While the plight of the federal economy tends to get the most news coverage, a great many states have financial challenges on the same scale. The current recession or shallow recovery, depending upon your point of view, has only exasperated the problem. The reasons are myriad and by their very nature difficult for politicians to address or the financial challenges wouldn't be an issue in the first place. Lacking easy solutions, politicians tend to look for shortcuts that often involve defunding or raiding existing programs that are seen to have less of a public profile. In some cases, the bureaucratic inefficiencies underlies many of the states' broader financial problems and similarly impact programs that would otherwise be healthy and stable.
State underground storage tank insurance programs can easily feel pressure. <i>NPN Magazine</i> takes a look at three states that have faced pressure in recent years. In two of those states relatively recent developments have been a source of encouragement, while in the third such developments are leaving marketers and retailers feeling like the business associates of Bernie Madoff
When basket-case economies are discussed at the state level, California is usually top of mind. A state possessing perhaps the best climate in America with an ocean view and an abundance of resources has managed to spend like one of those lottery winners that went bankrupt a few short years after turning in the winning ticket.
Structurally, the program is based on a 2-cent-per-gallon assessment for all fuels that go into underground storage tanks and that generates about $250 million to $300 million in revenue depending upon the utilization of fuels in the state. The state will pay up to $1.5 million per case with most claims generally being in the $500,000 range.
California's cleanup fund was making local headlines in 2009 because it had suspended payments for over 1000 remediation projects due to lack of funds in a system that had abundant funding revenues. For that, California’s program is generally well appreciated by local marketers.
“In my opinion the California program has been very successful," said Tom Robinson, president of San Jose, Calif.-based Robinson Oil Corp. "It's been successful for three reasons. First, a significant amount of site remediation has been accomplished. Second, it's been done in such a way that we've had very little litigation. We benefited because from the start it was designed so that a tank owner can get reimbursed for the costs associated with cleanup, but not for legal fees. So, it discourages legal fees and if you think about all the other programs that go on there are many programs that encourage legal fees. Third, it's been pretty reasonably funded and it is crafted so that effectively the state cannot steal money out of the fund without having to pay it back, which keeps the state from robbing it at will."
California's strong environmental focus, which can impact state business negatively in so many ways, impacts this program in a positive manner in that citizens, the media and state legislators have an actual appreciation for the benefits of the program and wanted to succeed.
For all of its good points the program has suffered from bureaucratic overload and inefficiency. "Where negatives are concerned, I think the amount of money that has been wasted is appalling," said Robinson.
Jay McKeeman, vice president of government relations for the California Independent Oil Marketers Association explained. "The real problem we've had here in California is the ‘how clean is clean,’ which has resulted in about 80 percent of the claims that are in the fund right now having been on the books for more than 15 years. People cannot get their sites closed."
McKeeman noted that the core issue is a multi-agency involvement in the initialization, oversight, cleanup and funding of sites. Local agencies initiate and provide oversight for the cleanups. The state’s water board is supposed to provide policy guidance, but that has been haphazard in areas like providing specific policy direction to the local agencies on what they need to do in terms of cleanup or how they need to assess when the site is clean and eligible for closure. "So you have a bunch of different ‘hats’ thinking about the same site in different ways and it just creates, as anybody would expect, substantial confusion in terms of trying to get a clear line in terms of how you get a site closed and everybody in agreement with the same conclusion. That is the problem and that is a problem we've been dealing with," he said.
Fortunately, the program is on the mend. Following the recent troubles, the state water board retained an independent auditor that thoroughly analyzed the program and concluded that there was a lot of inefficiency. It was also recognized that this multi-agency involvement created significant problems in both the decision to cleanup and the decision of what's adequate for funding. McKeeman stated that the water board has been reasonably aggressive about taking those recommendations into account and moving forward with a better and more efficient program.
"The basic thrust of their effort has been to establish a budget for various sites, independently assessing each cleanup that is in process right now in determining what they feel is the appropriate budget for the cleanup of that site," said McKeeman. "The problem is the local agencies don't necessarily have to agree with that. The state operates as a reimbursement program and then the water board comes back and says, ‘That is not in the budget, so sorry you can't do that,’ and the responsible party is caught in the middle because the local agency can take enforcement action if you do not do what they say.
“Well, this is currently still an issue, the water board will be considering (as this goes to press) a low risk policy – the first time ever in the state. It's fairly complicated, but it is a good policy," said McKeeman. "I served on the working group that helped put it together and it is deeply embedded with science and best thinking, and for the first time, it says there are scenarios in which a site should be eligible for closure. That gives the water board a better yardstick for measuring whether sites are, in fact, remaining on the books longer to being held up for appropriate reasons and it shifts the burden of proof from the responsible party to the local agency. If the agency feels a site needs to be kept open longer, it needs to provide specific reasons and actions that would accomplish the cleanup rather than just read holding the closure letter, which has been their typical strategy in the past."
While the current payout tends to average in the $500,000 range, the goal is to get that down to $250,000 with the program improvements.
McKeeman is hopeful for the future. "I think everybody's objective here is to have an enduring state fund, but one that is priced at the appropriate level with the ultimate goal, once you're in the system, of getting quickly out of it with a good cleanup," he said.
The Land of Lincoln doesn't have quite the same public awareness nationally as California where serious economic problems are concerned. In part, that's likely because California can be fairly exotic in how it gets into trouble where Illinois tends to do it in a rather mundane, old-fashioned way. But to economists in the know, it's usually the toss of a coin over which state is really the worst off. Illinois’ program has been facing some significant challenges, but as with California there is now a considerable amount of positive news to report.
