A REPORT
TO THE

ARIZONA LEGISLATURE

Performance Audit Division
Performance Audit

Department of Environmental
Quality—Underground Storage Tanks
Financial Responsibility

September • 2013
REPORT NO. 13-06

Debra K. Davenport
Auditor General

The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators and five
representatives. Her mission is to provide independent and impartial information and specific recommendations to improve the operations of state and local government entities. To this end, she provides financial audits and accounting services to the State and political
subdivisions, investigates possible misuse of public monies, and conducts performance audits of school districts, state agencies, and
the programs they administer.

The Joint Legislative Audit Committee
Senator Chester Crandell, Chair

Representative John Allen, Vice Chair

Senator Judy Burges
Senator Steve
Rich Crandall
Gallardo
Senator Katie
Steve Hobbs
Gallardo
Senator Andy
Katie Hobbs
Biggs (ex officio)
Senator Andy Biggs (ex officio)

Representative Paul Boyer
Representative Andrea Dalessandro
Representative Martin Quezada
Representative Kelly Townsend
Representative Andy Tobin (ex officio)

Audit Staff
Dale Chapman, Director
Shan Hays, Manager and Contact Person
Catherine
Anne
Hunter,
Dahlquist,
Team Leader
Team Leader and Contact Person
Steven
JenniferMeyeroff
Allen

Copies of the Auditor General’s reports are free.
You may request them by contacting us at:

Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:

www.azauditor.gov

STATE OF ARIZONA
OFFICE OF THE

DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL

MELANIE M. CHESNEY

AUDITOR GENERAL

DEPUTY AUDITOR GENERAL

September 3, 2013

Members of the Arizona Legislature
The Honorable Janice K. Brewer, Governor
Mr. Henry Darwin, Director
Department of Environmental Quality
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Environmental Quality—Underground Storage Tanks Financial
Responsibility. This report is in response to an October 26, 2010, resolution of the Joint
Legislative Audit Committee. The performance audit was conducted as part of the sunset
review process prescribed in Arizona Revised Statutes §41-2951 et seq. I am also
transmitting within this report a copy of the Report Highlights for this audit to provide a
quick summary for your convenience.
As outlined in its response, the Department of Environmental Quality agrees with all of the
findings and plans to implement all of the recommendations directed at it.
My staff and I will be pleased to discuss or clarify items in the report.
Sincerely,

Debbie Davenport
Auditor General

Attachment

2910 NORTH 44

th

STREET • SUITE 410 • PHOENIX, ARIZONA

85018 • (602) 553-0333 • FAX (602) 553-0051

Department of Environmental
Quality—Underground Storage Tanks
Financial Responsibility
REPORT HIGHLIGHTS
PERFORMANCE AUDIT

Our Conclusion
The Department of
Environmental Quality
(Department) is responsible
for ensuring that owners
and operators of petroleum
underground storage
tanks (USTs) comply with
federal and state financial
responsibility requirements.
These requirements help
ensure that UST owners
and operators can pay to
clean up leaks and spills
and compensate third
parties for bodily injury
and any property damage
incurred. Sites and/or
operators of petroleum USTs
include service stations,
convenience stores, and
local governments. The
Department continues to fail
to ensure that UST owners
and operators meet financial
responsibility requirements.
Although the Department
has begun to take steps to
identify and address some
of the weaknesses with
its financial responsibility
program, it should take
additional steps, including
developing policies and
procedures to ensure UST
owners and operators
comply with financial
responsibility requirements.

2013
August • Report No. 13-06

Department continues to fail to ensure that UST owners
and operators meet financial responsibility requirements
Financial responsibility requirements intended to minimize public cleanup
costs—To protect human health and the environment, federal and state laws require
owners and operators of petroleum underground storage tanks (USTs) to have financial
resources to clean up spills and leaks. These laws are intended to minimize the number
of leaking USTs that are abandoned or “orphaned” by their owners and operators and
to ensure that the polluter or responsible party, rather than the general public, bears
the burden and cost of cleanup if needed. Federal and state government entities are
exempt from the requirements. However, all others with regulated petroleum USTs,
including local governments, must comply with the requirements.
There are 12 different mechanisms that owners and operators can use to demonstrate
financial responsibility. These include insurance, self-insurance, letters of credit, and
other mechanisms. According to department data, as of March 2013, most of the 2,423
facilities with regulated USTs in Arizona used insurance as their financial responsibility
coverage mechanism. All USTs are supposed to be registered with the Department,
and proof of financial responsibility must be provided at registration.
Department continues to lack current financial responsibility evidence for many
USTs—Similar to findings in two prior audits, the Department continues to lack
evidence of current financial responsibility for many USTs. The Office of the Auditor
General’s 1998 audit report indicated that an estimated 53 percent of UST owners
failed to demonstrate financial responsibility, while a 2004 audit report indicated that
an estimated 38 percent of UST facilities failed to show compliance with the requirements. Likewise, our review of department data found that as many as 37 percent of
UST facilities lacked evidence of current financial responsibility coverage as of March
20, 2013. Specifically, of the 2,423 facilities with regulated USTs, potentially as many
as 145 facilities may never have had coverage, while another 746 facilities had expired
financial responsibility coverage.
State monies may be at risk—When owners do not maintain financial responsibility,
the State can end up paying the costs to clean up leaks and spills. The Department
uses two main mechanisms to help pay for
UST cleanup: the State Assurance Fund
Number and percent of USTs by age
(SAF) and the Regulated Substances Fund As of May 30, 2013
(RSF), which are primarily funded through a
Number
Percent of
1 cent per gallon excise tax. As of April 2013,
Years
of USTs
USTs
approximately $335 million in SAF monies
50+
36
<1%
had been used to help clean up 2,664 sites
40-49
189
3
with leaking USTs, an average of $103,000
30-39
676
10
per site. However, the excise tax and the
20-29
2,935
43
SAF are set to expire in December 2015.
10-19
2,000
29
Further, according to department staff, many
0-9
955
14
USTs may be approaching the end of their
Missing
83
1
expected 30-year lifespan, after which the
Total
6,874
100%
risk of leaks increases. This could pose a
significant expense to the State if owners do

not maintain financial responsibility.
Weak department processes and controls over financial responsibility requirements—The Department
lacks adequate processes and controls to ensure UST owners and operators meet financial responsibility
requirements. Specifically, the Department:

• Registered

USTs without proof of financial responsibility as long as the USTs met other technical
requirements such as spill and overflow protection. Department staff estimate that only 20 to 25 percent
of UST registrations include proof of financial responsibility.

• Conducted only limited followup on facilities with expired financial responsibility. As of March 2013, 746

facilities had expired coverage; however, since November 2012, only 21 letters were sent to UST owners
and operators notifying them of expired coverage.

• Did not follow up in instances where department data indicated the facility never had coverage.
• Provided general information to UST owners and operators about the requirement to have financial
responsibility in the registration approval letter and annual registration tank invoice, but did not notify
owners and operators of any noncompliance, and few owners and operators submitted updated financial
responsibility documents.

• Rarely enforced financial responsibility requirements unless noncompliance was discovered during an
inspection. Financial responsibility violations were cited in 40 percent of UST inspections in fiscal year
2012.

• Accepted documentation of financial responsibility that did not meet regulatory requirements.
In addition, the Department’s database did not accurately reflect all facilities’ financial responsibility coverage
or lack of coverage, or had accurate information about facilities that are covered under a different name.
Department has begun taking steps to address weaknesses, but additional actions needed—The
Department has hired an experienced manager to oversee the UST financial responsibility program and
improve its processes. The program manager has begun implementing various actions to strengthen the
program, including improving the usability of its database to monitor compliance with financial responsibility
requirements; educating both internal and external stakeholders on financial responsibility requirements;
leveraging partnership opportunities to facilitate its outreach activities; and developing a strategic plan to
further improve the program, including initiating enforcement action in response to failure to submit evidence
of financial responsibility rather than waiting on inspections.
The Department should take additional steps to ensure that UST owners and operators comply with financial
responsibility requirements, including developing and implementing up-to-date written policies and procedures,
developing and providing training to staff on required financial responsibility documentation, conducting
routine review of staff’s work, and improving communication and coordination between the registration and
financial responsibility staff.
Recommendations
The Department should:
Continue its efforts to make program improvements;
Develop and implement updated policies and procedures; and
Ensure that staff accurately determine that evidence of financial responsibility meets requirements and
take timely and appropriate action when owners and operators are found to be in noncompliance.

