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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

KRC SERVES NOTICE OF INTENT TO SUE TO FORCE REIMBURSEMENT OF MINING BOND POOL FUND  Posted: June 29, 2004

Kentucky Resources Council, Inc.

Post Office Box 1070

Frankfort, Kentucky 40602

(502) 875-2428

(502) 875-2845 fax

e-mail: FitzKRC@aol.com

June 28, 2004

Secretary LaJuana Wilcher

Environment and Public

Protection Cabinet

Fifth Floor, Capital Plaza Tower

Frankfort, Kentucky 40601

Commissioner Susan Bush

Department for Natural Resources

#2 Hudson Hollow

Frankfort KY 40601

Re: Notice of Intent To Sue Under Sections 520(a)(1) and/or 520

520(a)(2) of the Surface Mining Control and Reclamation Act

of 1977, 30 U.S.C. 1201 et seq.

To Whom It May Concern:

Pursuant to Sections 520(a)(1) and (2) of the Surface Mining Control and Reclamation Act of 1977, 30 U.S.C. Section 1270 (hereinafter “the Act”) and 30 C.F.R. 700.13, the Kentucky Resources Council, Inc. (KRC) hereby gives notice of the failure of the “state regulatory authority” (Environment and Public Protection Cabinet, Department for Natural Resources, formerly Department for Surface Mining Reclamation and Enforcement) to perform certain mandatory, non-discretionary duties as required by the Act. Specifically, the Commonwealth of Kentucky, acting as “state regulatory authority” under SMCRA, unlawfully transferred millions of dollars from a dedicated Bond Pool Fund to the state’s general fund, in a knowing and clear violation of 30 CFR 733.11 and 30 CFR 732.17(g).

Unless action is forthcoming within fourteen (14) days restoring the funding that was unlawfully removed from the bond pool fund, litigation will be initiated without further notice at any time thereafter to compel compliance with the Act. While SMCRA provides for a sixty-day notice period, both the recipients of this notice and the federal Office of Surface Mining have been on actual notice of the failure and omission of duty for over sixty (60) days, and in view of the immediate effect on the legal rights and interests of the complainants, complainants reserve the right to initiate action prior to the expiration of the sixty (60) day period, as they are authorized to do under 30 U.S.C. 1270(b)(2).

Introduction

30 U.S.C. 1270(a) provides that, upon giving the requisite notice, any person having an interest which is or may be adversely affected:

may commence a civil action on his own behalf to compel

compliance with this Act--

(1) against the United States or any other governmental

instrumentality or agency . . . which is alleged to be in

violation of the provisions of this Act . . . or

(2) against the Secretary or the appropriate regulatory authority

to the extent permitted by the eleventh amendment to the

Constitution where there is alleged a failure of the Secretary

of the appropriate State regulatory authority to perform any act

or duty under this Act which is not discretionary with the Secretary

or with the appropriate State regulatory authority.

30 U.S.C. 1270(a).

30 U.S.C. 1270(b) establishes the provisions for notice to the agency of the alleged violation or breach of duty. 30 C.F.R. 700.13 implements 30 U.S.C. 1270(b) and provides that a person who intends to initiate a civil action on his or her own behalf under 30 U.S.C. 1270 must give notice of intent to commence litigation in accordance with that regulation. The requirements for such notice are reprinted in pertinent part below:

(b) Notice shall be given by certified mail to the Secretary

and the Director in all cases . . . .

* * *

(c) Notice shall be given by certified mail to the alleged

violator, if the complaint alleges a violation of the Act or any

regulation, order, or permit issued under the Act.

* * *

(f) A person giving notice of an alleged failure by the Secretary

or a State regulatory authority to perform a mandatory act or

duty under the Act shall state, to the extent known;

(1) The provision of the Act containing the mandatory act or duty

allegedly not performed;

(2) Sufficient information to identify the omission alleged to

constitute the failure to perform a mandatory act or duty under

the Act;

(3) The name, address, and telephone number of the person

giving notice; and

(4) The name, address, and telephone number of legal counsel,

if any, of the person giving notice.

This letter serves as formal notice pursuant to that provision, of intent to commence litigation under 30 U.S.C. 1270 against the “state regulatory authority” for violations of SMCRA and implementing regulations; 30 U.S.C. 1253; 30 CFR 732.17(g) and 30 CFR 733.11.

