Environmental Liabilities
EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations Gao ID: GAO-05-658 August 17, 2005The burden of cleaning up Superfund and other hazardous waste sites is increasingly shifting to taxpayers, particularly since businesses handling hazardous substances are no longer taxed under Superfund and the backlog of sites needing cleanup is growing. While key environmental laws rely on the "polluter pays" principle, the extent to which liable parties cease operations or restructure--such as through bankruptcy--can directly affect the cleanup costs faced by taxpayers. GAO was asked to (1) determine how many businesses with liability under federal law for environmental cleanups have declared bankruptcy, and how many such cases the government has pursued in bankruptcy court; (2) identify challenges the Environmental Protection Agency (EPA) faces in holding bankrupt and other financially distressed businesses responsible for their cleanup obligations; and (3) identify actions EPA could take to better ensure that such businesses pay for their cleanups.
While more than 231,000 businesses operating in the United States filed for bankruptcy in fiscal years 1998 through 2003, the extent to which these businesses had environmental liabilities is not known because neither the federal government nor other sources collect this information. Information on bankrupt businesses with federal environmental liabilities is limited to data on the bankruptcy cases that the Justice Department has pursued in court on behalf of EPA. In that regard, the Justice Department initiated 136 such cases from 1998 through 2003. In seeking to hold liable businesses responsible for their environmental cleanup obligations, EPA faces significant challenges that often stem from the differing goals of environmental laws that hold polluting businesses liable for cleanup costs and other laws that, in some cases, allow businesses to limit or avoid responsibility for these liabilities. For example, businesses can legally organize or restructure in ways that can limit their future expenditures for cleanups by, for example, separating their assets from their liabilities using subsidiaries. While many such actions are legal, transferring assets to limit liability may violate federal law in some cases. However, such cases are difficult for EPA to identify and for the Justice Department to prosecute successfully. In addition, bankruptcy law presents a number of challenges to EPA's ability to hold parties responsible for their cleanup obligations, challenges that are largely related to the law's intent to give debtors a fresh start. Moreover, by the time a business files for bankruptcy, it may have few, if any, assets remaining to distribute among creditors. The bankruptcy process also poses procedural and informational challenges for EPA. For example, EPA lacks timely, complete, and reliable information on the thousands of businesses filing for bankruptcy each year. Notwithstanding these challenges, EPA could better ensure that bankrupt and other financially distressed businesses meet their cleanup obligations by making greater use of existing authorities. For example, EPA has not implemented a 1980 statutory mandate under Superfund to require businesses handling hazardous substances to demonstrate their ability to pay for potential environmental cleanups--that is, to provide financial assurances. EPA has cited competing priorities and lack of funds as reasons for not implementing this mandate, but its inaction has exposed the Superfund program and U.S. taxpayers to potentially enormous cleanup costs at gold, lead, and other mining sites and at other industrial operations, such as metal-plating businesses. Also, EPA has done little to ensure that businesses comply with its existing financial assurance requirements in cleanup agreements and orders. Greater oversight and enforcement of financial assurances would better guarantee that cleanup funds will be available if needed. Also, greater use of other existing authorities--such as tax offsets, which allow the government to redirect tax refunds it owes businesses to agencies with claims against them--could produce additional payments for cleanups from financially distressed businesses.
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-05-658, Environmental Liabilities: EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations
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Report to Congressional Requesters:
August 2005:
Environmental Liabilities:
EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup
Obligations:
GAO-05-658:
GAO Highlights:
Highlights of GAO-05-658, a report to congressional requesters:
Why GAO Did This Study:
The burden of cleaning up Superfund and other hazardous waste sites is
increasingly shifting to taxpayers, particularly since businesses
handling hazardous substances are no longer taxed under Superfund and
the backlog of sites needing cleanup is growing. While key
environmental laws rely on the ’polluter pays“ principle, the extent to
which liable parties cease operations or restructure”such as through
bankruptcy”can directly affect the cleanup costs faced by taxpayers.
GAO was asked to (1) determine how many businesses with liability under
federal law for environmental cleanups have declared bankruptcy, and
how many such cases the government has pursued in bankruptcy court; (2)
identify challenges the Environmental Protection Agency (EPA) faces in
holding bankrupt and other financially distressed businesses
responsible for their cleanup obligations; and (3) identify actions EPA
could take to better ensure that such businesses pay for their
cleanups.
What GAO Found:
While more than 231,000 businesses operating in the United States filed
for bankruptcy in fiscal years 1998 through 2003, the extent to which
these businesses had environmental liabilities is not known because
neither the federal government nor other sources collect this
information. Information on bankrupt businesses with federal
environmental liabilities is limited to data on the bankruptcy cases
that the Justice Department has pursued in court on behalf of EPA. In
that regard, the Justice Department initiated 136 such cases from 1998
through 2003.
In seeking to hold liable businesses responsible for their
environmental cleanup obligations, EPA faces significant challenges
that often stem from the differing goals of environmental laws that
hold polluting businesses liable for cleanup costs and other laws that,
in some cases, allow businesses to limit or avoid responsibility for
these liabilities. For example, businesses can legally organize or
restructure in ways that can limit their future expenditures for
cleanups by, for example, separating their assets from their
liabilities using subsidiaries. While many such actions are legal,
transferring assets to limit liability may violate federal law in some
cases. However, such cases are difficult for EPA to identify and for
the Justice Department to prosecute successfully. In addition,
bankruptcy law presents a number of challenges to EPA‘s ability to hold
parties responsible for their cleanup obligations, challenges that are
largely related to the law‘s intent to give debtors a fresh start.
Moreover, by the time a business files for bankruptcy, it may have few,
if any, assets remaining to distribute among creditors. The bankruptcy
process also poses procedural and informational challenges for EPA. For
example, EPA lacks timely, complete, and reliable information on the
thousands of businesses filing for bankruptcy each year.
Notwithstanding these challenges, EPA could better ensure that bankrupt
and other financially distressed businesses meet their cleanup
obligations by making greater use of existing authorities. For example,
EPA has not implemented a 1980 statutory mandate under Superfund to
require businesses handling hazardous substances to demonstrate their
ability to pay for potential environmental cleanups”that is, to provide
financial assurances. EPA has cited competing priorities and lack of
funds as reasons for not implementing this mandate, but its inaction
has exposed the Superfund program and U.S. taxpayers to potentially
enormous cleanup costs at gold, lead, and other mining sites and at
other industrial operations, such as metal-plating businesses. Also,
EPA has done little to ensure that businesses comply with its existing
financial assurance requirements in cleanup agreements and orders.
Greater oversight and enforcement of financial assurances would better
guarantee that cleanup funds will be available if needed. Also, greater
use of other existing authorities”such as tax offsets, which allow the
government to redirect tax refunds it owes businesses to agencies with
claims against them”could produce additional payments for cleanups from
financially distressed businesses.
What GAO Recommends:
GAO‘s nine recommendations include EPA‘s (1) implementing a financial
assurance mandate for businesses handling hazardous substances and (2)
enhancing its oversight and enforcement of existing financial
assurances and authorities. EPA generally agreed with many of the
recommendations, stating its intent to further evaluate some of them.
www.gao.gov/cgi-bin/getrpt?GAO-05-658.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John B. Stephenson at
(202) 512-3841 or stephensonj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Number of Business Bankruptcies Involving Environmental Liabilities
Is Not Known:
EPA Faces Significant Challenges When Seeking to Hold Businesses
Responsible for Their Cleanup Obligations, Particularly Businesses in
Bankruptcy and Other Financial Distress:
EPA Could Make Greater Use of Available Authorities and Enforcement
Tools to Pursue Hazardous Waste Cleanup Costs from Bankrupt and Other
Financially Distressed Businesses:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Chronology of EPA's Efforts to Develop Financial Assurance
Requirements for Businesses Handling Hazardous Substances:
Appendix III: Comments from the Environmental Protection Agency:
GAO Comments:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Financial Assurance Mechanisms Generally Accepted by EPA:
Table 2: Relative Financial Risk, Necessary Oversight and Enforcement
Effort, and Costs of Financial Assurance Mechanisms:
Abbreviations:
BLM: Bureau of Land Management:
CERCLA: Comprehensive Environmental Response, Compensation and
Liability Act:
EFAB: Environmental Financial Advisory Board:
EPA: Environmental Protection Agency:
IG: inspector general:
NPL: National Priorities List:
RCRA: Resource Conservation and Recovery Act:
Letter August 17, 2005:
The Honorable James M. Jeffords:
Ranking Minority Member:
Environment and Public Works Committee:
United States Senate:
The Honorable Patrick J. Leahy:
Ranking Minority Member:
Committee on Judiciary:
United States Senate:
The Honorable Barbara Boxer:
The Honorable Maria Cantwell:
United States Senate:
Key federal environmental statutes, such as the Resource Conservation
and Recovery Act (RCRA) and the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA),[Footnote 1] which established
the Superfund program, require that parties statutorily responsible for
pollution bear the cost of cleaning up contaminated sites.[Footnote 2]
In many cases, liable parties have met their cleanup responsibilities.
However, parties responsible for cleaning up some Superfund sites
include businesses that no longer exist, having been liquidated through
bankruptcy or otherwise dissolved. In the past, most of the costs for
these "orphan" Superfund sites were borne by a Superfund trust fund
supported primarily by a tax on crude oil and certain chemicals and an
environmental tax on corporations. However, authority to collect these
taxes expired in 1995, and the fund is now mostly depleted. As a
result, the government--the Environmental Protection Agency (EPA)--now
largely pays for hazardous waste cleanups with appropriations from the
general fund when responsible parties do not.[Footnote 3]
In light of the substantial federal deficit, EPA's management of its
financial risks associated with Superfund and RCRA is increasingly
important. For example, the extent to which responsible parties with
liabilities cease operations or restructure--often through bankruptcy
proceedings--can directly affect the Superfund costs that will be borne
by the government. According to recent studies, it will cost $140
million, on average, to clean up each of the 142 largest Superfund
sites, for a total of almost $20 billion.[Footnote 4] Importantly,
cleanups at 60 of these megasites are already being funded either
wholly or partially by EPA. In addition, the cleanup burden borne by
EPA and other government entities will be increased if operating
businesses, including those regulated under RCRA, fail to fulfill their
cleanup obligations. For example, businesses may simply close and
abandon contaminated properties--or they may go through bankruptcy
proceedings--leaving contaminated properties for state programs or
EPA's Superfund program to clean them up.
In implementing the Superfund and RCRA programs, EPA uses some risk
management approaches, such as requiring that certain responsible
parties--generally businesses--provide the agency with evidence of
their ability to pay their expected future cleanup costs because the
cleanups often take many years and the financial position of liable
businesses can change during that time. Financial assurances are meant
to assure EPA that the businesses will have the money to finish the
cleanups in the future. Thus, when negotiating Superfund and RCRA
cleanup agreements with EPA, businesses generally agree to provide
financial assurances aimed at demonstrating their ability to meet the
requirements of the agreements.[Footnote 5] These financial assurances
include bank letters of credit, trust funds, and, under certain
conditions, guarantees that businesses or their parent corporations
have the financial wherewithal to meet the obligations.
According to EPA officials, businesses file for bankruptcy protection
generally for economic reasons unrelated to environmental liabilities,
with some notable exceptions. When businesses file for bankruptcy in 1
of 90 U.S. bankruptcy courts, they seek either to liquidate all assets
and go out of business or to reorganize--which can include a partial
liquidation--and remain in business. EPA has set up an informal process
to identify bankruptcy cases that involve environmental liabilities and
to assess whether the assets available for creditors, which include
EPA, warrant referring a case to the Department of Justice, which files
claims in bankruptcy court on behalf of EPA.
In this context, our objectives were to (1) determine how many
businesses with liability under federal law for environmental cleanups
have declared bankruptcy and how many such cases the Justice Department
has pursued in bankruptcy court, (2) identify key challenges that EPA
faces in holding bankrupt and other financially distressed businesses
responsible for their cleanup obligations, and (3) identify any actions
EPA could take to better ensure that bankrupt and other financially
distressed businesses pay the costs of cleaning up their hazardous
waste sites to the maximum extent practicable.
To address these objectives, we reviewed federal statutes and policies
associated with hazardous waste management and cleanup, the federal
bankruptcy code and procedures, and academic and professional
literature addressing the intersection of environmental and bankruptcy
law, corporate limited liability, forms of business organization, and
asset management. In addition, we interviewed EPA headquarters and
regional enforcement officials about how the agency identifies,
pursues, and recovers federal environmental liabilities from
financially distressed or bankrupt businesses; the challenges EPA faces
in these tasks; and the extent to which the agency has used available
authorities and enforcement tools in this effort. We also analyzed
bankruptcy data for fiscal years 1998 through 2003 from the
Administrative Office of the U.S. Courts. In addition, for the same
period, we analyzed Justice Department data on bankruptcies involving
environmental liabilities that the department pursued in bankruptcy
court on behalf of EPA. More detail on our scope and methodology can be
found in appendix I. We performed our work between September 2003 and
July 2005 in accordance with generally accepted government auditing
standards.
Results in Brief:
While national bankruptcy data show that more than 231,000 businesses
operating in the United States filed for bankruptcy in fiscal years
1998 through 2003, the extent to which these businesses had existing
environmental liabilities is not known because neither the federal
government nor other sources collect this information. EPA seeks to
identify information on those business bankruptcies that involve
environmental liabilities owed to EPA by, among other things, reviewing
bankruptcy notices. However, EPA does not maintain information on the
results of its reviews of bankruptcy cases. According to EPA officials,
the agency does not maintain information on the results of all of its
reviews of bankruptcy cases--including whether environmental
liabilities are involved--because of the large volume of bankruptcy
notices it receives and the limited resources available to track such
information. Thus, information on businesses in bankruptcy proceedings
with federal environmental liabilities is limited to data on the
bankruptcy cases that the Justice Department has pursued in court on
behalf of EPA and other agencies. In that regard, the Justice
Department initiated 136 such cases from 1998 through 2003, most of
which were for hazardous waste liabilities under Superfund and RCRA.
In seeking to hold bankrupt and other financially distressed businesses
responsible for their cleanup obligations, EPA faces significant
challenges that often stem from the differing goals of environmental
laws that hold polluting businesses liable for cleanup costs and other
laws that, in some cases, allow businesses to limit or avoid
responsibility for those liabilities. For example, businesses can
legally reorganize or restructure in ways that can limit their future
expenditures for environmental cleanups by separating their assets from
their liabilities using subsidiaries. Importantly, the long-term nature
of many environmental cleanups--particularly under Superfund--gives
businesses a significant amount of time to make such corporate changes.
