Financial Instrument Definitions

Cash: The owner/operator may elect to submit a check for the full amount of the required financial assurance to the state. The check is deposited in the state treasury and the funds returned to the owner/operator when the site no longer requires financial assurance.

Certificate of Deposit: The certificate of deposit (CD) is a financial instrument that certifies that the face amount of the CD is on deposit with the issuing bank. A CD used to fulfill the financial responsibility requirement must be registered to the company and to TDEC, to be redeemed for cash by the department if required.

Corporate Financial Test: Companies have the option of “self insuring” by demonstrating their ability to pay the full amount the department has estimated it would take to clean up the site if necessary. Alternative one of the financial test requires that the company meet minimum standards for certain financial ratios derived from its latest financial statements, including the ratio of total liabilities to net worth. Alternative two of the financial test relies on the strength of the company’s most recent bond ratings from the major bond-rating agencies. To insure that financial data is kept current, TDEC requires the test to be submitted every year and has the authority to request quarterly statements if adverse news suggests that the company’s financial condition has deteriorated. Note: Only companies with a large asset base relative to estimated site clean up costs are likely to pass the corporate financial test.

County/Municipal Contracts of Obligation: This form is only available to Tennessee municipalities and counties. The contract of obligation is a binding agreement between the municipality or county and the state, allowing TDEC to collect the required amount from any funds being disbursed or to be disbursed from the state to the municipality or county.

Insurance Policies: An insurance policy is a contract between an insurer and the owner/operator, in which the insurer agrees to pay for any claims made against the policy in exchange for the regular payment of a premium.

Irrevocable Standby Letter of Credit (LOC): A letter of credit is a document issued by a financial institution, such as a bank or savings and loan, which guarantees the payment of a customer’s obligation up to a specific amount for a specific period of time. In effect, the LOC substitutes the bank’s credit for the customer’s credit.

Local Government Bond Rating Test: A local government tank owner or operator and/or a guarantor may satisfy its financial assurance requirements by having a currently outstanding issue of bonds of over $1,000,000 with a bond rating that meets or exceeds the level determined by TDEC to indicate a sound financial position.

Local Government Financial Test: A local government tank owner may satisfy its financial assurance requirements by passing a financial test that examines total revenues and expenditures, total funds, existing debt service and population.

Personal Bond Backed by Securities: This form allows the owner/operator to file his or her personal performance guarantee accompanied by collateral in the form of securities with a market value that is adequate for meeting the financial assurance requirement. These securities may include United States Treasury Bonds or general obligation municipal or corporate bonds.

Surety Bonds: A surety bond is a contract between a surety (e.g., an insurer) and the site’s owner/operator (called the “principal”), in which the surety agrees to be financially responsible for any necessary clean up on the site if the principal defaults on its obligations. There are two main types of surety bonds:

1. a payment bond, by which the surety simply guarantees it will pay the value of the bond to the state if the principal defaults, or
2. a performance bond, by which the surety guarantees it will perform any necessary clean up on the site OR pay the value of the bond to the state.

Trust Funds: After entering an agreement with TDEC and a financial institution (the trustee), the owner/operator transfers the required amount of financial assurance funds to the financial institution to be held in trust and used for any expenses related to the clean up of the site. The trustee manages the trust and insures that it is only used for its intended purpose.