The PolyMet mining damage deposit: A landlord's advice

The dirty refrigerator, stained carpet and other unpleasant surprises landlord Chad Anderson often encounters when he inspects Twin Cities apartments are similar to the pollutants at old, abandoned mines that can escape into nearby water supplies.

A landlord hopes a tenant's damage deposit will cover cleanup and repair costs, just as the state of Minnesota hopes financial assurance would protect the state's taxpayers from future cleanup and reclamation costs years from now at PolyMet's proposed copper-nickel mine and processing facility.

With Anderson's help, MPR News is using the tenant-landlord relationship as an analogy for the financial relationship the state of Minnesota is preparing to enter with PolyMet.

Financial assurance is far more complex than an apartment damage deposit, which is why a House committee Tuesday is planning to grill DNR officials for hours on how they will approach the issue. It will be one of the most important decisions the DNR could ever make, setting a precedent for other companies seeking to mine copper, nickel and precious metals in the rich northern Minnesota deposit known as the Duluth Complex.

LEARN MORE: PolyMet copper-nickel mining in Minnesota

Financial assurance in the mining world has only become more complex in recent years as state and federal regulators look to avoid past costly mistakes. Cleanup costs can run into the hundreds of millions of dollars and last decades or even centuries, especially when long-term water treatment is required, as could be the case in PolyMet's proposal.

Right now, and likely for many more months, state and federal regulators are executing a souped-up background check of sorts — a massive environmental review designed to assess the mine's potential environmental impacts. If that study passes muster, PolyMet would ask the state Department of Natural Resources for permission to mine. The mining permit includes a financial assurance proposal, and the DNR would have to evaluate whether it would be sufficient.

Anderson, whose family owns and manages several Twin Cities apartment buildings, gives examples from the rental property world that provide parallels to the bigger decision Minnesota state regulators could soon be making.

Skipping town and not paying rent: The bankruptcy-proof solution

Landlord Chad Anderson recently had to evict a woman who disappeared and stopped paying rent on her two-bedroom, two-bathroom apartment in Bloomington. It cost Anderson $700 in legal fees for the eviction plus a month's rent to hold her belongings and hundreds of dollars in cleaning and repair costs.

"She had lived here a while," Anderson said. "All the blinds were busted or missing slats, the refrigerator was filthy, the stove was filthy. The carpet had stains beyond normal wear and tear. There were some holes in the walls."

The damage deposit she had paid was less than $900.

Landlords usually end up cutting their losses in those situations, but government regulators have been trying to prepare as best they can for a similar scenario where a mining company abandons the site and declares bankruptcy.

In fact, financial assurance was invented with that scenario in mind, because there are real-world examples where bankruptcies have led to taxpayer-funded cleanup. But there are numerous examples where the financial assurance has come up short. In 2011, the Government Accountability Office identified 57 hardrock mines on federal lands with inadequate financial assurance.

The U.S. Environmental Protection Agency is working on standardized rules for financial assurance, but calculating it remains a challenge.

"It's difficult to get an accurate number," said Patty McGrath, who oversaw mining issues for the EPA in Washington, Oregon, Idaho and Alaska before joining SRK Consulting as an environmental consultant. "There's definitely been more scrutiny and more focus among agencies in developing these cost estimates."

Financial assurance involves various financial mechanisms, and to make sure it's bankruptcy proof, regulators often require a letter of credit from a bank guaranteeing that a certain amount of money will be available to close the mine, reclaim the land and pay for cleanup in the future, regardless of the company's future existence.

"Things are much better now than they used to be because I think agencies have learned from some of the problems in the past," McGrath said.

The filthy refrigerator, carpet and stove: Cleanup costs add up

Landlord Chad Anderson charges tenants $25/hour for any cleaning that has to be done after they move out. The cleaning costs are deducted from the damage deposit, and they can add up quickly.

One of the most important pieces of PolyMet's financial assurance package will be a way to pay for long-term water treatment at both the mine and processing facility.

The environmental study on the proposal concludes that monitoring and maintenance costs after the mine closes would be between $3.5 million and $6 million a year. The expenses include maintaining pumps and barriers to collect contaminated water and two water treatment plants to ensure that most water leaving the site meets state standards.

But the study is inconclusive when it comes to predicting how long these measures will be needed, and so PolyMet officials have said they are prepared to financially commit to treating that water forever, if necessary.

How would such ongoing operating costs be covered for the long-term? Likely through a trust fund, said Jess Richards, director of the DNR's Lands and Minerals Division.

"The performance of money over time is really important to understand here," he said.

The idea is to put enough money away so that when the mine closes, there's enough money in the fund that the ongoing costs would be covered by interest alone. The DNR will hire consultants with expertise in trust funds to ensure that the state would never have to tap into the fund's principal.

"You need good financial expertise in order to make that analysis," Richards said. "How soon does that fund need to be established in order to get that kind of protection?"

Trust funds are often used to pay for post-closure costs at mines, but trust funds sometimes come up short. Because of that, Richards said, the funds are often backed up by other financial mechanisms.