While many such actions are legal, transferring assets to limit
liability may be prohibited under certain circumstances. However, such
cases are difficult both for EPA to identify and for the Justice
Department to prosecute successfully. In addition, federal bankruptcy
law, like corporate law, presents a number of significant challenges to
EPA's efforts to hold bankrupt and other financially distressed
businesses responsible for their cleanup obligations. Bankruptcy law
serves both to provide insolvent debtors a measure of financial relief-
-including a fresh start--and to equitably distribute their funds to
maximize creditors' interests in receiving payment. However, these
goals can conflict with the Superfund and other environmental laws,
which generally require the cleanup of environmental contamination and
the imposition of costs on the parties responsible for the pollution.
These challenges are partly related to the bankruptcy law's discharging
of a debtor's liability for pre-bankruptcy debts. Moreover, by the time
a business files for bankruptcy, it may have few, if any, assets
remaining to distribute among creditors. The bankruptcy process also
poses procedural and informational challenges for EPA. For example,
EPA's efforts to identify bankruptcies that may warrant pursuit in
bankruptcy court are hampered by the lack of timely, complete, and
reliable information on the many thousands of businesses filing for
bankruptcy each year.
Notwithstanding these inherent challenges, EPA could better ensure that
bankrupt and other financially distressed businesses carry out their
cleanup responsibilities by making greater use of existing authorities
and enforcement tools. For example, EPA has not yet implemented a 1980
statutory mandate under Superfund to require businesses handling
hazardous substances to maintain financial assurances that would
provide evidence of their ability to pay to clean up potential spills
or other environmental contamination that could result from their
operations. By its inaction on this mandate, EPA has continued to
expose the Superfund program, and ultimately the U.S. taxpayers, to
potentially enormous cleanup costs at facilities that currently are not
required to have financial assurances for cleanup costs, such as many
gold, lead, and other hardrock mining sites and metal-plating
facilities. Although implementing the requirement could help avoid the
creation of additional Superfund sites and could provide funds to help
pay for cleanups, EPA has cited, among other things, competing
priorities and lack of funds as reasons for having made no progress in
this area for nearly 25 years. Additionally, although EPA's current
practice is to include requirements in settlement agreements and orders
under Superfund and RCRA for businesses to provide financial assurances
within a specified period of time, EPA has done little to ensure that
the businesses comply with the financial assurance requirements. For
example, EPA has not collected data on the financial assurances
businesses are required to have in place under the Superfund and RCRA
corrective action programs, such as the type of assurance required, the
amount of financial assurance they provide, and whether the financial
assurance is still authorized or is in force. The one study on this
issue, conducted by an EPA regional office, found that (1) about half
of the responsible parties subject to Superfund financial assurance
requirements in that region were not in compliance with them and (2)
the agency could not locate relevant financial assurance documents to
evaluate compliance in many cases--22 percent. Providing greater
oversight and enforcement of financial assurances would better
guarantee that cleanup funds will be available if needed.
In addition to financial assurances, EPA has on occasion used other
enforcement authorities to obtain payments for cleanups. For example,
in a few instances, EPA has used tax offsets, which allow the federal
government to redirect tax refunds it owes businesses to federal
agencies with claims against these businesses. Greater emphasis on and
use of such authorities could produce additional payments for cleanups
from bankrupt and other financially distressed businesses. We are
making nine recommendations to the Administrator, EPA, aimed at
improving EPA's ability to ensure that liable parties meet their
environmental cleanup obligations, including implementing the statutory
mandate under Superfund to develop financial assurance regulations for
businesses handling hazardous substances; enhancing its efforts to
manage and enforce its existing financial assurance requirements;
evaluating the financial assurances the agency accepts; and seeking
opportunities to more fully use its enforcement tools, particularly tax
and other offsets. In commenting on a draft of the report, EPA
generally agreed with many of the recommendations and said the agency
will further evaluate the others (app. III contains EPA's comments and
our responses).
Background:
At the federal level, the cleanup of hazardous waste sites is primarily
addressed under the Superfund and RCRA corrective action programs. The
Superfund program is directed primarily at addressing contamination
resulting from past activities at inactive or abandoned sites or from
spills that require emergency action. The RCRA corrective action
program primarily addresses contamination at operating industrial
facilities. In addition to these cleanup response programs, another
RCRA program--the closure/post-closure program--is designed to prevent
environmental contamination by ensuring that hazardous waste facilities
are closed in a safe manner and monitored after closure to the extent
necessary to protect human health and the environment.
CERCLA created the Superfund program, under which EPA may compel
parties statutorily responsible for contaminated sites to clean them up
or to reimburse EPA for its cleanup costs.[Footnote 6] In many cases,
liable parties have met their cleanup responsibilities under Superfund.
For example, EPA has reported that, as a result of its enforcement
activities, liable parties participate in cleanup work at about 70
percent[Footnote 7] of the sites on the Superfund National Priorities
List (NPL), EPA's list of seriously contaminated sites.[Footnote 8]
However, in some cases, parties responsible for the contamination
cannot be identified (for example, at long-abandoned landfills where
many parties may have dumped hazardous substances) or the parties do
not have sufficient financial resources to perform or pay for the
entire cleanup. In the latter case, EPA often settles environmental
claims with businesses for less than the cleanup costs if paying for
the cleanup would present "undue financial hardship," such as depriving
a business of ordinary and necessary assets or resulting in an
inability to pay for ordinary and necessary business expenses. (EPA
said it also often settles environmental claims for less than the total
cleanup costs if the agency believes making the business pay the full
cost would be inequitable.) Further, when parties file for bankruptcy
protection, EPA's recovery of cleanup costs may be reduced or
eliminated, particularly when there are few other parties with cleanup
liabilities at the Superfund site.
To help EPA pay for cleanups and related program activities, the
Superfund law established a trust fund. Among other things, the trust
fund can be used to pay for cleaning up sites on the NPL. Cleaning up
NPL sites has often been a very lengthy process--in many cases, it has
taken 10 to 20 years. The cleanup process begins when EPA either
conducts cleanup studies for the sites or negotiates with liable
parties to conduct such studies. These studies identify the types and
quantities of contamination at sites and consider alternative cleanup
remedies. EPA then chooses the cleanup remedies it considers most
appropriate and performs the cleanups itself or negotiates settlements
with liable parties for them to finance and perform cleanups.[Footnote
9]
Historically, a tax on crude oil and certain chemicals and an
environmental tax on corporations were the primary sources of revenues
for the Superfund trust fund; however, the authority for these taxes
expired in 1995. The trust fund continues to receive revenues in the
form of recoveries of Superfund-related costs from liable parties,
interest on the fund balance, fines and penalties, and general revenue
fund appropriations that supplement the trust fund balance. Since
fiscal year 2000, the Superfund program has increasingly relied on
revenue from general revenue fund appropriations.[Footnote 10] For
fiscal year 2004, for example, EPA's Superfund appropriation of $1.2
billion was from general revenue only.[Footnote 11] In contrast,
through the 1990s, Superfund trust fund revenues other than general
fund appropriations provided more than $1 billion a year in program
funding.[Footnote 12] Further, appropriations for the Superfund program
(from both general revenue and trust fund revenues) has decreased from
$1.9 billion to $1.2 billion, in constant 2003 dollars, from fiscal
year 1993 to fiscal year 2004.
Although funding for the Superfund program has decreased, sites
continue to be added to the NPL to address serious risks to health and
the environment. As of September 30, 2004, there were 1,236 NPL
sites.[Footnote 13] According to a recent study, the cleanup costs for
a majority of these sites are under $50 million each and will cost $12
million on average. However, there are 142 Superfund megasites--NPL
sites whose cleanup is estimated to cost more than $50 million each--
for which the average cost is expected to be $140 million. According to
EPA estimates, the vast majority of costs for most NPL sites will be
incurred getting to the construction completion stage.[Footnote 14] EPA
officials said that 933 NPL sites have reached the construction
complete stage as of July 2005.
Despite EPA's significant progress, a backlog of NPL sites is ready to
proceed to construction of a long-term cleanup remedy--which is
typically the most expensive stage of a cleanup. The decrease in
Superfund funding in recent years and this backlog of sites ready for
additional funding may make the already lengthy NPL cleanup process
even lengthier. According to EPA, many sites in this backlog are large,
complex, and costly.[Footnote 15] Further complicating the funding
situation, as we reported in 2003, the number of sites that do not have
an identifiable nonfederal source to fund their cleanup is growing, and
several factors indicate the potential for additional growth in the
future.[Footnote 16] For example, officials in 8 of the 10 EPA regions
noted that they expected more liable parties to declare bankruptcy in
the future. Thus, the number of taxpayer-funded cleanups could
increase, especially at sites where there are no (or few) other liable
parties.
In contrast to the Superfund program, the corrective action program
under the Resource Conservation and Recovery Act of 1976 (RCRA), as
amended, primarily addresses contamination at operating industrial
facilities.[Footnote 17] Among other things, RCRA regulates the
management of hazardous waste from "cradle to grave"--that is, from the
time hazardous waste is created and throughout its lifetime, even after
it enters a landfill or is incinerated. While EPA has overall
responsibility for implementing the act, and retains enforcement
authority, it has authorized most states to administer all or part of
RCRA's hazardous waste program.
RCRA requires owners and operators of hazardous waste facilities--those
used to treat, store, or dispose of hazardous waste and often called
"TSDFs"--to obtain operating permits specifying how hazardous waste
will be safely managed at the facilities. Owners and operators of
hazardous waste facilities are also required to prepare closure plans
and cost estimates for removing or securing wastes, decontaminating
equipment, and other activities required when they eventually cease
operations--such as capping a landfill when it is full. In addition,
under the RCRA corrective action program, these owners or operators
must clean up contamination occurring at their facilities.[Footnote 18]
This is consistent with one of RCRA's primary purposes, which is to
ensure the proper management of hazardous waste so as to minimize
present and future health and environmental threats.
A 2002 EPA study on the implementation of RCRA's corrective action
program reported that nearly 900 facilities had undertaken cleanup
measures and/or had selected a cleanup remedy by 1997.[Footnote 19] EPA
reported that spills were a major source of contamination at over half
of the facilities. The study suggests that those industries with a high
risk for contamination requiring clean up under the corrective action
program include chemical manufacturing, wood preserving, petroleum
refining or other manufacturing industries, and the service sector that
includes dry cleaning. In addition, EPA reported that required cleanups
under the RCRA corrective action program could be as costly as cleanups
at many Superfund sites--EPA estimated that between 2 and 16 percent of
the nearly 900 RCRA facilities would have total cleanup costs in excess
of $50 million.
RCRA's closure/post-closure and corrective action programs regulate
facilities that treat, store, or dispose of hazardous wastes--but,
importantly, RCRA does not regulate some facilities that make or use
hazardous substances that are not considered listed or characteristic
hazardous wastes under RCRA, but that nevertheless may in some
circumstances present a high risk for environmental contamination.
Businesses may generally store waste on site in compliance with
specified requirements for up to 90 days without needing a permit or
being subject to the regulations governing hazardous waste storage
facilities.[Footnote 20]Thus, for example, chemical companies that
manufacture and sell highly hazardous substances, such as chlorine
products, may not be required to obtain a RCRA permit if they do not
store their hazardous waste--even though the products themselves may
pose environmental risk.
RCRA authorizes EPA to issue regulations for the operation of hazardous
waste treatment, storage, and disposal facilities, including such
additional qualifications as to financial responsibility as may be
necessary or desirable.[Footnote 21] EPA has issued regulations under
the closure/post-closure program requiring that owners and operators of
certain hazardous waste facilities provide evidence to EPA, or a state
regulator, that they have sufficient financial resources to clean up as
required for proper closure, and, if necessary, for post-closure
care.[Footnote 22] EPA regulations also require a facility seeking a
permit to provide financial assurances to cover any corrective action
responsibilities identified in the permit.[Footnote 23] The principal
purpose of financial assurance requirements is to ensure that the
parties responsible for environmental contamination assume the costs of
cleanup rather than forcing the general public to pay for or otherwise
bear the consequences of businesses' environmental liabilities.
[Footnote 24] That is, financial assurances can help ensure that
resources are available to fulfill the businesses' cleanup obligations
as they arise. The fact that the parties responsible for the
contamination are also responsible for cleaning it up encourages
businesses to adopt responsible environmental practices.
Under the RCRA closure and post-closure and other EPA programs,
financial assurances can include, among other things, bank letters of
credit that guarantee payment by the financial institutions that issue
them and, under certain conditions, guarantees that businesses or their
parent corporations have the financial wherewithal to meet their
obligations. While EPA has not issued financial assurance regulations
under the RCRA corrective action program, EPA typically requires that
owners and operators provide financial assurances for cleanups of
spills or other contamination at hazardous waste facilities in
administrative orders the agency issues under this program.[Footnote
25] Also, as noted above, EPA regulations require a facility seeking a
permit to provide financial assurances to cover any corrective action
responsibilities identified in the permit. Since, as discussed above,
generators of hazardous waste generally are not subject to the RCRA
corrective action and closure and post-closure requirements, they are
not required to provide financial assurances for any RCRA cleanups that
may be needed as a result of their operations.
EPA also has not issued financial assurance regulations for the
Superfund program, but in some cases does require liable businesses to
obtain financial assurances demonstrating their ability to pay cleanup
costs for existing contamination at Superfund sites. Specifically, when
EPA reaches settlement agreements with parties regarding site cleanups,
the agency generally requires the businesses to provide financial
assurance demonstrating their ability to pay for the agreed-upon
cleanup activities. In this regard, EPA has included financial
assurance requirements in its "model agreements" for staff to use in
negotiating Superfund settlements. However, if EPA and a liable party
do not reach a settlement, there is no regulatory requirement under
Superfund that the party provide financial assurance that it will be
able to pay its cleanup liabilities. There is, however, a statutory
mandate under Superfund law that EPA has not implemented requiring it
to issue financial assurance regulations for facilities that handle
hazardous substances. As discussed further in this report, these
regulations could cover a number of facilities not currently covered by
financial assurances under RCRA.
Businesses that may incur environmental liabilities under Superfund or
RCRA run the gamut in terms of organization type and size--they include
large U.S. and international corporations as well as small businesses,
such as sole proprietorships. These entities may be publicly held--that
is, their stock is traded on public stock exchanges--or they may be
closely (privately) held. The different forms of organization--such as
corporations and partnerships--have different legal and tax attributes.
A corporation is a legal entity that exists independently of its owners
or investors, called shareholders. A key attribute of corporations is
that they limit the liability of their owners, the shareholders. That
is, corporations are liable for the debts and obligations of their
businesses, while the shareholders are liable only for what they have
invested. In contrast to shareholders, the owners of unincorporated
businesses, such as partnerships and sole proprietorships, are
generally liable for all debts and liabilities incurred by their
businesses but also have tax advantages that corporation owners do not.