Illinois’ program is funded by a 1.1-cent-per-gallon fee on gasoline and diesel that is collected and remitted by distributors and that generate approximately $70 million in revenue per year. About $20 million of that goes to cover administrative costs among state agencies and the debt retirement of a previous bond issuance in 1994. For tank owners, there is a $10,000 deductible if the tanks are registered and a $100,000 deductible if your tanks are unregistered.
The program itself was performing admirably up until the administrations of two notable Illinois governors who are now living in taxpayer afforded accommodations somewhat less ostentatious than the governor's mansion.
"For years we've had a very successful program paying people within 30 to 60 days, but in 2002 and 2003 first Gov. Ryan then Gov. Blagojevich took over $50 million out of the fund and we never quite recovered from that," said Billy Fleischli, executive vice president of the Illinois Petroleum Marketers Association/Illinois Association of Convenience Stores."We were running at about a $50 million deficit and we have claims of about $50 million." Fleischli noted that the debt had remained steady – no increase or decrease – and that people were waiting about two years to be reimbursed, but they were being paid. Things have started to change, and for the better.
"If we had had this conversation three or four months ago, it would've been more doom and gloom than it is. Right now if we can keep the state from (raiding) the program, we think that we can move ahead from here and come up with some things with the EPA that will improve claim management and go forward with a good program for the foreseeable future."
The turnabout came with a bonding proposal two years ago that included $75 million for the elimination of the backlog. At the same time, the association worked with EPA to streamline the claim and remediation process to address some of the same types of inefficiency and closure issues faced with California. The result managed to reduce the $50 million backlog to $38 million. Then, in December, 2011, the association asked for and had $38 million worth of the bonds sold and subsequently paid off the backlog. "So now we are in a situation where we think that if they do not sweep the fund anymore, we will be in better shape than we've ever been," said Fleischli.
Further good news is that the debt from the 1994 bond program will be paid off in January 2013, and the debt from the latest ($38 million) bond program is estimated to be in the $6-$8 million range providing a net gain to the fund of about $8 million for claims. Fleischli noted that there is approximately $20 million in bond money not yet sold that might be used in the state's legacy program to take care of some abandoned properties.
There is always the risk that that Illinois, facing tremendous budget problems, will raid the fund again. There is a low on the books to prevent that, but it can be overridden by 30 votes in the state Senate and 60 votes in the House. However, aside from the 2002-2003 attack, the legislature has been resistant to subsequent efforts. "We've been successful at convincing the General Assembly that this is a solid program that spends a lot of money cleaning the environment and generating jobs and returning property to the tax rolls and they have put a stop to it," Fleischli said.
Unfortunately, not all recent news is good news. Tank owners in Connecticut are just now finding out that the state is working hard to renege on the promises made to them over many years.
In the Connecticut, the petroleum gross receipts tax raises roughly $335 million per year and the tank program was supposed to receive $12-$15 million per year to keep up with claims and retire a deficit. But, in the past four years those funds have not been dedicated to the account at anything close to the expected levels. The result is now a backlog of $98 million owed to tank owners. That has now come to a head, with the USEPA recently drawing a line in the sand.
"The USEPA essentially wrote a letter to Connecticut saying you messed up your program and we're going to decertify if you do not square it away," said Gene Guilford, president of the Independent Connecticut Petroleum Association."The state, to this date, has failed to square the program away properly, and so we are working with legislators to make sure that an adequate amount of money is put in the program to retire the deficit and to keep the program running while we figure out a mechanism for the transition to insurance."
Initial proposals have not been encouraging.
"The average cleanup cost in Connecticut is about $160,000," said Guilford. "There is a $10,000 deductible, so now you're down $150,000. When you present your claim to the state generally about a third of it gets lopped off. So now you're down to $100,000. So now if the state comes along and says, ‘We’ll give you $20,000 against $100,000,’ it sounds like a bad deal especially if you borrowed the money to go out and do the work. You have to pay the loan back. Some people have pledged their homes against the note they have to take out. So that is the nature of the financial burden that we have here. If the state doesn't step up and do the right thing, we are going to lose some gas stations."
What's particularly galling to marketers and retailers in the state is that the money is there. As Guilford noted in the last four years the petroleum gross receipts tax has raised, give or take, about $1.2 billion with over $300 million coming in each year and a total state budget of about $20 billion – against $98 million owed to tank owners.
"Probably the biggest rub here is that people depend on this," said Mike Devino, chair of the ICPA motor fuels committee and president of Mercury Fuel in Waterbury, Conn. "If it needs to be sun-setted at some point – fine. But we relied on that. And now, in the eleventh hour, they're saying, ‘You're not going to be covered because we're only going to pay you $0.20 on the dollar for anyone with four or more stations,’ which is most of the family-run distributorships in the state. We’re not big oil; in fact, big oil is no longer in this state other than a handful of sites. It's really pulling the carpet out from under us."
Devino further noted that as part of these developments the state is dismantling the objective board that would administer the claims process and handing that over to the Department of Energy & Environmental Protection. "DEEP itself admitted it had no business administering an insurance program and that was better off done by a third-party," he said. "So now to reverse that and say were going to get rid of the objective part of that is really dramatic."
It's still early in the process, but IPCA has been fighting back hard. The association has managed to generate press on the issue and made inroads with the state's legislative leadership. But little has been achieved with the DEEP.
"We have a tough slog ahead of us, especially in view of the fact that this is an election year," said Guilford. "With the price of gasoline where it's at, we now have Democrats and Republicans in the legislature who want to cap the amount of money taken from the gross receipts tax to give people a penny or two of relief at the gas pump and not take as much in taxes and that just hurts the revenue stream out of which these funds would come in order to pay tank owners, which has certainly complicated the problem.”