Procedural Matters

The persons giving notice are:

The Kentucky Resources Council, Inc. (“Council”), a non-profit, Kentucky organization incorporated under the laws of the Commonwealth of Kentucky and dedicated to prudent use and conservation of the natural resources of the Commonwealth. The membership of the Council include numerous individuals who live, work and recreate in the coal-bearing regions of the state, including members who live, work and recreate in areas where lands are being or have been mined for which the bond pool fund standards as an alternative to individual reclamation performance bonds.

The illegal removal of funds from the dedicated bond pool fund has increased the possibility that in the event of non-performance of reclamation obligations by insured parties on covered acreage, the fund will be inadequate to assure completion of the reclamation plans in accordance with the permits, resulting in off-site damage and adverse effects to KRC members.

The address and telephone number for the Kentucky Resources Council, Inc. is P.O. Box 1070, Frankfort, Kentucky 40602, (502) 875-2428.

The name and address of the legal counsel giving notice is: Tom FitzGerald, Kentucky Resources Council, Inc., P.O. Box 1070, Frankfort, Kentucky, 40602 (502) 875-2428, fax (502) 875-2845, email fitzKRC@aol.com.

Failure to Perform Mandatory, Non-Discretionary Duties

The failures to perform a non-discretionary act or duty complained of with respect to this Notice of Intent is as follows:

The failure of the Environmental and Public Protection Cabinet, Department for Natural Resources (formerly Natural Resources and Environmental Protection Cabinet, Department for Surface Mining Reclamation and Enforcement, and hereinafter “state regulatory authority”) to refrain from transferring monies from the Kentucky Surface Mining Bond Pool until such a transfer was submitted to and approved by the Office of Surface Mining as a state program amendment. The state regulatory authority has an ongoing, mandatory, enforceable obligation under federal law to maintain, administer and enforce the approved state program. 30 USC 1253(a)(1-7); 30 CFR 733.11. Any change to an approved State regulatory program must be submitted to OSM for review, 30 CFR 732.17(a), and no amendment to the state program can be implemented until after the proposed amendment has been submitted to and approved by the federal Office of Surface Mining. 30 CFR 732.17(g).

Background

By telefax dated March 20, 2002, Kentucky asked the federal Office of Surface Mining to review informally the proposed transfer of $3 million dollars from its Kentucky Bond Pool Fund to the state’s general fund.

OSM responded by expressing concern on March 20, 2002 that the proposed transfer would require a formal state program amendment and that “under 30 CFR 732.17(g), the proposed transfer could not take effect until approved by OSM as an amendment to the app4roved State Program.” That letter is included in the Administrative Record for the rulemaking at KY-1528.

On March 18, 2003, OSM sent a second letter to Kentucky stating that it had become aware that a proposed transfer of those funds had been approved in the 2003 Kentucky Executive Branch Budget Bill, (KY-1575) and again OSM

reiterated our concerns with the transfer and referred to our letter dated

March 20, 2002. We emphasized that “no such change to laws or

regulations shall take effect for purposes of a State program until

approved as an amendment.”

69 Fed. Reg. 26500 (May 13, 2004).

Notwithstanding the continuing, enforceable, federal obligation of the state regulatory authority to maintain administer and enforce the approved state program in accordance with the approval, 30 C.F.R. 733.11, and to refrain from making state program amendments effective until after approval by the Secretary of Interior, 30 CFR 732.17(g), the funds were transferred on June 19, 2003, while the proposed state program amendment (submitted May 22, 2003) was pending.

On August 10, 2003, KRC wrote to the Director of the federal Office of Surface Mining’s Lexington Field Office, expressing concern with the proposed amendment to the Kentucky Regulatory Program, 68 Fed. Reg. 41980 (July 16, 2003), commenting that KRC was:

extremely concerned with the proposed transfer, and believes that the program amendment must be denied unless and until the state regulatory authority can produce an actuarial study demonstrating that the removal of this significant amount from the pool fund balance will not adversely affect the ability of that fund to assure reclamation of all properties insured under the fund.

The Kentucky state bond pool has been approved as an alternative mechanism for meeting the obligations of Section 509(a) of the federal Act, and thus must maintain sufficient fund balance to assure coverage in an amount necessary to assure that full reclamation will be undertaken from bond pool amounts in the event of operator default. If, at any time, the alternative bonding mechanism cannot demonstrate that the fund balance and income is sufficient to cover insured risks, the mechanism fails to meet the requirements of Section 509(c) and OSM must take prompt action to require that permitted operations obtain individual performance bond coverage. A repeat of the West Virginia problems is not acceptable in this state.