•
•
•

Department of Environmental
Quality—Underground Storage Tanks
Financial Responsibility

A copy of the full report is available at:
www.azauditor.gov
Contact person:
Catherine Dahlquist (602) 553-0333

REPORT HIGHLIGHTS
PERFORMANCE AUDIT
August 2013 • Report No. 13-06

TABLE OF CONTENTS
Introduction

1

Finding 1:Department continues to fail to ensure that
underground storage tank owners and operators
meet financial responsibility requirements
Department continues to lack evidence of financial responsibility
for many USTs

9
9

Lack of financial responsibility may place state monies at risk

10

Department has weak processes and controls over financial
responsibility requirements

12

Department has begun taking steps to identify and address
weaknesses with UST financial responsibility

15

Additional actions needed to ensure financial responsibility

17

Recommendations

18

Appendix A: Allowable financial responsibility mechanisms

a-1

Appendix B: Methodology

b-1

Agency Response

continued

Office of the Auditor General
page

i

TABLE OF CONTENTS
Tables
1

2

3

4

5

6

concluded

State of Arizona
page

ii

Number and percent of Arizona facilities with regulated petroleum USTs by
financial responsibility mechanism
As of March 20, 2013

3

Schedule of State Assurance Fund revenues, expenditures,
and changes in fund balance
Fiscal years 2009 through 2013
(In thousands)
(Unaudited)

6

Schedule of cleanup costs for USTs
Fiscal years 2010 through 2013
(In thousands)
(Unaudited)

7

Length of expired financial responsibility coverage
As of March 20, 2013

10

Number and percent of USTs by age
As of May 30, 2013
(Unaudited)

12

Descriptions of allowable financial responsibility mechanisms

a-1

INTRODUCTION
Scope and Objectives
The Office of the Auditor
General has conducted a
performance audit of the
Department of Environmental
Quality (Department)—
Underground Storage Tanks
Financial Responsibility,
pursuant to an October 26,
2010, resolution of the Joint
Legislative Audit Committee.
This audit is the second in a
series of audits conducted
as part of the sunset review
process prescribed in
Arizona Revised Statutes
(A.R.S.) §41-2951 et seq and
examines the Department’s
processes for ensuring that
owners and operators of
petroleum underground
storage tanks comply with
state and federal laws
and regulations regarding
financial responsibility for
leaks and spills. The first audit
focused on the Department’s
processes for monitoring and
enforcing regulated facilities’
compliance with state
and federal environmental
laws and regulations. The
third audit will address the
statutory sunset factors.

Financial responsibility requirements
intended to minimize public cleanup costs
To protect human health and the environment from the negative impacts of
abandoned leaking underground storage tanks (USTs), federal and state laws
require owners and operators of petroleum underground storage tanks to
provide guarantees for the
safe cleanup of these tanks
Underground storage tank—A UST includes a
(see textbox). These laws are
tank and any underground piping connected to
intended to minimize the
the tank that has at least 10 percent of its
number of these sites that are
combined volume underground. Sites with
petroleum USTs include:
abandoned or “orphaned” by
their owners or operators,
Marketers who sell gasoline to the public,
and to ensure that the polluter
such as service stations and convenience
or responsible party bears the
stores, and
burden and costs of cleanup
Nonmarketers who use tanks solely for their
if needed rather than the
own needs, such as fleet service operators
general
public.
These
and local governments.
requirements also provide an
incentive for owners to locate,
As of March 2013, there were approximately
213,000 sites with approximately 581,000 active
design, and operate their
USTs nation-wide, which are regulated by the
facilities in a manner that will
UST technical regulations in the United States.
minimize cleanup costs and
Source: A.R.S. §49-1001 and U.S. Environmental Protection
reduce the likelihood of
Agency, Office of Underground Storage Tanks’
accidents and other incidents
overview of the federal UST program.
that may harm third parties.

•
•

The U.S. Environmental Protection Agency’s (EPA) Web site indicates that
nearly 511,000 UST releases had been confirmed nation-wide as of March
2013. As a result of over a decade of work, 430,000 contaminated sites have
been cleaned up. However, approximately 81,000 UST sites still need to be
addressed. Some states have dedicated funding and programs that pay for
some UST cleanup costs. Altogether, state fund programs spent an estimated
$1 billion annually to clean up UST leaks and spills, in addition to federal
monies from the Leaking Underground Storage Tank Trust Fund and amounts
paid by responsible parties.1

1 The average annual amount spent by state fund programs to clean up UST leaks and spills was based on

annual survey results published by the Association of State and Territorial Solid Waste Management on their
Web site. The surveys were conducted by the Vermont Department of Environmental Conservation and showed
that between 2000 and 2010, the state funds spent an estimated $1 billion annually.
Office of the Auditor General
page

1

Financial responsibility requirements
Owners and operators of petroleum USTs must meet financial responsibility requirements established
by federal and state laws and regulations (see textbox).1 These requirements do not apply to federal
and state government entities whose debts are the debts of a state or the United States, such as
the Arizona Department of Transportation or the U.S. Air Force. Local governments, however, must
comply with the financial responsibility requirements. If the owner and operator are not the same,
only one must meet the financial responsibility requirements, although both are liable for cleanup
costs and fines in the event of noncompliance with the requirements. Federal regulations also
require UST owners and operators to certify that they meet federal requirements for financial
responsibility, and department rules require owners to submit and maintain updated certifications
with the Department.

Financial responsibility requirements
UST owners or operators must:

•

Cover cleaning up spills and leaks and compensating third parties for bodily injury
and property damage;

•

Cover sudden and nonsudden accidental releases from the operation of petroleum
underground storage tanks; and

•

Provide the following in addition to any coverage for legal costs:

•
•
•
•
Source:

$1 million per release for gas stations and other petroleum marketing facilities or
tanks handling more than 10,000 gallons per month;
$500,000 per release for other petroleum tanks;
$1 million annual aggregate coverage for owners with up to 100 USTs; or
$2 million annual aggregate coverage for owners with 101 or more USTs.
Auditor General staff summary of Title 40 of the Code of Federal Regulations (CFR) §280.93.

Allowable financial responsibility mechanisms
Federal UST financial responsibility regulations provide for eight different mechanisms that an owner
or operator of a petroleum UST may use to meet the financial responsibility coverage requirements,
including insurance, self-insurance, and a trust fund. Some states have developed additional EPAapproved mechanisms that may also be used by any UST owner or operator to demonstrate
financial responsibility. For example, Arizona Administrative Code R18-12-310 allows owners and
operators to cover cleanup, although not third-party compensation, with a certificate of deposit. In
addition, there are four mechanisms that are specifically designed for use by local governments.
1 The federal and state regulations are virtually identical, except that Arizona requires that financial responsibility documents be submitted to

the Department and Arizona allows UST owners to use a certificate of deposit to demonstrate financial responsibility.

State of Arizona
page

2

However, local governments are not limited
to these four mechanisms (see Appendix A, Table 1:
Table 6, page a-1, for a description of the
various financial responsibility mechanisms).1
As shown in Table 1, the most common
financial responsibility coverage mechanism
used by UST owners and operators in Arizona
is insurance. Specifically, as of March 20,
2013, 78 percent of the facilities with regulated
petroleum USTs used insurance as their
financial responsibility coverage mechanism
to pay for potential cleanup costs. To facilitate
access to UST insurance, the EPA publishes
a list of companies that have identified
themselves as willing to sell UST insurance.
As of July 2012, there were 16 companies
listed; 13 indicated that their coverage area
included Arizona.

