Environmental Liabilities
Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties in the Federal Government's Estimates Gao ID: GAO-06-427 March 31, 2006The nation's military installations and nuclear weapons production facilities have accumulated many types of waste and contamination over the years. The federal government estimated its environmental liability to clean up this waste at $249 billion in fiscal year 2004, representing the federal government's third largest reported liability. It represents a significant future outflow of funds at the same time as many other competing demands for federal dollars, but is currently not auditable. GAO was asked to address (1) the nature and extent of the government's environmental liabilities, (2) the extent to which Energy's and Defense's processes and controls were designed to estimate and report environmental liabilities in accordance with federal accounting standards, and (3) the nature and types of uncertainties that are currently not estimable but could affect the cost of cleanup.
The federal government's environmental liability reflects the estimated cost to clean up and dispose of environmental contamination in every state in the nation. The Departments of Energy and Defense report about 99 percent of this liability. Energy's reported liability of $182 billion relates primarily to the cleanup and disposal of nuclear waste, contamination, and by-products that resulted from decades of nuclear weapons production. Defense's reported liability of $64 billion is primarily for the cleanup of hazardous wastes at training ranges, military bases, and former defense sites; disposal of nuclear ships and submarines; and disposal of chemical weapons. While the design of Energy's internal controls have enabled its auditors to determine that Energy's financial statements were presented fairly and in accordance with federal accounting principles, significant weaknesses in Defense's controls have hindered it from producing auditable environmental liability estimates. Specifically, Defense's outdated and incomplete accounting guidance for developing and reporting its environmental liability estimates led to errors in financial reporting; its policies and procedures for determining, reporting, and documenting environmental liability estimates were not consistently followed; and none of the military services had adequate controls in place to help ensure that all identified contaminated sites were included in their environmental liability cost estimates. These weaknesses not only affected the reliability of Defense's environmental liability estimate, but also that of the federal government as a whole. Even if Defense resolved its internal control weaknesses, uncertainties exist for both Energy and Defense--the effect of which cannot currently be estimated--that could increase the government's environmental liabilities beyond the currently recorded amounts. These uncertainties involve the lack of feasible or proven remediation technologies, regulatory impediments and legal challenges, and uncertainties with the agencies' abilities to meet their current cost and schedule targets. It is important to understand the nature and extent of these uncertainties because they have the potential to materially impact the ultimate cost and timing of cleanup activities.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-427, Environmental Liabilities: Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties in the Federal Government's Estimates
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Report to Congressional Requesters:
March 2006:
Environmental Liabilities:
Long-Term Fiscal Planning Hampered by Control Weaknesses and
Uncertainties in the Federal Government's Estimates:
GAO-06-427:
GAO Highlights:
Highlights of GAO-06-427, a report to congressional requesters:
Why GAO Did This Study:
The nation‘s military installations and nuclear weapons production
facilities have accumulated many types of waste and contamination over
the years. The federal government estimated its environmental liability
to clean up this waste at $249 billion in fiscal year 2004,
representing the federal government‘s third largest reported liability.
It represents a significant future outflow of funds at the same time as
many other competing demands for federal dollars, but is currently not
auditable. GAO was asked to address (1) the nature and extent of the
government‘s environmental liabilities, (2) the extent to which
Energy‘s and Defense‘s processes and controls were designed to estimate
and report environmental liabilities in accordance with federal
accounting standards, and (3) the nature and types of uncertainties
that are currently not estimable but could affect the cost of cleanup.
What GAO Found:
The federal government‘s environmental liability reflects the estimated
cost to clean up and dispose of environmental contamination in every
state in the nation. The Departments of Energy and Defense report about
99 percent of this liability. Energy‘s reported liability of $182
billion relates primarily to the cleanup and disposal of nuclear waste,
contamination, and by-products that resulted from decades of nuclear
weapons production. Defense‘s reported liability of $64 billion is
primarily for the cleanup of hazardous wastes at training ranges,
military bases, and former defense sites; disposal of nuclear ships and
submarines; and disposal of chemical weapons.
While the design of Energy‘s internal controls have enabled its
auditors to determine that Energy‘s financial statements were presented
fairly and in accordance with federal accounting principles,
significant weaknesses in Defense‘s controls have hindered it from
producing auditable environmental liability estimates. Specifically,
Defense‘s outdated and incomplete accounting guidance for developing
and reporting its environmental liability estimates led to errors in
financial reporting; its policies and procedures for determining,
reporting, and documenting environmental liability estimates were not
consistently followed; and none of the military services had adequate
controls in place to help ensure that all identified contaminated sites
were included in their environmental liability cost estimates. These
weaknesses not only affected the reliability of Defense‘s environmental
liability estimate, but also that of the federal government as a whole.
Even if Defense resolved its internal control weaknesses, uncertainties
exist for both Energy and Defense”the effect of which cannot currently
be estimated”that could increase the government‘s environmental
liabilities beyond the currently recorded amounts. These uncertainties
involve the lack of feasible or proven remediation technologies,
regulatory impediments and legal challenges, and uncertainties with the
agencies‘ abilities to meet their current cost and schedule targets. It
is important to understand the nature and extent of these uncertainties
because they have the potential to materially impact the ultimate cost
and timing of cleanup activities.
Craters Left as a Result of Underground Nuclear Testing at the Nevada
Test Site:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO is making eight recommendations to help Defense improve its
internal controls over its environmental liabilities by improving its
financial management guidance and processes. We are also making a
recommendation to help Energy improve its process for ensuring all
litigation for potential disclosure is documented. Both Defense and
Energy concurred with the recommendations, and described corrective
actions being taken to address them.
www.gao.gov/cgi-bin/getrpt?GAO-06-427.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202) 512-
9508 or calboml@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Federal Government's Environmental Liabilities Are Significant,
Widespread, and Complex:
Energy's Processes and Controls Allowed It to Produce Estimates in
Accordance with Federal Accounting Standards; Defense's Did Not:
Major Uncertainties Will Affect Future Cleanup Costs and Funding
Demands:
Conclusions:
Recommendations For Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Related GAO Reports:
Tables:
Table 1: Primary Categories of Environmental Waste and Byproducts:
Table 2: Accounting Requirements for Recording or Disclosing a
Liability in the Federal Financial Statements:
Figures:
Figure 1: The Federal Government's Reported Fiscal Year 2004
Environmental Liabilities by Agency:
Figure 2: Energy's Cleanup Locations and Waste Repositories as of
September 30, 2004:
Figure 3: Number of Defense's Reported Cleanup Locations by State:
Figure 4: Energy's Reported Fiscal Year 2004 Environmental Liabilities
by Type:
Figure 5: Waste Drum Being Opened and Contents Processed through a
Remote-Handled Waste Facility:
Figure 6: Defense's Reported Fiscal Year 2004 Environmental Liabilities
by Type:
Figure 7: Aerial View of the Waste Treatment Plant under Construction
at Hanford:
Figure 8: Craters Left As A Result Of Underground Nuclear Testing At
The Nevada Test Site:
Figure 9: View of an Exploratory Tunnel at Yucca Mountain:
Figure 10: An Excavator Removes Buried Transuranic Waste at Energy's
Idaho Cleanup Location:
Letter March 31, 2006:
The Honorable Todd R. Platts:
Chairman:
Subcommittee on Government Management, Finance, and Accountability:
Committee on Government Reform:
House of Representatives:
The Honorable Darrell E. Issa:
Chairman:
Subcommittee on Energy and Resources:
Committee on Government Reform:
House of Representatives:
The nation's military installations and nuclear weapons production
facilities have accumulated many types of waste and contamination over
the years. This material, which includes radioactive byproducts from
nuclear weapons production, nonradioactive but hazardous chemicals such
as polychlorinated biphenyls (PCB), and unexploded ordnance such as
bombs and missiles at military ranges, poses a potential threat to the
public's health and well-being.[Footnote 1] Various federal laws,
agreements with states, and court decisions require the government to
clean up these environmental hazards. Federal accounting standards
require agencies responsible for cleaning up this waste and
contamination to estimate the cleanup and disposal cost and report it
in their financial statements as environmental liabilities.[Footnote 2]
In the federal government's fiscal year 2004 consolidated financial
statements, these environmental liabilities were estimated at $249
billion--the third largest reported liability facing the federal
government.[Footnote 3] This amount is currently unauditable and likely
misstated given the problems we discuss later in this report with the
Department of Defense's (Defense) controls over its estimation
processes. Paying for this liability will require a significant future
outflow of funds at the same time that the federal government will be
facing many other competing demands for its limited dollars, such as
escalating health care costs and growing Social Security obligations.
Given that the inability to estimate total environmental liabilities
has contributed to our disclaimer of opinion on the U.S. government's
consolidated financial statements, and that the ultimate cost of
cleanup and disposal activities will affect the long-term fiscal
outlook of the federal government, you asked us to review the
government's financial reporting of its environmental
liabilities.[Footnote 4] We focused our work on the two federal
agencies primarily responsible for those efforts--the Department of
Energy (Energy), which oversees the nation's nuclear weapons
facilities, and Defense, which oversees the nation's military
installations and weapons systems. Together, these two agencies
comprised 99 percent of the cleanup and disposal cost estimates
reported in the federal government's fiscal year 2004 consolidated
financial statements. In response to your request, our report
addresses:
* the nature and extent of the environmental cleanup and disposal cost
liabilities as reported in the federal government's financial
statements,
* the extent to which Energy's and Defense's processes and controls are
adequately designed to estimate and report environmental liabilities in
accordance with related federal accounting standards, and:
* the nature and types of uncertainties that are currently not
estimable but could affect the ultimate cost of Energy's and Defense's
environmental cleanup efforts.
In performing our work, we focused our review on Energy's and Defense's
Performance and Accountability Reports for fiscal year 2004, the most
recent completed fiscal year at the time we began our review, to
determine what the agencies recorded and reported in their financial
statements with respect to their environmental liabilities.[Footnote 5]
We interviewed Energy and Defense officials, visited various sites, and
reviewed policies and other documentation to obtain a better
understanding of each agency's cleanup responsibilities and the cleanup
and disposal issues being addressed by each agency, their internal
controls and procedures for developing their environmental liability
estimates, and the uncertainties that could affect the ultimate cost of
cleanup and disposal. In reviewing both agencies' internal controls, we
did not review or test detailed contractor estimates but instead
focused on each agency's procedures for compiling and developing its
environmental liability amounts.
Because an independent public accounting firm audited Energy's fiscal
year 2004 financial statements and found them to be fairly stated, we
reviewed those statements, traced and verified environmental
liabilities amounts to supporting schedules, and reviewed audit
workpapers where available. We otherwise relied on the work performed
by the independent auditors and did not perform additional audit
procedures to verify the completeness or accuracy of the amounts
reported. Because Defense has acknowledged serious data reliability
problems related to its financial systems and information, including
those involved in the reporting of its environmental liabilities,
auditors did not attempt to perform audit procedures and disclaimed an
opinion on Defense's fiscal year 2004 financial statements. Therefore,
it was not our objective to--and we did not--audit the completeness or
accuracy of Defense's reported environmental liabilities amounts.
Although we have previously reported on the potential for Defense to
incur costs in voluntary restoration initiatives in conjunction with
returning overseas Defense facilities to host nations, these activities
are not reported as environmental liabilities in its financial
statements, and we did not review their international operations or
processes.[Footnote 6] Since Defense's reported amounts are not
reliable, we are providing them in this report for informational
purposes only.
We also reviewed Energy's and Defense's fiscal year 2005 Performance
and Accountability Reports primarily to determine whether any
significant new issues had arisen subsequent to the issuance of the
fiscal year 2004 financial statements. We performed our work from
October 2004 through January 2006 in accordance with generally accepted
government auditing standards. Appendix I provides further details on
our scope and methodology.
