NOTE: This article is authored by PTRCB and reflects solely PTRCB’s information and opinions. All questions and comments should be directed to PTRCB or PTRCB staff.
On October 25, 2016 an Actuarial Report, prepared by Taylor & Mulder, Incorporated (T&M), was finalized and submitted to the Petroleum Tank Release Compensation Board, (Board). The Board contracted with T&M to conduct an actuarial review of the Fund as of June 30, 2016. The report was prepared by Daniel W. Lupton, FCAS, MAAA, MBA, Vice President and Consulting Actuary and Evelyn Toni Mulder, FCAS, MAAA, FCA, Principal and Consulting Actuary. An actuarial analysis was recommended in a Tier II Soundness Assessment of the Fund by the US Environmental Protection Agency Region 8 dated April 7, 2015. The EPA report raised concerns about the long-term financial soundness of the fund, as well as questions about the speed with which cleanups could proceed toward release closure. The actuarial report was provided to EPA in response to their assessment and is available on the Board’s web site at:
The specific scope of the actuarial analysis included:
- assessment of the history of claim activity including reimbursement to date, by year, by type of tank system and to the extent possible, by type of cleanup strategy;
- assessment of anticipated long-term average cost of release cleanup for all eligible releases; assessment of long-term average cost of release cleanup for different types of tank systems (such as Federally Regulated USTs, USTs not federally regulated, large ASTs, and small ASTs);
- assessment of anticipated long-term average cost of release cleanup for different types of cleanup methods (remediation systems (SVE, AS, etc.), excavation, monitored natural attenuation, petroleum mixing zone, etc.);
- financial projections for the next ten (10) fiscal years, assuming no changes are made to the Fund; projection of Loss and Loss Adjustment Expense Reserves by report year;
- assessment and quantification of risk; as well as, identification, measurement, analyses and understanding the existing and emerging risks that impact the Fund’s business.
- risk evaluation on the financial impact of current economic, legal and social trends and used these insights to help suggest strategies for the Fund; Provision of values for the predictive variables and the actuarial assumptions made about certain variables, especially key predictive variables leading to inputs into the actuarial, financial and predictive models.
The scope of the analysis was used to assist in determining if the Fund were to cease collecting income or accepting new reported claims, how much money would need to be in the Fund to be able to bring all currently eligible and open sites to closure.
This report predicted that a total of $158,667,8236 would be the anticipated amount spent on all currently open releases, as of June 30, 2016, to bring those releases to complete closure in the future. This is done with no accounting of future revenues or administrative costs. This predictive amount includes a total of $37,493,087 yet to be paid out to bring all sites included in this study to closure, this amount represents the “actuarial central estimate” based on the understanding of changes to the program and actuarial judgement. The projected amount yet to be paid did not include any reserve for sites that are federally regulated and potentially eligible for the Fund but have not applied or are not likely to apply for assistance from the Fund.
The actuarial report stated that, in the case of sites that are potentially eligible, but have not applied, there is a likelihood that if they did apply, the projected cost to the fund could be anticipated to be $125,184,547, with an additional unanticipated amount of $10,966,915, for a total outlay of $136,151,463. This could be a Fund liability, if the federally regulated sites that are potential eligible applied for assistance from the Fund, were granted eligibility and were subsequently brought to closure. The actuarial report assumes that the potentially eligible sites would cost the same to complete the cleanup as those that have applied, which does not appear to be a valid assumption. The Board believes that the releases used for the report assessment have not applied for eligibility because they are minor releases.
The report projected the anticipated total revenue, expenses (including personal services and operating expenses), remediation expenses and use of any reserve to reach the final payoff of the remaining backlog of releases. The estimates start in 2017 with a reserve loss of $32,302,074 and project through 2029 to bring the loss of reserve to $0, reaching the final cleanup of all current open and eligible releases. This prediction has a projected revenue and expense based on the history and reasonable inflationary factors over time. It is noted that if there is a slow-down in revenue, or an increase in sites ready for cleanup, this process could take longer.
It is noted that financial projections for future releases and cost factors related with those is very hard to predict and that the most solid predictions would be from the backlog currently on the books. The analysis considered three scenarios and projected the time estimated to pay-off the backlog.
- Scenario 1 represented the worst-case scenario, in which the current funding is inadequate to close the current backlog because other factors, like a catastrophic spill, outstrip the Fund’s ability to keep up. This would mean that the backlog would extend indefinitely.
- Scenario 2 represented a more moderate approach that accounts for new releases, but the costs associated with those don’t over run the revenue needed to address the current backlog. This scenario projects 15 years to pay off the backlog.
- Scenario 3 represented fewer new releases allowing more funding to be applied toward the backlog of historical releases. This scenario projects a backlog payoff of 10 years.
Using the expected losses, the losses that represent the actuarial central estimate, the estimated time to clear the backlog would be13 years, and that estimate falls between scenario 2 and scenario 3.
T&M projected the long-term average cost per release, the severities, each year through 2026. The average costs per release was found by the actuary to start at $120,000 in 2017 with a project increase of 2.5% per year thereafter. They noted that in general, ASTs appear to have more costly releases on average than USTs; that releases from large tanks tend to be about three to five times as expensive as releases from small tanks, on average; and, federally-regulated tanks have higher average costs than non-federally-regulated tanks. ASTs have a projected average cleanup cost of $144,000 per release, which is $24,000 higher than USTs. Releases from ASTs is still one of the long-term liabilities to the Fund and are not federally regulated like the USTs.
It was noted by the actuaries that due to the nature of ASTs and lack of regulations, these liabilities are much harder to project or track. The AST Tank Type, both large and small capacity, create a larger remediation problem than do the regulated UST Tank Types. The ASTs still have a narrow path to gain eligibility to the Fund and don’t have the same incentives, inspections or assurance of compliance to safety standards to prevent fuel loss into the environment as their UST counterparts.
The report also analyzed work plan types and costs associated with work plans. It was concluded that when soil removal is part of a work plan, the overall costs for the plan stays closer to the average costs per release, provided above. A further conclusion from the report showed that ground water monitoring activities increases the cost of a work plan by $8,267 and adds $25,618 to the average cost per release.