However, another unincorporated organizational form that is relatively
new but is becoming more popular for businesses of all sizes--the
limited liability company--provides owners limited liability similar to
a corporation as well as tax treatment similar to partnerships and sole
proprietorships.[Footnote 26] Like many corporations, these "hybrids"
can have any number of investors (owners), and the investors may
include partnerships, corporations, individuals, and others.[Footnote
27]
In general, more financial and ownership information is available about
publicly held corporations, which must comply with more federal
reporting requirements, such as those of the U.S. Securities and
Exchange Commission (SEC), than about privately held corporations.
Information about limited liability companies, including those in
offshore locations such as the Bahamas, may be limited or unavailable.
Information may also be limited or unavailable about special purpose
entities--legal entities created to carry out a specified purpose or
activity, such as to consummate a specific transaction or a series of
transactions with a narrowly defined purpose. Some large corporations,
such as Enron, allegedly have used special purpose entities to hide the
true financial condition of the companies.[Footnote 28] Following the
bankruptcy of Enron and other corporate failings, the Congress passed
the Sarbanes-Oxley Act of 2002 to protect investors by improving the
accuracy and reliability of corporate disclosures. Among other things,
the law includes requirements governing financial disclosures and
audits for publicly held corporations.
In addition, in 2003 the Financial Accounting Standards Board, the
organization that establishes financial accounting and reporting
standards for the private sector, issued revised guidance on accounting
for special purpose entities and is currently working on further
accounting guidance for them.
While some financially distressed businesses simply cease operations,
others file for bankruptcy protection. The bankruptcy code is a uniform
body of federal law that governs all bankruptcy cases and gives
debtors--individuals or businesses--a fresh start or some measure of
relief from burdensome debts.[Footnote 29] Filing a bankruptcy petition
gives the petitioner some immediate relief in the form of an automatic
stay, which generally bars creditors from commencing or continuing any
debt collection actions against the entity while it is in
bankruptcy.[Footnote 30]
In bankruptcy, debt can be placed in one of three broad categories:
secured, priority unsecured, and general unsecured, which are generally
satisfied in that order when a debtor's assets are distributed in a
bankruptcy proceeding. The actual, necessary costs and expenses of
preserving the bankruptcy estate are administrative expenses, which
must be paid in full before any other class of claims are paid. By
definition, administrative expenses must be incurred post-petition
because the bankruptcy estate is created by the filing of the
bankruptcy petition. Response costs incurred by EPA under the Superfund
law post-petition with respect to property of the estate may be
entitled to administrative priority. However, environmental response
costs at property the debtor does not own are typically considered
general unsecured debts, and often are paid at pennies on the dollar--
if at all--in a bankruptcy proceeding.
The two types of bankruptcy cases most relevant to EPA are chapter 7
business liquidations and chapter 11 corporate reorganizations.
Businesses file for bankruptcy under chapter 7 when they are ceasing
operations.[Footnote 31] While some financially distressed businesses
cease operations without the formality of bankruptcy proceedings, those
that file under chapter 7 use a court-supervised procedure in which a
trustee collects the assets of the business (the bankruptcy estate),
reduces them to cash, and makes distributions to creditors. In many
chapter 7 cases, however, few or no assets are available for
distribution.
Alternatively, businesses facing financial difficulties may want to
continue to operate. These businesses can use the chapter 11 bankruptcy
process to restructure unmanageable debt burdens. Most bankruptcy
claims EPA pursues in court are chapter 11 reorganizations. EPA's goals
in participating in chapter 11 cases include collecting environmental
costs owed to the government, ensuring that the debtor complies with
applicable environmental laws and regulations, and ensuring that
cleanup obligations are satisfied. The chapter 11 debtor generally has
120 days during which it has the exclusive right to file a plan of
reorganization. However, the bankruptcy court can extend or reduce this
period.[Footnote 32] The debtor must provide creditors with a
disclosure statement containing information adequate to enable
creditors to evaluate the plan, including how the existing debts will
be paid. The court ultimately approves (confirms) or disapproves the
plan of reorganization. Confirmation of the plan generally discharges
eligible debts that were incurred prior to the plan's confirmation.
Certain cleanup obligations, however, such as future cleanup
liabilities under RCRA, are not dischargeable under bankruptcy. The
debtor normally goes through a period of consolidation and emerges with
a reduced debt load and a reorganized business. However, many chapter
11 reorganizations are not successful in that many reorganized
businesses subsequently fail and go through liquidation.
Bankruptcy cases are heard by U.S. bankruptcy judges in 90 federal
bankruptcy courts, which are under 12 regional federal appellate
circuit courts.[Footnote 33] In many instances, applicable law on key
questions is unsettled and interpretations may vary among the circuits.
For example, interpretations may vary concerning the extent to which
post-petition response costs incurred by EPA under CERCLA with respect
to property of the bankruptcy estate may be entitled to administrative
priority. Businesses may generally file for bankruptcy protection in a
bankruptcy court in a state either in which (a) their facilities are
located or (b) they are incorporated. In fact, many businesses file for
bankruptcy protection in the second and third circuits, which include
Delaware and the Southern District of New York.
EPA has established a bankruptcy work group comprised of several EPA
headquarters staff members, along with one or two staff members from
each of the 10 regions, many of whom are Superfund enforcement
attorneys who handle bankruptcy matters as a collateral duty. The work
group helps identify bankruptcy cases in which EPA may have a claim and
assists in resolving other issues that involve contaminated property or
otherwise affect EPA's interests in bankruptcies, among other things.
In addition, several Justice Department attorneys participate in the
work group.
The Number of Business Bankruptcies Involving Environmental Liabilities
Is Not Known:
Information on the number of bankruptcies involving environmental
liabilities is very limited. For example, while the bankruptcy courts
collect data on the number of businesses that file for bankruptcy each
year and the Administrative Office of the U.S. Courts maintains these
data in a national database, neither the courts, EPA, nor private
providers of business data collect information on how many of these
businesses have environmental liabilities.[Footnote 34] Thus, although
national bankruptcy data show that 231,630 businesses operating in the
United States filed for bankruptcy in fiscal years 1998 through 2003--
an average of about 38,600 businesses a year--how many of these had
environmental liabilities is not known. Currently, information on
bankrupt businesses with federal environmental liabilities is limited
to data on the bankruptcy cases that the Justice Department has pursued
in court on behalf of EPA and other agencies, such as the Department of
the Interior. In fiscal years 1998 through 2003, the Justice Department
filed 136 such claims, 112 of which related to hazardous waste
liabilities under Superfund and RCRA. The gap in data between
businesses that file for bankruptcy and those with environmental
liabilities that the Justice Department has pursued in court is large:
what is not known is how many of the other 231,494 businesses that
filed for bankruptcy during this time period had environmental
liabilities.
EPA may learn of bankruptcy filings that involve environmental
liabilities in various ways--for example, from the businesses
themselves or from other federal or state agencies. However, the most
systematic notification is from the bankruptcy courts. These courts
mail notices of filings to EPA when the agency is listed as a creditor
in the bankruptcy filing.[Footnote 35] Although EPA reviews information
about the businesses identified in the bankruptcy notices to determine
whether it should request the Justice Department to pursue an
environmental claim in the bankruptcy proceedings, the agency does not
keep records on the bankruptcy filings it has researched, its basis for
deciding whether to pursue a claim related to environmental
liabilities, or the characteristics of the businesses involved, such as
industry type. Among the factors EPA considers in deciding whether to
pursue a claim in bankruptcy court is whether the debtor has any assets
remaining to be divided among creditors. In many cases, particularly
when the company is ceasing operations under chapter 7, EPA decides not
to pursue a claim in bankruptcy court because it concludes that the
business involved has few, if any, remaining assets. Similarly, EPA may
choose not to pursue a claim when the claim is small relative to the
resources needed for the government to pursue it.
According to EPA officials, the agency does not routinely collect or
maintain information on the bankruptcy cases it reviews but decides not
to pursue in bankruptcy because of the volume of bankruptcy notices it
receives--including many that do not involve EPA liabilities--and the
limited resources available to track such information. While EPA would
incur a cost to routinely collect and maintain information about
bankruptcies involving environmental liabilities--including those that
EPA decides not to pursue--such information would be useful as a
management tool, for example, in identifying (1) the types of
businesses that have avoided or limited their environmental liabilities
by filing for bankruptcy protection and (2) individual business owners
who have a history of filing for such bankruptcy protection.
The 112 companies with hazardous waste liabilities that the Justice
Department pursued in bankruptcy court between 1998 and 2003 represent
a variety of industries, including some that could be expected to have
significant environmental liabilities, such as chemical companies,
metal finishers, hazardous waste recyclers, and paper mills. Other
companies, such as Fruit of the Loom and Kmart Corporation, represent
industries not immediately associated with a great likelihood of
creating environmental liabilities.[Footnote 36] Most of the companies
for which the Justice Department filed a bankruptcy claim on behalf of
EPA were undergoing reorganization in bankruptcy rather than
liquidating and going out of business. Further, 100 of the cases
involved liabilities under the Superfund program, and 12 involved
liabilities under RCRA.[Footnote 37] As of February 2005, 35 of the 112
bankruptcy cases the Justice Department pursued had essentially been
completed, and more than half--59--were still ongoing. For example, W.
R. Grace and Company and many of its subsidiaries filed for bankruptcy
under chapter 11 in April 2001, and this bankruptcy case is still under
way as of July 2005. The remaining 18 cases were dismissed by the
bankruptcy court for various reasons. In such cases, EPA and other
creditors are no longer barred from pursuing claims against these
businesses directly. However, EPA may have little success in recovering
costs or ensuring compliance with environmental responsibilities if
these businesses are, in fact, financially distressed.
Over time, the current information gap that exists between businesses
filing for bankruptcy and the subset of those for which the Justice
Department files an environmental claim in bankruptcy court may be
reduced because of new filing requirements that became effective
recently. Since 2003, bankruptcy petitions and the accompanying
Statement of Financial Affairs have required companies filing for
bankruptcy to provide information identifying sites they own or possess
that have actual or potential environmental problems, including any
sites that pose or allegedly pose an imminent threat to public health
and safety.[Footnote 38] However, this additional environmental
information is not yet readily available electronically from the 90
bankruptcy courts in the United States. That is, the systems cannot be
queried to identify filings with information on sites with
environmental liabilities. However, EPA has sought assistance in this
regard from the U.S. trustees who participate in all bankruptcy cases
except those filed in Alabama and North Carolina.[Footnote 39] In
August 2004, the Acting General Counsel, Executive Office for U.S.
Trustees, sent a memorandum to all U.S. trustees instructing them to
coordinate with EPA in bankruptcy cases involving contaminated
property.
The trustees are to alert the appropriate EPA contact by email when
they become aware of an affirmative response to the questions asking
petitioners to identify sites with actual or potential environmental
liabilities, and to attach the bankruptcy petition and appropriate
schedules. EPA officials told us that they have received some
notifications from U. S. trustees since this August 2004 memorandum.
Because these environmental disclosure requirements are relatively new,
little is known about the thoroughness and accuracy of the data on
environmental liabilities that companies in bankruptcy have submitted
to the courts. We note that the information businesses provide about
their environmental liabilities would likely be subject to the same
data quality issues as other self-reported data. For example, studies
on other bankruptcy filing information from debtor companies, such as
information on assets and liabilities, have found that such self-
reported data tend to be flawed.[Footnote 40] Consequently, it is too
soon to know the extent to which this additional information provided
to bankruptcy courts will help fill the existing data gap relating to
bankrupt companies with environmental liabilities.
EPA Faces Significant Challenges When Seeking to Hold Businesses
Responsible for Their Cleanup Obligations, Particularly Businesses in
Bankruptcy and Other Financial Distress:
In its efforts to hold businesses responsible for their cleanup
obligations, particularly when they are in bankruptcy or other
financial distress, EPA faces significant challenges, often stemming
from the differing goals of environmental laws that hold polluting
businesses liable for cleanup costs and other laws that, in some cases,
allow businesses to limit or avoid responsibility for such liabilities.
Further, the complexities of the federal bankruptcy code and its
associated procedures, along with the complexities of the environmental
cleanup process and EPA's many information needs when dealing with
bankruptcies, present challenges to EPA's ability to hold businesses
responsible for their environmental cleanup obligations.
Businesses Can Organize and Restructure Themselves in Ways That May
Allow Them to Limit Their Expenditures for Environmental Cleanups:
A key legal attribute of corporations is that the liability of their
owners--the shareholders--is limited. That is, corporations are liable
for the debts and obligations of their businesses, while the
shareholders are liable only for what they have invested. Aimed at
encouraging shareholder investment to generate capital, the limited
liability principle enables corporations to engage in enterprises that
might not attract sufficient funding if shareholders were not protected
in this way. Shareholders generally include individuals, corporations,
and unincorporated business forms, such as partnerships.
Many businesses take advantage of this limited liability principle to
protect their assets by using a parent and subsidiary corporate
structure in which the subsidiary is largely or wholly owned by the
parent corporation--in other words, the parent is the subsidiary's
shareholder. For example, using this structure, a subsidiary that is
engaged in a business that is at risk of incurring substantial
liability, such as mining or chemical manufacturing, can protect its
assets by transferring the most valuable ones--such as equipment and
patents--to a related entity, such as the parent or other subsidiary
engaged in less risky endeavors. The high-risk subsidiary can continue
to use the transferred assets, as appropriate, by leasing or renting
them. It has become common practice for experts in asset protection to
recommend that corporations protect their assets in this way. A goal is
to continually draw down on the subsidiary's remaining assets, such as
cash from the sale of equipment, to pay operating expenses, including
rental and lease payments and salaries. If a liability arises, under
the limited liability principle, the high-risk subsidiary's remaining
assets may be reached--but generally not those of the parent
corporation or other subsidiaries to which assets were transferred. And
if the subsidiary incurs an environmental liability and does not have
sufficient resources to fund the cleanup, the burden for the cleanup
may be shifted to taxpayers. For example, the subsidiary could plead
financial hardship, and under its ability-to-pay process, EPA may
reduce the amount of funding the subsidiary has to provide, with the
balance coming from the Superfund trust fund in the absence of other
liable parties. Alternatively, the subsidiary could seek reorganization
under the bankruptcy act, which could result in the discharge of the
liability.
While these asset protection strategies are generally legal depending
on the circumstances, it is generally unlawful to transfer assets with
the intent to hinder or defraud creditors. Under federal bankruptcy
law, a transfer may be invalidated if it occurred within 1 year prior
to the bankruptcy filing and if the transfer (1) occurred with the
intent to defraud creditors or (2) in certain circumstances yielded
less than reasonably equivalent value for the debtor.[Footnote 41] In
addition, most states have enacted the Uniform Fraudulent Transfer Act,
which contains prohibitions on fraudulent transfers analogous to the
bankruptcy provision. Creditors generally must seek to invalidate such
transfers within 4 years of their occurrence.