Results in Brief:
The environmental liability amount reported in the federal government's
consolidated financial statements reflects an estimate of the cost to
clean up and dispose of environmental contamination in every state in
the nation. Of the $249 billion reported for fiscal year 2004, Energy's
recorded liability was $182 billion, the largest of any agency, and was
related primarily to the cleanup of nuclear waste and contamination at
about 50 Energy locations around the country. Over 40 percent of
Energy's total liability relates to cleanup at three locations in
Washington, South Carolina, and Idaho where most of the nation's
nuclear weapons production activities occurred during World War II and
the subsequent Cold War. The estimated cleanup costs relate to the
treatment and disposal of millions of gallons of radioactive byproducts
from making plutonium and other nuclear materials, decontamination and
demolition of facilities used for decades in nuclear materials
production, and the cleanup of contaminated soil and groundwater at
these locations. Energy's recorded environmental liabilities also
include estimates for the future cleanup of its current, or "active,"
facilities; long-term stewardship and monitoring at sites after they
are cleaned up; and disposal of high-level waste, used ("spent")
nuclear fuel, and excess special nuclear material. The radioactivity of
most of Energy's waste makes its cleanup effort technically difficult,
costly, and subject to significant legal challenges.
Defense's unaudited cleanup cost estimate, reported at $64 billion in
fiscal year 2004, accounted for the bulk of the government's remaining
reported environmental liability balance. Its cleanup responsibilities
include treatment and disposal of many types of hazardous wastes
associated with military operations; disposal of weapons systems
including nuclear ships and submarines; storage and disposal of highly
toxic chemical weapons such as nerve agents and sulfur mustard blister
agents; and environmental cleanup at military installations affected by
base realignment and closures. Defense has identified about 600
military locations and over 1,700 formerly used defense locations
requiring remediation in all 50 states.
Energy's processes and internal controls over the financial reporting
of its environmental liabilities have enabled it to produce an estimate
of its environmental liabilities in accordance with federal accounting
standards for several years; however, Defense's have not. Key
components of Energy's environmental liability estimation process
include the issuance of internal control guidance to its field
locations for the development and annual update of environmental
liability estimates, independent reviews of selected projects, and
establishment of a requirement that project work scope changes and cost
increases be approved by a control board. Another key part of Energy's
financial reporting process is its "contingency estimate," which is
used to take into account the inherent uncertainties in estimating the
cost of environmental cleanup activities. Adding this component to the
liability helped Energy achieve a clean financial statement audit
opinion in fiscal year 1999 and in subsequent years.
In contrast, numerous weaknesses in the design of Defense's processes
and internal controls for estimating and reporting environmental
liabilities have precluded it from producing an auditable estimate of
its environmental liabilities. While some progress has been made over
the years, we found that (1) Defense's outdated and incomplete
accounting guidance for developing and reporting its environmental
liabilities estimates led to errors in financial reporting; (2) its
policies and procedures for determining, reporting, and documenting
environmental liability estimates were not consistently followed; and
(3) none of the military services had adequate controls in place to
help ensure that all identified contaminated sites were included in
their reported environmental liability estimates. These weaknesses not
only impacted the reliability of Defense's environmental liability
estimate, but also that of the federal government as a whole.
Even if Defense resolves all of its control deficiencies and reports
cost estimates that meet all federal accounting standards,
nonquantifiable uncertainties currently exist for both Energy and
Defense that could increase the eventual cost of the cleanup beyond the
estimated amounts recorded in the federal government's consolidated
financial statements. While not quantifiable, these, like the
quantified environmental liabilities, add to the fiscal exposures of
the federal government and will affect the long-term fiscal outlook.
For example, various regulatory requirements and legal challenges have
caused multiple delays in the licensing and design of the nation's
planned high-level waste repository at Yucca Mountain, Nevada, and many
of the environmental liability cost estimates are predicated upon Yucca
Mountain opening and accepting this waste by certain milestone dates.
Further delays could cause construction, interim storage, and other
costs to increase, but Energy has not yet committed to a new target
date for opening the repository. These uncertainties do not affect the
auditability of the liability because under current federal accounting
standards a potential liability that cannot be estimated but is
considered at least reasonably possible to occur is not required to be
recorded, only disclosed. Both Energy and Defense currently disclose
these types of uncertainties in the notes to their financial
statements, although improvements in their disclosures are warranted at
both agencies.
Given these uncertainties and the extensive internal control weaknesses
at Defense, the ultimate cost and funding requirements of cleanup and
disposal of the federal government's environmental contamination cannot
be fully determined. Improving Defense's financial management processes
and controls are critical to ensuring that environmental liability
estimates are as reliable as possible under current circumstances. We
are making eight recommendations to Defense that, if properly
implemented, will improve internal controls at Defense to help ensure
that its environmental liabilities estimates are adequately supported
and properly reported. We are also making a recommendation to Energy to
help improve disclosure in the notes to the financial statements of
uncertainties that could have a significant impact on ultimate cleanup
costs. We provided Energy and Defense with a draft of applicable
sections of this report for their review and comment. We received
verbal comments from Energy, and written comments from Defense that are
reprinted in appendix II. Each concurred with the respective
recommendations made to them and described the corrective actions they
were taking to address them.
Background:
Federal agencies' responsibilities for environmental cleanup are set
forth in a number of different laws, regulations, and agreements. For
example, many of Energy's and Defense's cleanup activities are governed
by the Resource, Conservation, and Recovery Act of 1976, as
amended,[Footnote 7] and the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.[Footnote 8]
Additionally, the Nuclear Waste Policy Act of 1982, as
amended,[Footnote 9] established a program for the development of a
geologic repository (a permanent deep disposal system) for disposing of
high-level radioactive waste and spent nuclear fuel; the Waste
Isolation Pilot Plant Land Withdrawal Act[Footnote 10] provided for the
establishment of a repository for transuranic wastes. Furthermore, 10
U.S.C. §§ 2701-2709 established the Defense Environmental Restoration
Program to identify, investigate, and clean up properties contaminated
by Defense's activities. Table 1 describes the primary categories of
waste and materials that the government is faced with cleaning up.
Table 1: Primary Categories of Environmental Waste and Byproducts:
Type: Spent nuclear fuel;
Description: Fuel elements and irradiated targets that have been
removed from nuclear reactors. These spent fuels are highly radioactive
and must be stored in special facilities that shield and cool the
materials.
Type: High-level waste;
Description: Highly radioactive liquid left over when spent nuclear
fuel is reprocessed to recover reusable uranium or plutonium. Most of
Energy's high-level waste came from the production of plutonium. This
designation is also applied to solids made when liquid high-level waste
is treated. This waste typically contains highly radioactive, short-
lived fission products as well as long-lived isotopes, hazardous
chemicals, and toxic heavy metals. High-level waste must be isolated
from the environment for thousands of years.
Type: Transuranic waste;
Description: Waste contaminated with transuranic elements at a
concentration higher than 100 nanocuries per gram. This includes soil
and chemicals as well as contaminated tools, equipment, and clothing.
Transuranic waste is generated during nuclear weapons production and
other activities involving long-lived transuranic elements, such as
plutonium. Some of these isotopes have half-lives of tens of thousands
of years, thus requiring long-term isolation.
Type: Low-level waste;
Description: Any radioactive waste that does not fall into one of the
above categories regardless of content, activity level, or longevity.
Most low-level waste contains small amounts of radioactivity in large
volumes of material.
Type: Hazardous waste;
Description: Hazardous wastes are chemical wastes containing substances
defined as hazardous by law. These are capable of causing illness,
death, or some other harm to humans and other life forms when
mismanaged or released into the environment.
Type: Mixed waste;
Description: Waste that contains both radioactive and chemically
hazardous materials. Some high-level, transuranic, and low-level wastes
are also hazardous and thus are also considered mixed waste.
Source: GAO.
[End of table]
In our report on major challenges facing the nation in the 21st
century, we pointed out that progress in cleaning up sites frequently
does not meet expected time frames and the costs dramatically exceed
available funding levels.[Footnote 11] Furthermore, the current
approaches to cleaning up the various sites are not consistent and, in
some cases, not especially efficient or effective. Such issues are some
of the reasons we have designated aspects of Energy's and Defense's
operations as high-risk areas for the federal government.[Footnote 12]
We have also previously reported on shortcomings with the federal
budgeting process for environmental liabilities.[Footnote 13]
Specifically, we reported that because the federal budget is primarily
calculated on a cash basis, the full costs of a program that will have
cleanup costs are not recognized in the budget, nor are estimates of
these future costs provided elsewhere in budget documents.
Consequently, the budget itself does not provide policymakers the
information to compare the full costs of certain programs and thus, the
long-term fiscal exposures. We have previously suggested to the
Congress that budget process mechanisms be developed to prompt more
deliberations about such fiscal exposures while recognizing the
uncertainty inherent in estimating some long-term costs.[Footnote 14]
Meeting these cleanup responsibilities carries a financial cost, and
federal accounting standards require the costs associated with the
federal government's environmental cleanup responsibilities to be
reported in the respective agencies' financial statements as well as
the federal government's consolidated financial statements. The Federal
Accounting Standards Advisory Board's Statement of Federal Financial
Accounting Standards (SFFAS) No. 5, Accounting for Liabilities of the
Federal Government, requires the recognition of a liability when there
has been a past government-related event and there is both a probable
and a reasonably estimable future outflow or sacrifice of
resources.[Footnote 15] If a future outflow of resources is probable
but the amount is not reasonably estimable, then SFFAS No. 5 requires
the disclosure of a liability in the notes to the financial statements
with a statement that the amount of the liability cannot be estimated.
If a future outflow of resources is not considered probable but there
is at least a reasonable possibility that a loss or future expenditure
may be incurred, SFFAS No. 5 requires disclosure of the possible
liability in the notes to the financial statements. Table 2 explains in
more detail the accounting criteria for determining when to record a
liability in the federal financial statements, disclose it in the notes
to the financial statements, or not disclose it at all.[Footnote 16]
Table 2: Accounting Requirements for Recording or Disclosing a
Liability in the Federal Financial Statements:
Likelihood of future outflow or other sacrifice of resources: Probable:
Future confirming event(s) are more likely to occur than not[A];
Degree to which loss can be measured: Loss amount can be reasonably
measured: Record a liability (reported on balance sheet and statement
of net cost);
Degree to which loss can be measured: Loss range can be reasonably
measured: Record a liability for best estimate or minimum amount in
loss range if there is no best estimate, and disclose nature and range
of estimated liability;
Degree to which loss can be measured: Loss amount or range cannot be
reasonably measured: Disclose nature of liability and include a
statement that an estimate cannot be made.
Likelihood of future outflow or other sacrifice of resources:
Reasonably possible: Possibility of future confirming event(s)
occurring is more than remote and less than likely;
Degree to which loss can be measured: Loss amount can be reasonably
measured: Disclose nature of possible liability and estimated loss
amount;
Degree to which loss can be measured: Loss range can be reasonably
measured: Disclose nature of possible liability and estimated loss
range;
Degree to which loss can be measured: Loss amount or range cannot be
reasonably measured: Disclose nature of possible liability and include
a statement that an estimate cannot be made.
Likelihood of future outflow or other sacrifice of resources: Remote:
Possibility of future event(s) occurring is slight;
Degree to which loss can be measured: Loss amount can be reasonably
measured: No disclosure;
Degree to which loss can be measured: Loss range can be reasonably
measured: No disclosure;
Degree to which loss can be measured: Loss amount or range cannot be
reasonably measured: No disclosure.
Source: Statement of Federal Financial Accounting Standards, No. 5.
[A] For liabilities related to litigation, probable is defined as a
future confirming event(s) that is likely to occur.
[End of table]
Federal agencies are also obligated to establish and maintain effective
internal control. We issue the standards for internal control in the
federal government, which provide the overall framework for
establishing and maintaining internal control and for identifying and
addressing major performance and management challenges and areas at
greatest risk of fraud, waste, abuse, and mismanagement.[Footnote 17]
According to the standards, internal control is an integral component
of an organization's management that provides reasonable assurance that
agency objectives--such as the reliability of financial reporting and
the effectiveness and efficiency of operations--are being met. These
standards define the minimum level of quality acceptable for internal
control in government and provide the basis against which internal
control is to be evaluated.
The Federal Government's Environmental Liabilities Are Significant,
Widespread, and Complex:
For fiscal year 2004, the estimated cost for environmental cleanup
reported in the federal government's consolidated financial statements
was $249.2 billion--the third largest reported liability. The
government's responsibility for cleanup extends to locations in every
state of the nation, with Energy and Defense showing marked differences
in the nature of these locations and the types of cleanup
needed.[Footnote 18] Energy's liability is primarily for the cleanup of
waste resulting from the nation's nuclear weapons complex, and the
number of these locations is considerably fewer than the locations for
which Defense is responsible. Although concentrated at fewer locations,
the radioactivity associated with much of Energy's cleanup work make
the efforts technically difficult and costly. Defense's liability is
for contamination from current and past military activities at over
2,300 locations across the country, creating difficult management
challenges. While cleanup at many of these locations may not carry the
same technical challenges as those associated with Energy's nuclear
cleanup responsibilities, some Defense locations have chemical weapons
or hazardous waste that carry considerable challenges of their own.
