Underground Storage Tanks

Fund Balance

There are several potential measures of fund balance. The least conservative is the cash-basis definition: the fund balance is defined as the amount of cash currently in the state fund (or in the account maintained by the state treasurer for the fund), minus any outstanding checks for reimbursement under the fund. Under this definition, the fund balance would exclude as-yet unprocessed claims against the fund or any recognition of future claims likely to be submitted for known releases.

A slightly more conservative definition would require the region or state to acknowledge claims received against the fund but not yet processed. Using this definition, the state would start with the cash in the fund and subtract the sum of all claims submitted for reimbursement by owners and operators, including those not yet processed.

The most conservative definition would adopt modified accrual standards typically required under government accounting standards, in which liabilities are recognized as soon as they can be reasonably measured, but income is not recognized until received. Under this definition, the state would estimate the total potential liability associated with all known releases and subtract it from the amount of cash currently in the fund. Because most state funds have adopted some version of a pay-as-you-go system, in which revenues are set to correspond with anticipated cash payments for corrective action and third-party liability expenses, this definition would likely show most funds in a deficit position, even though future revenues to the fund would increase the cash available for payment of these future claims.

The above three measures for determining the size of the fund balance reflect different management philosophies. For most funds, the second definition of fund balance would be adequate. When using the fund balance in conjunction with other measures, however, the least conservative measure can be selected as the most appropriate measure to use. If the fund balance decreases dramatically, some states and regions may opt to change to a more conservative definition of the fund balance. The three choices outlined in the fund balance definition give the states and regions more flexibility. It is important to note, however, that changes in fund balance cannot be compared with earlier fund balance estimates if different definitions were used. EPA hopes that regions and states will work together in selecting a fund balance measure that meets the specific needs of both parties.

Rate of Collection

The rate of collection is the amount of money collected for use by the fund over a specified period. The period should correspond to the fee collection mechanism. For example, many funds collect annual tank fees; consequently, the appropriate period is one year, corresponding to payments of the fees. Other funds, especially those funded through per-gallon fees on petroleum products, may have more frequent requirements for payments (e.g., monthly or quarterly), and thus allow for a shorter period for estimating the rate of collection. For the purpose of tracking fund solvency, the rate of collection on a semi-annual (six month) basis probably provides a reasonable balance between the information collection burden and the amount of information obtained.

The rate of collection can be used in at least two ways. First, decreasing trends in the rate of collection may indicate that tanks are being taken out of operation, reducing the amount of revenue available to the fund because closed tanks do not pay fees. In comparing period-to-period collections, however, it may be important to consider any significant seasonal patterns. For example, gasoline sales are generally higher in the summer, so that fund revenues may show a decrease from summer to winter months.

Second, the rate of collection should be compared to the rate of disbursement as a means of anticipating potential future shortfalls in the fund. If the rate of collection exceeds the rate of disbursement, then fund balances will increase over time and the fund will become increasingly more solvent. If the rate of collection is less than the rate of disbursement, then fund balances will decrease and the fund will become less solvent.

Rate of Disbursement

The rate of disbursement is the amount of money spent by the fund (in actual payments) over a set time period. As discussed under rate of collection, the appropriate time period may vary between states depending on their different fiscal cycles. In general, disbursements per period should provide a time period long enough to smooth out the effects of single, large disbursements, but short enough to provide timely identification of significant increases or decreases in the rate of disbursements. The period used for rate of disbursement should correspond to the period used for the rate of collection.

Collections Projected for Next Reporting Period

Collections projected for the next reporting period is the state's estimate of the dollar amount of funds that will be collected for use by the fund at any time during the next state fund solvency reporting period. This measure is similar to the rate of collection, but, rather than calculating current collections over time, the measure projects total colletions over a future time period. The measure is intended to estimate additions to the fund for use in paying existing and projected future claims against the fund, and should not be confused with fund balance. The state must rely on its judgement in estimating future collections. The state should make a reasonable judgement of funds that it believes will be available for disbursement to pay claims made against the fund, rather than either a liberal or conservative estimate. The estimate should account for other relevant information, such as past rates of collection and major or pending changes to the fund.

As in the case of the rate of collection, the reporting period should be as short as possible subject to constraints imposed by the fee collection mechanism. In many states, financial information is commonly reported on a quarterly basis for fiscal purposes, consequently, quarterly projections should provide reasonably accurate data without unduly burdening the state. Semi-annual reporting would also be appropriate if no appreciable collections would be received in some quarters, the estimate would be misleading or unreliable, or rates of collections are fairly constant.