Perhaps for these reasons, publications by financial and legal advisors
have suggested that asset transfers be implemented in stages over time
to avoid calling attention to them.[Footnote 42] The goal is to make
them indistinguishable from ordinary business decisions and
transactions and to implement them as early as possible, preferably
well in advance of claims. From an asset protection standpoint, this
approach makes sense because it helps protect transfers from legal
challenges by the mere passage of time. However, the use of such
strategies by parties liable for environmental cleanups presents a
significant challenge to EPA in obtaining cleanup costs because it is
hard for the agency to know about such transfers, much less obtain
sufficient information to successfully challenge them within the time
permitted by law or to challenge businesses' claims that paying the
cleanup costs represents an undue economic hardship. Further, because
businesses typically are aware of Superfund liabilities for many years
before they actually have to fund the cleanups, they have ample time to
reorganize and structure themselves in ways that can limit the
expenditures they may be required to make in the future. For example,
it is not unusual for it to take 10 or more years in total for sites to
be placed on the National Priorities List, for cleanup remedies to be
selected, and for the cleanups to be conducted.
In addition, to protect assets even further, businesses may be
structured with multiple organizational layers--beyond the two-tier
parent/subsidiary construct--as well as with different types of
corporate entities, such as limited liability companies. As outlined in
a recent book on asset protection, dispersing assets among as many
different types of entities and jurisdictions as possible is also a
useful way to protect them from creditors.[Footnote 43] The goal of
this approach is to create complex structures that, in effect, provide
multiple protective trenches around assets, making it challenging and
burdensome for creditors to pursue their claims. Because it is easier
and less costly to set up and maintain limited liability companies than
corporations, this relatively new hybrid form of business organization
facilitates the establishment of complex, multi-layered businesses
using corporations and limited liability companies.[Footnote 44]
Creditors may go to court to obtain the assets of a corporation's
shareholders (including, for example, a parent corporation) to satisfy
the corporation's debts. This is called "piercing the corporate veil,"
and it is difficult to achieve.[Footnote 45] EPA occasionally attempts
to secure cleanup costs from a parent corporation under a veil-piercing
theory. However, these cases are extremely complex and resource
intensive, according to EPA officials. The strategy recommended to
businesses to use multiple organizational layers to protect assets
recognizes this challenge and seeks to make any challenge as difficult
and costly as possible. Along these lines, an EPA enforcement official-
-who said that EPA is seeing more and more cases in which companies are
restructuring using various layers and thereby shielding corporate
assets--noted that the "transaction cost" for EPA to try to follow such
cases to ensure that these companies satisfy their environmental
liabilities can be prohibitively high.
Finally, some EPA officials stated that a 1998 Supreme Court case has
further complicated efforts to obtain cleanup costs from parent
corporations. Under the Superfund law, past and present owners and
operators are among the parties generally liable for cleanup costs at a
contaminated site. The Supreme Court decision in United States v.
Bestfoods held that a corporate parent could be liable (1) indirectly
(as an owner) if the corporate veil could be pierced; and (2) directly
(as an operator) if the corporate parent actively participated in, and
exercised control over, the operations of the contaminated facility
itself.[Footnote 46] The Bestfoods decision confirmed that the
government could hold a parent corporation directly liable under the
Superfund law for a subsidiary's cleanup costs under certain
circumstances. However, EPA officials noted that prior to the Bestfoods
decision, some courts had found a parent corporation liable where it
exercised control over the subsidiary even if the parent did not
control the contaminated facility. In addition, while the Bestfoods
case recognized that the government could hold a parent corporation
directly liable under the Superfund law, these officials stated that
the case also helped establish a road map for observing corporate
formalities that companies could follow to insulate themselves from
this liability.
Legal and Informational Challenges Constrain EPA's Ability to Hold
Businesses in Bankruptcy Responsible for Their Cleanup Obligations:
An obvious challenge that EPA faces when it attempts to ensure that
businesses in bankruptcy carry out their environmental cleanup
obligations is that the businesses may have little or no financial
resources to pay EPA or any other creditors. However, EPA faces further
challenges when companies file for bankruptcy, stemming from the
differing goals of the bankruptcy code and federal environmental laws,
the complexities of bankruptcy procedures and environmental cleanup
programs, and EPA's many information needs when dealing with
bankruptcies.
Differing Statutory Goals and Program Complexities Present EPA with
Challenges:
Federal bankruptcy and environmental laws seek to address vastly
different problems using solutions that frequently come into conflict.
Specifically, while environmental laws generally impose cleanup costs
on the parties responsible for pollution, one purpose of bankruptcy law
is to give the debtor a fresh start by discharging existing claims
against the debtor, including environmental claims in some cases. For
example, when businesses with liability under the Superfund law file
for bankruptcy protection, payment of cleanup costs may be nonexistent
or substantially reduced in some cases, depending in part on the type
of financial assurance the businesses agreed to provide under
settlement agreements to meet the obligations.[Footnote 47] As a
result, cleanup costs may be shifted to the general public, especially
when the site has no other liable parties.[Footnote 48]
The inherent conflict between the goals of environmental cleanup laws
and the bankruptcy code represents only the first of several key
challenges EPA faces in attempting to hold businesses in bankruptcy
responsible for their environmental cleanup obligations. For example,
conflicts relating to the timing of events can have a significant
impact on EPA's ability to recover costs in bankruptcy proceedings. One
timing issue relates to the interpretations by various bankruptcy
courts of when an environmental liability arises as a claim subject to
discharge in bankruptcy. For example, bankruptcy courts in the Second
Circuit[Footnote 49]--where many chapter 11 bankruptcies are filed--
generally hold that a claim arises when a release of a hazardous
substance into the environment (such as a spill) occurs.[Footnote 50]
In many bankruptcy cases involving responsible parties under Superfund,
the relevant releases took place prior to the filing of the bankruptcy
petition, making all claims for such releases subject to discharge even
if EPA has not yet incurred cleanup or other response costs.
Another challenge EPA faces is the need to provide timely estimates of
cleanup costs that will form the basis for claims. Bankruptcy courts
aim to resolve cases expeditiously and set specific time frames for
proceedings, but it can be difficult for EPA to estimate the dollar
amount of cleanup work needed at sites within the court's time frames.
In particular, Superfund sites often require long-term investigations
to both identify the nature and extent of contamination and to develop
cleanup requirements and cost estimates. For many Superfund NPL sites,
these processes may take a number of years. Depending upon where EPA is
in these processes, it may be challenging to provide an estimate of
future cleanup costs. For example, the extent of contamination may
still be unknown or the cleanup remedy may not yet have been
determined. Nonetheless, the Justice Department must submit a "proof of
claim" in the bankruptcy court in order for EPA to have a chance for
any cost recovery. With incomplete information regarding future cleanup
costs, EPA may underestimate these costs in its claims to bankruptcy
courts. Further, if EPA provides a cost estimate that the court rejects
because it considers the estimate to be speculative, or if EPA does not
have the time or resources to develop an estimate to support its
bankruptcy claim, the government can lose any opportunity to recover at
least some of the cleanup costs for such sites.[Footnote 51]
Provided that EPA is able meet these challenges and develops a
supportable claim for the Justice Department to file in the bankruptcy
case, provisions of the bankruptcy code may result in the claim being
assigned a low status in the distribution of the debtor's assets. Many
of EPA's claims may be considered general unsecured claims--the last to
be paid after claims for creditors holding secured and priority
unsecured claims have been paid. Further, although EPA may submit a
claim for environmental penalties and/or fines, under chapter 7, these
claims may rank even lower than most other unsecured claims. In some
cases, a bankruptcy judge may deem certain EPA claims to be entitled to
priority as administrative expenses--for example, if the expenses were
incurred to address conditions endangering public health and the
environment. Often, however, insufficient funds are available from the
bankruptcy estate to pay cleanup and/or closure costs, or they provide
only "pennies on the dollar" of the claims amounts when a debtor's
assets are distributed. In these cases, the responsibility for cleaning
up a Superfund site or closing and monitoring an RCRA hazardous waste
facility may fall to EPA or a state agency unless, for example, other
liable parties pay the cleanup costs or sufficient financial assurances
are in place to cover these costs.
Another important challenge facing EPA in bankruptcy cases results from
the automatic stay provision, which preserves the status quo during
bankruptcy proceedings, both giving debtors a "breathing spell" from
their creditors and preventing the piecemeal distribution of a debtor's
remaining assets in ways that could be preferential to some creditors
and detrimental to others. However, the bankruptcy code expressly
allows an exemption from the automatic stay for a governmental unit to
begin or continue a proceeding to enforce its police or regulatory
power, or to carry out a court judgment (other than a money judgment)
to enforce its police or regulatory power. If EPA can successfully
argue that the environmental proceedings fall within this exception to
the stay, it can take action in federal district court while the
bankruptcy proceedings continue. If EPA is unsuccessful in avoiding the
automatic stay, it must pursue the claim in the bankruptcy court, along
with other creditors. The key to when a court will permit an
environmental action to avoid application of the automatic stay is how
the court defines the phrase "money judgment."
As we reported in 1986, the stay can interfere with efforts of federal
and state agencies to ensure that owners carry out their environmental
responsibilities, such as cleaning up and properly closing hazardous
waste facilities according to RCRA requirements.[Footnote 52] For
example, although companies undergoing liquidation under chapter 7 are
required to comply with federal and state environmental laws to the
same extent as any other party, they may argue that the automatic stay
allows them to avoid expending funds to carry out compliance actions.
Companies reorganizing under chapter 11 are also obliged to comply with
environmental laws while they are in bankruptcy proceedings even if it
requires the debtor to incur additional expenses. Moreover, EPA
enforcement officials noted, during a company's period of
reorganization under chapter 11, EPA can pursue administrative expense
penalties if the company continues to operate in violation of
environmental laws, and has in some cases been successful in this
regard. However, an EPA enforcement official also noted that the agency
has limited leverage to ensure that such companies continue facility
closures, site cleanups, and other environmental responsibilities
during the bankruptcy proceedings--that can take years to complete--
unless EPA can convince a bankruptcy judge that a company must carry
out these activities to address an imminent threat to human health or
the environment.[Footnote 53]
The automatic stay also prevents creditors, such as federal and state
agencies, from immediately collecting on certain court judgments. Thus,
while courts may order businesses to pay environmental fines and/or
cleanup costs to EPA, the government's ability to collect these
payments may be reduced or negated by bankruptcy filings. For example,
in August 2003, W.R. Grace and Company, the primary liable party at the
Libby Asbestos Superfund site in Libby, Montana, was ordered by a U. S.
district court to reimburse EPA $54.5 million for costs the agency had
incurred in investigating and conducting certain emergency cleanup
actions at the site.[Footnote 54] (Total long-term cleanup costs at
this site are expected to rise to at least $179 million.) However,
because W.R. Grace filed for bankruptcy protection in 2001 and is
protected by the automatic stay, the company does not have to pay this
judgment until the reorganized company emerges from
bankruptcy.[Footnote 55] Moreover, EPA officials noted that because any
reimbursement of the $54.5 million will be subject to the repayment
terms agreed to in the company's reorganization plan, it has not yet
been determined how much the federal government will be reimbursed for
these cleanup costs. However, according to the lead EPA attorney
working on this case, it is likely that creditors, including EPA, will
receive a substantial return in this bankruptcy case once the company's
reorganization plan has been confirmed by the court.[Footnote 56] In
the meantime, according to EPA, the agency continues to pay for and
oversee the cleanup work to address the most hazardous conditions at
the site, at an estimated cost to taxpayers of $18 million per year
over the past several years.
Information Gaps Regarding Bankruptcies Also Present EPA with
Challenges:
In evaluating bankruptcy filings to determine whether EPA should
request that the Justice Department pursue cases in bankruptcy court,
EPA faces further challenges because it does not consistently have
accurate and readily available information on which to base these
evaluations. As a result, EPA cannot be assured that it is aware of all
relevant bankruptcy filings.
EPA officials have acknowledged that the agency could miss identifying
some relevant bankruptcy cases. According to the chair of EPA's
bankruptcy work group, one of the more common reasons EPA is likely to
miss identifying some relevant bankruptcies is that the debtor fails to
include EPA on its list of creditors in bankruptcy filings, which means
that bankruptcy courts will not send the notices of bankruptcy filing
that are routinely sent to creditors to inform them of the filings. In
addition, EPA could also miss relevant bankruptcy cases for other
reasons, including the following:
* Because businesses may change their names over time for various
reasons--including reorganizations and mergers--and because a business
filing for bankruptcy may be affiliated with a number of different
company names, EPA staff may not recognize the business name or names
cited in bankruptcy filings. In addition, owners of businesses
sometimes file for bankruptcy in their own names, rather than in the
business names, which EPA may be more likely to recognize.
* Data quality problems in EPA's Superfund database limit the
usefulness of automated searches to match the businesses associated
with the bankruptcy notices sent to EPA with businesses with
environmental liabilities nationwide.[Footnote 57] Further, even if EPA
staff search program and enforcement databases to identify contaminated
sites associated with a company, the searches may not be reliable
because the current name or names associated with the bankruptcy filing
may not be reflected in EPA's databases. For this reason, some EPA
staff do not routinely search these databases for such matches because
the information is likely to be incomplete or outdated. However, EPA's
most recent bankruptcy guidance, discussed later, recommends that staff
search the Superfund and other relevant databases to help them
determine whether an environmental claim or issue of interest is
involved.
* EPA officials said that the agency has some difficulty identifying
from its program and enforcement databases which companies have large
liabilities, particularly when those liabilities are dispersed across
states in several regions. As a result, certain companies in bankruptcy
may not capture EPA's attention as being worthwhile cases for the
government to pursue.
Overall, EPA's current system of identifying bankruptcies of concern to
the agency relies heavily on the availability of staff with knowledge
of the companies and their related environmental liabilities to
identify cases that the agency should pursue in bankruptcy court in
time to meet the court's deadlines. Although the chair of EPA's
bankruptcy work group believes that their current approach to timely
identification of relevant bankruptcies has worked well under these
limitations, she acknowledged that EPA has no assurance that it has not
missed some relevant bankruptcies. As discussed above, EPA does not
maintain records on all bankruptcy cases that the agency has identified
and researched, and the reason the cases were either pursued in
bankruptcy court or not. Consequently, information to evaluate EPA's
efforts in identifying and researching relevant bankruptcies is not
available. Further, because the bankruptcies of small and medium-sized
businesses are not as widely reported in the business press, EPA is
more at risk of not identifying relevant bankruptcies of such
companies.
Some members of EPA' s bankruptcy work group noted that, in their view,
developing a fail-safe system for identifying relevant bankruptcies
could require significant additional resources and might not be a cost-
effective endeavor. For example, in many bankruptcy cases there may be
few, if any, assets available for distribution to creditors.