Number and percent of Arizona facilities
with regulated petroleum USTs by
financial responsibility mechanism
As of March 20, 2013

Mechanism

Number of
facilities1

Percent of
facilities

1,886

78%

Insurance
No coverage

2

208

9

194

8

49

2

37

2

Guarantee

21

<1

Coverage denied

12

<1

Local government fund

8

<1

Letter of credit

3

<1

Surety bond

3

<1

Local government financial test

2

<1

Self-insurance
Local government bond
rating test
Risk retention group coverage

Financial responsibility documentation and
Total
2,423
100%
submission schedules vary by type of 1
Of the 2,423 total facilities, 746 had expired financial responsibility (see Table 4, page
mechanism. For example, evidence of
10).
insurance may be an endorsement attached 2 Sixty of the 208 facilities were state or federal government facilities that were exempt
from the financial responsibility requirements. Auditors reviewed a small sample of the
to an insurance policy or a certificate of
remaining 148 facilities and found that some had coverage. Specifically, auditors
insurance that summarizes the coverage.
reviewed 4 such cases and found that 3 had coverage under other owner or operator
names.
These documents must be provided to the
Department whenever there is a change in Source: Auditor General staff analysis of department UST financial responsibility data as of
March 20, 2013.
the insurance policy, such as a change in the
effective period or coverage amount. By
comparison, local governments using a
bond rating test must annually provide the Department with a letter from their chief financial officer
certifying that they currently have general obligation bonds of $1 million outstanding that meet a
specified bond rating.

Department staff responsible for ensuring UST owners and
operators meet financial responsibility requirements
The Department relies on several staff in its Waste Programs Division to ensure that UST owners and
operators meet financial responsibility requirements. Specifically:
1 Laws 2013, Ch. 244, established a UST study committee composed of legislators and stakeholders to consider and make recommendations

on various issues relating to Arizona’s UST program, including financial responsibility requirements and mechanisms for demonstrating
financial responsibility. The committee is to present its findings and recommendations to the Governor, Senate President, and Speaker of
the House by December 31, 2013.

Office of the Auditor General
page

3

•

UST registration staff—All USTs must be registered with the Department within 30 days of the
tank being brought into use.1 As part of this registration, evidence of financial responsibility must
be submitted to the Department. Department staff responsible for registering USTs receive
financial responsibility documents and forward them to the financial responsibility program
manager for review.

•

Financial responsibility staff—The financial responsibility program manager is responsible for
reviewing submitted documents to ensure they meet regulatory requirements. If the evidence
provided meets the financial responsibility requirements, she should then update the department
UST database to record the financial responsibility mechanism, the facilities and USTs covered
by the mechanism, and the effective coverage dates. If the evidence does not meet
requirements, she should contact the UST owner, operator, or insurer by letter, phone, or e-mail
to request the correct information.

•

Inspectors—In addition, as part of routine inspections of UST facilities, department inspectors
check for financial responsibility compliance and initiate enforcement when UST owners and
operators are out of compliance with the requirements.

Although various staff help ensure UST owners and operators meet financial responsibility
requirements, as of May 2013, only the financial responsibility program manager was solely
dedicated to this function. However, department officials reported that they plan to add more
resources to the financial responsibility program by September 2013 through reallocating or hiring
an additional staff person.

Financial information
The Department uses two main mechanisms to help pay for UST cleanup: the State Assurance Fund
(SAF) and the Regulated Substances Fund (RSF), which are primarily funded through an excise tax
(see textbox on page 5). As shown in Table 2 (see page 6), between fiscal years 2009 and 2013,
SAF revenues ranged from approximately $28.8 million to $37.2 million annually, while expenditures
ranged from approximately $6.1 million to $29.3 million annually. Additionally, between fiscal years
2009 and 2012, legislatively required transfers from the SAF, primarily to the State General Fund,
totaled nearly $48.5 million. Finally, in fiscal year 2013, the Department transferred approximately
$50.5 million from the SAF to the RSF in accordance with Laws 2013, Ch. 244, which requires any
monies in the SAF up to a maximum of $60 million be transferred to the RSF.
As shown in Table 3 (see page 7), between fiscal years 2010 and 2013, department expenditures
for UST cleanups have ranged from a total of approximately $9.9 million to $26.6 million annually.
The large decline in expenditures in fiscal year 2012 resulted from the Department closing out most
of its remaining obligations in fiscal year 2011 for releases that met the eligibility requirements for

1 A.R.S. §49-1002(A) requires that UST owners submit notification to the Department, which the Department refers to as “registration.”

State of Arizona
page

4

Excise tax—1 cent per gallon fuel tax established in 1990 by A.R.S. §49-1031. Laws
2013, Ch. 244, §5, repeals the tax effective December 2015.
State Assurance Fund (SAF)—The Legislature created the SAF in 1990 to help
eligible UST owners and operators meet the potentially high costs of leaking UST
cleanups and to fund the Department’s cleanup of orphaned leaking USTs where the
owner or operator could not be located or were not otherwise capable of performing
cleanups. The SAF uses monies from the excise tax for these purposes. UST owners
and operators are eligible for reimbursement through the SAF for leaks and spills that
occurred and were reported by June 30, 2006, unless the leak or spill could not have
been reported before that date with reasonable diligence. The owner or operator must
apply by December 31, 2015, and must meet conditions including compliance with
financial responsibility requirements. Monies cannot be used to pay for injuries to third
parties. Laws 2013, Ch. 244, §5, repeals the SAF effective December 2015.
Regulated Substances Fund (RSF)—The Legislature created the RSF in 2004 to
succeed the SAF in recognition of the long-term nature of many UST cleanups and the
continuing need to clean up orphan USTs yet to be found. A.R.S. §49-1018 requires
the Department to select the sites where it will use these monies based on risk to
human health and the environment. Laws 2013, Ch. 244, require that any monies up to
a maximum of $60 million in the SAF are to be transferred into the RSF. Any monies in
excess of the $60 million are to be deposited into the state highway fund.
Source:

Auditor General staff summary of A.R.S. §§49-1018, 49-1031, 1051, and 1052; Laws 2013, Ch. 244; and
Arizona Department of Environmental Quality. (2009). Underground Storage Tank Assurance Account
liabilities report (Publication # EQR 09-03). Phoenix, AZ: Author.

reimbursement under the SAF.1 Consequently, the expenditures in fiscal years 2012 and 2013 are
primarily for cleanup costs incurred by the Department’s State Lead Program.
The State Lead Program cleans up leaking orphaned tanks, which are tanks whose owner cannot
be located, because, for example, the owner is deceased. The State Lead Program also assumes
cleanup responsibility for leaking tanks whose owners do not have the technical or financial capability
to clean up the leaks or spills or are unwilling to do so (see Finding 1, page 11, for more information
on the State Lead Program). If an owner is unwilling to conduct the cleanup required by the
Department or is technically or financially incapable of conducting the cleanup, the State Lead
Program may perform the cleanup and then attempt to recover the costs.

1 Until the Legislature enacted Laws 2013, Ch. 244, releases had to be reported before July 1, 2006, to be eligible for reimbursement by the

SAF. However, the 2013 legislation eliminated the 2006 reporting deadline for releases that could not have been reported by that date using
reasonable diligence.

Office of the Auditor General
page

5

6

State of Arizona

page

Table 2:

Schedule of State Assurance Fund revenues, expenditures, and changes in fund balance
Fiscal years 2009 through 2013
(In thousands)
(Unaudited)
2009

2010

2011

2012

2013

Revenues
Underground Storage Tank Revolving Fund1
Expenditures and transfers
Personal services and related benefits
Professional and outside services
Travel
Aid to organizations and individuals
Other operating and equipment
Indirect costs3
Total expenditures
4

Transfers
Total expenditures and transfers
Net change in fund balance
Fund balance, beginning of year
Fund balance, end of year

$ 29,206

$ 29,059

$ 28,849

$ 37,171

4,206
3,910
38
18,884
186
2,092

3,875
1,399
24
16,520
375
1,885

2,996
3,285
29
13,245
362
1,475

2,705
3,308
24
1,227
94
1,234

29,316
14,637
43,953

24,078
20,545
44,623

21,392
7,021
28,413

8,592
6,290
14,882

6,053
50,498
56,551

(14,747)
34,752
$ 20,005

(15,564)
20,005
$ 4,442

436
4,442
$ 4,878

22,289
4,878
$ 27,167

(27,145)
27,167
$
22

$ 29,406
1,184
330
10
270
3,6342
625

1 Amount consists of the revenues allocated to the assurance account portion of the UST Revolving Fund in accordance with A.R.S. §49-1036. The UST Revolving Fund receives

its revenue primarily from excise taxes.
2 According to the Department, the large increase in fiscal year 2013 primarily relates to information and technology costs that were paid with a portion of the approximately

$6.1 million the Department spent for administrative costs as authorized by Laws 2012, Ch. 303, §14.
3 Amount consists of administrative and support service costs that are allocated by the Department to its various divisions.
4 Fiscal year 2009 through 2012 amounts primarily consists of monies transferred to the State General Fund in accordance with session laws. Fiscal year 2013 amount consists

of transfers to the RSF in accordance with Laws 2013, Ch. 244, which requires any monies in the SAF up to a maximum of $60 million be transferred to the RSF.
Source:

Auditor General staff analysis of department-prepared financial information for fiscal years 2009 through 2013.

