BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 480 (Solorio) - Insurance: solid waste facilities
Amended: May 29, 2012 Policy Vote: Insurance 7-0, EQ
5-0
Urgency: No Mandate: No
Hearing Date: June 25, 2012 Consultant:
Marie Liu
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 480 would allow captive insurance to be used
for up to 50 percent of the financial assurance obligation that
a solid waste facility operator is required to hold to cover the
cost of closure and postclosure maintenance of a solid waste
landfill, provided that certain conditions are met. This
allowance would sunset on January 1, 2018.
Fiscal Impact: Unknown one-time costs, possibly in the high tens
of thousands or hundreds of thousands of dollars, from the
Integrated Waste Management Account (special fund) beginning in
2013-14 for a study and possible audit on holders of captive
insurance.
Background: Any person owning or operating a solid waste
landfill must submit to the Department of Resources Recycling
and Recovery (DRRR) evidence of financial ability, through the
use of financial mechanisms set forth in federal regulations or
approved by DRRR, to provide for the cost of closure and 15
years of postclosure maintenance.
Existing law required the Integrated Waste Management Board
(IWMB) by January 1, 2008 to study and define the conditions
that potentially affect solid waste landfills in order to
identify potential long-term threats to public health and safety
and the environment. The study was also to look at various
financial assurance mechanisms that would protect the state from
long-term post closure and corrective action costs in the event
that a landfill owner or operator fails to meet its legal
obligations. Existing law also required the IWMB to adopt
regulations and develop recommendations for needed legislation
to implement the findings of the study. Such regulations were
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finalized by DRRR on April 1, 2010.
Captive insurance is a type of insurance offered by an insurance
company whose exclusive purpose to insure risks of the parent
organization and affiliated companies. Captive insurers do not
necessarily need a financial safety net or backup as is required
by insurers that are domiciled or admitted in California. The
financial assurance regulations adopted in 2010 by DRRR
effectively prohibited the use of captive insurance as a
financial mechanism because it is not licensed (i.e. admitted)
by the California Department of Insurance (DOI).
Proposed Law: This bill would allow captive insurance, even if
not admitted by DOI, to be used as a financial assurance
mechanism for up to 50% of closure and post closure costs
provided that certain conditions are met, including that the
insurance mechanism is in compliance with federal regulations,
is domiciled in the United States and is licensed in the state
which it is domiciled, and maintains a rate of A- or better.
These provisions sunset on January 1, 2018.
This bill would also require DRRR, in consultation with DOI, to
submit a report to the Legislature by January 1, 2016 on the use
of captive assurance for financial assurances. The report must
address whether captive insurance provides adequate financial
assurance and an evaluation of captive assurance compared to
other financial mechanisms.
Staff Comments: There are significant financial risks to the
state if any financial assurances fail, including captive
insurance. For example, in 1996, closure was begun at the BKK
landfill in West Covina as a result of a legal settlement.
During the closure process, it was discovered that BKK had a
$2.4 million deficiency in funding from the closure financial
insurance mechanisms, which in this case was provided by
insurance. Additionally, closure and maintenance costs continued
to rise. In the end, the IWMB expended approximately $1.2
million and the Department of Toxic Substances Control expended
over $5 million to assist with the closure. The IWMB was able to
avoid having to take over the closure project and postclosure
maintenance; however, had the state had to take over, the state
would have likely been responsible for several more millions in
additional costs. The partial failure of financial assurance
mechanisms in the BKK landfill were completely unrelated to the
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use of captive insurance, however, the case illustrates the
state's fiscal risks involved in choosing appropriate financial
assurance mechanisms.
It is unclear how much it will cause DRRR to complete the study
required by this bill. If DRRR conducts an audit of the captive
insurance used for financial assurances as part of the report,
the audit costs alone are likely to range in the tens to low
hundreds of thousands of dollars. Waste Management, Inc., the
party that is most likely to use these provisions and sponsor of
the bill, believes that the audit and reporting costs will be in
the low end of the range as there will be limited data to review
as captive insurance is unlikely to actually be utilized for any
postclosure or closure costs before the bill's sunset date.
Waste Management has indicated significant interest in financing
the study required by this bill. However, should Waste
Management be allowed to pay for the costs of this bill, it
should be in a manner that would also prevent Waste Management
from having undue influence over the results of the study.
The passage of this bill would necessitate DRRR to update its
regulations. However, DRRR estimates these costs to be
negligible as the change to the regulation would be minor and
not substantive.