The Federal Government's Cleanup Responsibilities Are Vast and Span the
Nation:
The federal government's reported environmental liability is an
estimated amount, stated in current dollars. As illustrated in figure
1, Energy and Defense together made up $246 billion (99 percent) of the
federal government's total reported environmental liability at the end
of fiscal year 2004. The remaining $3 billion (1 percent) of the
reported 2004 liability represented the estimated environmental cleanup
costs of 12 other federal agencies, with the three largest being the
Department of Transportation ($1.1 billion), National Aeronautics and
Space Administration ($987 million), and the Department of Veterans
Affairs ($339 million).
Figure 1: The Federal Government's Reported Fiscal Year 2004
Environmental Liabilities by Agency:
[See PDF for image]
[End of figure]
The size of the overall estimate makes the environmental liability
amount the third largest reported liability that the federal government
faces, behind federal debt securities held by the public with their
related accrued interest and federal employee and veteran benefits
payable.[Footnote 19] As such, management of the environmental
liability represents one of the federal government's major challenges
from both financial and environmental perspectives.
The majority of Energy's environmental liability, reported at $182
billion as of September 30, 2004, comes from nuclear weapons production
during World War II and the Cold War. During this period, the United
States built a massive industrial complex to research, produce, and
test nuclear weapons. At all locations where these activities took
place, environmental contamination of buildings, soil, surface water,
and groundwater occurred. This environmental legacy of nuclear weapons
production also produced large volumes of radioactive and chemical
waste requiring treatment, stabilization, and disposal. Collectively,
the waste remaining from the development and production of nuclear
weapons is referred to as legacy waste. Energy is also responsible for
stabilizing and disposing of waste from ongoing operations at active
facilities, such as at its national laboratories, which carry out
scientific research for national and defense purposes.[Footnote 20]
Additionally, Energy is tasked with disposing of radioactive special
nuclear materials and depleted uranium surplus from our national
defense needs, including the nation's surplus plutonium and highly
enriched uranium used in nuclear weapons. Energy has about 50 locations
nationwide for which it is responsible for cleaning up, stabilizing,
and disposing of hazardous and radioactive wastes and materials
resulting from past and current operations.[Footnote 21] Figure 2 shows
major Energy locations where legacy and active facility wastes require
cleanup either currently or in the future. Although Energy's legacy and
active facility waste cleanup and disposal locations are dispersed
throughout the United States, over 40 percent of Energy's total
environmental liabilities estimate pertains to cleanup and related long-
term monitoring at just three locations: Hanford near Richland,
Washington; Savannah River near Aiken, South Carolina; and Idaho
National Laboratory near Idaho Falls, Idaho.
Figure 2: Energy's Cleanup Locations and Waste Repositories as of
September 30, 2004:
[See PDF for image]
Note: Map locations not drawn to scale.
[End of figure]
In contrast to Energy, Defense reports a need to clean up over 2,300
locations around the country. This includes about 600 current and base
realignment and closure (BRAC) military locations and over 1,700
formerly used defense locations in every state in the country.[Footnote
22] Defense is required to clean up contamination resulting from past
and current waste disposal practices, leaks, spills, and other
activities that have created a public health or environmental risk.
Defense is also responsible for costs of (1) closure and monitoring
associated with the transportation, storage, and disposal of hazardous
wastes, (2) disposal of weapons systems such as nuclear ships and
submarines and their associated spent nuclear fuel, (3) storage and
disposal of highly toxic chemical weapons, and (4) environmental
cleanup related to base realignments and closures. As figure 3 shows,
every state has at least one such Defense cleanup location, and 14
states have more than 100.
Figure 3: Number of Defense's Reported Cleanup Locations by State:
[See PDF for image]
Note: Map does not reflect the locations of chemical weapons and
nuclear ships and submarines. The number of states reflected in the
legend includes the District of Columbia.
[End of figure]
Cleanup Efforts Pose Diverse Challenges:
As shown in figure 4, about $130 billion (72 percent) of Energy's
reported fiscal year 2004 environmental liability relates primarily to
the cleanup and long-term stewardship of legacy waste at sites where
weapons research, production, and testing took place. By comparison,
Energy's 2004 liability for the estimated cost of cleaning up its
active facilities when current operations cease was only $30 billion,
17 percent of the total. Energy's plan is to dispose of its high-level
waste and spent nuclear fuel in a deep geologic repository that will
also be used for the disposal of such waste from other federal agencies
and commercial nuclear generators. Energy's allocated share of the
disposal cost at the repository is $15 billion, 8 percent of its
reported environmental liability.[Footnote 23] The remaining $6
billion, 3 percent of the liability, primarily relates to the disposal
of special nuclear material in excess of national defense needs.
Figure 4: Energy's Reported Fiscal Year 2004 Environmental Liabilities
by Type:
[See PDF for image]
[End of figure]
Energy's cleanup and disposal efforts involve difficult and costly
technical challenges. The physical characteristics and radioactivity of
its wastes affect the handling requirements, treatment, and disposal
methods, and thus the cost of cleanup. For example, Energy's cleanup
efforts involve large amounts of radioactive waste from nuclear weapons
production. While the level of radioactivity varies, some waste--such
as waste contaminated with plutonium--will stay radioactive for
thousands of years. As a result, some wastes must be remotely handled
with special robotic machines sealed in heavily shielded rooms because
they are too dangerous for workers to physically handle. This further
adds to the cost of cleanup.
Figure 5: Waste Drum Being Opened and Contents Processed through a
Remote-Handled Waste Facility:
[See PDF for image]
[End of figure]
Furthermore, Energy is developing and testing technologies and methods
of treatment for certain types of waste because there are currently no
proven methods for cleaning them up. As discussed later in this report,
some of these treatment methods have proved unsuccessful, requiring
Energy to pursue new methods. This lack of treatment technology means
that the cost to treat these wastes will likely increase. Also, the
hazardous and long-lived nature of much of Energy's waste has resulted
in contention between interested parties as to the best way and extent
to which cleanup should occur. As discussed later in this report, this
has at times resulted in legal challenges, which can also increase the
extent and cost of cleanup.
The Defense portion of the federal government's environmental
liabilities also poses significant challenges. Defense's environmental
liabilities, shown in figure 6, consist primarily of (1) hazardous
waste disposal and cleanup on training ranges, including removal of
unexploded ordnance, (2) disposal of nuclear ships and submarines, and
(3) disposal of chemical weapons. The "other" category includes cleanup
of hazardous wastes (such as petroleum products and PCBs) at military
bases and formerly used defense sites.
Figure 6: Defense's Reported Fiscal Year 2004 Environmental Liabilities
by Type:
[See PDF for image]
[End of figure]
Although the technical processes for dealing with Defense's cleanup may
be more clearly defined and understood at this point than the processes
for dealing with some of Energy's cleanup of high-level radioactive
wastes, many of Defense's cleanup efforts are nonetheless significant
and challenging. Not only are Defense's cleanup efforts spread across
the nation, but estimating the future costs of disposing of nuclear
ships and submarines is complicated by the uncertainty surrounding the
final disposal location of spent nuclear fuel, as discussed more fully
later in this report. Further, Defense has responsibility for
safeguarding the environment and human life from the extreme risks
inherent in storing the nation's stockpile of deadly chemical weapons-
-including highly toxic nerve agents and sulfur mustard blister agents-
-while working to develop alternative methods for their disposal.
Energy's Processes and Controls Allowed It to Produce Estimates in
Accordance with Federal Accounting Standards; Defense's Did Not:
Energy's processes and internal controls for developing its overall
environmental liability estimate have evolved and improved over time to
the point where, for fiscal years 1999 through 2004, its auditors
determined that the financial statements that reported the estimated
environmental liabilities were presented fairly and in accordance with
federal accounting principles.[Footnote 24] Key components of Energy's
environmental liability estimation process include the issuance of
internal control guidance to its field locations for the development
and annual update of environmental liability estimates; independent
reviews of selected projects; and establishment of a requirement that
project work scope changes and cost increases be approved by a control
board. Another key part of Energy's financial reporting process is its
"contingency estimate," which is used to take into account the inherent
uncertainties in estimating the cost of environmental cleanup
activities. Adding this component to the liability estimate helped
Energy achieve a clean financial statement audit opinion in fiscal year
1999 and subsequent years. While Energy's auditors identified some
issues related to the environmental liability reporting process that
require corrective action, none of these were significant enough to
materially impact the reasonableness of the overall liability estimate.
Defense has made some improvements to its controls in recent years,
such as issuing management guidance for reporting environmental cleanup
costs that are not funded under the Defense Environmental Restoration
Program. However, there remain significant weaknesses in Defense's
processes and internal controls that have hindered it from producing
auditable estimates of its environmental liabilities. Specifically,
Defense's outdated and incomplete accounting guidance for developing
and reporting its environmental liabilities estimates led to errors in
financial reporting; its policies and procedures for determining,
reporting, and documenting environmental liability estimates were not
consistently followed; and none of the military services had adequate
controls in place to help ensure that all identified contaminated sites
were included in their environmental liability cost estimates. These
weaknesses not only impacted the reliability of Defense's environmental
liability estimate, but also that of the federal government as a whole.
Auditors Found Energy's Processes and Controls Sufficient to Produce
Reliable Environmental Liability Estimates in Accordance with Federal
Accounting Standards:
Over the years, the design of Energy's processes and internal controls
for developing its overall environmental liability estimate has evolved
and improved, which enabled its auditors to determine that Energy's
financial statements that reported these estimates were presented
fairly and in accordance with federal accounting principles from fiscal
years 1999 through 2004. Beginning in fiscal year 1999, Energy issued
written internal control guidance to its field offices outlining
requirements they are to follow in the development and annual update of
environmental liability estimates, such as assigning responsibilities,
maintaining supporting documentation, and reviewing and approving the
estimates. Energy's estimating process for its legacy waste cleanup,
which represented 62 percent of its fiscal year 2004 environmental
liability estimate, normally starts with life cycle cost estimates that
are usually prepared by Energy's contractors based on the extent of
cleanup, timing of the work, and funding levels. External independent
reviews are to be conducted each year on selected projects, and
headquarters management is to perform baseline validation reviews of
projects before they are put under Energy's configuration control
process. The configuration control process requires that proposed
changes to a particular project, such as a change in cost estimate or a
change in work scope, be approved by Energy's configuration control
board.[Footnote 25] Energy's second largest environmental liability
component--the future clean up of its active facilities--represented 17
percent of its 2004 environmental liability total. Unlike the legacy
waste component that is managed entirely by Energy's Office of
Environmental Management, active facilities may be managed by any of
several different programs, such as Energy's Office of Science or the
National Nuclear Security Administration (NNSA).[Footnote 26] Energy's
Office of the Chief Financial Officer developed an approach in 1996
that uses a cost- estimating model to develop its active facilities
baseline estimate. With the model, various parameters, such as facility
type and size, are used to estimate the total cost of cleanup,
including facility deactivation and decommissioning. Some locations,
such as the Idaho National Laboratory, have developed their own site-
specific active facilities liability estimates, and thus, are not
included in the baseline model. Idaho lab officials indicated they
develop their estimate based on more specific information about their
facilities than the baseline model requires, which enables them to
prepare a more detailed active facilities estimate.