The transfer of $3 million dollars from the fund into the General fund was not undertaken because the funds are in excess of need – instead the effort was a part of a larger effort by the 2003 General Assembly to meet general fund shortfalls by removing funds from supposedly "dedicated" accounts and transferring them into the general fund to offset structural budget deficits.

The Council is unaware of any actuarial study supporting the proposition that the transfer would have a neutral effect on the solvency of the fund relative to the risks currently insured by the fund. Given past actuarial studies expressing concern that tonnage fees might not cover the full pool liability, and given further the poor performance of other sources of income and investment used to shore up the fund's solvency, the state regulatory authority must demonstrate through current actuarial study that the depletion of $3 million dollars of the bond pool corpus will not jeopardize fund solvency and ability to cover the reasonable worst-case design actuarial forfeiture risk.

Until such time as Kentucky can make that demonstration, OSM must take steps necessary to assure that the funds are not depleted, and should require assurance from the state that the funds have not been reprogrammed and removed from the fund, or it they have, that they will be restored pending a review of the state program amendment. In the event that the state has, in violation of 30 CFR 733.11 and 732.17, already transferred those funds, OSM should direct that no further risks be incurred by the state bond pool – including no new operators and no new acreage, until the state either restores the funds or demonstrates the solvency of the fund in light of covered risks absent those funds.

OSM required, by letter dated July 10, 2003, that Kentucky demonstrate by actuarial analysis that the transfer of funds would not adversely impact the ability of the Fund to complete reclamation plans for any areas which may be in default at any time, as required by 30 CFR 800.11(e).

Fully ten months after the bond pool funds were knowingly, unlawfully transferred, the state regulatory authority provided an actuarial review to OSM that concluded, predictably, that the pool was in a less favorable financial situation than the last analysis, needed to increase its assets so as to provide for potential liabilities and future growth, and could not reasonably withstand the failure of more than two of its member companies and remain actuarially sound and viable. 69 Fed. Reg. 26500.

With full knowledge that transferring funds from the Bond Pool Fund to the state’s general fund violated federal law, the state again transferred funds from the Bond Pool Fund on March 1, 2004, removing an additional $840,000.

On May 13, 2004, OSM disapproved the Kentucky State Program Amendment, concluding that:

Kentucky’s transfer of funds in the amount of $3,840,000 violates the basis

for our 1986 approval by directing funds to other nonapproved uses. Further,

such transfers are not consistent with the requirements of SMCRA and

the Federal regulations at 30 CFR 800.11(e) that require that the ABS

[Alternative Bonding System] ensures that the regulatory authority has

sufficient funds available to complete the reclamation plan for any areas which

may be in default at any time. Therefore we cannot approve the amendment.

The transfer of funds seriously jeopardizes Kentucky’s ability to provide

for the completion of reclamation plans as required by the Federal

regulations and represents a significant departure from the terms of OSM’s

approvals of Kentucky’s alternative bonding system on July 18, 1986.

Hoping to avoid the necessity of serving this formal Notice of Intent to Sue and the commencement of litigation, KRC wrote to Governor Fletcher and Secretary Wilcher on May 19, 2004, requesting that the unlawfully transferred funds be restored. The text of that letter is as follows:

May 19, 2004

Dr. Ernie Fletcher, Governor

Commonwealth of Kentucky

State Capitol

Frankfort, Kentucky 40601

Hon. LaJuana Wilcher, Secretary

Environmental and Public Protection Cabinet

Fifth Floor Capital Plaza Tower

Frankfort KY 40601

Re: Kentucky Surface Mining Bond Pool

Request for Restoration of Funds Unlawfully Transferred

Dear Governor Fletcher and Secretary Wilcher:

I am writing to you concerning the unlawful transfer of millions of dollars from the state surface mining bond pool fund to the general fund on June 19, 2003 and March 1, 2004. On June 19, 2003, $3 million dollars were transferred from that dedicated account to the general fund in direct violation of federal law, and on March 1, 2004, an additional $840,000 was unlawfully removed from the bond pool fund; a fund established under KRS 350.700 to provide an actuarially-based bonding mechanism as an alternative to individual per-acre surety or cash bonds. The transfers from this dedicated fund were accomplished as one of many funds transfers authorized under House Bill 269, the Executive Branch Budget bill enacted in 2003.