"There are actually situations where you financially assure the financial assurance," he said. "You might back it up with a bond or some other tool to be there in the event that the trust doesn't perform as well as expected early on. So these are all the things that we're looking at. Yes, it's complicated."

The stove that's so dirty it has to be replaced: Does Sears sell wetlands, too?

Even when charging tenants $25/hour for cleanup, landlord Chad Anderson has encountered stoves that are so dirty it makes more sense to replace them.

This is where environmentalists urge caution when using the apartment damage deposit as an analogy for financial assurance in mining.

In Anderson's case, a tenant's living habits threaten material objects — stoves, refrigerators, carpeting, walls. But mining threatens the environment — water and natural features that plants, animals and human beings depend on.

"Financial assurance has its limits," said Don Arnosti, policy director for Audubon Minnesota. "Once a wetland is poisoned, I don't think you can replace that."

By law, PolyMet must account for the wetlands it will destroy as part of mining by replacing or restoring wetlands elsewhere. But replacement wetlands are located elsewhere and are often of inferior quality, Arnosti said.

And although the PolyMet environmental study predicts the company's mining plan will meet state water quality standards, what if something goes wrong and a river that people rely on for subsistence fishing is poisoned?

"In the case of an apartment, you could completely trash the apartment, they could use money to completely rebuild the apartment," he said. "In the case of wetlands or wildlife that live in the St. Louis River or the people who may be exposed to additional mercury because they're eating fish out of these rivers, money doesn't resolve the issue."

Mold and ticking time bombs: Problems that don't show up until years later

Arnosti said the other way the analogy falls short is most landlords can easily tell what the damages are during the move-out inspection. In mining, it sometimes takes years to detect a problem.

"It'd be like hidden time bombs in the basement and mold in the walls and things that don't show up for decades," Arnosti said. "We're talking about subtle things like pollution to groundwater where if nobody looks, you don't know until it comes up in somebody's well 50 years later."

But mining industry officials say modern financial assurance packages are designed to take care of such circumstances.

"These trust funds are working," said Laura Skaer, executive director of the American Exploration and Mining Association. "If the mine operates for an extended period of time, it's going to be a successful mine and the company's going to be making money and they're going to be able to make sure there's a sufficient amount of money in these long-term trusts to treat the water as long as necessary."

Mid-year inspections: Monitoring for financial protection

In a perfect world, landlord Chad Anderson wishes he could avoid getting burned by damages by arranging to inspect his apartments every six months or so. That way, if he sees problems, he could ask a tenant to put additional money in the damage deposit or pay for any needed repairs on the spot.

"Regular inspections would help so that at the end of a five-year lease you don't go in there and you're totally blown away," he said.

During those inspections he might also catch something like a malfunctioning smoke detector. Fixing it could protect him and his tenants.

The idea could be similar to state officials checking on PolyMet's mining site regularly to see if the company is meeting the terms of its permits.

Anderson said regular checks could save money.

"If there is [pollution], it would be probably a little bit rather than a lot," he said. "If it's a five-year project and in year one they see something, they can correct it there and will only have to correct one year of problems instead of five years of problems."

PolyMet proposes mining for 20 years, and regulators will be performing regular checks. In addition, state law requires the DNR to reevaluate financial assurance annually.

Before mining begins, "there's an area of uncertainty that is really based on the water quality modeling that you've done," McGrath said of potential cleanup costs. "As mines get into operations and start collecting real data, that uncertainty is usually decreased. So your financial assurance accuracy will actually increase, and that's why agencies will update bonds on a regular basis."

Financial assurance also increases with the amount of rock that's unearthed, because more potential contaminants are exposed. PolyMet's environmental review predicts financial assurance will peak at about $200 million in year 11 of mining. After that, it could go back down because PolyMet will have reclaimed part of the site, lessening the pollution risks. Those numbers are up for debate, and Richards said the DNR will seek the public's input on financial assurance.

Despite regulators' ability to increase financial assurance amounts after mining has begun, recently permitted mines in the U.S. have erred on the side of overfunding financial assurance at the start, said Skaer, of the American Exploration and Mining Association.

"[Regulators] will err on the side of way more money than the company might think is necessary, because they want to err on the side of protection," she said.

She said mining companies have been OK with that: "Companies have figured out that it's not good for the bottom line or the public perception if there's an environmental issue and all of a sudden you find out that financial assurance is inadequate."

Free TV when you lease: Market forces affect decision making

Landlord Chad Anderson recalls a soft rental market several years back when property managers would go to great lengths to find tenants.

"Everybody would call up and say, 'What are your specials?' There were landlords giving out TVs and no deposit," he said.

Those desperate landlords who allowed tenants to move in without paying a damage deposit were betting that the cost of any damages would pale in comparison to having a unit go vacant for months.

In the mining world, environmental groups are concerned that companies' promises of jobs and tax revenue can be so enticing that government regulators end up being too lax on financial assurance requirements.

In Minnesota, the rules regarding financial assurance direct the commissioner of the DNR to make decisions.

"The law allows hiring experts, but nevertheless, when push comes to shove and a decision is made, it's up to the commissioner to decide," said Arnosti, of Audubon Minnesota.