Table 3:

Schedule of cleanup costs for USTs
Fiscal years 2010 through 2013
(In thousands)
(Unaudited)

Revenues
Underground Storage Tank Revolving Fund1
Regulated Substances Fund2
Federal grants, reimbursements, and agreements3
Total revenues
Expenditures
Personal services and related benefits
Professional and outside services
Travel
Aid to organizations and individuals
Other operating and equipment
Indirect costs4
Total expenditures

2010

2011

2012

2013

$ 24,078

$ 21,240

$ 8,394

2,546
$ 26,624

2,581
$ 23,821

1,529
$ 9,923

$ 1,468
8,512
1,165
$ 11,145

$ 4,472
3,032
27
16,520
383
2,190
$ 26,624

$ 3,410
5,084
33
13,245
371
1,678
$ 23,821

$ 3,130
4,001
30
1,227
111
1,424
$ 9,923

$ 2,724
6,659
25
270
53
1,414
$ 11,145

1 Amount consists of the revenues allocated from the UST Revolving Fund in accordance with A.R.S. §49-1036 that were used for cleanup costs for USTs. The

UST Revolving Fund receives its revenue primarily from excise taxes.
2 Amount consists of the portion of the RSF monies that were used for cleanup costs for USTs.
3 According to the Department, amounts include monies awarded to the Department through the American Reinvestment and Recovery Act that were used for

cleanup of 26 facilities with contamination from leaking underground storage tanks. Specifically, approximately $1.61 million, $1.58 million, and $32,800 were
received and spent in fiscal year 2010, 2011, and 2012, respectively, for cleanup.

page

7

Office of the Auditor General

4 Amount consists of administrative and support service costs that are allocated by the Department to its various divisions.

Source:

Auditor General staff analysis of department-prepared financial information for fiscal years 2010 through 2013.

State of Arizona
page

8

FINDING 1

The Department of
Environmental Quality
(Department) continues to fail
to ensure that underground
storage tank (UST) owners
and operators meet financial
responsibility requirements
that help ensure that they
can pay to clean up leaks
and spills and compensate
third parties for bodily injury
and property damage.
Similar to prior audit findings,
department records indicate
that many UST facilities
have expired coverage
or lack coverage. Further,
the department database
may incorrectly show other
facilities as having coverage
when they do not. As a
result, state monies have
had to be used to pay for
UST cleanup of leaks and
spills. The Department
has hired a new program
manager who has begun
taking action to address
program weaknesses, and it
should take additional steps
to ensure that UST owners
or operators meet financial
responsibility requirements.

Department continues to fail to ensure that
underground storage tank owners and
operators meet financial responsibility
requirements
Department continues to lack evidence of financial
responsibility for many USTs
The Department continues to fail to ensure that UST owners and operators with
regulated petroleum USTs have financial responsibility. UST owners and
operators can demonstrate financial responsibility in several ways, as shown
in Table 6 (see Appendix A, page a-1), although as of March 2013, most used
insurance. However, similar to findings in audit reports issued by the Arizona
Office of the Auditor General in 1998 and 2004, this audit found that many UST
facilities lacked evidence of current financial responsibility.
Specifically, the Auditor General’s 1998 report indicated that an estimated 53
percent of UST owners had not demonstrated compliance with financial
responsibility requirements as of October 1997, while the Auditor General’s
2004 report indicated that an estimated 38 percent of UST facilities failed to
demonstrate compliance with the requirements as of January 2004. Likewise,
auditors’ review of department data found that as many as 37 percent of UST
facilities may not have had current financial responsibility coverage as of
March 20, 2013.1 Specifically, of the 2,423 facilities with regulated USTs,
potentially as many as 145 facilities may never have had coverage, while
another 746 facilities had expired financial responsibility coverage (see Table
4, page 10). Of those facilities with expired coverage, 275 had not had financial
responsibility coverage for more than 2 years. For example:

•

One company, which had two open underground storage tanks at a
mobile home park, had not provided the Department with proof of
financial responsibility since its most recent coverage expired in April
2010.

1 In general, the Department’s data reliably reflected the information provided by the UST owners or operators

on the type of financial responsibility mechanism used and its expiration date. Other data for UST facilities
reported as having no coverage in the department database was found to be less reliable. According to the
Department’s database, 208 facilities had no coverage as of March 20, 2013, but 60 of these were state or
federal facilities that are exempt from financial responsibility requirements. Further, auditors reviewed a small
sample of the remaining 148 facilities and found that some had coverage. Specifically, auditors reviewed 4
such cases and found that 3 had coverage under other owner or operator names.

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One company, which owned gas stations, had not provided the Department with proof of
financial responsibility for 17 of its facilities since its most recent coverage expired in April 2007.
Although the company closed all of its gas stations, as of March 2013, it still had tanks at these
locations that had not been formally closed or
Length of expired financial responsibility coverage removed. Even if tanks are no longer operating,
they still pose a risk because liquid may still sit in
As of March 20, 2013
the tank, and the owner is required to continue to
USTs with expired
submit evidence of financial responsibility until the
financial responsibility
tank is properly closed or removed.

•

Table 4:

coverage

Number
of UST
facilities

Time expired

Percent
of UST
facilities

1-60 days

52

61-120 days

76

10

3

121-180 days

85

11

4

181-365 days

100

14

4

366 days-2 years

158

21

7

More than 2 years

275

37

11

746

100%

Total
Source:

7%

Percent of
the 2,423
total UST
facilities
2%

31%

Auditor General staff analysis of department financial responsibility data for total
regulated facilities and facilities with expired financial responsibility coverage as of
March 20, 2013.

Lack of financial responsibility
may place state monies at risk
Financial responsibility requirements help to
ensure that UST owners can pay the costs of
cleaning up leaks and spills and compensate
third parties for damages incurred because of
leaks or spills. In addition, according to the U.S.
Environmental Protection Agency (EPA), the
financial responsibility requirements may also
provide an incentive to owners to implement
operating practices that can prevent leaks and
spills.1 Although the incidence of leaks from
USTs had decreased since improved tank
standards were fully imposed in 1998, leaks

Further, some facilities the Department believes
have coverage may not be covered because of
the way the department database is updated.
UST owners are required to have financial
responsibility for all of their facilities, and although
they may use one mechanism to cover all of their
facilities, they can also use separate mechanisms
to cover each of their facilities. However, in cases
where a UST owner has multiple facilities, when
staff update the financial responsibility mechanism
for one facility, the database automatically updates
all of the owner’s remaining facilities with this
same information (see textbox), even if that
particular mechanism is not being used to cover
all of the facilities.

Example of database problem that may
result in erroneous financial responsibility
coverage status information—In one case
auditors reviewed, the owner had 49 facilities,
and the database showed that all 49 facilities
had current financial responsibility coverage.
However, the Department had only one
insurance certificate for the owner, and the
certificate covered only one facility. The
Department lacked evidence that the other 48
facilities had coverage. When staff updated the
database with information for the one facility,
the database automatically updated records for
all of the owner’s facilities.
Source:

Auditor General staff review of financial responsibility
files and data.