Accounting standards recognize that no one accounting estimate can be
considered accurate with certainty.[Footnote 27] One of the auditors'
criticisms of Energy's fiscal year 1998 environmental liability
estimate was that it did not sufficiently reflect significant
uncertainties associated with the technical cleanup scope of the
program. Thus, in fiscal year 1999 Energy began adding an amount--which
Energy refers to as a contingency estimate--to its environmental
liabilities baseline amount to help recognize the risks associated with
its projects, such as the reliance on new technology and complex
construction projects. In fiscal year 2004, Energy added $33.2 billion
to its baselines estimates for this contingency estimate, 18.3 percent
of its total environmental liabilities, which the auditors reviewed as
part of Energy's annual financial statement audit.[Footnote 28]
Although the contingency amount is significant, it is not intended to
estimate all uncertainties. Federal accounting standards require
recording a liability only when a future outflow of resources is
considered both probable and measurable. The estimated liability may be
a specific amount or range of amounts. If the estimate is a range, the
standards require only the minimum amount in the range to be recognized
unless some amount within the range is a better estimate. Energy
developed its contingency methodology to derive its best estimate
within the range. For each project, the cognizant project manager
assigns a risk score of one to five to each of three project
characteristics: project definition, which refers to how well the
project is defined in terms of its cost, schedule, and scope;
innovation, which refers to the maturity of technology upon which the
project is reliant; and complexity, which refers to the difficulty and
number of processing and treatment steps required. These risk scores
are then input to a statistical model that predicts the range of total
life-cycle cleanup costs and the mean within the range. The difference
between the mean and the current project baseline total is the amount
that is recorded as the contingency estimate.
This additional contingency amount is necessary because Energy's
cleanup cost estimates can and have experienced significant increases.
For example, Energy is currently constructing a waste treatment plant
consisting of three treatment facilities, an analytical laboratory, and
several support structures to attempt to treat over 53 million gallons
of radioactive and hazardous waste at its Hanford location, but this
complex project has experienced several cost increases. It was
originally approved for $4.3 billion in 2000, but later increased to
$5.8 billion in 2003. Subsequent problems--including required changes
to the design's seismic criteria after the seismic assumptions were
found inadequate--resulted in the contractor revising the cost estimate
in 2005 to $8.0--$8.3 billion, which Energy has not yet approved. The
Army Corps of Engineers (Corps) reviewed the contractor's revised cost
estimate under an agreement with Energy, and found that the actual cost
could be an additional $1.3 billion higher than the revised estimate.
Although Energy has not yet approved a revised estimate, both the
contractor's revised estimate and Corps' review of it indicated that
the final cost will likely be significantly higher than the current
$5.8 billion estimate. At Energy's request, the contractor subsequently
submitted a more detailed cost estimate in early fiscal year 2006,
which the Corps is now reviewing. Because of the uncertainty of the
project estimate, Energy added both a project-specific contingency
estimate and included this project in the statistical model calculation
of its overall contingency estimate in fiscal year 2005. These
construction cost increases are the types of things for which Energy
established its contingency amount. Using this overall approach to
develop its environmental liability estimate, Energy has been able to
produce an auditable estimate from fiscal years 1999 through 2004.
Figure 7: Aerial View of the Waste Treatment Plant under Construction
at Hanford:
[See PDF for image]
[End of figure]
Minor Improvements at Energy Would Help Enhance Reliability of
Estimates:
In its audit report on Energy's fiscal year 2004 financial statements,
Energy's independent auditors did not identify any material weaknesses
or reportable conditions related to environmental liabilities, but did
identify two matters related to environmental liabilities that
warranted communicating to management for corrective action.[Footnote
29] While not material to the overall estimate, continued attention to
improvement helps ensure the future auditability of the estimate. The
following are the issues the auditors identified in fiscal year 2004.
* As previously discussed, Energy uses a cost-estimating model to
estimate its environmental liability for the future remediation of
active facilities. Field location personnel are responsible for
inputting and verifying certain facility data such as type of facility
(e.g., office space, laboratory), size, and a general characterization
of the type of contamination in the facility. The model then uses the
data to estimate the active facilities' portion of the environmental
liability estimate. In fiscal year 2004, the auditors tested a
statistical sample of facilities and structures from each of five
locations to test the reliability and accuracy of selected facility
data, and found immaterial errors at two of the five locations. The
auditors made recommendations to correct the specific errors and to
improve internal controls for verifying the accuracy of the data.
* The auditors' review of selected key projects identified two
instances where the field location did not have adequate supporting
documentation on file for its cost estimates. For both projects, the
field location was ultimately able to produce detailed information that
satisfied the auditors as to the reasonableness of the cost estimates.
However, the auditors made recommendations to establish procedures to
ensure that all project cost estimates were adequately supported by
written documentation and reviewed.
In fiscal year 2005, the auditors also noted immaterial errors in the
active facilities' data and supporting documentation tested, although
the specific locations at which these errors were identified may have
changed. The auditors made specific recommendations in each instance,
and indicated that management generally agreed with the findings and
was responsive to the recommendations.
In addition, we learned of an instance during our review where the
estimated cleanup cost of a particular project was erroneously excluded
from a prior-year environmental liability estimate. Specifically, in
fiscal year 2003, Energy's Office of Environmental Management recorded
a liability for the estimated cost of operating the Savannah River
Site's H Canyon Processing Facility through fiscal year 2007, and
assumed that NNSA would take over responsibility for the facility and
record the liability for fiscal years 2008 through 2010. However, NNSA
never agreed to take over responsibility for this facility and thus did
not record those costs, which were estimated at $632 million. The
Office of Environmental Management subsequently included the full
amount in its fiscal year 2004 estimates. Subsequent to the costs being
excluded, Energy issued a policy requiring such transfers to be
formally documented, agreed to by the affected parties, and approved by
the Secretary of Energy through the Chief Financial Officer. If
properly implemented, this should help ensure that estimates associated
with such transfers are not excluded in future estimates.
While these errors and omissions were not material to the overall
liability estimate, continued attention and improvements to Energy's
internal controls would help provide additional assurance that its
overall environmental liability estimates are reliable and are reported
in accordance with federal accounting standards.
Outdated and Incomplete Financial Management Guidance Impeded Defense's
Ability to Reliably Estimate Environmental Liabilities:
At the time of our review, the accounting guidance provided by
Defense's Financial Management Regulations (FMR) had not been updated
to reflect current federal accounting standards for determining and
reporting environmental liabilities. This outdated and incomplete
guidance contributed to financial reporting errors in fiscal years 2004
and 2005 as follows.
* Changes in federal accounting standards, which eliminated the asset
category of National Defense Property, Plant, and Equipment, and
changed the required accounting for the associated environmental
liabilities were issued in May 2003.[Footnote 30] Defense's FMR had not
been timely updated to reflect the effect of these changes for
recognition of cleanup costs related to nuclear ships and submarines.
Consequently, the Navy was recording the cleanup cost estimates in full
at the time the ships and submarines were placed into service rather
than incrementally over the useful life of the vessels, as the new
standards required. This could result in an overstatement of the
estimated environmental liability for the affected vessels.
* FMR accounting guidance did not completely identify all the budgetary
cost elements that should be considered when determining the unpaid
costs required to be included in reported environmental liability
estimates.[Footnote 31] In certain circumstances, such as for estimates
of remediation costs on BRAC bases, some Defense component officials
told us that they were excluding certain cleanup costs once
appropriations had been received to pay those costs, even though actual
payments had not yet been made. As a result, certain costs (e.g.,
unsigned contracts) intended to be paid for with prior-year budgetary
authority were not included in BRAC cleanup cost estimates, even though
this is required to comply with federal accounting standards.
Defense Office of Comptroller financial management personnel told us
that the FMR had not been updated in a timely manner because of
personnel turnover and inadequate staffing. Subsequent to our
inquiries, but prior to the release of this report, the FMR was updated
to address the issues we identified, and to reflect current federal
accounting standards requirements for measuring and recognizing
estimated cleanup costs related to environmental liabilities. According
to Defense component officials, cleanup cost estimates will be reported
in accordance with the new FMR guidance no later than September 30,
2006.
Defense's Existing Policies and Procedures for Determining, Reporting,
and Documenting Environmental Liability Estimates Were Not Consistently
Followed:
In addition to the guidance problems, certain policies and procedures
included in Defense's FMR related to environmental liabilities are not
being consistently followed by some military service components.
Further, there continues to be a lack of adequate documentation
supporting estimates of environmental liabilities, which precluded
Defense's management from properly carrying out their oversight
responsibilities related to the estimation process. This lack of
documentation also precludes Defense's financial auditors from making a
determination of the reasonableness of the liability amount recorded in
the financial statements. These compliance lapses were caused in part
by a lack of financial management review and oversight of the
environmental liability estimation process at both the Department of
Defense and the military services level. We identified several
instances where the failure to follow established policies and
procedures resulted in errors in the liability estimates, as follows.
* The Navy has not been estimating and reporting all costs for
disposing of spent nuclear fuel produced by its nuclear ships and
submarines. The Navy's financial reporting and program management
personnel believed that the Navy's responsibility for estimating costs
for spent nuclear fuel disposal stopped with the fuel's removal from
the ship or submarine, since at that point the fuel became the property
of Energy. The Navy's management assumed, but had not verified, that
Energy was recording this liability. However, further discussions with
the Navy's and Energy's financial management confirmed that the
liability for disposing of nuclear fuel generated by Navy ships and
submarines was not being estimated and reported by either department.
Prior to the issuance of this report, Navy financial management assumed
responsibility for reporting a liability for disposing of spent nuclear
fuel, which Defense has estimated may be as much as $4 billion, in its
financial statements beginning in fiscal year 2006.
* The Navy's financial management was unaware that the Navy had been
discontinuing the reporting of cost estimates for disposing of nuclear
ships and submarines when appropriated funds were obligated, which is
prior to the actual disposal costs being paid, and is contrary to
federal accounting requirements. Naval Sea Systems, which has
responsibility for estimating and reporting these disposal liabilities,
ceased doing so once individual ships or submarines were scheduled for
inactivation, a contract for disposal was executed with the Puget Sound
Naval Shipyard, and funds were obligated for the cost of disposal.
Because it is not unusual for the actual inactivation of a ship or
submarine to be extended to meet operational demands and for the
disposal activities to take over a year to accomplish, costs may not be
paid for months or years after the liability estimate was omitted from
the reporting process. As a result, the Navy has understated reported
environmental liabilities by the unpaid costs of ships and submarines
still in the process of inactivation and disposal.
* The Air Force has not been including in its environmental liability
estimates all of the unpaid costs that are required by both Defense's
FMR and federal accounting standards.[Footnote 32] Personnel at two Air
Force major commands told us that estimates for completing Defense
Environmental Restoration Program (DERP) efforts reflected only those
costs that had not yet been funded. Costs that had been incurred in
prior years and for which funding had been received but payments had
not been made were not included in the DERP estimates. These omissions
were also contrary to Air Force guidance that required estimates to
include "all anticipated costs required to effect the restoration of
the site."[Footnote 33] Because Air Force financial management did not
have a monitoring process in place to ensure that guidance was
understood and being followed, the Air Force has been understating its
cost estimates by the amount of incurred but unpaid prior-year costs.
* The military services are not preparing or retaining documentation
that supports the consistency and adequacy of their reported
environmental cleanup and disposal cost estimates. In its annual
Performance and Accountability Reports for fiscal years 2003 through
2005, Defense has acknowledged--and independent financial auditors have
reported--that inadequate supporting documentation for environmental
liabilities is an ongoing material weakness in the department's system
of internal control. In addition, in recent audit reports specifically
targeting environmental liability controls, various military audit
agencies reported a general lack of adequate documentation to support
cost estimates in the military services.[Footnote 34] One auditor told
us that environmental personnel completing or updating environmental
liability estimates erroneously believed that an electronic file
created by a cost estimating model was sufficient supporting
documentation, even though the model did not explain or contain source
documentation for variables used in the cost calculation, such as
remaining capacity, usage rates, contractors estimates, or engineering
studies. According to military service representatives, environmental
engineers see no need to retain supporting documentation for cost
estimates since management does not request or review it. Neither
financial or program management nor auditors will be able to assess the
reliability of environmental cost estimates until estimators develop
and retain sufficient documentation to support their calculations.
Defense's Internal Controls Are Inadequate to Help Ensure That All
Cleanup Sites Are Included in the Environmental Liability Estimate:
Even if the guidance and monitoring issues previously discussed are
remedied, none of the military services have a structured process in
place and working at the installation level to provide reasonable
assurance that all known contaminated sites and hazardous operations
are included in the reported environmental liability cost estimates.
One example of such a control would be a comparison of the cleanup
sites and hazardous waste operations actually being reported by
specific programs on each base to a comprehensive inventory of all
sites and hazardous waste operations located on each base that was
prepared without regard to reporting program or Defense component use.