The projection of collections, while speculative, may be used as an early indicator of potential solvency problems. First, the projection of collections may be compared with the projection of disbursements as a means of drawing attention to potential future shortfalls in the fund. Second, the projections of collections and disbursements could be combined with the backlog and fund balance to determine whether the current backlog will grow or contract.

Disbursements Projected for Next Reporting Period

Disbursements projected for the next reporting period is the state's estimate of the dollar amount of anticipated disbursements from the fund to pay claims for the next full reporting period. In projecting disbursements, the state should make a reasonable estimate of the costs of claims it expects will be submitted and require payment during the reporting period. This measure of disbursements projected from the fund will be compared with the measure of collections projected into the fund in order to establish an early indicator of potential problems with fund solvency. Consequently, when developing estimates for disbursements projected and collections projected, the assumptions and reporting period used should be consistent (e.g., if the state has a six month reporting period and is accounting for a pending change to the fund when determining collections projected, it must also have a six month reporting period for the disbursements projected and account for the same pending change in the fund). Although projecting disbursements requires speculation by the state, the projection should account for past patterns of claims received and the current number of claims filed but not paid, and reflect pending or major changes to the fund that are likely to affect disbursements.

Number or Dollar Amount of Pending Claims

The number of pending claims is defined as the total number of claims against the fund that have been received but that have not been approved for payment at the close of the reporting period. Similarly, the dollar amount of pending claims is the dollar amount of received claims that have not been approved for payment at the close of the reporting period. These measures are intended to provide the state and region with a firm estimate of claims against the fund that are likely to be realized as disbursements at a later date, even though processing is not complete.

The region may request that the state report either the number or the dollar amount of pending claims in order to track a rise or fall in either measure over time. The state or region might find that the dollar amount of pending claims is a more direct indicator of the fund's future liabilities than number of claims, because it can be compared to the fund balance and rate of collection to provide a measure of solvency. In contrast, collecting data on the numbers of claims permits observation of the trend in claims without bias introduced by individual large claims.

Number of Days Between Cailm Submittal, Approval, and Payment

The number of days to process claims is only a partial indicator of fund solvency. Even a relatively long period for processing may not indicate solvency problems, as long as owners and operators and corrective action contractors continue to clean up sites. An increasing period, however, may indicate that the state fund has inadequate staff or administrative procedures to process claims on a consistent schedule. A decreasing period probably reflects reduced demands on the fund, or improved administrative procedures.

The start date for each part of the approval process must be clearly defined. In some cases, there may be a significant lag (up to several months) between the time a claim is first submitted and the time the owner and operator finally supplies all necessary information (for example, complete invoices, documentation of types of costs covered by the invoices). As a consistent measure, the first date the claim is submitted is probably best. A lengthy period may suggest that states need to streamline their guidance for claims and/or improve their outreach to consultants and contractors so that they know what must be submitted. In addition, the date used as the date of approval may vary between funds. In some states, the technical staff reviewing claims have the authority to approve payment, based on their review. In other states, an independent board or agency must ratify the decisions of the technical staff. The appropriate date is the date that all necessary approvals and reviews have been met. The date of payment should be the date the check is written by the state treasury to the owner or operator (or cleanup contractor in states that allow direct payment). Significant lengths of time between approval and payment may indicate that disbursements are held up to prevent overdrawing accounts.

Major or Pending Changes to the Fund

Major or pending changes to the fund could be either economic or administrative, positive or negative. Impending negative impacts could include legislative expansion of fund coverage to include a larger universe of tanks or facilities without additional funding. Regulatory amendments that either lowered or raised the costs of corrective action are respective examples of potentially positive or negative impacts. Direct effects on staffing levels or productivity, such as hiring freezes, would be included here. Finally, the most obvious major change to be considered would be one that will likely have a direct effect on a fund's finances, for example, the reporting of an extraordinarily large release.

Besides the measures listed above, another important factor in assessing the financial soundness of a fund is gauging the degree to which cleanups are being delayed due to fund-related issues. One approach to getting such qualitative information is to monitor the complaints made by the regulated community and/or cleanup contractors to the state or EPA about the cleanup delays that are being caused by slow fund payments. There may also be other ways to obtain this information. Obviously, the reasons for delays in fund payments may not always be financial. For instance, the delays could be caused by lack of staff to process claims. Reviewers should use complaints as a starting point for further analysis rather than as a financial determination of a fund's financial condition.

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