1 U.S. Environmental Protection Agency. (2000). Financial responsibility for underground storage tanks: A reference manual. Washington, DC:

Author.

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and spills continue to be a problem. According to a 2011 report prepared for the EPA, leaks and
spills continue to occur from tank piping, operational errors such as overfilling tanks, releases at the
dispenser, and failure to properly maintain UST systems, which includes the tank, underground
connected piping, impact valve, and connected underground ancillary equipment and containment
system, if any.1
When owners do not maintain financial responsibility, the State can end up paying the costs to clean
up leaks and spills. As of May 2013, there were 736 leaks and spills being cleaned up at 397 UST
facilities in Arizona, including 163 leaks and spills at 86 UST facilities being cleaned up by the
Department’s State Lead Program. This program, authorized by Arizona Revised Statutes (A.R.S.)
§49-1017, uses a combination of state UST excise tax monies and other monies to pay for cleanup
of orphaned and abandoned tanks, as well as tank leaks or spills the owner is not technically or
financially capable of cleaning up. Altogether, the Department estimated it had used $60 million for
such cleanups from July 1992 through January 2013. According to the Department, it costs
approximately $103,000, on average, to clean up a leak or spill. For example, the State’s costs to
clean up a site that had a leak in 1996 and another leak in 2006 totaled approximately $113,000 as
of December 2012 (see textbox for this and another example).

Leaking UST cleanup cost examples
1. According to department records, a northern Arizona trading post had a UST leak reported in July
1996 and another leak in June 2006. As required by state and federal regulations, the UST owner
should have had at least $500,000 in financial responsibility coverage for such incidents. However, the
UST owner did not have this coverage, and aside from sending a letter in 2007 requesting evidence of
financial responsibility, the Department did not take any action regarding this noncompliance. Between
November 2006 and June 2009, the property owner submitted reimbursement requests to the
Department totaling $184,575.1 The Department used the SAF to reimburse approximately $88,000 of
the property owner’s costs, and the State Lead Program also spent approximately $25,000 for cleanup
at the site. By the time the cleanup was completed in December 2012, state expenditures for the
cleanup totaled approximately $113,000.
2. The owner of a Tempe gas station did not meet financial responsibility requirements before beginning
to fill the station’s USTs in April 2010. When a spill occurred, the owner had to apply to the
Department’s State Lead Program because she did not have the ability to pay for the cleanup. A
department inspector learned about a nearly 10,000-gallon inventory discrepancy at the station during
a May 2010 inspection. According to an assessment report completed in April 2012, there had been a
release of gasoline, and both soil and groundwater were contaminated with volatile organic
compounds such as benzene and toluene. The company that conducted the assessment estimated
the total costs of cleanup will likely range from $500,000 to $1.5 million.
1 Although A.R.S. §49-1052(F)(5) states that UST owners are not eligible for SAF reimbursement if they do not comply with financial

responsibility requirements, A.R.S. §49-1052(I) allows a property owner who voluntarily takes responsibility for the cleanup to receive
reimbursement.
Source: Auditor General staff analysis of information provided by the Department.

The State may be even more at risk in the future because an excise tax that can pay for some
cleanups will expire in December 2015. A.R.S. §49-1031 established a 1-cent-per-gallon excise tax
beginning in 1990 to help pay for UST clean-up costs. Two funds established to provide mechanisms
1 Industrial Economics, Inc. (2011). Assessment of the potential costs, benefits, and other impacts of the proposed revisions to EPA’s

underground storage tank regulations. Cambridge, MA: Author.

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Table 5:

Number and percent
of USTs by age
As of May 30, 2013
(Unaudited)
Number
of USTs

Years

Percent of
USTs

50+

36

<1%

40-49

189

3

30-39

676

10

20-29

2,935

43

10-19

2,000

29

955

14

83

1

0-9
Missing
Total
Source:

6,874

100%

Auditor General staff analysis of department UST
data as of May 30, 2013.

to help pay for cleanup of leaks and spills—the State Assurance Fund
(SAF) and the Regulated Substances Fund (RSF)—receive monies from
this excise tax. As of April 2013, approximately $335 million in SAF monies
had been used to help clean up 2,664 sites, an average of approximately
$103,000 per site for the 2,392 sites that had been fully addressed.
Additionally, the Department is authorized by A.R.S. §49-1015.01 to use
RSF monies to pay for cleanup of UST releases, including cases where an
owner or operator cannot be found. However, the excise tax and the SAF
are set to expire in December 2015. With the expiration of the SAF and the
excise tax, financial responsibility becomes even more important to ensure
prompt cleanup and third-party compensation to reduce the risk to human
health and the environment posed by leaking USTs.
Finally, according to department staff, many USTs in Arizona may be
approaching the end of their expected 30-year lifespan, after which the risk
for leaks increases. As shown in Table 5, as of May 2013, 56 percent of
USTs in Arizona were installed at least 20 years ago, including 13 percent
that were 30 years or older. The average UST age in Arizona was 21 years.
This could pose a significant expense for the State, especially if several of
the facility owners lack financial responsibility.

Department has weak processes and controls over financial
responsibility requirements
The Department lacks adequate processes and controls to ensure that UST owners or operators
meet financial responsibility requirements. Specifically, the Department:

•

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Registered USTs without evidence of financial responsibility—The Department registered
USTs without proof of financial responsibility as long as they met other technical requirements,
such as leak detection and corrosion, spill, and overflow protection. All USTs must be registered
with the Department within 30 days of the tank being brought into use, and Arizona Administrative
Code R18-12-222 requires that evidence of appropriate financial responsibility be submitted as
part of the registration process. However, according to UST registration staff, the Department
approved the registration and sent a confirmation notice even if there was no evidence of
financial responsibility as long as the other registration requirements were met. The Department
did not reject the application if the financial responsibility requirement had not been met, nor
did it notify the owner that his/her application was deficient when it lacked only proof of financial
responsibility. In addition, the Department did not notify its own financial responsibility program
manager of the new registration to enable her to follow up and obtain the required evidence.
Department staff estimated that only approximately 20 to 25 percent of UST registration forms
are submitted with evidence of financial responsibility.

•

Did not ensure that UST owners and operators maintained continuing financial
responsibility—The Department conducted limited followup on UST owners and operators of
facilities with expired financial responsibility coverage. Although the Department sent letters to
UST owners and operators of selected facilities with expired coverage notifying them that they
have 90 days to obtain and provide evidence of current financial responsibility, very few were
sent the letter, and facilities with long-expired coverage were skipped in the selection process.
Specifically, the previous financial responsibility coordinator reported selecting and sending the
letter to some facility owners and operators and following up with a phone call if necessary.
However, only 21 letters were sent between November 2012 and March 2013, even though 746
facilities had expired coverage as of March 2013. The previous coordinator reported that she
did not send the letters to UST owners and operators of facilities with older coverage expiration
dates because she believed the tanks were likely no longer in use. However, as mentioned
previously, unless the tanks have been formally closed or removed, they may still contain liquid
and pose a risk to human health and the environment and are required to have financial
responsibility coverage.

•

Did not follow up and resolve instances where it appeared that the UST owner had never
obtained financial responsibility—The Department has done even less regarding the facilities
its database shows as having no coverage. Specifically, department staff were unable to explain
the meaning of the “no coverage” status in the department database, and the facilities in this
group were not included in those the Department selected to send letters to notifying the owners
and operators that they had 90 days to obtain and provide evidence of current financial
responsibility. Although auditors determined that some facilities in this group were exempt or
had coverage under a different facility name, the Department had not tracked exempt facilities
although the database had this capability, and had not reviewed the facilities to identify those
that actually lacked coverage so it could then take steps to ensure the UST owners and
operators obtained and provided evidence of financial responsibility.

•

Did not inform owners that their facilities lacked evidence of financial responsibility—The
Department included general information about financial responsibility requirements in the
confirmation notice that it sent to UST owners notifying them that their UST registration has been
approved and in the invoice letter the Department sent to remind owners that it was time to pay
their annual UST registration fee. According to department staff, the invoice letters do not result
in many owners submitting updated financial responsibility documents, and department staff
reported uncertainty regarding the effectiveness of the confirmation notices. However, neither of
these letters specifically notified facility owners if they were out of compliance with the financial
responsibility requirements.