Defense's FMR requires a reconciliation of environmental and property
records, and indicates the purpose of the resulting inventory is to
ensure that all disposal liabilities are recognized.[Footnote 35] The
FMR stops short of specifically requiring a comparison of the
reconciled site inventory to sites included in environmental liability
reporting, and no Army, Navy, or Air Force program or financial
management personnel we spoke with were aware of any activity at the
base level making such a comparison. As a result, contaminated sites
and operations that are not included in a reporting program are at risk
of not being identified and reported as required, and the related cost
estimates could be understated. For example, we spoke with Defense
component personnel who expressed conflicting views about
responsibility for reporting cleanup costs associated with underground
storage tanks physically located on a military base that contain fuel
owned and managed by another Defense component. Thus, the associated
liability is at risk of not being reported by any Defense component.
Without a comparison of site lists as described, such an oversight
would likely go undetected.
Major Uncertainties Will Affect Future Cleanup Costs and Funding
Demands:
Beyond the issues previously discussed that make Defense's and the
federal government's environmental liability estimates unauditable, the
ultimate cost of the cleanup will be affected by major uncertainties,
the impact of which cannot be currently estimated. These uncertainties,
which primarily involve the lack of feasible or proven remediation
technologies, regulatory impediments and legal challenges to cleanup
and disposal, and uncertainties as to the agencies' abilities to meet
their current cost and schedule targets, do not impact the auditability
of the liability because under current federal accounting standards a
potential liability that cannot be estimated but is considered at least
reasonably possible to occur is not required to be recorded on the face
of the financial statements, only disclosed in the notes. Both Energy
and Defense currently disclose various uncertainties in the notes to
their financial statements, although improvements to their disclosures
are warranted at both agencies. It is important to understand the
nature and extent of these uncertainties in assessing future funding
demands for environmental cleanup because they have the potential to
materially affect the ultimate cost and timing of cleanup activities.
Remediation Technologies for Some Sites Are Nonexistent or Uncertain:
The nature and extent of contamination the federal government must
clean up is complex and vast, and suitable technologies to address all
of the waste do not currently exist. As stated in Energy's fiscal year
2004 Performance and Accountability Report, estimated cleanup costs at
sites for which there is no current feasible remediation approach would
be higher if some remediation were assumed for these areas, but because
Energy has not identified effective remediation technologies for these
sites, no basis for estimating costs is available. Energy has
identified 18 significant uncertainties, at various and multiple
locations, where no currently feasible remediation technology exists or
the effectiveness of technologies currently being explored remains to
be seen. An example of a location for which Energy reported that
cleanup costs were excluded is the nuclear explosion test area at the
Nevada Test Site. The Nevada Test Site, an area larger than Rhode
Island, was the site of over 900 atmospheric and underground nuclear
test explosions that occurred over four decades ending in 1992. These
nuclear detonations left residual radioactivity, but most of the
radioactivity is in highly inaccessible underground locations.
According to Energy, effective, feasible remediation technologies have
not yet been developed to address this widespread contamination, and
Energy's fiscal year 2004 environmental liability estimate primarily
for the Nevada Test Site only included an estimate of approximately
$3.3 billion for monitoring of groundwater contamination plumes,
disposal of active facilities, and long-term stewardship.
Figure 8: Craters Left As A Result Of Underground Nuclear Testing At
The Nevada Test Site:
[See PDF for image]
[End of figure]
In other cases, potential remediation technologies have been
identified, but their effectiveness has yet to be successfully
demonstrated. For example, during operations at Energy's Hanford
location from 1943 through 1989, Energy generated large volumes of
hazardous and radioactive waste. Some of this waste was deposited
directly into the ground, while some of the most hazardous and
radioactive material was stored in underground tanks that have leaked
contaminants into the soil. Over time, concern has developed about the
impact of Hanford's waste moving through the ground and toward the
Columbia River. As we have previously reported, Energy has used three
main approaches to treat the groundwater near the river, but has
experienced problems with all three.[Footnote 36] For example, one
approach has been to use a chemical barrier near the Columbia River to
block chromium from entering the river near major fish breeding
areas.[Footnote 37] The barrier consists of a series of wells where
Energy injected a chemical into the groundwater that reacts with
chromium to change it to a less hazardous and less mobile form.
However, in 2004 Energy reported that the barrier was not fully
effective, and that the hazardous form of chromium was detected in
groundwater readings beyond the barrier. Energy is currently evaluating
alternative approaches to contain the chromium or fix the barrier.
Until an effective remediation technology can be identified, tested,
and implemented, the ultimate cost of cleaning up this groundwater
contamination remains unknown.
Regulatory Requirements and Legal Challenges Remain Unresolved:
Various regulatory requirements and legal challenges also affect the
ultimate cost, extent, and timing of cleanup at several sites. The
primary uncertainty facing the federal government's cleanup efforts
relates to the opening of the national geologic repository for high-
level waste and spent nuclear fuel. The disposal of Energy's and
Defense's high-level waste and spent nuclear fuel is contingent upon
the opening of this repository planned for Yucca Mountain. However,
multiple challenges related to the regulatory and legal requirements it
must meet have caused several delays in its licensing and design.
Additionally, the degree of cleanup required by regulations can vary
from site to site and depend on how the land is expected to be used
after it has been cleaned up. These decisions must usually be agreed
upon by various federal and state agencies, with input from interested
parties, such as community representatives. Even after an agreement has
been signed, various parties may raise legal challenges to the
agreement, the outcome of which could affect both the cost and timing
of cleanup plans. Thus, it can take years to determine the final
cleanup requirements for some sites. Until these issues are resolved,
the ultimate cost of cleanup and disposal of the federal government's
environmental contamination cannot be fully determined. The following
are examples of current regulatory and legal uncertainties Energy and
Defense are facing, the resolution of which could significantly impact
the final cost of cleanup.
* Over the years, regulatory requirements and legal challenges have
caused multiple delays in the licensing and design of the Yucca
Mountain geologic repository, which is intended to be the nation's
first high-level waste and spent nuclear fuel disposal site. For
example, Energy reported that it did not meet its goal of submitting a
license application for the repository to the Nuclear Regulatory
Commission by the end of calendar year 2004, in part due to a July 2004
decision by the U.S. Court of Appeals to invalidate the Environmental
Protection Agency's (EPA) radiation standard, which set a 10,000 year
time frame in which the amount of radiation that can be released from
the repository would be limited.[Footnote 38] The court held that EPA
violated section 801 of the Energy Policy Act of 1992, which required
the agency to issue standards for Yucca Mountain based upon and
consistent with findings by the National Academy of Sciences. In August
2005, EPA issued a proposed standard that extended protection to 1
million years to be consistent with the Academy's recommendations.
Because the repository must be designed to comply with the EPA
standard, approval of a revised standard is critical. Consequently,
Energy acknowledged that it will not meet its goal of commencing
disposal operations by 2010 but has not committed to a new target date
for opening the repository. Energy acknowledged that delays in opening
the repository could cause project costs to increase, including the
cost of constructing the repository as well as interim storage and
other costs, for the Energy and Defense locations that are expected to
ship waste to Yucca Mountain. For example, officials at Energy's
Savannah River location estimated that if there was a 5-year delay in
the opening of the repository, the additional costs incurred for their
spent nuclear fuel disposal could range anywhere from about $50 million
to $200 million, depending on how Energy decides to deal with the fuel
during such a delay.
Figure 9: View of an Exploratory Tunnel at Yucca Mountain:
[See PDF for image]
[End of figure]
* The 2005 Defense Base Closure and Realignment Commission recommended
22 major base closures and 33 major base realignments. Although cleanup
costs for Defense property in prior BRAC rounds are included in
Defense's environmental liabilities, some of the cleanup costs that
will result from the 2005 BRAC round have not yet been estimated, such
as the estimated cleanup cost of currently operational ranges with
ordnance or other explosive material. In addition, the decision to
realign or close a base may result in a change to its planned use and
thus require a change in cleanup estimate based on those plans. For
example, the cleanup requirements and therefore the cleanup costs are
less if the property is expected to be used for industrial purposes
than if it is to be used for residential purposes. But before planned
use can be decided, Defense must determine who the next owner will be.
If, as in previous BRAC rounds, most property is transferred to
nonfederal ownership for economic development and other purposes,
communities receiving the property transfer will likely want
contamination removal. Defense may prefer containment to save costs,
thus, the adopted cleanup plan and final associated costs will often be
the result of negotiation and agreement among all of the involved
parties including Defense, EPA, and various community representatives.
Until all of these significant new decisions are made for each site,
the cost to remediate excess property as a result of the 2005 BRAC
round remains uncertain.
* At the Idaho National Laboratory there is a great deal of controversy
over how much buried transuranic waste Energy will have to excavate and
remove from the lab's Subsurface Disposal Area, an 88-acre area where
radioactive transuranic waste has been buried in shallow pits and
trenches since 1952. In April 2002, the State of Idaho sued Energy over
its interpretation of a 1995 settlement agreement concerning the amount
of transuranic waste that must be removed from the Idaho National
Laboratory. Specifically, Energy asserted that the agreement requires
only certain stored waste to be removed, but the state asserted that
the agreement also applied to all buried transuranic waste. In March
2003, the District Court of Idaho ruled in favor of the state and
concluded that Energy was responsible for removing all transuranic
waste buried or stored at the laboratory. Energy appealed, and in
December 2004, the court of appeals reversed the decision and sent the
case back to the district court for further consideration. Energy is
currently removing selected portions of the buried waste totaling 4
acres where it has identified the highest concentrations of
radioactivity and has recorded a corresponding environmental liability
for this portion of the waste. However, officials indicated that the
cost to excavate all 88 acres would be extremely costly and cannot be
estimated. Should the state ultimately prevail, the resulting
additional costs could be substantial.
Figure 10: An Excavator Removes Buried Transuranic Waste at Energy's
Idaho Cleanup Location:
[See PDF for image]
[End of figure]
Ability to Effectively Meet Current Cost and Schedule Targets is
Uncertain:
Both Energy's and Defense's environmental liabilities estimates are
based upon current plans and targets for accomplishing their cleanup
responsibilities. However, our previous reports have identified project
management weaknesses at both agencies that could hinder them from
meeting these goals.[Footnote 39] At Energy, we have previously
reported that many of its major projects, including environmental
cleanup projects, have experienced substantial cost overruns and
delays. For example, our 2002 assessment of Energy's contract reform
initiatives found that 5 of the 16 major projects we examined had more
than doubled in cost--for billions of dollars in total cost overruns--
and experienced more than 5 years in:
delays.[Footnote 40] In late 2002, Energy began implementing an
accelerated cleanup plan to address the uncontrolled cost and schedule
overruns that had occurred over many years. In describing this plan,
Energy reported that it would reduce the total cost of the cleanup
program by an estimated $50 billion and would complete its cleanup
activities by 2035--35 years earlier than called for in previous plans.
While Energy has made some progress since it implemented its plan, both
we and the Energy Inspector General have identified cleanup projects
and activities that are behind schedule and thus may cost more than
currently planned.[Footnote 41] Although Energy reevaluates and adjusts
its environmental liability estimates each year, its history of cost
and schedule overruns raises additional uncertainties as to what the
ultimate cost of cleanup will be.
In addition to the processes and internal control weaknesses discussed
earlier that have prevented Defense from developing an auditable
estimate of its environmental liabilities, we have also previously
reported on program management weaknesses at Defense that add to the
uncertainty about its current estimates. For example, we previously
reported that Defense had made limited progress in its program to
identify, assess, and clean up sites that may be contaminated with
military munitions, and that its plan to address potentially
contaminated sites relied on preliminary cost estimates that can change
significantly because they were developed using incomplete
information.[Footnote 42] In another report, we found that the U.S.
Army Corps of Engineers did not have a sound basis for determining that
about 38 percent of former defense sites--sites now owned by states,
local governments, and individuals and used for parks, farms, schools,
and homes--did not need further study or cleanup action.[Footnote 43]
As a result, the Corps' assessment may not be accurate, and the Corps
cannot be reasonably certain that it has identified all hazards that
may require further study or cleanup. These issues raise questions as
to whether Defense and Energy can effectively perform the necessary
cleanup work within current cost and schedule targets and thus raise
additional uncertainties as to the ultimate cost of cleanup.
