and place the updated information in the operating 
record within 180 days following the close of the owner or operator's 
fiscal year.
    (iv) The local government owner or operator is no longer required 
to meet the requirements of paragraph (f)(3) of this section when:
    (A) The owner or operator substitutes alternate financial assurance 
as specified in this section; or
    (B) The owner or operator is released from the requirements of this 
section in accordance with Sec. 258.71(b), 258.72(b), or 258.73(b).
    (v) A local government must satisfy the requirements of the 
financial test at the close of each fiscal year. If the local 
government owner or operator no longer meets the requirements of the 
local government financial test it must, within 210 days following the 
close of the owner or operator's fiscal year, obtain alternative 
financial assurance that meets the requirements of this section, place 
the required submissions for that assurance in the operating record, 
and notify the State Director that the owner or operator no longer 
meets the criteria of the financial test and that alternate assurance 
has been obtained.
    (vi) The Director of an approved State, based on a reasonable 
belief that the local government owner or operator may no longer meet 
the requirements of the local government financial test, may require 
additional reports of financial condition from the local government at 
any time. If the Director of an approved State finds, on the basis of 
such reports or other information, that the owner or operator no longer 
meets the requirements of the local government financial test, the 
local government must provide alternate financial assurance in 
accordance with this section.
    (4) Calculation of Costs to be Assured. The portion of the closure, 
post-closure, and corrective action costs for which an owner or 
operator can assure under this paragraph is determined as follows:
    (i) If the local government owner or operator does not assure other 
environmental obligations through a financial test, it may assure 
closure, post-closure, and corrective action costs that equal up to 43 
percent of the local government's total annual revenue.
    (ii) If the local government assures other environmental 
obligations through a financial test, including those associated with 
UIC facilities under 40 CFR 144.62, petroleum underground storage tank 
facilities under 40 CFR Part 280, PCB storage facilities under 40 CFR 
Part 761, and hazardous waste treatment, storage, and disposal 
facilities under 40 CFR Parts 264 and 265, it must add those costs to 
the closure, post-closure, and corrective action costs it seeks to 
assure under this paragraph. The total that may be assured must not 
exceed 43 percent of the local government's total annual revenue.
    (iii) The owner or operator must obtain an alternate financial 
assurance instrument for those costs that exceed the limits set in 
paragraphs (f)(4) (i) and (ii) of this section.
* * * * *
    (h) Local Government Guarantee. An owner or operator may 
demonstrate financial assurance for closure, post-closure, and 
corrective action, as required by Secs. 258.71, 258.72, and 258.73, by 
obtaining a written guarantee provided by a local government. The 
guarantor must meet the requirements of the local government financial 
test in paragraph (f) of this section, and must comply with the terms 
of a written guarantee.
    (1) Terms of the written guarantee. The guarantee must be effective 
before the initial receipt of waste or before the effective date of 
this section, whichever is later, in the case of closure, post-closure 
care, or no later than 120 days after the corrective action remedy has 
been selected in accordance with the requirements of Sec. 258.58. The 
guarantee must provide that:
    (i) If the owner or operator fails to perform closure, post-closure 
care, and/or corrective action of a facility covered by the guarantee, 
the guarantor will:
    (A) Perform, or pay a third party to perform, closure, post-closure 
care, and/or corrective action as required; or
    (B) Establish a fully funded trust fund as specified in paragraph 
(a) of this section in the name of the owner or operator.
    (ii) The guarantee will remain in force unless the guarantor sends 
notice of cancellation by certified mail to the owner or operator and 
to the State Director. Cancellation may not occur, however, during the 
120 days beginning on the date of receipt of the notice of cancellation 
by both the owner or operator and the State Director, as evidenced by 
the return receipts.
    (iii) If a guarantee is cancelled, the owner or operator must, 
within 90 days following receipt of the cancellation notice by the 
owner or operator and the State Director, obtain alternate financial 
assurance, place evidence of that alternate financial assurance in the 
facility operating record, and notify the State Director. If the owner 
or operator fails to provide alternate financial assurance within the 
90-day period, the guarantor must provide that alternate assurance 
within 120 days following the guarantor's notice of cancellation, place 
evidence of the alternate assurance in the facility operating record, 
and notify the State Director.
    (2) Recordkeeping and reporting. (i) The owner or operator must 
place a certified copy of the guarantee along with the items required 
under paragraph (f)(3) of this section into the facility's operating 
record before the initial receipt of waste or before the effective date 
of this section, whichever is later, in the case of closure, post-
closure care, or no later than 120 days after the corrective action 
remedy has been selected in accordance with the requirements of 
Sec. 258.58.
    (ii) The owner or operator is no longer required to maintain the 
items specified in paragraph (h)(2) of this section when:
    (A) The owner or operator substitutes alternate financial assurance 
as specified in this section; or
    (B) The owner or operator is released from the requirements of this 
section in accordance with Sec. 258.71(b), 258.72(b), or 258.73(b).
    (iii) If a local government guarantor no longer meets the 
requirements of paragraph (f) of this section, the owner or operator 
must, within 90 days, obtain alternative assurance, place evidence of 
the alternate assurance in the facility operating record, and notify 
the State Director. If the owner or operator fails to obtain alternate 
financial assurance within that 90-day period, the guarantor must 
provide that alternate assurance within the next 30 days.
* * * * *
    (k) Use of multiple mechanisms. An owner or operator may 
demonstrate financial assurance for closure, post-closure, and 
corrective action, as required by Secs. 258.71, 258.72, and 258.73, by 
establishing more than one financial mechanism per facility, except 
that mechanisms guaranteeing performance, rather than payment, may not 
be combined with other instruments. The mechanisms must be as specified 
in paragraphs (a), (b), (c), (d), (f), (h), (i), and (j) of this 
section, except that financial assurance for an amount at least equal 
to the current cost estimate for closure, post-closure care and/or 
corrective action may be

[[Page 60339]]

provided by a combination of mechanisms, rather than a single 
mechanism.
* * * * *
    4. Section 258.75 is added to subpart G to read as follows:


Sec. 258.75  Discounting.

    The Director of an approved State may allow discounting of closure 
cost estimates in Sec. 258.71(a), post-closure cost estimates in 
Sec. 258.72(a), and/or corrective action costs in Sec. 258.73(a) up to 
the rate of return for essentially risk free investments, net of 
inflation, under the following conditions:
    (a) The State Director determines that cost estimates are complete 
and accurate and the owner or operator has submitted a statement from a 
Registered Professional Engineer so stating;
    (b) The State finds the facility in compliance with applicable and 
appropriate permit conditions;
    (c) The State Director determines that the closure date is certain 
and the owner or operator certifies that there are no foreseeable 
factors that will change the estimate of site life; and
    (d) Discounted cost estimates must be adjusted annually to reflect 
inflation and years of remaining life.

[FR Doc. 96-30038 Filed 11-26-96; 8:45 am]
BILLING CODE 6560-50-P