•

Rarely enforced financial responsibility requirements unless noncompliance discovered
in an inspection—The Department typically has not initiated enforcement action based on
owners’ or operators’ failure to submit evidence of financial responsibility. Instead, if a facility
lacked evidence of financial responsibility coverage during the Department’s regular on-site
inspections, which are required every 3 years, the inspector initiated enforcement action for this
violation along with any other violations discovered during the inspection. According to
department data, the enforcement action resulted in many UST owners or operators coming
back into compliance; however, not always in a timely manner. Financial responsibility violations

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are among the most common identified by inspectors, occurring in 40 percent of UST
inspections in fiscal year 2012.

•

Accepted financial responsibility evidence that did not meet requirements—Auditors
reviewed a random sample of 16 UST facility files representing facilities with current, expired,
and missing coverage.1 Auditors’ review of the 5 UST facilities demonstrating current financial
responsibility coverage found that the Department accepted documentation of financial
responsibility that did not meet regulatory requirements designed to help ensure the owner or
operator would be able to use the financial responsibility coverage to help pay for cleanup and
third-party liability costs in case of a leak or spill. Specifically, two of these facility owners did not
include the required listing of all the tanks and facilities covered by their financial responsibility
mechanism. For example, one owner listed only 1 of its 49 facilities on the certificate of
insurance. As a result, the insurance may not cover all of its facilities. Additionally, for 2 of the 3
facilities covered by insurance, the file did not include a documented endorsement or certificate
of insurance worded as required by federal and state regulations, such as including a paragraph
stating that the UST owner’s bankruptcy does not relieve the insurer of liability to pay a claim.
Absent this language, the facility may be inadequately covered in the event of a leak or spill.
Further, none of the 16 facility files auditors reviewed, including 6 with expired coverage,
contained a certificate of financial responsibility, which is required from the UST owner or
operator to certify that they meet federal requirements for financial responsibility. The
Department’s new financial responsibility program manager reported that she also had noted
problems with absent or inadequate financial responsibility documentation in many of the files
she had reviewed. For example, she stated that she had not seen a certificate of financial
responsibility in any of the files she had reviewed in her first 2 months in her position.

•

Did not ensure the accuracy of the financial responsibility data in its UST database—
Finally, the Department’s database does not accurately reflect all facilities’ financial responsibility
coverage or lack of coverage, so the Department cannot use it to effectively identify facilities
that lack coverage. Two problems previously discussed—department staff’s not using the
database’s ability to reflect a facility’s exempt status and the database’s automatic updating of
all of an owner’s facilities when evidence for one facility is submitted—affect the database’s
usefulness. In addition, if a facility operator, not the owner, provides evidence of financial
responsibility, the database is not programmed to reflect this coverage. Finally, if a facility has
a change in owner name or is owned by a company that operates under more than one name,
the database may not accurately reflect the coverage. For example, one gas station shown in
the database as having no coverage was owned by a family that has several other gas stations
in the State under a different company name and was covered under the other company name.

1 The 16 facility files auditors reviewed included 6 facilities with expired financial responsibility, 5 facilities with no financial responsibility, and

5 facilities with current financial responsibility. The 5 facilities with current financial responsibility included 3 facilities using insurance, 1 facility
using self-insurance, and 1 facility using the local government bond rating test.

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Department has begun taking steps to identify and address
weaknesses with UST financial responsibility
The Department has begun to take steps to identify and mitigate the problems with UST financial
responsibility. In November 2012, the Department established a financial responsibility program
manager position to oversee the program and improve processes, and filled the position with an
experienced manager. As of May 2013, the new program manager had identified several problems
with the financial responsibility program and begun to implement changes to address them. These
changes include the following:

•

Recording UST owner and operator compliance only after complete and accurate
evidence is provided—The financial responsibility program manager reported that she does
not enter financial responsibility information that is submitted to the Department into its UST
database until determining that it is complete and accurate. If it is inadequate, she reported that
she follows up with the owner, operator, or insurer typically by e-mail to explain why the
information is incomplete and/or inaccurate and to request the appropriate documentation.
Once the appropriate documentation is provided, she enters the financial responsibility
coverage into the UST database.1

•

Improving database usefulness—The financial responsibility program manager has begun
working with department information technology staff to enhance the accuracy and availability
of financial responsibility information so that staff can more effectively use it to ensure UST
owners’ and operators’ compliance with financial responsibility requirements. As noted
previously, the Department cannot rely on its database to identify noncompliant facilities. In June
2013, requests were submitted to the Department’s information technology section to modify
programming to capture financial responsibility information provided by operators and allow
staff to update financial responsibility information by facility. In addition, a request was made to
add a date field to track when financial responsibility documentation is received and to fix the
database function that allows staff to delete a record when USTs have been permanently closed
and no longer require financial responsibility or when an error has been made, such as linking
the wrong owner identification number to a UST. Although the requests were logged into the
Department’s program change request tracking system, department staff report that they have
a fairly low priority for resolution. As of June 11, 2013, there were 274 requests for program
changes from throughout the Department listed in the tracking system.

•

Conducting outreach to stakeholders—The financial responsibility program manager has
begun reaching out to stakeholders to educate them about UST financial responsibility.
Specifically, the program manager presented information on financial responsibility requirements
and available mechanisms at the National Institute for Storage Tank Management conference
held in Phoenix on August 1, 2013. This outreach activity was in addition to two prior stakeholder
meetings held by the Department in 2012, specifically focused on financial responsibility.

1 The program manager reported that although she realizes obtaining the certificate of financial responsibility is required and important as it

is a self-certification that UST owner and operators comply with federal financial responsibility requirements, she is not currently requesting
it because given the current resources available to her, her priority is to ensure UST owners and operators provide evidence of the actual
mechanism that they are using to meet their financial responsibility obligations. However, as soon as the program is allocated additional
resources, she will expand her followup to include the certificates.

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According to the Department, during these meetings, participants were provided with
information on UST financial responsibility requirements and mechanisms, including insurance,
because it is the most commonly used mechanism in Arizona. Participants also had
opportunities to speak with representatives of insurance companies and the Arizona Department
of Insurance about available coverage options and issues related to coverage denials.

•

Clarifying financial responsibility requirements for UST inspection and compliance staff—
The financial responsibility program manager provided written clarification to UST inspection
and compliance staff on financial responsibility requirements in May 2013, including the specific
documentation needed to demonstrate compliance. This clarification provided inspectors and
compliance staff with a clear and consistent understanding of the types of documentation they
should review during inspections to ensure owners and operators have complied with financial
responsibility requirements and when this documentation is submitted as proof that the UST
owner or operator has returned to compliance with financial responsibility requirements.

•

Leveraging partnership opportunities—The financial responsibility program manager met
with representatives from the Arizona Petroleum Marketers Association (APMA) and the
Petroleum Marketers Management Insurance Company (PMMIC) in July 2013 to discuss
developing and providing UST operator training. The APMA is spearheading this effort with
assistance from the PMMIC, who will serve as the primary trainer, and the financial responsibility
program manager, who will assist with the financial responsibility component of the training.
Department staff also continue to participate on the Association of State and Territorial Solid
Waste Management Officials’ State Funds—Financial Responsibility Task Force. According to
the Department, this participation provides it with an opportunity to learn about compliance
strategies and legislative efforts in other states, as well as overall UST financial responsibility
program improvements made by other states.

•

Developing a strategic plan for the program—Finally, the financial responsibility program
manager is developing a strategic plan to improve the program in other ways. For example, she
is proposing that the financial responsibility program directly initiate enforcement action in
response to financial responsibility noncompliance instead of relying on inspectors to check for
compliance during an inspection in order to speed up compliance with financial responsibility
requirements. On June 27, 2013, the program manager submitted a draft strategic plan to her
supervisor for review.