Energy's and Defense's Financial Disclosures Acknowledge Uncertainties,
but Improvements Are Warranted:
As mentioned earlier in this report, federal accounting standards
require recording a liability only if the future outflow of resources
is considered both probable and measurable. If one of the two
conditions is not met but the future outflow of resources is considered
at least reasonably possible, then it does not need to be recorded as a
liability in the financial statements but should be disclosed in the
notes to the financial statements. Both Energy and Defense disclose in
the notes to their financial statements various uncertainties that are
not included in their liability estimates because the events are not
considered probable or the amount of the liability cannot be reasonably
estimated. Some examples of Energy's disclosures in its notes to the
fiscal year 2004 financial statements include the following.
* "The Department has identified approximately 10,400 potential release
sites from which contaminants could migrate into the environment.
Although virtually all of these sites have been at least partially
characterized, final remedial action and/or regulatory decisions have
not been made for many sites. Site-specific assumptions regarding the
amount and type of contamination and the remediation technologies that
will be utilized were used in estimating the environmental liability
related to these sites."
* "Cost estimates for management of the Department's high-level waste
are predicated upon assumptions as to the timing and rate of acceptance
of the waste by the first geologic repository. Delays in opening the
repository could cause EM project costs to increase."
* "Estimated cleanup costs at sites for which there is no current
feasible remediation approach are excluded from the baseline estimates,
although applicable stewardship and monitoring costs for these sites
are included. The cost estimate would be higher if some remediation
were assumed for these areas. However, because the Department has not
identified effective remedial technologies for these sites, no basis
for estimating costs is available. An example of a site for which
cleanup costs are excluded is the nuclear explosion test area at the
Nevada Test Site."
As noted previously, the State of Idaho is currently in litigation with
Energy over the amount of transuranic waste that must be removed from
the Idaho National Laboratory, and in March 2003 the Idaho District
Court ruled in the state's favor. Energy did not disclose this
potential liability in the notes to its fiscal year 2004 financial
statements. We questioned Energy's decision not to disclose this case
in its fiscal year 2004 financial statements given that it had an
adverse court ruling at the time that would seem to indicate that there
was at least a reasonably possible likelihood that Energy would
ultimately be required to remediate additional acreage. Energy
officials stated that, at the time, the case was under appeal and they
thought the likelihood that they would be required to remediate all
transuranic waste within the 88 acres was remote. However, Energy did
not document this conclusion, the reasons behind its conclusion, and
whether its legal counsel concurred with that conclusion in its fiscal
year 2004 legal representation letter.[Footnote 44]
Subsequent to the issuance of its fiscal year 2004 financial statements
on November 15, 2004, the court of appeals reversed the decision and
sent the case back to the district court for further consideration,
which is still ongoing. Nonetheless, Energy disclosed this matter in
the notes to its fiscal year 2005 financial statements. According to
Energy officials, activities at the site to evaluate the waste in the
area have indicated that the amount of waste that would have to be
removed should Idaho prevail would be greater than what Energy
originally estimated, and thus it documented in its fiscal year 2005
legal representation letter that there was a reasonably possible
likelihood of an unfavorable outcome. Energy's fiscal year 2005
financial statement disclosure noted that the State of Idaho was
challenging Energy's interpretation of the 1995 settlement agreement
concerning the shipment of transuranic waste from the Idaho National
Laboratory. It further disclosed that, should the state prevail, the
resulting costs could be substantial but Energy had not recorded a
provision for such costs in its financial statements.
Because of these and other uncertainties discussed in Energy's
Performance and Accountability Report, Energy's auditors have included
an emphasis paragraph with the audit opinion since fiscal year 1999,
emphasizing that the cost estimates supporting Energy's environmental
liabilities are based upon assumptions regarding future actions and
decisions, many of which are beyond Energy's control.[Footnote 45] In
essence, this highlights the fact that, should circumstances change in
the future, the effects of such changes could be material.
Defense disclosed one uncertainty in the notes to its financial
statements. Defense acknowledged that, because the extent of buried
chemical munitions and agents is not known, the Army was unable to
provide a reasonable estimate of its liability to clean up buried
chemical munitions and agents.
However, Defense failed to disclose the liability implications of its
2005 BRAC round. In its September 8, 2005, report to the President, the
2005 Defense Base Closure and Realignment Commission reported that
Defense will likely incur additional environmental cleanup and
restoration costs resulting from these base realignment and closure
activities. Since the additional costs could be significant, the lack
of a discussion of the 2005 BRAC round in the notes precludes financial
statement users from having a full understanding of Defense's
environmental liability exposures.
Conclusions:
The federal government is responsible for cleaning up environmental
contamination that is both complex and widespread. The estimated cost
of cleaning up this waste is substantial and will be competing for
limited federal resources over many years. Therefore, proper reporting
of the government's environmental liabilities is important to help
determine priorities for cleanup and disposal activities and to
appropriately consider future budgetary resources needed to carry out
these activities. However, weaknesses in Defense's processes and
internal controls are largely responsible for the federal government's
inability to reasonably estimate or adequately support the amounts
reported for its environmental liabilities. Also, significant
uncertainties at both Energy and Defense surrounding how waste will be
cleaned up and when it will be disposed of make it inherently
impossible to fully determine the ultimate cost of cleanup; therefore,
it is essential that disclosures of such uncertainties help keep
policymakers informed of potential future resource needs. Without
adequate policies, processes, and internal controls for identifying,
estimating, recording, and disclosing its environmental liabilities,
the federal government does not have sufficient information on the
potential cost of addressing these liabilities for long-term fiscal
planning.
Recommendations For Executive Action:
To address Defense-related deficiencies, we are making the following
eight recommendations. To improve internal controls over the
development and reporting of environmental liabilities and to prevent
recurrence of the types of problems we identified in our report, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense (Comptroller) and the Secretaries of the Army, Navy, and Air
Force, as appropriate, to:
* develop, document, and implement a program for financial management
review, approval, assessment, and monitoring of the estimation and
reporting processes for environmental liabilities,
* improve compliance with federal accounting standards and FMR guidance
and remedy the specific deficiencies we identified by:
* designing a process and controls at the department level to identify
new federal accounting standards and to update the FMR for changes and
additions in a timely manner,
* reassessing its process for ensuring that all required financial
statement disclosures are made, and disclosing in the notes to the
financial statements for the department and for the Army, Navy, and Air
Force, as appropriate, all significant uncertainties in accordance with
current federal accounting standards, including the effects of the 2005
BRAC round on reported environmental liabilities,
* estimating, updating, and reporting the accrued environmental
liability for the cost of disposing of the Navy's spent nuclear fuel,
* implementing revised FMR guidance for recognizing cleanup costs for
the Navy's nuclear ships and submarines over the estimated lives of
those assets,
* including all appropriate budget elements for reporting financial
liabilities for (1) the Navy's nuclear ships and submarines, (2) the
Air Force's cleanup and restoration costs, and (3) all costs intended
to be paid for with prior-year budgetary authority (e.g., unsigned
contracts) by the Army, Navy, and Air Force,
* reconciling the Army's, Navy's, and Air Force's installation-level
environmental records to installation-level property records as
required and then using the corrected site inventories to determine
that all sites with cleanup or corrective action costs and all
hazardous waste operations with cleanup or closure costs are included
in financial reports of environmental liabilities and all are reported
by the appropriate Defense component, and:
* producing and maintaining adequate supporting documentation for Army,
Navy, and Air Force environmental liabilities at all levels in
accordance with internal control standards in the federal government.
To address the deficiency identified with Energy's legal representation
letters, we recommend that the Secretary of Energy reassess Energy's
process for ensuring that all litigation is appropriately documented in
its legal representation letters, including its evaluation of the
likelihood of an unfavorable outcome, the basis for its conclusion, and
whether its legal counsel concurred with that conclusion.
Agency Comments and Our Evaluation:
We provided a draft of this report to Defense for review and comment.
In written comments, Defense's Principal Deputy Under Secretary of
Defense (Comptroller) stated that Defense concurred with all eight
recommendations in the report and was taking actions to correct the
noted deficiencies. For example, Defense stated that the military
departments have been instructed to include steps and milestones in
their Financial Improvement Plan[Footnote 46] to comply with several of
the recommendations. Defense also established a workgroup to improve
the financial reporting of environmental liabilities, and it plans to
assist the military departments in meeting the key milestones. Defense
also noted that it was updating the financial statement reporting
guidance in the FMR to improve its disclosures and would change some of
its environmental liability accounting procedures to comply with
applicable federal accounting standards and FMR guidance. Once properly
implemented, these steps should significantly improve Defense's
environmental liability reporting.
We received verbal comments from Energy officials on a draft of this
report. Energy officials concurred with our recommendation, and stated
that they will implement procedures to help ensure that all cases are
appropriately documented in their legal representation letters.
Specifically, Energy officials said that the headquarters program
offices will now send the field offices' summary evaluations and backup
documentation on each case to the office of the Chief Financial Officer
in addition to the office of General Counsel. Once the office of
General Counsel prepares the final legal representation letter, staff
in the office of the Chief Financial Officer are to compare the cases
listed in the letter with the case summaries received from the field
offices to help ensure that all cases were appropriately included in
the letter. If properly implemented, these actions appear responsive to
the recommendation.
We are sending copies of this report to other interested congressional
committees; the Secretary of Energy; the Secretary of Defense; the
Under Secretary of Defense (Comptroller); and the Secretaries of the
Army, the Air Force, and the Navy. Copies will be made available to
others upon request. In addition, this report is available at no charge
on the GAO Web site at [Hyperlink, http://www.gao.gov].
Please contact me at (202) 512-9508 or [Hyperlink, calboml@gao.gov] if
you or your staffs have any questions about this report. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Other GAO contacts and key
contributors to this report are listed in appendix III.
Signed by:
Linda M. Calbom:
Director:
Financial Management and Assurance:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine the nature and extent of the federal government's reported
environmental liabilities, we reviewed the Performance and
Accountability Reports of all federal agencies that reported
environmental liabilities for fiscal year 2004, the most recent
completed fiscal year at the time we began our review. Because Energy's
fiscal year 2004 financial statements were audited by an independent
public accounting firm and determined to be reliable, we reviewed those
statements, traced and verified environmental liabilities amounts to
supporting schedules, and reviewed audit workpapers, where available.
We otherwise used the work performed by the independent auditors and
did not perform additional audit procedures to verify the completeness
or accuracy of the amounts reported. Because Defense has acknowledged
serious data reliability problems related to its financial systems and
information, auditors did not attempt to perform audit procedures and
disclaimed an opinion on Defense's fiscal year 2004 financial
statements. Therefore, it was not our objective to--and we did not--
audit the completeness and accuracy of Defense-reported environmental
liabilities amounts. Although we have previously reported on the
potential for Defense to incur costs related to voluntary restoration
initiatives in conjunction with returning overseas Defense facilities
to host nations, these activities are not reported as environmental
liabilities in its financial statements, and we did not review its
international operations or processes.[Footnote 47] Since Defense-
reported amounts are not reliable, we are providing them in this report
for informational purposes only. We also reviewed Energy's and
Defense's fiscal year 2005 Performance and Accountability Reports
primarily to determine whether any significant new issues had arisen
subsequent to the issuance of the fiscal year 2004 statements.
At Energy and Defense, we interviewed agency officials and performed
site visits to obtain a better understanding of the types of
environmental contamination being addressed. We met with officials at
Energy headquarters and visited its three largest cleanup locations
(the Hanford nuclear reservation in Washington State, the Savannah
River location in South Carolina, and the Idaho National Laboratory in
Idaho). For Defense, we met with program management, financial
management, and financial reporting officials for the relevant
environmental programs for each military service. For additional
background information, we also visited Defense's Puget Sound Naval
Shipyard in Washington State, which dismantles and disposes of nuclear
ships and submarines that are being removed from service.