Nonetheless, on May 10, 2005, EPA issued an interim protocol for
coordination of bankruptcy matters under the Superfund program that,
among other things, (1) recommends actions to better ensure that EPA
receives relevant bankruptcy notices and (2) identifies additional
actions that may be relevant in bankruptcy cases other than filing
claims, such as opposing abandonment of contaminated properties and
objecting to terms of plans of reorganization or sales of property.
Further, available technologies, such as an EPA Intranet site, could be
an efficient and effective tool for the agency to track bankruptcy
cases it identifies and reviews. For example, such a site could contain
an EPA data sheet on each bankruptcy case identified, as well as key
court documents as appropriate and available, that would be readily
accessible to EPA staff across the agency to review and update.
Even when EPA identifies relevant bankruptcy filings to assess, the
agency is hampered by other information limitations. For example, as
previously discussed, in many cases, EPA does not yet have adequate
information on the extent of contamination at relevant sites and has
difficulty in developing supportable cleanup cost estimates for the
claim in the bankruptcy case. In other cases, the bankruptcy filings
include lengthy lists of sites, some of which EPA may have no
information about, including whether there is any liability under
federal environmental law. Lack of information about sites can present
challenges to EPA in negotiating bankruptcy settlement agreements with
large companies, such as Exide Technologies and Kaiser Aluminum, which
cover numerous contaminated sites. An EPA attorney who worked on the
Kaiser Aluminum case said that the tight time frames under which they
had to obtain information about the relevant contaminated sites and the
significantly larger resources the company had to support its
negotiations made this effort challenging.
Another challenge EPA faces is that companies may send EPA notice of
their bankruptcy filings identifying sites with no related enforcement
actions. According to an EPA official, if a company provides EPA with
notice of its bankruptcy filing and EPA does not submit a proof of
claim in the bankruptcy court--likely in this situation since EPA would
not be aware of any environmental hazard--the claim could be discharged
in the bankruptcy process.[Footnote 58] Consequently, reviews of the
environmental disclosures in Exhibit C of the debtor's bankruptcy
petition and the Statement of Financial Affairs are important to
identify those sites for which EPA may file a claim as well as those
sites about which the agency has no knowledge and can potentially
challenge discharge requests to the bankruptcy court.[Footnote 59] We
note that EPA's May 10, 2005, interim bankruptcy protocol recommends
that the agency's bankruptcy coordinators review these documents in
determining whether an environmental claim or issue of interest is
involved.
Finally, it is a challenge for EPA to have timely and accurate
information to identify those instances in which fraudulent transfers
of assets may have occurred and which a bankruptcy court would nullify
if such transfers were brought to its attention. Generally, EPA has
limited, if any, information on the complex organizational structures
businesses may be using and on any transfers among entities that may
have taken place. Similarly, information is not readily available about
privately held corporations or limited liability companies--an
organizational form being used by many businesses. For instance,
limited liability companies registered in Nevada do not have to provide
information about all of the owners, making it difficult for EPA or
others to identify transactions among related companies that may be
illegal. Because the liable parties often are aware of environmental
liabilities for years before they must pay for the cleanups, they have
time to reduce their net worth by making business decisions that result
in the redistribution of assets--and thus make these resources
unavailable for payment of environmental liabilities. According to an
EPA enforcement official, it is extremely difficult for the agency to
look back on the business decisions a company has made over three or
more years to determine whether its actions may have been fraudulent.
EPA Could Make Greater Use of Available Authorities and Enforcement
Tools to Pursue Hazardous Waste Cleanup Costs from Bankrupt and Other
Financially Distressed Businesses:
EPA has authorities and enforcement tools that it could use more fully
to obtain cleanup costs from liable businesses, especially those in
bankruptcy or other financial distress. Specifically, EPA has not
implemented a 1980 statutory mandate under the Superfund law to require
that businesses handling hazardous substances maintain financial
assurances that would provide evidence of their ability to pay to clean
up potential spills or other environmental contamination that could
result from their operations. As a result of EPA's inaction, the
federal treasury continues to be exposed to potentially enormous
cleanup costs associated with businesses not currently required to
provide financial assurances. Also, although EPA requires financial
assurances from businesses entering into settlement agreements and
orders under Superfund and, as a matter of policy, includes them in
settlement agreements and orders under RCRA, the agency has done little
to ensure compliance with these requirements. EPA has on occasion used
other enforcement authorities, including (1) obtaining offsets, which
allow the government to redirect payments or tax refunds it owes
businesses to federal agencies with claims against these businesses and
(2) filing liens on property for which the government has incurred
expenses under Superfund.[Footnote 60] Greater use of these authorities
could produce additional payments for cleanups from liable businesses,
even in bankruptcies.
EPA Has Not Implemented a Statutory Mandate under Superfund to
Establish Financial Assurance Requirements for Certain Businesses
Handling Hazardous Substances:
Despite a requirement to do so in the 1980 statute creating the
Superfund program, EPA has not issued regulations requiring certain
businesses that handle hazardous substances to demonstrate their
ability to pay for environmental cleanup costs.[Footnote 61]
Specifically, the statute required EPA to issue requirements "that
classes of facilities establish and maintain evidence of financial
responsibility consistent with the degree and duration of the risk
associated with the production, transportation, treatment, storage or
disposal of hazardous substances."
Such regulations could help to fill several significant gaps in EPA's
environmental financial assurance coverage, thereby reducing the risk
that the general public (i.e., taxpayers) will eventually have to
assume financial responsibility for cleanup costs. One gap involves
types of waste that are excluded from RCRA coverage. Some wastes
associated with mining activities can result in substantial cleanup
costs but are excluded from the definition of hazardous wastes and,
therefore, are not regulated under RCRA's hazardous waste provisions. A
second gap in EPA's financial assurance coverage is that hazardous
waste generators (such as metal-plating facilities and dry cleaners)
are generally not required to maintain any financial assurances.
Specifically, businesses may generally store waste in compliance with
specified requirements for up to 90 days without needing a permit or
being subject to the regulations governing hazardous waste storage
facilities. Finally, a third gap is that none of EPA's current
financial assurance regulations require companies or industries that
pose a significant risk of environmental contamination to provide
assurance that they could meet cleanup obligations associated with
future accidents or spills of hazardous substances or wastes.[Footnote
62] These gaps may be more significant since the authority for an
environmental tax on corporations, crude oil, and certain chemicals,
which had largely funded the Superfund program, expired in 1995. As a
result, the federal government's general appropriations fund is
increasingly funding the cleanups paid for by the Superfund trust fund
when responsible parties do not. For example, for fiscal year 2004,
EPA's appropriation for the Superfund program was from general revenues
only.[Footnote 63]
Regarding the financial assurance requirements in the Superfund
statute, which could help to address these gaps, the statute requires
EPA to develop financial assurance regulations for businesses handling
hazardous substances. As previously noted, EPA was to use a risk-based
approach for both (1) identifying the entities that would be covered
and (2) specifying the financial assurance coverage they would be
required to have.[Footnote 64] The law requires EPA to give priority in
developing these requirements to those classes of facilities, owners,
and operators that the agency determined present the highest level of
risk of injury. Once identified, the different classes of facilities
that handle hazardous substances--which could, for example, include all
businesses in a given industry or all those handling a specific
hazardous substance--would be required to maintain evidence of
financial ability to cover actual and potential cleanup costs
consistent with the degree and duration of risk associated with the
production, transportation, treatment, storage, or disposal of
hazardous substances.[Footnote 65]
Implementation of this requirement could help to close the financial
assurance gaps discussed above because under the Superfund law EPA
could require financial assurances for cleaning up existing and future
contamination at facilities that handle hazardous substances but are
not subject to RCRA's closure/post-closure or corrective action
programs, including many mining sites and facilities that generate, but
do not treat, store, or dispose of hazardous waste. EPA may also wish
to give priority in developing these requirements to facility owners
whose prior actions indicate they may pose a high risk of default on
their environmental obligations. Factors EPA may wish to consider in
evaluating owner risk include compliance history--such as a history of
noncompliance with environmental laws, including cleanup obligations,
and magnitude of past, current, and potential environmental
liabilities.
In applying the Superfund law's risk-based criterion for developing
financial assurance requirements, EPA may want to consider hardrock
mining a high priority--for example, gold, copper, and iron ore mining-
-because it presents taxpayers with an especially serious risk of
having to pay cleanup costs associated with wastes from thousands of
abandoned, inactive, and operating mines on private lands in the United
States. Using a statutory provision that allows solid waste from
certain mining activities to be excluded from regulation as hazardous
waste under RCRA, EPA has excluded several types of mining wastes from
the definition of hazardous waste under RCRA, characterizing them as
"low toxicity, high volume wastes."[Footnote 66] This exclusion has
resulted in a significant gap in financial assurance, as discussed
above. In addition, mining activities on private lands are not covered
by the financial assurance requirements the Department of the
Interior's Bureau of Land Management (BLM) requires for mines on
federal land it manages.[Footnote 67] However, some mining facilities
handle hazardous substances as defined under the Superfund law, and
therefore financial assurance regulations issued under the Superfund
law could apply to these facilities.[Footnote 68]
According to the EPA Inspector General, mining sites can cause
significant environmental problems, and these sites are typically
large, complex, and costly to clean up. A March 2004 report by EPA's
Office of Inspector General identified 63 hardrock mining sites on the
Superfund's National Priority List (NPL) and another 93 sites with the
potential of being added to the list.[Footnote 69] At least 19 of the
63 existing NPL mining sites had estimated cleanup costs of $50 million
or more. In total, the 63 sites were estimated to cost up to $7.8
billion to clean up, $2.4 billion of which is expected to be borne by
taxpayers rather than the parties responsible for the contamination.
The EPA Inspector General reported that at least one "clearly viable"
party has been identified for 70 percent of the 63 NPL mining sites
(including 11 percent where the viable party was a federal agency, such
as the Department of the Interior). However, the report also emphasized
that EPA should be concerned about the viability of these parties over
time because of the long-term nature of the cleanup liabilities at
mines. For example, the report states that the projected operation and
maintenance period for the cleanup remedy ranges from 40 years to "in
perpetuity." The costs to taxpayers would increase if the liable
parties expected to pay for the cleanup remedies proved to be unable to
do so.[Footnote 70]
Some mine owners have defaulted on environmental liabilities associated
with their mines on multiple occasions, and the cleanup costs for these
sites are being or are expected to be borne largely by taxpayers. These
owners may reasonably be viewed as at high risk for defaulting on
environmental obligations associated with mines or businesses that they
currently own. For example, one individual is associated with several
businesses that have filed for bankruptcy protection.[Footnote 71] Like
other mine owners with serial bankruptcies involving contaminated
mining sites, this owner continues to operate businesses with
significant contamination that need to be cleaned up, potentially via
the Superfund. If EPA developed and implemented the financial assurance
regulations that the Superfund law requires, EPA could require such
owners to provide financial assurances now for existing and future
cleanups, thereby reducing the amount that taxpayers would otherwise
likely be required to pay.
A Superfund site in Delaware provides an example of the exposure of the
federal treasury to enormous cleanup costs associated with industries
not currently required to provide EPA with financial assurances
because, as generators of hazardous waste, they were not covered by
RCRA's financial assurance requirements. In the 1980s, when this
facility was owned by Standard Chlorine Corporation, it experienced two
major chemical releases--including a 569,000-gallon release of
hazardous chemicals that contaminated soil, sediment, a groundwater
aquifer, and nearby surface water. Because the facility did not treat
or dispose of hazardous waste, and did not store waste for more than 90
days, however, Standard Chlorine did not have to provide financial
assurance under RCRA for the cleanups.[Footnote 72] In 1987, EPA added
the site to the Superfund NPL because of the extensive contamination.
Subsequently a limited liability business, Charter Oak Capital Partners
LP, established a subsidiary corporation called Metachem Products,
which acquired substantially all of Standard Chlorine's assets
including the facility in 1998, and Metachem accordingly became liable
for the Superfund cleanup. However, in May 2002, Metachem declared
bankruptcy and abandoned the chlorinated benzene manufacturing
facility. EPA estimates that it has incurred about $28 million in
cleanup costs to date at this site and that the total cleanup cost will
eventually rise to $100 million.
Despite the clear benefits that EPA could derive from implementing
financial assurance requirements under the Superfund statute, over the
past 25 years, EPA has made only sporadic efforts to do so. For
example, EPA took some steps early on to identify high-priority classes
of facilities but did not complete this effort, although the statute
included a December 1983 deadline for this task (see app. II for more
detail). In 1983, the Director of EPA's Office of Solid Waste stated
that resources were insufficient to develop and implement the Superfund
financial assurance requirements. But EPA never asked the Congress to
provide additional funds for this purpose.
In 1987, we recommended that EPA set milestones leading to the timely
implementation of Superfund financial assurance regulations, but EPA
did not implement this recommendation.[Footnote 73] More recently, an
April 2004 internal review of EPA's Superfund program recommended that
the Office of Solid Waste and Emergency Response study whether
promulgating new regulations under the broad financial assurance
authorities contained in the Superfund law could reduce future
Superfund liabilities with respect to facilities not covered under RCRA
financial assurance requirements. In response to this recommendation,
EPA created a work group that is collecting and evaluating information
on the industries and types of facilities that have been listed on the
Superfund program's National Priorities List (NPL).[Footnote 74]
While this study should provide useful and relevant information to EPA-
-in particular on gaps in the coverage of RCRA's corrective action
program--we believe that the issue for implementing the financial
assurance requirement under the Superfund law is broader than the
question of which industries have sites that have been listed on the
NPL. That is, the key issue is identifying industries at high risk for
environmental contamination. EPA and the states have a wealth of
information from both existing studies and from the knowledge base of
EPA's and states' enforcement staff across the country. For example,
EPA's 2002 study on the almost 900 RCRA facilities undergoing cleanup
measures under the corrective action program provides relevant
information on industries at risk for environmental contamination and
on the costs of those cleanups.
EPA Does Not Effectively Manage Its Existing Portfolio of Financial
Assurances for Cleanups:
In addition to not establishing the financial assurance requirements
called for in the Superfund law, EPA is not ensuring that the benefits
that could be derived from its existing financial assurance
requirements for Superfund and RCRA corrective action cleanups are
realized. Specifically, in negotiating compliance orders and
settlements for these cleanups, EPA generally accedes to the financial
assurance mechanism the liable party suggests without routinely
determining the risk of the proposed mechanism in light of such factors
as the strengths and limitations of the various mechanisms, the
financial histories of liable parties, any existing agreements that
have reduced the amounts businesses are required to pay for cleanups on
the basis of ability-to-pay analyses, and the estimated total
environmental liability of individual parties. In addition, EPA has
increased the financial risk to the government by not providing
adequate oversight and enforcement to ensure that the parties
responsible for Superfund and RCRA cleanups obtain and maintain the
required financial assurances. EPA has acknowledged that its
enforcement of financial assurances has been inadequate and has
initiated some actions to address this problem.