The Department should continue its efforts to improve its financial responsibility program. Specifically,
it should continue to record UST owner and operator compliance in the UST database only after
complete and accurate evidence of financial responsibility is received and follow up with the owner,
operator, or insurer when it is not provided and ensure that the financial responsibility programming
requests submitted in June 2013 are made. The Department should also continue to reach out to
stakeholders and its inspection and compliance staff to educate them about financial responsibility
requirements, including documentation needed to show compliance. In addition, it should continue
to leverage partnership opportunities to facilitate its outreach activities and learn about strategies
used in other states to improve financial responsibility compliance, which should be communicated
to the Department’s financial responsibility program manager. Finally, the Department should
complete development of a strategic plan for the financial responsibility program and implement it.

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Additional actions needed to ensure financial responsibility
Despite these efforts, additional actions are needed to better ensure UST owners and operators
comply with financial responsibility requirements. Specifically, the Department should take steps to
ensure UST owners and operators obtain and maintain up-to-date financial responsibility, including
developing policies and procedures that, among other things, ensure that UST registration is not
approved without proof of financial responsibility, guide the review of proof of financial responsibility
submitted by UST owners and operators, and require followup when this proof is insufficient. In
addition, the Legislature should consider modifying statute to require insurance companies to notify
the Department when UST insurance coverage is canceled or expires.

Department should take additional steps to ensure that UST owners meet
financial responsibility requirements—In order to better ensure that UST owners and
operators maintain appropriate, up-to-date financial responsibility, the Department should:

•

Develop updated policies and procedures to ensure compliance with rules and good
business practices—The Department lacks up-to-date written policies and procedures to
guide the process for ensuring that UST owners and operators meet financial responsibility
requirements. For example, consistent with its rules, these policies should specify that UST
registration should require evidence of financial responsibility. In addition, they should define
expectations for communication and coordination between the UST registration and UST
financial responsibility functions, explain how to evaluate the evidence of financial responsibility
to ensure it meets state and federal requirements, establish expectations and time frames for
monitoring UST owner and operator compliance with the requirements, and specify actions
to be taken when the requirements are not met.

•

Provide training to financial responsibility staff—Financial responsibility requirements
require staff to evaluate whether financial and legal documents meet requirements specified
in federal and state regulations. In addition, staff must be able to reconcile UST facility
ownership changes in order to ensure that a UST owner or operator’s financial responsibility
mechanism(s) reflect all of its UST facilities regulated in Arizona. Insufficient training on the
required documentation needed to comply with financial responsibility requirements may
have contributed to some of the problems auditors and the new financial responsibility
program manager identified. To ensure that department staff understand the requirements
and procedures for ensuring that UST owners meet requirements, the Department should
provide or obtain training for any new staff who join the program and should consider
periodically providing refresher training.

•

Implement supervisory review—The Department does not have a process for routinely
reviewing financial responsibility staff’s work. Supervisory review could help ensure that staff
have accurately determined whether evidence meets requirements and that staff have taken
appropriate and timely actions when UST owners and operators have not submitted evidence
of financial responsibility, when the evidence does not meet requirements, or when financial
responsibility needs to be updated.

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•

Improve coordination between registration and financial responsibility staff—Although
department UST registration staff forward financial responsibility documents to the financial
responsibility program manager, they do not notify her when a UST registration is received
that lacks evidence of financial responsibility. As noted previously, the Department should not
register a UST without evidence of financial responsibility. However, even after making this
change, coordination will be needed to inform the registration staff that the evidence meets
requirements and ensure that the financial responsibility staff have accurate information about
facility owners and operators.

Legislature should consider modifying statute so that insurers must notify the
Department when they cancel UST coverage—In addition, the Legislature should
consider modifying statute to require insurance companies to notify the Department when UST
insurance coverage is canceled or expires. According to department data, owners and operators
of 78 percent of the regulated UST facilities use insurance as their financial responsibility
mechanism. At least one other state has a requirement for insurance companies to notify the
state’s environmental department about financial responsibility coverage changes. Specifically,
Michigan requires insurers to notify its Department of Environmental Quality within 20 days after
termination or nonrenewal of UST financial responsibility coverage. In Arizona, at least one type of
insurance already has a similar requirement. Specifically, A.R.S. §23-961(I) requires insurers to
notify the Industrial Commission if a workers’ compensation policy is canceled or is not renewed.

Recommendations:
1.1 The Department should continue its efforts to improve its financial responsibility program,
including:

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a.

Recording UST owner and operator compliance with financial responsibility requirements
in its database only after complete and accurate evidence of financial responsibility is
received and following up with the owner, operator, or insurer to request the information
when it is not provided;

b.

Improving the database usefulness by modifying programming to capture financial
responsibility provided by operators, allowing staff to update financial responsibility
information by facility, tracking when financial responsibility documentation is received,
and fixing the function that deletes records when USTs have been permanently closed
and no longer require financial responsibility or when an error has been made, such as
linking the wrong owner identification number to a UST;

c.

Conducting outreach to educate stakeholders about financial responsibility requirements
and mechanisms available to comply with the requirements;

d.

Ensuring department inspection and compliance staff have a clear understanding of the
financial responsibility requirements and documentation needed to comply with them;

e.

Leveraging partnership opportunities to provide outreach to stakeholders and learn about
strategies used in other states to improve financial responsibility compliance, which
should be communicated to the Department’s financial responsibility program manager;
and

f.

Developing and implementing a strategic plan for the program.

1.2 The Department should develop and implement updated policies and procedures that:
a.

Specify that UST registration should not be approved without evidence of financial
responsibility;

b.

Define expectations for communication and coordination between the UST registration
and UST financial responsibility functions;

c.

Explain how to evaluate the evidence of financial responsibility to ensure it meets state
and federal requirements;

d.

Establish expectations and time frames for monitoring UST owner and operator
compliance with financial responsibility requirements; and

e.

Specify actions to be taken when a UST owner or operator does not meet the requirements.

1.3 The Department should ensure that its staff accurately determine whether financial responsibility
evidence meets requirements and take appropriate and timely actions when UST owners and
operators do not submit evidence of financial responsibility, when the evidence does not meet
requirements, or when financial responsibility needs to be updated by:
a.

Developing and implementing training for financial responsibility staff, including refresher
training, and

b.

Developing and implementing supervisory review practices.

1.4 The Legislature should consider modifying statutes to require insurance companies to inform
the Department before and/or after UST financial responsibility insurance is terminated,
canceled, or not renewed.

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State of Arizona

APPENDIX A

Allowable financial responsibility
mechanisms

Federal UST financial responsibility rules provide for eight different mechanisms that an owner or operator of a
petroleum underground storage tank may use to meet the financial responsibility coverage requirements. In
addition, there are four mechanisms that are specifically designed for use by local governments. However, local
governments are not restricted to these four mechanisms. Table 6 summarizes these mechanisms.
Table 6:

Descriptions of allowable financial responsibility mechanisms

Mechanism

Description

Availability

Self-insurance

The owner or operator assumes the risk of financial loss for conducting cleanup and
paying for third-party liabilities of bodily injury or property damage. The owner's or
operator's chief financial officer (CFO) must sign a letter certifying the company has at
least $10 million of tangible net worth among other requirements.

Anyone

Guarantee

A third party promises to fund a standby trust fund if the owner or operator fails to
conduct cleanup or pay third-party liability claims. The guarantor must have a close
business relationship with the owner or operator, or controlling interest in the business.
The guarantor's CFO must sign a letter certifying the guarantor meets the same
financial strength requirements as those for the self-insurance mechanism.

Anyone

Insurance and risk
retention group coverage

The owner or operator obtains coverage from an insurance company that is
authorized to offer such coverage. The policy must include specific language
established in federal regulations.

Anyone

Surety bond

A third party (the surety) promises to either meet the unmet obligations or fund a
standby trust fund if the owner or operator using the mechanism fails to conduct
cleanup or pay third-party liability claims.

Anyone

Letter of credit

A third party promises to fund a standby trust fund if the owner or operator using the
mechanism fails to conduct cleanup or pay third-party liability claims. A standby trust
fund is a trust fund that is not yet funded but is otherwise ready to accept monies that
can then be used to pay for cleanup and third-party compensation.

