The commission that oversees Kentucky’s Reclamation Guaranty Fund is waiting to take any major actions after receiving an actuarial analysis of the fund’s first two years.
In the analysis, performed by Pinnacle Actuarial Resources, actuaries recommended several adjustments to ensure the fund’s future viability. But in an interview last month, the fund’s director said the KRGF Commission would adopt a wait-and-see approach on several of the recommendations.
To receive a permit for coal mining, a company has to post a bond. If the mining and reclamation are completed successfully, the company gets its bond back. But if the company isn’t able to reclaim the land like it’s required to under the law, they forfeit the bond and the money is used for reclamation.
But in 2012, the federal Office of Surface Mining and Reclamation raised concerns about inadequate bonding of Kentucky coal mines. The worry was that the bonds weren’t large enough to actually cover the costs of reclamation if they were needed. So in response, state lawmakers formed the Kentucky Reclamation Guaranty Fund.
The fund is meant to provide a backup for reclamation bonding. Coal companies pay a few cents per ton of coal mined or a fee for each permitted acre, and the money goes into the fund. Money also comes in from a few other sources, like penalty fees and interest.
The actuarial study that was completed in November analyzed the first two years of the fund’s performance and made recommendations to keep the fund solvent over the next 20 years.
One of those recommendations was significantly increasing the tonnage fee coal companies pay for each ton of coal mined. The report recommended an increase from 7.57 cents to 24.79 cents on surface mined coal, and 3.57 cents to 11.69 cents on coal from underground mines.
But for now, the commission won’t act on that recommendation. KRGF executive director Danny Hall said there were questions about whether the 20-year time frame is appropriate.
He said in the next actuarial analysis, which will be out later this year, they’ve asked for a more short-term outlook to reflect reality.
“To make the assumption that we’re not going to do anything for 20 years is just wrong,” he said. “If there was a dramatic downturn again, we’re going to adjust rates. We’re going to do something to protect the fund.”
Hall said the estimation of the number of forfeitures — companies that default on their bonds and require the KRGF to step in to pay for reclaiming the land — is also higher than the state is experiencing in reality.
“Well, so what happened was the forfeitures were a lot lower than anybody expected, so the fund grew faster,” he said. “So the rates that were set in 2013, they’re probably a little higher than they could have been, had we known the future.”
‘Insurance for insurance’
Any decision to raise the tonnage fees would have to go through the state legislature, and could be seen as placing additional burdens on the struggling industry. But in July of last year, before the final version of the study was released, members of the Kentucky Reclamation Guaranty Fund Commission indicated they were willing to raise the rates coal companies pay into the fund.
The minutes from the July 26, 2016 meeting relate a conversation between commissioner Bill Adams of Cumberland Surety Company, a bonding company, and chairman Charles Snavely, the secretary of the Energy and Environment Cabinet:
“Commissioner Adams asked whether a rate increase for the KRGF Fund would hurt the coal industry from the perspective of would an increase possibly cause more of the harm that the KRGF is trying to prevent.
Chairman Snavely indicated that potentially rate increases could have an impact on companies and their operations, however, if the actuary states that the KRGF needs to increase rates to sustain the Fund, then it is their job to present that regardless of how people feel. Chairman Snavely stipulated that it is the KRGF Commission’s job to be the messenger and go before the legislature and say the Fund needs a rate increase, if that is what the actuary finds. Commissioner Adams indicated that he agreed with Secretary Snavely’s assessment of the KRGF Commission’s job.”
The actuarial study also recommended the KRGF explore getting reinsurance, which director Danny Hall described as “insurance for insurance.” It would kick in after the fund paid out a certain amount of money in losses.
The KRGF is currently getting quotes on reinsurance to determine whether it would be affordable and prudent.