An owner or operator may satisfy the requirements of financial assurance for closure by obtaining a local government financial test or a local government financial test and local government guarantee which conforms to the requirements of this subchapter, in addition to the requirements specified in Subchapters A and B of this chapter (relating to General Financial Assurance Requirements and Financial Assurance Requirements for Closure). In order to continue using the local government financial test, the test must be passed on an annual basis. This test consists of a financial component, a public notice component, and a record-keeping and reporting component. A local government must satisfy each of the three components to pass the test. The criteria for each component is as follows.

1. (1) In order to satisfy the financial component of the test, a local government must meet the criteria of either subparagraph (A) or (B) of this paragraph and in addition must meet certain general conditions outlined in subparagraph (C) of this paragraph.

   1. (A) The local government must have:

      1. (i) a ratio of cash plus marketable securities to total expenditures greater than or equal to 0.05;
      2. (ii) a ratio of annual debt service to total expenditures less than or equal to 0.20; and
      3. (iii) a ratio of the current cost estimates for closure and any other environmental obligations assured by a financial test, to total annual revenue less than or equal to 0.43. The local government must obtain an alternate financial assurance mechanism for those costs that exceed the 43% limit.

   2. (B) The local government must have:

      1. (i) outstanding, rated, general obligation bonds that are not secured by insurance, a letter of credit, or other collateral or guarantee which have a current bond rating of Aaa, Aa, A, or Baa, issued by Moody's, or AAA, AA, A, or BBB, as issued by Standard and Poor's on all such general obligation bonds; and
      2. (ii) a ratio of the current cost estimates for closure and any other environmental obligations assured by a financial test, to total revenue less than or equal to 0.43.

   3. (C) In addition to meeting the criteria listed under subparagraph (A) or (B) of this paragraph, the following general conditions must be met:

      1. (i) the local government's financial statements shall be prepared in accordance with Generally Accepted Accounting Principles for local governments and have its financial statements audited by an independent certified public accountant (CPA) (or appropriate state agency);
      2. (ii) a local government must not have operated at a deficit equal to 5.0% or more of total annual revenue in each of the past two fiscal years;
      3. (iii) it must not currently be in default on any outstanding general obligation bonds;
      4. (iv) it must not have any outstanding general obligation bonds rated lower than Baa as issued by Moody's or BBB as issued by Standard and Poor's; and
      5. (v) it must not have received an adverse opinion, disclaimer of opinion, or other qualified opinion from the independent CPA (or appropriate state agency) auditing its financial statements as required under clause (i) of this subparagraph.

   4. (D) Unless otherwise defined in this section, financial terms used in this section are to be interpreted consistently with generally accepted accounting principles for local governments. The following terms used in this section are defined as follows:

      1. (i) Deficit equals total annual revenues minus total annual expenditures;
      2. (ii) 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;
      3. (iii) Total expenditures include all expenditures excluding capital outlays and debt repayment;
      4. (iv) 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
      5. (v) Debt service is the amount of principal and interest due on a loan in a given time period, typically the current year.
2. (2) In order to satisfy the public notice component of the test, a local government must comply with this paragraph. The local government must place a reference to the closure 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 requirements; the reported liability at the balance sheet date; the estimated total closure care cost remaining to be recognized; if applicable, the percentage of any landfill capacity used to date; and the estimated landfill life in years. For the first year the financial test is used to assure costs at a particular facility, the disclosure may instead be placed in the operating record until issuance of the next available CAFR if timing does not permit the disclosure to be incorporated into the most recently issued CAFR or budget. For closure costs, conformance with Government Accounting Standards Board Statement 18 assures compliance with this public notice component.

3. (3) In order to satisfy the recordkeeping and reporting component of the test, a local government must comply with this paragraph. To demonstrate that the local government meets the requirements of this test, the following four items must be submitted to the executive director:

   1. (A) a letter signed by the local government's chief financial officer (CFO) and worded as specified in §37.371 of this title (relating to Local Government Financial Test for Closure) that:

      1. (i) lists all the current cost estimates covered by a financial test;
      2. (ii) provides evidence and certifies that the local government meets the conditions of either paragraph (1)(A) or (1)(B) of this section; and
      3. (iii) certifies that the local government meets the conditions of paragraph (1)(A)(iii) or (1)(B)(ii) of this section, and paragraphs (1)(C) and (2) of this section;
   2. (B) a copy of the local government's independently audited year-end financial statements for the latest fiscal year, including the "unqualified opinion" of the auditor. The auditor must be an independent CPA or an appropriate state agency that conducts equivalent comprehensive audits;

   3. (C) a special report from the independent CPA or the appropriate state agency to the local government which:

      1. (i) is based on performing an agreed upon procedures engagement relative to the financial ratios required by paragraph (1)(A) of this section, if applicable, and the requirements of paragraphs (1)(C)(i), (1)(C)(ii) and (1)(C)(v) of this section; and
      2. (ii) states the procedures performed and the CPA's or state agency's findings; and
   4. (D) a copy of the CAFR used to comply with paragraph (1)(B) of this section or certification that the requirements of General Accounting Standards Board Statement 18 have been met.
4. (4) Annual updates of the financial test documentation must be submitted to the executive director within 180 days after the close of each succeeding fiscal year. This information must consist of all the items as specified previously.
5. (5) A local government must satisfy the requirements of the financial test at the close of each fiscal year. If the local government no longer meets the requirements of paragraphs (1), (2), and (3) of this section, the local government must send notice to the executive director of intent to establish alternate financial assurance. This notice must be sent within 90 days after the end of the fiscal year for which the year-end financial data show that the local government no longer meets the requirements. The local government must provide alternate financial assurance within 120 days after the end of such fiscal year.
6. (6) The local government is no longer required to comply with the requirements of this section when the conditions as specified in §37.61 of this title (relating to Termination of Mechanisms) are met.
7. (7) The executive director, based on a reasonable belief that the local government 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 executive director finds on the basis of such reports or other information, that the local government no longer meets the requirements of the financial test, the local government must provide alternate financial assurance as specified in this subchapter within 30 days after notification of such a finding.

Source Note:The provisions of this §37.271 adopted to be effective July 7, 1998, 23 TexReg 6966.