Arnosti, who participated in the financial assurance rulemaking process in the early '90s, said the reason it's concerning for DNR commissioners to have so much power in financial assurance decisions is because the agency has a dual charge: protecting the environment and natural resources, and promoting mining.

"Any natural resource commissioner has conflicting legal and political mandates, and the thumb is on the scale on the side of development," Arnosti said. "Once you have jobs, industry, people's livelihoods on the line, it's very difficult politically for either politicians or their appointees in agencies to actually lower the boom."

It isn't clear whether a mining company like PolyMet would walk away from a project solely because the state was requiring too much financial assurance. Mining industry and environmental experts contacted by MPR News weren't familiar with any examples of that happening elsewhere. Richards, of the DNR, said PolyMet's financial situation wouldn't be a factor.

"The ability for PolyMet to afford or not afford different financial assurance mechanisms is secondary to our desire to make sure whatever mechanism would be in place is protective of taxpayers," he said. "We will not put a permit out unless we feel like we have the right number."

The EPA's efforts to come up with standards for financial assurance are aimed in part at avoiding agreements that are swayed by the politics and economics of the time, said David Chambers, president of the Center for Science in Public Participation, a Montana nonprofit that formed following troubling mining scenarios in that state.

"They're going to be more objective in their calculations and less susceptible to outside pressure," he said.

The day a tenant's fish dinner caught fire: The unforeseen, expensive disaster

One of landlord Chad Anderson's tenants was cooking fish one day last summer. The tenant took a break from cooking to watch some TV and returned to the kitchen to find a grease fire, which he doused with water. Bad idea.

"It basically blew up," Anderson said.

The damage? About $600,000, including gutting and remodeling the tenant's apartment and smoke damage throughout the building to everything from carpet to walls to light fixtures.

The tenant didn't have renter's insurance, so Anderson and his family had to pay the $10,000 insurance deductible. In a perfect world, Anderson said, he would require his tenants to have renter's insurance.

A common criticism of the environmental study on PolyMet's proposal is that it doesn't describe how problems such as a broken pipeline or water treatment plant, or a natural disaster hitting the site would be handled to prevent extensive environmental harm. DNR officials have said the mine and processing facility's engineering, including potential vulnerabilities, will be fully vetted during the permitting phase of the project.

Richards, whose division within the DNR oversees mining permits, said financial assurance would only be used in one of these situations if PolyMet failed to meet its obligations.

"If a mining company fails to remedy the situation or walks away, that's when the financial assurance kicks in," he said, adding that such a scenario could also give the DNR reason to revoke a permit.

Skaer, of the mining industry group, said although mining companies may carry insurance policies to cover certain problems, financial assurance is usually not set up for the "worst-case scenario, unimaginable event" like a meteor falling out of the sky.

"There's risk in everything we do, and you try to develop procedures and policies and equipment to minimize the risk," she said.

Learn from experience or else seek advice from experts

Landlord Chad Anderson has been in the business long enough to know the types of costs he will have to cover.

"It's the planning and preparation that does the best, so I think you need to have systems in place that can accomplish that, and do research and figure out worst-case scenarios," he said.

The DNR is hiring consultants to help evaluate PolyMet's plans, assuming the project moves forward after the environmental review. DNR officials are also looking at a database of more than 200 mines across the country to compare against PolyMet's financial assurance proposal.

"We have access to information where we can see what were the actual costs of reclamation for specific mining parameters, and when we get PolyMet's proposals through their permit application, that's one of the things we would look at," Richards said.

Sometimes, tenants leave the place as nice as they found it

These are the kind of tenants that make landlord Chad Anderson's work worthwhile.

Mining by its very nature won't leave the earth exactly as a company found it, but reclamation is designed to come as close as possible. Financial assurance is there in the event a mining company fails to reclaim the land.

The industry and regulators have gotten better at understanding and calculating financial assurance, said Skaer, of the American Exploration and Mining Association. She said none of the mining and exploration sites permitted by the Bureau of Land Management and the U.S. Forest Service since 1990 have ended up as superfund sites, meaning federal taxpayers financed cleanup.

"That's a pretty good track record," she said. In addition, technology is improving and becoming cheaper, which could mean the financial assurance is more than what's needed, Skaer said.

"It's based on what the best available technology is at the time. If new technology is developed that treats water just as well or better for less money, then that would be considered by the agency when they do their recalculations," she said.

Other times, it's worth waiting for a better tenant

Landlord Chad Anderson says it's often tempting to sign leases with tenants he knows might cost him later on. Sometimes landlords need that immediate rental income.

But he said it's worth taking a step back and analyzing all the potential costs.

"Have people who really know what they're talking about sit down and say, what's the best case, what's the worst case and how do we create the jobs without putting ourselves up for the fact that there could be bad stuff on the back end," he said. "$900 today might cost you a lot in the future."

The Minnesota DNR will be working on those calculations to ensure state taxpayers are protected.

But Arnosti, of Audubon Minn., said he's convinced it would be better to wait until there's a way to mitigate the risks even more, such as by building the mine underground.

"Maybe this technology, this approach, this location, this time, is not right," he said. "These minerals have been there for billions of years. We can gift the minerals to our great grandchildren."