EPA Allows Companies to Choose among Financial Assurance Mechanisms
That Carry Varying Degrees of Financial Risk to the Government, Rather
Than Taking into Account Information on the Extent of Default Risk That
Companies May Pose:
EPA has generally given companies significant flexibility to choose the
type of financial assurance mechanism they will use to demonstrate
their ability to meet their obligations under the RCRA corrective
action and Superfund programs. While the closure/post-closure program
has regulations governing financial assurances, the corrective action
and Superfund programs do not. EPA generally accepts the same financial
assurance mechanisms in the Superfund and RCRA corrective action
programs as are outlined in the RCRA closure/post-closure regulations.
Under the closure/post-closure regulations EPA must generally accept
the financial assurance mechanism chosen by the party, so long as the
party meets the relevant regulatory requirements for that mechanism.
The financial assurance mechanisms EPA generally accepts in all three
programs are outlined in table 1.
Table 1: Financial Assurance Mechanisms Generally Accepted by EPA:
Mechanism: Corporate financial test;
Description: A company may demonstrate its ability to meet its
obligations by passing one of two financial tests, one of which
evaluates certain financial ratios, and one of which requires a minimum
bond rating. Both tests require that the company have at least $10
million in tangible net worth and demonstrate that this tangible net
worth is equal to at least 6 times the sum of the current estimates of
the cleanup, closure/post-closure, or other costs for which the company
is using the financial test as its financial assurance. Use of the
corporate financial test is also called self-insurance.
Mechanism: Corporate guarantee;
Description: A company may demonstrate its ability to meet its
obligations by obtaining a written guarantee from an affiliated entity,
such as a parent corporation. For EPA to accept this guarantee, the
affiliated entity must meet one of the two corporate financial tests
described above.
Mechanism: Insurance;
Description: Ability to meet obligations may be demonstrated by an
insurance policy covering the estimated cost of these obligations.
Mechanism: Letter of credit;
Description: To demonstrate its ability to meet its obligations, a
company may provide an irrevocable standby letter of credit issued by a
financial institution guaranteeing payment of the obligations up to a
specified amount.
Mechanism: Surety bond;
Description: A company may obtain a bond from an approved surety
company[A] guaranteeing that its obligations will be met.
Mechanism: Trust fund;
Description: A company may establish a trust fund with a financial
institution to demonstrate its ability to meet its obligations. The
release of funds from the trust fund may be directed only by EPA or
other regulator.
Source: EPA closure and post-closure regulations.
[A] To be approved, a surety company must be listed on U.S. Department
of the Treasury's Circular 570.
[End of table]
Financial assurance mechanisms vary in:
* the financial risks they pose to the government--and thus to
taxpayers who may ultimately have to pay for environmental cleanups if
the responsible parties default on their obligations;
* the oversight and enforcement challenges they pose to the regulators,
such as EPA, who are responsible for enforcing them; and:
* the costs companies may incur to obtain them.
For example, as shown in table 2, while the costs to companies of the
corporate financial test and the corporate guarantee mechanisms are low
compared with other forms of financial assurance, the relative
financial risk to the government and the amount of oversight needed are
relatively high. In contrast, letters of credit present comparatively
low financial risk to the government and need less oversight but impose
relatively high costs on companies. In essence, as the table shows,
those financial assurance mechanisms that impose the lowest costs on
the companies using them also typically pose the highest financial
risks to the government entity accepting them. We note that EPA
continues to allow financial assurances that are simply promises to
pay--the corporate financial test and the corporate guarantee--even
though its 2003 guidance on financial assurance for the RCRA corrective
action program underscores the importance of having resources set aside
"in the event a company hits a financial decline."
Table 2: Relative Financial Risk, Necessary Oversight and Enforcement
Effort, and Costs of Financial Assurance Mechanisms:
Mechanism: Corporate financial test;
Relative financial risk to the government: High; If a company that
passed the test later files for bankruptcy or becomes insolvent, the
company in essence is no longer providing financial assurance because
it may no longer have the financial capacity to meet its obligations.
Such financial deterioration can occur quickly. While companies no
longer meeting the financial test are to obtain other financial
assurance, they may not be able to obtain or afford to purchase it;
Oversight and enforcement effort needed: High; The test requires
regulators to have expertise in financial analysis and monitor
companies' financial condition. For example, the regulator is expected
to review companies' annual financial submissions showing that they
continue to pass the test. Regulators should also monitor the business
press for adverse news about the company, indicating that it may no
longer pass the test;
Cost to the company: Low; The corporate financial test and the
corporate guarantee (discussed below) are the lowest-cost options for
companies because they do not have to set aside funds for future
payments or pay fees or premiums to third parties, such as banks.
Mechanism: Corporate guarantee;
Relative financial risk to the government: High; Same issues as with
the corporate financial test;
Oversight and enforcement effort needed: High; Same issues as with the
corporate financial test;
Cost to the company: Low; See discussion concerning the corporate
financial test.
Mechanism: Insurance;
Relative financial risk to the government: Varies; Several factors
affect financial risk. For example, "captive" insurance companies--
those not independent of the liable business--can pose greater risk
than independent insurance providers. Also, if there is conflicting
language between an insurance policy and EPA's regulatory requirements,
recovery on the policy may be delayed;
Oversight and enforcement effort needed: Moderate; However, extent of
oversight needed can vary based on the type of insurance. Captive
insurance, in particular, poses many of the same challenges as the
corporate financial test and corporate guarantee (see above) because
the captive insurer is not a true third-party provider of assurance.
Even with an independent insurance provider, however, significant
oversight is needed;
Cost to the company: Moderate; However, cost can vary based on the type
of insurance. For example, captive insurance can pose lower costs than
insurance from an independent provider. Also, many independent
providers are underwriting environmental insurance using finite or
fully funded policies--which limit their risk. Such policies resemble
trust funds and, like trusts, present higher costs to the company than
do conventional insurance policies.
Mechanism: Letter of credit;
Relative financial risk to the government: Low; Financial institutions
issuing letters of credit are required to pay the amounts specified if
EPA requests such payments within the periods of time specified in the
letters;
Oversight and enforcement effort needed: Low; Requires periodic
monitoring to verify that the letter of credit remains in force and is
maintained in a secure place and that the financial institution issuing
the letter of credit is still viable;
Cost to the company: High; Companies typically pay fees to obtain
letters of credit and may be required to set aside substantial
collateral. Fees may be up to 1 percent of the amount guaranteed,
depending on the company's creditworthiness, according to EPA.
Mechanism: Surety; Bond;
Relative financial risk to the government: Low to moderate; Surety
companies are required to pay the amounts specified in the bonds upon
receipt of demand letters by the regulator.[A];
Oversight and enforcement effort needed: Low to moderate; Periodic
monitoring is required to verify that the bond remains in force and
that the surety company is still approved;
Cost to the company: Moderate to high; Companies pay annual premiums to
surety companies and generally are required to provide substantial cash
collateral.
Mechanism: Trust fund;
Relative financial risk to the government: Low; There is a risk that
the trust may not be fully funded if the company is allowed the
flexibility of paying over time;
Oversight and enforcement effort needed: Low to moderate; Periodic
monitoring is required to ensure, among other things, that the
financial institution has the authority to act as trustee;
Cost to the company: High; The company must set aside funds into the
trust to cover its anticipated obligations. In addition, the company
usually pays a fee for the administrative services provided by the
trustee.
Source: GAO analysis.
[A] In some cases, EPA allows performance bonds to be used; the surety
guarantees that it will either perform the required work or will pay
out the amount specified in the bond upon receiving notification from
the regulator that the company for which the surety has provided a
performance bond has failed to carry out its obligations.
[End of table]
The mechanisms that pose the greatest financial risk to the government-
-the corporate financial test, the corporate guarantee, and some
insurance products--also require specialized expertise to oversee.
Concerns have been raised, both within EPA and by others, that the
corporate financial test and the corporate guarantee offer EPA minimal
long-term assurance that the company with environmental liability will
be able to fulfill its financial obligations. In 2000, the Department
of the Interior's Bureau of Land Management (BLM) identified similar
concerns when it decided to prohibit new corporate guarantees for
future reclamation work to restore lands when mining operations cease.
In making this decision, BLM cited both the agency's lack of expertise
to perform the periodic reviews of companies' assets, liabilities, and
net worth that would be necessary to oversee guarantees and the fact
that even with annual reviews by skilled staff, a default risk would
remain.[Footnote 75]
Further, some concerns about the financial test, such as the following,
stem from limitations inherent in relying on financial indicators
rather than secured guarantees:
* The corporate financial test rests on the assumption that a company's
recent financial performance is a reasonable predictor of its financial
future. However, the financial test cannot anticipate sudden changes in
market conditions or other factors that can dramatically change a
company's financial picture--and a company's ability to meet its
environmental obligations.
* Once a company's financial condition declines to the point that the
company can no longer pass the financial test, it can be very difficult
for the company to meet the requirements, or pay the costs, of
obtaining an alternative form of financial assurance from a third-party
provider.
* The financial test is only as sound as the data used to calculate the
financial ratios underpinning the test--if a company's accounting of
its net assets or liabilities is questionable, or the quality of its
assets is weak, one or more of the ratios may not represent the
company's true financial condition. EPA officials noted that the
passage of the Sarbanes-Oxley Act of 2002, with its requirements aimed
at improving the accuracy and reliability of corporate disclosures, may
have reduced some of these data-related concerns about the financial
test, at least for publicly held companies.
In addition to these limitations, weaknesses in the financial test
itself are actively under discussion. For example, EPA's Environmental
Financial Advisory Board, a federal advisory committee that provides
advice and recommendations to EPA on environmental finance issues, has
been charged by EPA with reviewing financial assurance mechanisms. In
March 2005, the project work group leading this review submitted to the
full board for consideration the first draft of a proposed letter to
the EPA Administrator commenting on the financial test. In this draft
letter, the work group stated that the current test is "an inadequate
mechanism for determining financial capacity." The draft letter also
stated that while the EPA financial test is transparent and objective,
the test is not sufficiently comprehensive in what it assesses, does
not examine and incorporate historical trends, and is not sufficiently
rigorous to protect against manipulation. The membership of the full
board is reviewing the draft letter, and the board has received
substantive comments on the draft letter from outside parties. The work
group is reviewing comments on the draft letter and expects to develop
a revised draft letter for full board review and approval outlining the
board's findings and recommendations concerning the financial test.
Another concern about the financial test relates to the threshold a
company must meet to qualify for the test--a company must have at least
$10 million in tangible net worth. EPA has not adjusted the standard
since 1982 when the RCRA financial assurance regulations were
implemented.[Footnote 76] The Environmental Financial Advisory Board
subcommittee noted that the $10 million threshold may be inadequate and
should either be recalibrated or have standards of proportionality. We
believe that the $10 million standard is likely to no longer be
appropriate given, for example, the rate of inflation since 1982.
In addition, the financial test requires that EPA and state regulators
have the financial skills to assess whether a company's representation
of its financial condition is reasonable. An EPA regional enforcement
official said that the assessment of whether a company meets the
financial test can be particularly difficult given that companies have
an incentive to pass the test--therefore, companies may try to paint
their financial position as "rosier" than it actually is to avoid
having to pay for higher-cost financial assurance. (As recent court
cases, such as those involving Enron and Worldcom, have shown, serious
misstatements of financial position aimed at demonstrating strong
financial position may occur for a number of other reasons as well--for
example, to protect or improve the value of the corporate stock.)
Because EPA and state staff who oversee the implementation of these
mechanisms may not have sufficient expertise to provide the desired
level of financial analysis, the Environmental Financial Advisory
Board's March 2005 draft letter to the EPA Administrator noted that the
financial test may be better served if companies retained credit
services to provide independent financial analysis.
Moreover, in a March 2001 report, EPA's Inspector General identified
other factors that complicate overseeing the financial test.[Footnote
77] In this report, officials cited difficulties in predicting
companies' long-term financial viability. For example, in reviewing the
financial assurances of a sample of hazardous waste facilities required
to have financial assurances, the Inspector General found that some
facilities that had established financial assurance through the
corporate financial test no longer met the requirements of the test a
year later. Other difficulties officials cited in overseeing the
financial test included evaluating data from companies that have
hazardous waste facilities in many states and factoring in the impact
of mergers and acquisitions, among other things.
In a 2003 paper summarizing its review of RCRA financial assurances,
the Association of State and Territorial Solid Waste Management
Officials[Footnote 78] reported that waste and remediation managers
from various states believe that EPA should reconsider the financial
test and corporate guarantee as financial assurance mechanisms due to
the financial meltdown of Enron and many other publicized financial
scandals of Fortune 500 companies with audited financial
statements.[Footnote 79] The paper states that EPA's position is that
eliminating these financial assurances could add substantially to the
cost of the financial assurance regulations.[Footnote 80]
As table 2 shows, the corporate financial test and the corporate
guarantee are the least costly financial assurances for companies to
use, so eliminating them would increase compliance costs. At the same
time, these two financial assurance mechanisms are the most costly for
the government because of the high oversight costs associated with
them, as discussed above, and because the government, rather than the
companies, is carrying the default risk.
In addition to the risks posed by the use of the corporate financial
test and the corporate guarantee, the use of insurance polices as
financial assurance has typically presented higher financial risk to
the government than letters of credit, surety bonds, and trust funds.
For example, concerns have been raised about the increased use of
policies written by "captive" insurance companies--that is, by wholly-
owned subsidiaries controlled by parent companies and established to
insure the parent companies or other subsidiaries.
In 2001, for example, EPA's Office of Inspector General found that
financial assurance provided by a "captive" company did not provide
adequate assurance of funding for closure and post-closure activities
at hazardous waste facilities.[Footnote 81] EPA acknowledges that the
financial health and solvency of a captive insurance company may be
closely connected to the financial condition of the company with
environmental liabilities, and therefore, if the company faces
financial difficulties, the insurer may also be in financial distress
and not be able to cover claims made on its policies.
The Congress has also raised questions about the use of insurance as
financial assurance at solid waste landfills, which have a separate set
of financial assurance regulations.[Footnote 82] A June 2000 House
committee report directed EPA to conduct a study of financial assurance
agreements at solid waste landfills to determine if sufficient
safeguards have been properly maintained and future liabilities
minimized. According to the EPA official responsible for preparing this
report, the concerns that led to this mandate dealt largely with
captive insurance. EPA's draft report in response to the mandate was
being reviewed within the agency as of June 2005; no expected issuance
date has been announced yet. Because the report is still in draft form,
EPA officials were not willing to discuss its findings or potential
recommendations.
Moreover, independent of issues associated with captive insurance
policies, insurance policies covering corrective action or Superfund
cleanups can require significant oversight on the part of regulators.