To determine the extent to which Energy's and Defense's processes and
internal controls are adequately designed to assure estimating and
reporting environmental liabilities in accordance with federal
accounting standards, we interviewed Energy's financial auditors and
reviewed selected workpapers prepared for its annual financial
statement audit; interviewed Energy and Defense program and financial
management officials at agency headquarters and at the field locations
we visited; and reviewed agency documentation supporting their
processes. We did not review or test detailed contractor estimates but
focused on each agency's procedures for compiling and developing its
environmental liability amounts. We compared Energy's and Defense's
processes and internal controls to GAO's Standards for Internal Control
in the Federal Government[Footnote 48] and reviewed applicable federal
accounting standards and guidance for the recognition and reporting of
environmental liabilities.
To determine the nature and types of uncertainties that might affect
the ultimate cost of Energy's and Defense's environmental cleanup
efforts, we interviewed Energy and Defense program and financial
management officials and reviewed supporting documentation. During
interviews with agency, contractor, and state agency officials, we
inquired about sites that have not been fully estimated or reported as
well as other uncertainties that could affect the total cost to the
federal government of cleaning up the contamination. We also reviewed
Energy's and Defense's recent Performance and Accountability Reports
for further information on disclosed uncertainties that are not
estimated in their environmental liabilities balances, and reviewed our
relevant prior reports. Our work was conducted from October 2004
through January 2006 and was performed in accordance with generally
accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Defense:
UNDER SECRETARY OF DEFENSE:
COMPTROLLER:
1100 DEFENSE PENTAGON:
WASHINGTON, DC 20301-1100:
MAR 15 2006:
Ms. Linda M. Calbom:
Director:
Financial Management and Assurance:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Calbom:
This is the Department of Defense (DoD) response to the Government
Accountability Office (GAO) draft report, "Environmental Liabilities:
Long-Term Fiscal Planning Hampered by Control Weaknesses and
Uncertainties in the Federal Government," dated February 14, 2006 (GAO
Code 190133/GAO-06-427). The DoD concurs with all eight recommendations
in the draft report. The Department is already taking actions to
correct the noted deficiencies. Our detailed response is enclosed.
The Department appreciates the opportunity to comment on the draft
report. My staff point of contact is Mr. Phillip Streit. He may be
reached by email at phillip.streit@osd.mil or by telephone at (703) 697-
0538.
Sincerely,
Signed by:
J. David Patterson:
Principal Deputy:
Enclosure: As stated:
GAO DRAFT REPORT DATED February 14, 2006 GAO-06-427 (GAO CODE 190133):
ENVIRONMENTAL LIABILITIES: LONG-TERM FISCAL PLANNING HAMPERED BY
CONTROL WEAKNESSES AND UNCERTAINTIES IN THE FEDERAL GOVERNMENT'S
ESTIMATES:
DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
direct the Under Secretary of Defense (Comptroller) (USD(C)) and the
Military Departments, as appropriate to develop, document, and
implement a program for financial management review, approval,
assessment, and monitoring the estimation and reporting process for
environmental liabilities. (p.31/GAO Draft Report):
DoD Response: Concur. The Department of Defense Financial Improvement
and Audit Readiness Plan includes key milestones addressing the issues
of financial management review, approval, and assessment of the
estimation and reporting process and we will update the plan to include
a key milestone for developing a program to monitor the estimation and
reporting process. The USD(C) in conjunction with the Under Secretary
of Defense (Acquisition Technology & Logistics) established a workgroup
to improve the financial reporting of environmental liabilities. It is
a priority of this workgroup to assist the Military Departments in
meeting the key milestones. The estimated completion date is June 30,
2008.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
direct the USD(C) to improve the compliance with financial accounting
standards and the Department of Defense Financial Management Regulation
("DoDFMR") guidance and remedy the specific deficiencies by designing
processes and controls at the Department level to identify new federal
accounting standards and to timely update the FMR for changes and
additions. (p.31/GAO Draft Report):
DoD Response: Concur. The Department's Office of the Deputy Chief
Financial Officer (DCFO) currently has a published standard operating
procedure for updating the "DoDFMR" which assigns responsibility for
each chapter to a policy proponent office. The DCFO will update this
standard operating procedure to require the policy proponent office to
monitor the Financial Accounting Standards Advisory Board's publishing
of proposed and new accounting standards. The policy proponent will be
required to publish updated guidance by the effective date of the new
accounting standard or publish a policy letter implementing new
accounting standards when it is not feasible to update the "DoDFMR"
before the effective date. The estimated completion date is September
30, 2006.
RECOMMENDATION 3. The GAO recommended the Secretary of Defense direct
the USD(C) and the Military Departments, as appropriate, to improve:
compliance with federal accounting standards and "DoDFMR" guidance and
remedy the specific deficiencies by reassessing its process for
insuring all required financial statement disclosures are made, and
disclosing in the notes to the financial statements for the Military
Departments, as appropriate, all significant uncertainties in
accordance with current federal accounting standards, including the
effects of the Fiscal Year (FY) 2005 Base Realignment and Closure
(BRAC) on reported environmental liabilities. (p.31/GAO Draft Report):
DoD Response: Concur. The "DoDFMR" was updated in October 2005 and
specifically requires the disclosure of uncertainties in the financial
statements. We are updating financial statement reporting guidance in
the "DoDFMR" to specifically require the Military Departments to
disclose environmental liability uncertainties regarding significant
specific situations, e.g., the FY 2005 BRAC. We have also instructed
the Military Departments to include a step in their Financial
Improvement Plan to ensure they have processes in place to identify and
disclose uncertainties regarding environmental liabilities for specific
situations. The estimated completion date for updating the "DoDFMR" is
August 31, 2006. The estimated completion date for implementation is
June 30, 2008.
RECOMMENDATION 4. The GAO recommended that the Secretary of Defense
direct the Department of the Navy (DON) to improve compliance with
federal accounting standards and the "DoDFMR" guidance and remedy
specific deficiencies by estimating, updating, and reporting the
accrued environmental liabilities for the cost of disposing of spent
nuclear fuel. (p.31/GAO Draft Report):
DoD Response: Concur. The DON had not reported the environmental
liability for disposing of the spent nuclear fuel because they believed
it was the responsibility of the Department of Energy. The DON has
since determined that it is their responsibility for reporting the
liability and is in the process of estimating the cost for disposing of
the spent nuclear fuel. We have also instructed the DON to include a
step in their Financial Improvement Plan to track the progress of
reporting their environmental liabilities for spent nuclear fuel. The
estimated completion date is March 31, 2006.
RECOMMENDATION 5. The GAO recommended that the Secretary of Defense
direct the DON to improve compliance with federal accounting standards
and the "DoDFMR" guidance and remedy specific deficiencies by
implementing revised "DoDFMR" guidance for recognizing cleanup cost for
Navy's nuclear ships and submarines over the estimated lives of these
assets. (p.31/GAO Draft Report):
DoD Response: Concur. The DON initiated action to accrue the liability
for nuclear ships and submarines over the estimated useful lives of
these assets upon the publishing of the revised "DoDFMR" guidance. For
Navy ships and submarines placed into service on or after October 1,
1997, the DON will begin to accrue the environmental disposal liability
over the life of the ships and submarines when placed into service
rather than recognizing the full cost. Pie have also instructed the DON
to include a step in their Financial Improvement Plan to track the
progress of reporting their environmental liabilities of ships and
submarines. The estimated completion date is March 31, 2006.
RECOMMENDATION 6. The GAO recommended that the Secretary of Defense
direct the Military Departments, as appropriate, to improve compliance
with federal accounting standards and the "DoDFMR" guidance and remedy
the specific deficiencies by including all appropriate budget elements
for reporting financial liabilities for (1) Navy's nuclear ships and
submarines, (2) Air Force's cleanup and restoration costs, and (3) all
costs intended to be paid with prior year, budgetary authority (e.g.,
unsigned contracts) by the Military Departments. (p.31/GAO Draft
Report):
DoD Response: Concur. We have instructed the Military Departments to
include a step in their Financial Improvement Plan to comply with this
recommendation. The estimated completion date is June 30, 2008.
RECOMMENDATION 7. The GAO recommended that the Secretary of Defense
direct the Military Departments, as appropriate, to improve compliance
with federal accounting standards and the "DoDFMR" guidance and remedy
the specific deficiencies by reconciling the Military Department
installation level environmental records to installation level property
records as required and then using the corrected site inventories to
determine that all sites with cleanup or closure costs are included in
financial reports of environmental liabilities and all are reported by
the appropriate Defense Component. (p.32/GAO Draft Report):
DoD Response: Concur. We have instructed the Military Departments to
include a step in their Financial Improvement plan to comply with this
recommendation. The estimated completion date is June 30, 2008.
RECOMMENDATION 8. The GAO recommended that the Secretary of Defense
direct the Military Departments, as appropriate, to improve compliance
with federal accounting standards and the "DoDFMR" guidance and remedy
the specific deficiencies by producing and maintaining adequate
supporting documentation for environmental liabilities at all levels in
accordance with internal control standards in the Federal Government.
(p.32/GAO Draft Report):
DoD Response: Concur. We have instructed the Military Departments to
include a step in their Financial Improvement Plan to comply with this
recommendation. The estimated completion date is June 30, 2008.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Linda M. Calbom, (202) 512-9508 or calboml@gao.gov:
Acknowledgments:
In addition to the contact named above, Molly Boyle, Assistant
Director; Doreen Eng, Assistant Director; Stephen Lipscomb, Assistant
Director; William Bates; Jessica Gray; Mary Ann Hardy; Charles Hodge;
Nancy Kintner-Meyer; Rick Kusman; Delores Lee; Jenny Li; Tom Perry;
Bennet Severson; and Stan Stenerson made key contributions to this
report.
[End of section]
Related GAO Reports:
Nuclear Waste: Better Performance Reporting Needed to Assess DOE's
Ability to Achieve the Goals of the Accelerated Cleanup Program. GAO-
05-764. Washington, D.C.: July 29, 2005.
Securing U.S. Nuclear Materials: DOE Needs to Take Action to Safely
Consolidate Plutonium. GAO-05-665. Washington, D.C.: July 20, 2005.
Opportunities Exist to Improve Future Comprehensive Master Plans for
Changing U.S. Defense Infrastructure Overseas. GAO-05-680R Washington,
D.C.: June 27, 2005.
Department of Energy: Further Actions Are Needed to Strengthen Contract
Management for Major Projects. GAO-05-123. Washington, D.C.: March 18,
2005.
Nuclear Waste: Absence of Key Management Reforms on Hanford's Cleanup
Project Adds to Challenges of Achieving Cost and Schedule Goals. GAO-
04-611. Washington, D.C.: June 9, 2004.
DOD Operational Ranges: More Reliable Cleanup Cost Estimates and a
Proactive Approach to Identifying Contamination Are Needed. GAO-04-
601. Washington, D.C.: May 28, 2004.
Yucca Mountain: Persistent Quality Assurance Problems Could Delay
Repository Licensing and Operation. GAO-04-460. Washington, D.C.: April
30, 2004.
Nuclear Waste Cleanup: DOE Has Made Some Progress in Cleaning Up the
Paducah Site, but Challenges Remain. GAO-04-457. Washington, D.C.:
April 1, 2004.
Military Munitions: DOD Needs to Develop a Comprehensive Approach for
Cleaning Up Contaminated Sites. GAO-04-147. Washington, D.C.: December
19, 2003.
Nuclear Waste: Challenges to Achieving Potential Savings in DOE's High-
Level Waste Cleanup Program. GAO-03-593. Washington, D.C.: June 17,
2003.
Environmental Contamination: DOD Has Taken Steps to Improve Cleanup
Coordination at Former Defense Sites but Clearer Guidance Is Needed to
Ensure Consistency. GAO-03-146. Washington, D.C.: March 28, 2003.
Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and
Uncertainties. GAO-03-213. Washington, D.C.: January 24, 2003.
Long-Term Commitments: Improving the Budgetary Focus on Environmental
Liabilities. GAO-03-219. Washington, D.C.: January 24, 2003.
Environmental Contamination: Corps Needs to Reassess Its Determinations
That Many Former Defense Sites Do Not Need Cleanup. GAO-02-658.
Washington, D.C.: August 23, 2002.
Environmental Contamination: Many Uncertainties Affect the Progress of
the Spring Valley Cleanup. GAO-02-556. Washington, D.C.: June 6, 2002.
Waste Cleanup: Status and Implications of DOE's Compliance Agreements.
GAO-02-567. Washington, D.C.: May 30, 2002.
Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca
Mountain Repository Project. GAO-02-191. Washington, D.C.: December 21,
2001.