The transfers occurred in knowing disregard for federal law, since the transfers occurred despite the state having received advise from the federal Office of Surface Mining on two separate occasions (March 20, 2002 and March 18, 2003) that under 30 CFR 732.17(g), the proposed transfer could not take effect until the proposal was approved by OSM as an amendment to the approved state regulatory program. That regulation prohibits amendments to the state regulatory program prior to federal approval.

These transfers, in addition to violating the mandatory, nondiscretionary obligation of the state to maintain the approved surface mining regulatory program until an amendment to same is first approved, have in fact damaged the viability of the bond pool.

On May 13, 2004, OSM disapproved the state program amendment that belatedly sought approval for these fund transfers. On the basis of an actuarial review required by OSM and commissioned by the state from the Madison Consulting Group, and covering the period of July 1, 2000 to June 30, 2003, OSM has determined that the state program amendment cannot be approved, and finding that:

[t]he transfer of funds seriously jeopardizes Kentucky’s ability to provide for the completion of reclamation plans as required by

the Federal regulations and represents a significant departure from

the terms of OSM’s approvals of Kentucky’s alternative bonding

system on July 18, 1986.

OSM has suspended the use of the Fund to provide new financial guarantees and has directed that Kentucky replenish the $3,840,000 within sixty days (July 13, 2004) or provide a written plan to accomplish this action.

I am writing on behalf of the membership of the Council, to respectfully demand that the unlawfully transferred funds be restored immediately, in order to allow that fund to be restored to financial health and to assure that the risks of non-reclamation will not fall on the public due to the failure of this and the previous administration to follow federal law.

The Kentucky state bond pool has been approved as an alternative mechanism for

meeting the obligations of Section 509(a) of the federal Act, and thus must

maintain sufficient fund balance to assure coverage in an amount necessary to

assure that full reclamation will be undertaken from bond pool amounts in the

event of operator default. The goals of the bond pool statute are to provide,

through rigorous compliance and performance history screening and actuarially-

sound levels of funding, for a risk-based pool that would satisfy federal bonding

requirements under Section 509 of the 1977 Surface Mining Control and

Reclamation Act, at a cost more affordable to smaller and independent coal mining

entities who might otherwise find bond coverage prohibitively costly. The

sequential transfers of funds have interfered with the ability of the pool to provide

meaningful assistance to small businesses in a manner that would not increase

risks to the public and environment.

For these reasons, and in order to mitigate the ongoing non-compliant status of the

state under 30 CFR 732.17(g), I urge you to restore the funds to the bond pool

immediately. In the event that the Administration fails to do so, please be advised

that KRC reserves the right to commence civil action after notice under Section

520 of the 1977 mining law for the ongoing failure of the Cabinet to comply with

ongoing federal obligations, including the mandatory requirement of 30 CFR

733.11 to maintain, administer and enforce the approved state program in

accordance with federal law.

Cordially,

Tom FitzGerald

Director

Having received no response, this formal Notice of Intent to Sue is served in order to compel the state regulatory authority to restore the unlawfully transferred funds. I urge you to restore the funds immediately in order to cure the serious jeopardy that has been created in the ability of the Bond Pool Fund to cover the insured risks. Absent a commitment to restoration of those funds, KRC intends to seek an order under the citizen suit provision mandating restoration of the fund balance, and all other appropriate relief, including the costs and expenses of maintaining such litigation.

KRC also reserves the right to petition OSM to commence proceedings to withdraw the July 18, 1986 OSM approval of the State Bond Pool Fund as an alternative bonding system, and to request appropriate enforcement action to assure that all permitted and disturbed areas are adequately bonded through individual performance bonds.

Sincerely,

Tom FitzGerald, Esq.

Kentucky Resources Council, Inc.

P.O. Box 1070

Frankfort, Kentucky 40602

cc:

Secretary

U.S. Department of Interior

1849 C Street, N.W. Washington, D.C. 20240

Director

Office of Surface Mining

Reclamation and Enforcement

U.S. Department of the Interior

1951 Constitution Avenue, N.W.

Washington, D.C. 20240

Director, Lexington Field Office

Office of Surface Mining

2675 Regency Road

Lexington KY 40504



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