For example, since insurance policies may contain exclusions that limit
their coverage, the regulator must carefully review a policy being used
as financial assurance to verify that it fully covers the anticipated
environmental claims. Also, the regulator must remain aware of the
insurer's status--under current EPA requirements, the insurer is not
required to inform the regulator if its license to operate is revoked
or it becomes insolvent. In addition, EPA officials noted that insurers
will sometimes include language in the policy that conflicts with EPA's
regulatory requirements, which may delay recovery on the
policy.[Footnote 83] The Association of State and Territorial Solid
Waste Management Officials has voiced concerns about the level of
oversight required of insurance as financial assurance, and in 2003,
recommended that EPA update its guidance on financial assurances,
particularly its guidance on insurance issues, such as how to make
claims on policies.[Footnote 84]
In addition to the financial risks to the government resulting from the
use of certain financial assurance mechanisms, as discussed above,
several other financial risk factors affecting liable parties' ability
to fulfill their cleanup obligations make it all the more important
that EPA or state regulators, if applicable, ensure that liable parties
provide solid financial assurances that will be available when needed.
These risk factors include (1) the financial histories of liable
parties, (2) any existing agreements that have reduced the amounts
businesses are required to pay on the basis of ability-to-pay analyses,
and (3) the estimated total environmental liability of individual
parties. When EPA or a state regulator agrees to a liable party's use
of a financial assurance mechanism, it would be prudent for the agency
to consider these factors as well as the risk to the government
associated with the mechanism itself.
In some cases, EPA or state regulators have encountered individuals or
companies with track records that indicate that they are unlikely to
have the financial resources or the willingness to carry out their
environmental cleanup responsibilities. The histories of these parties
may indicate that they are at high risk of failing to comply with
future requirements, such as cleanup requirements under the corrective
action program. Parties that present such high risks to EPA and state
regulators could be required to obtain strong financial assurances to
ensure that their environmental responsibilities are fulfilled.
Also, large liabilities--which may stem from one or more megasites
either under Superfund and/or RCRA or from a series of smaller sites--
expose EPA and taxpayers to significant financial risk, especially if
there is only one or a few parties liable for the cleanups. In such
cases, choosing financial assurance mechanisms that provide relatively
low financial risk to the government--that is, that provide at least
some actual funding--is particularly important. However, EPA and state
staff overseeing financial assurances generally do not have information
readily available about a company's total environmental liabilities
across the United States, nor would they typically have access to
information about (1) environmental obligations a company may have in
other countries or (2) the extent to which the company may be using the
same financial assurance mechanism to back up numerous environmental
obligations.[Footnote 85] As a result, these regulators may, for
example, approve the financial test for financial assurance at a RCRA
site or sites without considering a company's liability for a large
Superfund site in another state.
Finally, for RCRA sites, typically an owner or operator is responsible
for the cleanup. Similarly, at some Superfund sites, there may be few,
even only one, liable parties. Along these lines, EPA enforcement
officials said that strong financial assurances are particularly
critical when a site's cleanup costs are large, but the number of
liable parties is small. At such sites, strong financial assurances are
likely to be the only way to avoid having taxpayers pay for these
cleanups should the liable party experience financial reverses, file
for bankruptcy, or restructure in a way that leaves the party with
insufficient assets to pay for the cleanup.
EPA Has Further Increased the Financial Risk to the Government by Not
Providing Adequate Oversight and Enforcement of Financial Assurance
Requirements for Cleanups:
EPA has conducted limited enforcement of its existing financial
assurance requirements. As a result, the agency has not ensured that
the parties responsible for Superfund and RCRA corrective action
cleanups obtain and maintain the financial assurances they are required
to provide to demonstrate their ability to meet these environmental
obligations. In fact, the agency lacks basic information about its
portfolio of financial assurances. That is, EPA does not have data on
the financial assurances that businesses are required to have in place
for Superfund and RCRA cleanups, such as the type of assurance
required, the amount of financial assurance provided, and whether the
financial assurance is still authorized or is in force.[Footnote 86]
Further, in late 2003, one EPA regional office conducted an assessment
of financial assurances for Superfund cleanup settlements negotiated in
that region and found significant noncompliance with financial
assurance requirements. Specifically, EPA officials found that only 30
percent of the liable parties subject to financial assurance
requirements in Superfund settlements, consent decrees, and EPA cleanup
orders were in compliance with these requirements. Overall, the
responsible parties at 48 percent of these sites appeared to be out of
compliance with relevant financial assurance requirements. In addition,
the regional staff reported that 22 percent of the cases needed
additional follow up and review because, among other things, EPA could
not locate the financial assurance documents and thus could not
determine whether the liable parties were in compliance with the
financial assurance requirements. (In some cases, EPA had the
responsibility for maintaining the financial assurance documents, and
in others that responsibility had been delegated to state regulators.)
The staff member leading the assessment reported that locating the
original financial assurance documents within the region's records was
"painfully slow."
Moreover, EPA's key databases for Superfund and RCRA do not contain
data elements related to financial assurances. In addition, although
EPA's regional offices are responsible for ensuring compliance with
Superfund settlement agreements, including financial assurance
requirements, the regional offices have generally not tracked
information on their portfolios of financial assurances supporting
settlements for cleanups in their regions. For example, we asked
several EPA regional offices to provide information on the Superfund
settlements negotiated in their offices such as (1) the number of
settlements backed by financial assurances and (2) the number, if any,
not in compliance with this requirement. Regional EPA officials told us
that information was not readily available, and that obtaining it would
entail going back to each individual settlement agreement to identify
the financial assurance mechanism, if any, and then determining the
current status of the financial assurance. The situation with financial
assurances under the RCRA corrective action program is more complex.
While EPA has overall responsibility for implementing the act, and
retains enforcement authority, it has authorized most states to
administer the corrective action program. As a result, to obtain
information on these financial assurances, EPA would have to request
that the states gather this information and provide it to EPA.
Lacking data on the financial assurances that are required, EPA cannot
be assured that all appropriate financial assurances are in place and
available, as needed. In addition, the data limitations preclude EPA
and state officials from conducting other analyses and enforcement-
related tasks, such as determining whether the financial assurances
that a company provides will be adequate given the company's cleanup
liability across the nation and analyzing the effectiveness of the
various types of financial assurance in providing funding for cleanups.
Enforcement officials both at EPA headquarters and several regional
offices acknowledged that the agency has often paid scant attention to
oversight and enforcement of financial assurance requirements in
cleanup settlements and cleanup orders. According to EPA officials, the
agency's focus in the Superfund program has been on the environmental
issues associated with cleanups, such as ensuring that appropriate
cleanup remedies are chosen and that the liable parties begin the
agreed-upon cleanup work. Consequently, when EPA negotiates and
enforces cleanup settlements, enforcing financial assurance
requirements, including reviewing complex financial data about
responsible parties, typically takes a back seat to environmental
concerns. According to one regional attorney, there are a number of
important issues to resolve in negotiating settlements, and ensuring
that a strong financial assurance mechanism is in place often becomes a
"B list" issue during negotiations. Moreover, one official noted that
EPA tracks whether its regional enforcement officials reach a
settlement with liable parties as a key measure of enforcement
activity--but there is no such results-oriented measure concerning
enforcement of financial assurances. In addition, the existing model
language for Superfund settlements does not require that the financial
assurance be obtained by the time the settlement is signed. Rather, the
party agreeing to the settlement has 30 days after signing it to obtain
financial assurance and notify EPA. This arrangement has precluded an
assessment of the assurance before the settlement is signed.
Once a Superfund settlement has been signed, enforcement of financial
assurances--to ensure that they were actually obtained, are sufficient
to cover anticipated cleanup costs, and remain in force--is likely to
remain a low priority, according to some EPA enforcement officials. An
EPA official explained that this enforcement responsibility typically
falls to the remedial project manager, who has overall responsibility
for the site cleanup. This remedial project manager's expertise is
typically in engineering and environmental cleanup issues, not
financial matters such as determining whether a liable party's
corporate guarantee provides adequate protection against default on the
party's cleanup obligations. Moreover, if EPA discovers at some point
that the liable party's financial assurance is no longer adequate, EPA
is often reluctant to insist that the company incur the additional cost
of obtaining further financial assurance as long as the company is
carrying out at least some of the cleanup work, according to some
enforcement officials. In fact, EPA and Justice Department officials
have noted that at times they are faced with this dilemma: whether to
require companies to use some of their limited resources to obtain
secure financial assurances versus applying those funds directly to the
cleanups.
EPA has begun to recognize that its limited enforcement of its
financial assurance requirements for Superfund and RCRA cleanups, as
well as these requirements for closure and post-closure activities at
hazardous waste facilities, is exposing taxpayers to significant risk
of having to pay cleanup costs at many current and future Superfund
sites. As a result, EPA's enforcement office has begun several
initiatives concerning financial assurances:
* EPA has added financial assurances to its national enforcement
priorities beginning in fiscal year 2006.[Footnote 87]
* EPA has taken steps to evaluate the addition of data elements, such
as the type of financial assurance provided and the name of the company
providing it, to its key databases for Superfund and RCRA programs. EPA
estimates that the Superfund database's revisions will be in place by
the end of fiscal year 2005. The data elements are expected to be added
prospectively, that is, EPA would add information about financial
assurances in new Superfund settlements and consent decrees to the
database as they are reached, but information about existing financial
assurances would not likely be added. Because the RCRA database
additions involve coordinating with states and tribes authorized to
implement RCRA, they are expected to take longer, and no estimate of
implementation date has been made.
* EPA has begun efforts to increase the expertise of officials who
enforce its financial assurance requirements. For example, the agency
has developed a course on financial assurance mechanisms for officials
who enforce RCRA financial assurance requirements.
* In late 2004, EPA made available three cost-estimating tools to help
regulators estimate the appropriate level of financial assurances
needed in the RCRA corrective action program. EPA has also begun to
fund training in the use of cost-estimating software for its staff and
state agency personnel.
* In response to a recommendation in EPA's April 2004 internal
Superfund review, as discussed earlier, EPA has begun a study that,
among other things, will assess the extent to which facilities that had
been required to have financial assurances under RCRA's hazardous waste
program have become taxpayer-funded Superfund cleanups. Also, EPA's
Office of Inspector General initiated a review in late 2004 on the
effectiveness of RCRA's financial assurance requirements.
EPA Could More Fully Utilize Other Enforcement Authorities, Such as
Claiming Payments the Government Owes to Liable Businesses and Filing
Liens on Superfund Properties:
In addition to financial assurances, EPA has other enforcement
authorities available under certain circumstances to help obtain
payments for cleanups. For example, EPA may in appropriate
circumstances (1) seek, in cooperation with the appropriate federal
agency, tax refund or other administrative offsets, which allow the
federal government to redirect payments or tax refunds it owes
businesses to federal agencies with claims against these businesses and
(2) file liens on property for which the federal government has
incurred expenses under the Superfund law. These authorities may be
used regardless of whether a liable party is in bankruptcy. Under the
bankruptcy code, offsets and these liens may be considered secured
claims--that is, those the debtor must pay first--which can greatly
increase the likelihood that EPA will recover at least some of its
cleanup costs in bankruptcies.
EPA May Obtain Tax Refund and Other Administrative Offsets to Help Pay
for Costs of Environmental Cleanups:
An administrative offset is a procedure allowing a federal agency to
obtain monies owed to it by a party from payments that the federal
government owes the same party, such as tax refunds or payments under
government contracts. EPA officials noted an important advantage of
offsets as opposed to claims in bankruptcy court: to the extent that
the offsetting amount will cover the dollar amount of EPA's claim, the
claim will be paid in "full dollars." In contrast, claims in bankruptcy
court, as previously discussed, may result in a payment of only pennies
on the dollar amount of the claim. According to EPA and Justice
Department enforcement officials, the agency has obtained tax refund
offsets in several bankruptcy cases and other administrative offsets in
two cases in the past few years. EPA officials noted one such example:
in July 2004, after United Airlines filed for bankruptcy protection,
EPA reached a settlement with the company on its environmental
liabilities that included a provision to recover $550,000 through an
offset of a federal tax refund.
EPA officials also described an instance in which they had not been
successful in obtaining an offset. Officials in EPA's Philadelphia
office told us of their failed attempt to obtain an offset from Exide
Technologies when it filed for bankruptcy reorganization in 2002. One
of these officials estimated that the company had an environmental
liability of about $80 million from more than 100 contaminated sites.
EPA officials believed the company had significant government contracts
and tried to identify those contracts and the amount the government
owed the company at that time. However, these officials said they were
unable to obtain this information in time--that is, before the
government paid Exide. (Under the Prompt Payment Act, an agency
acquiring property or services from a business concern must make
payments by the required payment dates or pay an interest penalty to
the business on the amount due, and thus information on pending
government payments must be gathered quickly.) To gain the benefit of
administrative offsets to help recover some cleanup costs, EPA would
need to quickly identify government payments owed to bankrupt or
financially distressed companies with environmental liabilities and
process its offset claim before the government paid the contractor or
vendor.[Footnote 88]
To date, EPA has provided little guidance to its enforcement staff on
how to use its offset authority in recovering cleanup costs. For
example, EPA's guidance for participating in bankruptcy cases mentions
offsets but does not provide any instruction on the necessary steps in
obtaining an offset, such as coordination that may be needed with the
Internal Revenue Service for a tax refund offset. Similarly, in
training sessions on bankruptcy issues for EPA attorneys that we
observed in 2004, EPA and Justice Department bankruptcy experts
encouraged the use of offsets, but did not include any specific
information on how to obtain offsets or refer participants to any
guidance on doing so. Particularly given the time-critical nature of
any attempt to obtain offsets, procedures and guidance to staff to
facilitate the use of offsets would both encourage staff to use these
tools, when appropriate, and support their efforts to do so. For
example, guidance to EPA staff on how to quickly obtain information on
government contracts or grants may have helped them identify potential
offsets for some environmental liabilities associated with
bankruptcies. In addition, an agencywide process for identifying tax
payments due to businesses would enable the agency to routinely
identify whether businesses filing for bankruptcy that have
environmental liabilities are owed any tax refunds.
EPA's Authority to File Liens on Superfund Properties Can Help the
Agency Recover Costs Associated with Environmental Cleanups:
Under the Superfund law, EPA has a lien, or legal claim, on property if
the government has incurred costs associated with cleanup at the
property.[Footnote 89] According to a relevant House committee report,
one purpose of the lien was to prevent the unjust enrichment of the
responsible party, who might otherwise benefit from the rise in
property value resulting from the property's cleanup. According to EPA,
liens can provide the agency with leverage in obtaining cleanup costs
generally, and can also assist the agency in obtaining cleanup funds
under bankruptcy proceedings because liens are classified as secured
claims--the highest priority category for receiving payments from a
debtor in a bankruptcy. Thus, a lien can greatly increase the
likelihood that EPA will recover at least some of its cleanup costs in
bankruptcy cases.