Anyone

State-required
mechanism

The owner or operator may use state-developed mechanisms approved by the U.S.
Environmental Protection Agency (EPA). Arizona Administrative Code R18-12-310
allows use of a Certificate of Deposit to pay for cleanup but an owner or operator must
use a different mechanism to pay for third-party liability claims.

Anyone

State fund or other state
assurance

The owner or operator may use an EPA-approved state fund or state assurance
program if available.

Anyone

Trust fund

The owner or operator enters into an agreement with a trustee, which is usually a
bank. If the owner or operator fails to conduct cleanup or pay third-party liabilities, the
director of the regulatory agency can direct payments from the fund to perform the
obligations not met.

Anyone

Local government bond
rating test

The local government owner or operator uses outstanding issues of general obligation
or revenue bonds and the ratings of those bonds to demonstrate that it can pay for
cleanup and third-party liability claims. The local government must have at least $1
million of outstanding general obligation or revenue bonds that are investment rated
by Moody’s or Standard & Poor’s.

Local
government

Local government
financial test

The local government owner or operator assumes the risk of financial loss for
conducting cleanup and paying for third-party liabilities of bodily injury or property
damage. The CFO must sign a letter certifying that the local government meets the
eligibility requirements.

Local
government

Local government
guarantee

A third party, which is either a state or another local government, agrees to honor the
obligations of the local government if that government fails to conduct cleanup or pay
third-party liability claims. The third party must have a close governmental relationship
with the local government. The guarantor, if another local government, must meet all
of the requirements established for using the local government bond rating test,
financial test, or fund.

Local
government

Local government fund

A local government owner or operator relies on its own funds to meet its obligations.
Coverage is evidenced in a letter from the local government’s CFO.

Local
government

Source:

Auditor General staff summary of 40 CFR §§280.90 through 280.115.

Office of the Auditor General
page

a-1

APPENDIX B
This appendix provides
information on the methods
auditors used to meet the
audit objectives.
This performance audit was
conducted in accordance
with generally accepted
government auditing
standards. Those standards
require that we plan and
perform the audit to obtain
sufficient, appropriate
evidence to provide a
reasonable basis for our
findings and conclusions
based on our audit objectives.
We believe that the evidence
obtained provides a
reasonable basis for our
findings and conclusions
based on our audit objectives.

Methodology
Auditors used various methods to study the issues addressed in this report.
Auditors interviewed department officials and staff, as well as a representative
from the Arizona Department of Insurance. Auditors also reviewed federal
laws, regulations, and policies; and state statutes and administrative rules
applicable to underground storage tank (UST) financial responsibility
requirements. In addition, auditors reviewed department- prepared documents,
including policies and procedures; and various external documents on
financial responsibility, including documents prepared by the U.S. Environmental
Protection Agency and the Association of State and Territorial Solid Waste
Management Officials. Auditors also used the following specific methods to
address the audit’s objectives:

•

To review the Department’s processes for ensuring that owners and
operators of USTs meet financial responsibility requirements, auditors
observed department staff as they reviewed financial responsibility
documentation; reviewed the financial responsibility program manager’s
list of issues to be addressed and proposed solutions; and obtained and
analyzed department financial responsibility data as of March 20, 2013, to
determine how many facilities with open or temporarily closed USTs had
each type of financial responsibility coverage and how many had expired
or no financial responsibility coverage. In addition to analyzing department
financial responsibility data, auditors obtained and analyzed fiscal year
2012 enforcement data to determine how many UST inspections identified
financial responsibility violations and unaudited UST installation data to
determine the typical age of underground storage tanks in Arizona.

•

To assess the reliability of department data, auditors examined department
controls over the data including reviewing system help files, security, and
program change procedures; and interviewed department staff
knowledgeable about the data. Auditors also validated enforcement data
as part of a prior audit on the Department’s compliance management
(see Arizona Auditor General Report No. 13-01). Finally, to further assess
the reliability of the financial responsibility data, auditors verified the
automated data against a random sample of 16 hard-copy files for
facilities with regulated open or temporarily closed USTs as of March 20,
2013. The sample of 16 financial responsibility and UST files consisted of
6 facilities with expired coverage, 5 facilities shown in the database as
having no coverage, and 5 facilities with current coverage using insurance,
self-insurance, or a local government bond rating test. In general, the
automated financial responsibility data appeared reliable except for the
weaknesses discussed in Finding 1 (see pages 9 through 19).

The Auditor General and staff
express appreciation to the
Department of Environmental
Quality (Department) Director
and staff members for their
cooperation and assistance
throughout the audit.

Office of the Auditor General
page

b-1

State of Arizona
page

b-2

•

Auditors also reviewed existing Michigan and suggested Delaware UST regulatory language
requiring insurers to notify the state environmental agency when insurance used to cover
financial responsibility is canceled or expires.

•

Auditors’ work on internal controls focused on reviewing department processes for ensuring
UST owners and operators comply with federal and state financial responsibility laws and
regulations. Auditors’ conclusions on internal controls are reported in Finding 1 (see pages 9
through 19).

•

To develop information for the report’s Introduction section, auditors compiled unaudited
department-prepared financial information on state and federal monies used for UST cleanup
efforts during fiscal years 2009 through 2013.

AGENCY RESPONSE
AGENCY RESPONSE

August 29, 2013

Debra K. Davenport
Auditor General
2910 N. 44th Street, Ste. 410
Phoenix, AZ 85018
Dear Ms. Davenport:
This letter provides the Arizona Department of Environmental Quality’s response to the August 19, 2013
revised preliminary report draft of the Underground Storage Tanks Financial Responsibility performance
audit. We appreciate the diligence and hard work of the Auditor General’s staff in completing this
performance audit and their consideration of our feedback on the previous draft.
1.1 The Department should continue its efforts to improve its financial responsibility program, including:
a. Recording UST owner and operator compliance with financial responsibility requirements in its
database only after complete and accurate evidence of financial responsibility is received and following
up with the owner, operator, or insurer to request the information when it is not provided;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
b. Improving the database usefulness by modifying programming to capture financial responsibility
provided by operators, allowing staff to update financial responsibility information by facility, tracking
when financial responsibility documentation is received, and fixing the function that deletes records when
USTs have been permanently closed and no longer require financial responsibility or when an error has
been made, such as linking the wrong owner identification number to a UST;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
c. Conducting outreach to educate stakeholders about financial responsibility requirements and
mechanisms available to comply with requirements;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
d. Ensuring department inspection and compliance staff have a clear understanding of the financial
responsibility requirements and documentation needed to comply with them;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
Southern Regional Office
400 West Congress Street  Suite 433  Tucson, AZ 85701
(520) 628-6733

Printed on recycled paper

Page 2 of 3

e. Leveraging partnership opportunities to provide outreach to stakeholders and learn about strategies
used in other states to improve financial responsibility compliance, which should be communicated to the
Department’s financial responsibility program manager; and
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
f. Developing and implementing a strategic plan for the program.
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
1.2 The Department should develop and implement updated policies and procedures that:
a. Specify that UST registration should not be approved without evidence of financial responsibility;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
b. Define expectations for communication and coordination between the UST registration and UST
financial responsibility functions;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
c. Explain how to evaluate the evidence of financial responsibility to ensure it meets state and federal
requirements;
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
d. Establish expectations and time frames for monitoring UST owner and operator compliance with
financial responsibility requirements; and
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
e. Specify actions to be taken when a UST owner or operator does not meet the requirements.
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
1.3 The Department should ensure that its staff accurately determine whether financial responsibility
evidence meets requirements and take appropriate and timely action when UST owners and operators do
not submit evidence of financial responsibility, when the evidence does not meet requirements, or when
financial responsibility needs to be updated by:

Page 3 of 3

a. Developing and implementing training for financial responsibility staff, including refresher training,
and
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
b. Developing and implementing supervisory review practices.
Response: The finding of the Auditor General is agreed to and the audit recommendation will be
implemented.
On behalf of ADEQ, we appreciate the opportunity to respond and look forward to continue working
productively with the Auditor General’s staff on completion of the Department’s remaining performance
audits.
Sincerely,

Henry R. Darwin
Director

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