Environmental Liabilities: Cleanup Costs From Certain DOD Operations
Are Not Being Reported. GAO-02-117. Washington, D.C.: December 14,
2001.
Environmental Contamination: Cleanup Actions at Formerly Used Defense
Sites. GAO-01-557. Washington, D.C.: July 31, 2001.
Nuclear Cleanup: DOE Should Reevaluate Waste Disposal Options Before
Building New Facilities. GAO-01-441. Washington, D.C.: May 25, 2001.
Nuclear Waste: Agreement Among Agencies Responsible for the West Valley
Site Is Critically Needed. GAO-01-314. Washington, D.C.: May 11, 2001.
Environmental Liabilities: DOD Training Range Cleanup Cost Estimates
Are Likely Understated. GAO-01-479. Washington, D.C.: April 11, 2001.
Nuclear Waste: DOE's Advanced Mixed Waste Treatment Project--
Uncertainties May Affect Performance, Schedule, and Price. RCED-00-
106. Washington, D.C.: April 28, 2000.
(190133):
FOOTNOTES
[1] Polychlorinated biphenyls (PCB) are chemicals once used as coolants
and lubricants in transformers, capacitors, fluorescent lighting
fixtures, and other electrical equipment. The manufacture of PCBs was
banned in the United States in 1977 because of evidence that they build
up in the environment and cause harmful effects in humans and in
wildlife.
[2] Throughout this report, we use the terms cleanup or remediation
interchangeably to refer to a wide range of activities intended to
restore the environment, such as stabilizing contaminated soil,
treating contaminated groundwater, decontaminating and demolishing
contaminated buildings, and exhuming buried drums of waste.
[3] In this report, we primarily use environmental liability amounts
reported as of fiscal year-end 2004. At the time we developed our audit
approach and began our work, it was the most recent fiscal year for
which an entire year's data were available. Reported environmental
liabilities as of fiscal year-end 2005, compiled after our work began,
totaled $259.8 billion.
[4] As discussed later in this report, we previously reported on
shortcomings with the federal budgeting process for environmental
liabilities. See GAO, Long-Term Commitments: Improving the Budgetary
Focus on Environmental Liabilities, GAO-03-219 (Washington, D.C.: Jan.
24, 2003).
[5] An agency's performance and accountability report contains the
agency's description of its performance for the year as well as its
annual financial statements and independent auditor's reports. Fiscal
year 2004 reports reflect each agency's financial results and positions
as of and for the year ended September 30, 2004.
[6] GAO, Opportunities Exist to Improve Future Comprehensive Master
Plans for Changing U.S. Defense Infrastructure Overseas, GAO-05-680R
(Washington, D.C.: June 27, 2005).
[7] 42 U.S.C. §§ 6901-6991k.
[8] 42 U.S.C. §§ 9601-9675.
[9] 42 U.S.C. §§ 10101-10270.
[10] Pub. L. No. 102-579, 106 Stat. 4777 (October 30, 1992), as amended
by Pub. L. No. 104-201, div. C, title XXXI, §§ 3181-3191, 110 Stat.
2422, 2851 (September 23, 1996).
[11] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[12] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[13] GAO, Long-Term Commitments: Improving the Budgetary Focus on
Environmental Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24,
2003).
[14] GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term
Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).
[15] Recognition means reporting a dollar amount on the face of the
financial statements.
[16] Several other federal accounting standards also apply to
environmental liability disclosures. The Federal Accounting Standards
Advisory Board's Federal Financial Accounting and Auditing Technical
Release No. 2, Determining Probable and Reasonably Estimable for
Environmental Liabilities in the Federal Government, provides further
guidance to agencies in recognizing their environmental liabilities.
SFFAS No. 6, Accounting for Property, Plant, and Equipment, addresses
cleanup that is deferred until the operation of the associated
property, plant, or equipment ceases permanently or temporarily. SFFAS
No. 6 requires the entity to estimate the total cleanup cost when the
associated property, plant, or equipment is placed into service and to
recognize a portion of the estimated total cleanup cost as an expense
during each period the facility is in operation.
[17] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[18] For purposes of this report, we use the term location to refer to
all of the environmental cleanup at a particular place, such as at
Energy's Hanford nuclear reservation or Defense's Puget Sound Naval
Shipyard. We use the term site to refer to the various cleanup projects
or areas of contamination awaiting cleanup at a location. Thus, a
particular cleanup location could have many contaminated sites.
[19] Under federal accounting standards, the reported liability for
social security is only that amount due and payable at the end of the
fiscal year, not the estimated amount of future payments. As previously
mentioned, the environmental liability estimate is likely misstated
given Defense's internal control weaknesses with its estimation
processes, discussed later in this report.
[20] The national laboratories are a system of research facilities
funded and controlled by Energy to advance science and help promote the
economic and defensive interests of the country.
[21] Energy's Office of Environmental Management (EM) has
responsibility for managing the environmental cleanup of its legacy
waste. Energy refers to "active facilities" as those facilities
requiring cleanup that are operated by programs other than EM. The
Office of Legacy Management has responsibility for long-term
stewardship after locations are remediated and closed.
[22] These formerly used defense sites were once owned or controlled by
Defense but are now owned by states, local governments, and
individuals. The U.S. Army Corps of Engineers is responsible for
identifying, investigating, and cleaning up hazardous, toxic, and
radioactive wastes; ordnance and explosive wastes; and unsafe buildings
if Defense caused the unsafe condition.
[23] As discussed later in this report, the estimated target date for
the opening of the repository, which currently hasn't been constructed,
has been delayed several times due to various legal and regulatory
challenges. Due to recent difficulties, Energy has not committed to a
new target date and thus, there is significant uncertainty as to what
the final cost of the repository might be.
[24] Energy's auditors disclaimed an opinion on Energy's fiscal year
2005 financial statements due to limitations on the scope of work they
could perform on the overall audit. During 2005, Energy implemented a
new accounting system and chart of accounts and reorganized its finance
and accounting services, which resulted in a significant number of
conversion, posting, reconciliation, and reporting issues that Energy
was unable to resolve by fiscal year-end. As a result, the auditors
were not able to perform the work necessary to express an opinion on
Energy's financial statements for the year. Energy reported
environmental liabilities of $189.7 billion in its fiscal year 2005
financial statements.
[25] The configuration control board is made up of deputy assistant
secretaries in Energy's Office of Environmental Management. According
to one board official, the board meets at least monthly to review
project baselines and proposed baseline changes. Proposed baseline
changes that result in a decrease in cost estimate do not require the
configuration control board's approval but do require formal
notification to the board of the change.
[26] NNSA is a separate entity within Energy responsible for the
management and security of the nation's nuclear weapons,
nonproliferation, and naval reactor programs.
[27] American Institute of Certified Public Accountants, Statement on
Auditing Standards No. 57, Auditing Accounting Estimates, AU §342.14.
This standard became effective for audits of financial statements for
periods beginning on or after January 1, 1989.
[28] The $33.2 billion contingency estimate primarily represents the
contingency amount generated by Energy's contingency model. In some
cases, specific locations or projects develop their own contingency
amounts separate from the model. The actual contingency percentages
generated by the model in fiscal year 2004 ranged from 26.3 percent for
the legacy waste component to 16.9 percent for the long-term
stewardship portion of the liability.
[29] Reportable conditions are significant deficiencies in the design
or operation of internal control that could adversely affect the
entity's ability to record, process, summarize, and report financial
data consistent with the assertions of management in the financial
statements. A material weakness is a reportable condition in which the
design or operation of one or more of the internal control components
does not reduce to a relatively low level the risk that misstatements
caused by error or fraud in amounts that would be material in relation
to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing
their assigned functions.
[30] Statement of Federal Financial Accounting Standards, No. 23,
Eliminating the Category National Defense Property, Plant, and
Equipment.
[31] Department of Defense, Financial Management Regulations (FMR) vol.
4, ch. 13, Accounting Policy and Procedures, Environmental and
Nonenvironmental Liabilities (Washington, D.C.: October 2005).
[32] Department of Defense, Financial Management Regulations (FMR),
vol. 4, ch. 13, Accounting Policy and Procedures, Environmental and
Nonenvironmental Liabilities (Washington, D.C.: October 2005) and
Statement of Federal Financial Accounting Standards, No. 5, Accounting
for Liabilities of the Federal Government.
[33] Department of the Air Force, Thirty Year Maximum Combined Remedial
Action Operation/Long-Term Management Criteria.
[34] U.S. Department of Defense, Office of Inspector General, Financial
Management: Environmental Liabilities Required To Be Reported on Annual
Financial Statements, D-2004-080 (Arlington, VA: May 5, 2004) and
Department of the Navy, Naval Audit Service, Agreed-Upon Procedures
Attestation Engagement of Department of the Navy General Fund, Fiscal
Year 2004 Environmental Liabilities Account, N2005-0050 (Washington,
D.C.: July 15, 2005).
[35] Department of Defense, Financial Management Regulations (FMR) vol.
4, ch. 13, Accounting Policy and Procedures, Environmental and
Nonenvironmental Liabilities (Washington, D.C.: October 2005).
[36] GAO, Department of Energy: Preliminary Information on the
Potential for Columbia River Contamination from the Hanford Site, GAO-
06-77R (Washington, D.C.: Nov. 4, 2005).
[37] Chromium is toxic to fish and this portion of the Columbia River
is a major salmon breeding area.
[38] Energy is responsible for the construction, management, and
operation of the intended geologic repository at Yucca Mountain. EPA is
responsible for developing site-specific standards for Yucca Mountain
to protect public health and the environment from harmful exposure to
the radioactive waste that would be stored and disposed of in the
repository. The Nuclear Regulatory Commission is responsible for
licensing Energy to construct the repository and to dispose of high-
level radioactive waste and spent nuclear fuel in the repository, which
includes determining whether Energy can meet EPA's standards.
[39] See the Related GAO Reports section of this report. Many of these
reports identify weaknesses with Energy's and Defense's management of
their environmental cleanup programs.
[40] GAO, Contract Reform: DOE Has Made Progress, but Actions Needed to
Ensure Initiatives Have Improved Results, GAO-02-798 (Washington, D.C.:
Sept. 13, 2002).
[41] See for example, U.S. Department of Energy, Office of Inspector
General, Accelerated Tank Waste Retrieval Activities at the Hanford
Site, DOE/IG-706 (Washington, D.C.: Oct. 17, 2005); GAO, Nuclear Waste:
Better Performance Reporting Needed to Assess DOE's Ability to Achieve
the Goals of the Accelerated Cleanup Program, GAO-05-764 (Washington,
D.C.: July 29, 2005); and U.S. Department of Energy, Office of
Inspector General, National Nuclear Security Administration's Pit
Disassembly and Conversion Facility, DOE/IG-0688 (Washington, D.C.: May
3, 2005).
[42] GAO, Military Munitions: DOD Needs to Develop a Comprehensive
Approach for Cleaning Up Contaminated Sites, GAO-04-147 (Washington,
D.C.: Dec. 19, 2003).
[43] GAO, Environmental Contamination: Corps Needs to Reassess Its
Determinations That Many Former Defense Sites Do Not Need Cleanup, GAO-
02-658 (Washington, D.C.: Aug. 23, 2002).
[44] Legal representation letters are generally prepared by the
agency's general counsel to document its evaluation of the likelihood
of an unfavorable outcome by categorizing each case as probable,
reasonably possible, or remote in accordance with federal accounting
standards. These letters are used to inform the agency's auditor about
litigation, claims, and assessments to help the auditor determine the
adequacy of the financial accounting and reporting of such matters in
the agency's financial statements. Energy uses two kinds of letters
that collectively contain its legal representations.
[45] An emphasis paragraph is explanatory and is not construed as a
qualification of the auditor's opinion. It is intended to highlight
circumstances of particular importance and to aid in interpreting the
financial statements.
[46] According to the written comments, the Department of Defense
Financial Improvement and Audit Readiness Plan includes key milestones
addressing the issues of financial management review, approval, and
assessment of the estimation and reporting process.
[47] GAO, Opportunities Exist to Improve Future Comprehensive Master
Plans for Changing U.S. Defense Infrastructure Overseas, GAO-05-680R
(Washington, D.C.: Jun. 27, 2005).
[48] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
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