However, to establish the priority of a property lien under the
Superfund program among other secured parties and creditors, EPA must
file notice of the lien (sometimes called "perfecting a lien") in the
appropriate governmental office in the state where the property is
located.[Footnote 90] Importantly, the automatic stay provision under
bankruptcy law generally prohibits filing or enforcing a lien after a
debtor has filed for bankruptcy. In addition, the priority of property
liens is typically based on their filing dates. Thus, it is to EPA's
advantage to file Superfund liens as soon as possible to secure EPA's
financial interest in them and to receive as high priority for that
interest as possible. An example of the benefit liens can provide is a
bankruptcy case cited by EPA in which the agency recovered $10 million
in satisfaction of its property lien. (The property was sold for $24
million at an auction conducted by the bankruptcy court.) If, however,
EPA does not routinely consider and analyze the use of liens at
Superfund sites to protect the government's financial interest where
cost reimbursement may otherwise be difficult or impossible, the agency
can miss opportunities to have status as a secured creditor in
bankruptcy cases.[Footnote 91]
In addition, having Superfund liens can also help EPA negotiate
settlements with liable parties at Superfund sites, according to EPA.
For example, according to EPA, the liens cover the entire property for
which Superfund-related costs have been incurred, not just contaminated
areas--and owners of some properties may wish to sell "clean" portions
of their properties. Such owners would have an incentive to have the
lien released, which would happen only if they conducted the cleanup or
reimbursed EPA for cleanup costs. In fact, EPA has identified instances
in which even the threat of filing a lien has produced agreements for
payments with uncooperative parties. With filed liens, the agency may
also become aware of assets businesses may wish to sell to affiliated
parties, and which EPA could challenge under fraudulent transfer laws,
because such transactions would need to be approved by the agency.
Since the lien provision was added to the Superfund law in 1986, EPA
has issued guidance to it staff on filing liens and has encouraged
staff to do so. For example, in 2002, EPA's Director of the Office of
Site Remediation Enforcement issued a memorandum encouraging the filing
of liens to secure response costs in Superfund cases. Also, in training
sessions on bankruptcy issues for EPA enforcement attorneys, such as
those we observed in 2004, EPA and Justice Department experts in
bankruptcy encouraged these attorneys to file Superfund liens whenever
possible. However, we found that EPA headquarters does not require that
its regions report information to them on liens they have filed, and
that overall the agency has little centralized information on such
liens. For example, although the principal database used to manage the
Superfund program contains data fields for such liens, an EPA official
with expertise in this database said that the agency has little
confidence in the completeness or accuracy of these fields. Also, the
lien-related fields were added in the late 1990s, so liens filed before
that time are not likely to be included in the national database. Thus,
it is not clear whether EPA has made good use of its authority to file
Superfund liens.
In addition, it is not clear that the agency is consistently and timely
aware of EPA property liens that it should pursue in bankruptcy cases.
For example, EPA officials indicated that the agency generally relies
on its enforcement attorneys to have knowledge of its Superfund liens
at sites for which the attorneys have enforcement responsibility.
However, the reliability of this informal system is questionable in
light of such things as the often voluminous Superfund files we have
observed--a wall of floor-to-ceiling shelves can be filled with files
from just one case--staff changes over time, and the need for the
relevant staff to be available when the notice of bankruptcy is
circulated via email. In addition, agency guidance on bankruptcy cases
does not specifically require staff to routinely determine, when
reviewing notices of bankruptcy filings, whether EPA has filed a lien
that could become a secured claim in the bankruptcy proceedings.
Finally, we note that EPA officials highlighted the fact that lien
filings are not included in the agency's performance measures, and that
greater attention can be expected to be given to those activities that
are counted, such as reaching Superfund settlements.
Conclusions:
The need for EPA to fully use its existing authorities to execute the
"polluter pays" principle underlying the Superfund and RCRA laws is
even more compelling today than it was during the 1980s and 1990s when
corporate taxes--largely assessed on businesses at risk for
environmental pollution--provided about $1 billion a year for Superfund
cleanups. Now, without revenue from Superfund taxes, the cleanup burden
has increasingly shifted to the general public--and at a time when
large federal deficits are likely to constrain EPA's ability to obtain
such funding for these cleanups. In addition, over time, businesses
have become more sophisticated in using the limited liability principle
to protect their assets by separating them from their liabilities. They
use the traditional corporate parent/subsidiary structure as well as
relatively new business forms--limited liability companies and
partnerships--often in complex, multilayered organizational structures.
The result is that businesses of all sizes can easily limit the amounts
they may be required to pay for environmental cleanups under Superfund
and RCRA. Compounding the problem, from EPA's perspective, is the long-
term nature of many of the cleanups, which provides businesses with
ample time to implement complex asset protection plans. Finally, it has
become more common and acceptable for businesses to use the bankruptcy
courts as a reorganization tool that enables businesses to emerge with
discharged or reduced environmental liabilities.
Collectively, these factors present serious challenges to EPA in
attempting to enforce environmental laws and to ensure that polluters
pay for cleanups. For example, the ease with which companies can
protect their assets can actually encourage businesses to take more
risks in their operations, thereby increasing the risks of
environmental contamination. Importantly, this situation also presents
a significant management challenge for EPA in determining whether
businesses have resources available to meet their environmental
obligations. These challenges can seriously hamper EPA's ability to
achieve its primary mission of protecting human health and the
environment because they present formidable obstacles to obtaining the
funding needed for cleanups. That is, it is increasingly difficult for
EPA to obtain funding to clean up not only existing Superfund sites but
also those still in the Superfund pipeline. Thus, we believe it is
imperative for EPA to increase its focus on financial management and to
fully use its existing authorities to better ensure that those
businesses that cause pollution also pay to have their contaminated
sites cleaned up.
In this regard, EPA has not used its authority under the Superfund law
to require businesses that handle hazardous substances to provide
financial assurances covering existing and potential cleanups. This
statutory mandate recognizes that businesses likely to cause
environmental contamination and endanger public health can reasonably
be expected to incur a business cost in order to ensure that they will
have the financial wherewithal to pay for spills and other
contamination, whenever they may occur, consistent with the degree of
risk their operations pose to public health and the environment. Under
this statutory mandate, EPA is to require, as appropriate, financial
assurances from businesses to protect public health and the environment
prospectively. This requirement may be viewed as akin to mortgage
companies' requirements that borrowers provide homeowners insurance to
protect the value of the assets against possible damage, except that
this requirement is not directed at all businesses--it is directed at
those at risk for contaminating the environment.
Importantly, using this authority would help to close gaps in EPA's
existing financial assurance requirements: it would require some
businesses not subject to RCRA's financial assurance coverage, such as
producers of certain mining wastes that have caused enormous
environmental harm, to obtain financial assurance because of the
environmental problems their operations are likely to continue to
cause. It would also close the gap that exists under RCRA's financial
assurance requirements, which generally extend to businesses that
treat, store, or dispose of hazardous waste, but not to businesses that
generate hazardous waste, even though they may be at high risk for
environmental problems, such as chemical spills.
In 1980, when the Superfund financial assurance requirement was enacted
by the Congress, it required EPA to first identify the classes of
facilities with the highest risk of harm. This task is much easier
today because EPA and the states now have 25 years of experience with
Superfund and 29 years with RCRA. We believe EPA can expeditiously
implement the requirement to identify those industries with the highest
risk of environmental harm and establish appropriate risk-based
financial assurance requirements for them. For example, EPA should be
able to gather relevant information from Superfund and RCRA program
data, studies, and the many officials involved with these programs over
the years, among other sources, to identify those industries that pose
high levels of environmental risk.
Further, to ensure that financial assurances the agency requires under
the Superfund and RCRA corrective action programs actually provide
funding for cleanups in the event the liable parties default on their
environmental obligations, it is critically important that EPA
effectively oversee and enforce the financial assurances that
businesses provide to the agency. The fact that EPA currently cannot
even readily identify the financial assurances that should be in force
is a clear indication of inadequate oversight and enforcement. As a
result, there is an increased risk that taxpayers, rather than the
parties responsible for the contamination, will ultimately have to pay
for the cleanups of contaminated sites under Superfund and RCRA.
Although EPA has begun some efforts to increase its oversight and
enforcement of financial assurances, the agency will need to sustain
and increase such efforts if financial assurances are to achieve their
intended goal of ensuring that responsible parties, not U.S. taxpayers,
pay to clean up hazardous waste sites.
Also, we believe that EPA should evaluate the degree of financial risk
and the oversight costs it is appropriate for the agency to bear.
Fundamentally, it is a question of whether the industries that pose
environmental risk or the government charged with protecting the
environment should carry the financial risk for the contamination that
the industries may cause. Considering the often very long-term nature
of the cleanups--during which time it would be reasonable to expect
businesses to set aside increased resources--as well as the resources
and skills necessary to oversee the unsecured financial assurances,
continuing to, in effect, subsidize businesses by accepting unsecured
assurances may be a luxury the government can no longer afford.
More specifically, in its evaluation, EPA should consider the different
financial risks that the various financial assurances pose to the
government. This is especially important in light of the problems that
we, the EPA Inspector General, state regulators, and others have
identified, particularly with respect to the corporate financial test,
corporate guarantee, and captive insurance. For example, to effectively
oversee some of the financial assurances, EPA staff--and state staff
handling RCRA financial assurances for EPA--must have a high level of
expertise in financial management and insurance, among other fields.
However, EPA has not taken into account either the variations in number
of staff or levels of expertise needed that are associated with
overseeing and enforcing the various financial assurances. Doing so,
however, could provide EPA with the opportunity to both minimize the
costs the government needs to bear to effectively oversee and enforce
its financial assurance portfolio and reduce the government's financial
risk for environmental cleanups. For example, when faced with the trade-
off between allocating staffing resources to oversee unsecured
financial assurances and meeting other agency responsibilities, BLM
decided to no longer accept corporate guarantees, in part because of
the oversight challenges they present. In so doing, BLM shifted more of
the financial risk to the businesses they regulate who have to purchase
financial assurances from independent third parties, such as banks.
In addition to financial assurances, greater use of other enforcement
authorities, such as offsets and Superfund liens, could help EPA
recover more costs from parties liable for environmental cleanups in
some cases. Although offset authorities are limited to situations in
which the government owes the company a tax refund or some other
payment, a greater willingness by EPA to use these authorities--and to
establish procedures and provide direction to staff in how to use these
authorities--could help the government better ensure that parties
responsible for pollution pay the associated cleanup costs to the
maximum extent practicable. For example, when liable parties are
unwilling to fulfill their financial obligations for cleanups, EPA
officials should routinely explore whether tax offsets may be
available. Staff should be provided with policies and procedures
detailing the steps that need to be taken to use these enforcement
tools effectively.
Finally, companies with environmental liabilities that file for
bankruptcy present another set of management challenges to EPA. Under
its current process for identifying and reviewing bankruptcies, the
agency cannot be confident that companies with EPA liabilities are held
responsible for their cleanup obligations to the maximum extent
practicable because the agency cannot ensure that it has identified (1)
those bankruptcies for which it should request the Justice Department
to file claims with the bankruptcy courts for cleanup funds and (2) any
existing rights the agency has that can give its bankruptcy claims a
priority status, such as liens on Superfund properties, which
significantly improves the agency's chances of recovering funds under
bankruptcy proceedings. Importantly, EPA also needs to review the
specific sites identified in bankruptcy proceedings for purposes other
than filing claims. One such purpose is to help ensure that discharges
for businesses reorganizing under bankruptcy proceedings are not
approved for contaminated sites that EPA has not been previously aware
of.
To its credit, EPA has established a bankruptcy work group that seeks
to identify relevant bankruptcy filings to pursue and bankruptcy
actions to monitor, such as notices to abandon property. However, the
process the agency uses to identify relevant bankruptcy cases and
actions is informal and essentially undocumented. As a result, it is
not clear whether EPA is devoting sufficient time and resources to
maximize the cleanup funds it can obtain under bankruptcy proceedings
and to ensure that businesses are not receiving discharges of
environmental liabilities inappropriately. We believe that EPA should
build on the existing informal processes the agency is using and
formalize and document its process for identifying relevant bankruptcy
proceedings. In addition, we believe that EPA guidance on bankruptcy
cases should be revised to emphasize some important actions that are
not sufficiently addressed in existing guidance, such as routinely
identifying contaminated sites identified in bankruptcy filings about
which EPA is not familiar so that the agency can take appropriate steps
to ensure that courts do not inappropriately discharge such
environmental liabilities.
Recommendations for Executive Action:
To close gaps in financial assurance coverage that expose the
government to significant financial risk for costly environmental
cleanups, the EPA Administrator should expeditiously implement the
statutory mandate under Superfund to develop financial assurance
regulations for businesses handling hazardous substances, first
addressing those businesses EPA believes pose the highest level of risk
of environmental contamination, as the statute requires.
In addition, to better ensure that the financial assurances EPA does
require under the Superfund and RCRA corrective action programs provide
sufficient funds for cleanups in the event liable parties do not
fulfill their environmental obligations, EPA should enhance its efforts
to manage and enforce the financial assurance requirements for
Superfund and RCRA corrective action cleanups by taking the following
actions:
* Evaluate the financial assurances the agency accepts in light of such
factors as the financial risks EPA faces if liable parties do not meet
their cleanup obligations; the varying financial risks posed by the
individual financial assurance mechanisms; the agency's capacity to
effectively oversee the various financial assurance mechanisms--in
particular, the expertise of staff (federal and state) and the number
of staff; the information gaps the agency faces in overseeing the
various financial assurances; and the concerns about certain financial
assurances, such as the corporate financial tests, corporate
guarantees, and captive insurance, that have been brought to the
agency's attention by state regulators, the EPA Inspector General, and
others.
* If EPA continues to accept the corporate financial tests and
corporate guarantees as financial assurance in these programs, it
should revise and update its financial tests to address the
deficiencies identified by the EPA Inspector General and others.
* Implement changes to Superfund and RCRA databases to support the
efficient identification of EPA's portfolio of financial assurances and
populate these databases with information on all financial assurances
that liable parties should have in force, developing quality controls
to ensure data reliability.
* Develop a strategy to effectively oversee the agency and state
portfolios of financial assurances to ensure that all required
financial assurances are in place and sufficient in the event the
related businesses encounter financial difficulties, including
bankruptcy. Such a strategy should include ensuring that adequate
staffing resources with relevant expertise are available.
* Require that financial assurances be in place before EPA and liable
parties finalize Superfund settlement agreements.
In addition, to better ensure that EPA holds liable parties responsible
for their cleanup obligations to the maximum extent practicable, the
agency should seek opportunities to more fully use its enforcement
tools, particularly tax and other offsets, and provide specific
guidance to their staff on how and when to use these tools. For
example, EPA should routinely take advantage of tax offsets when liable
parties are not meeting their obligations--not just when parties file
for bankruptcy.
To better ensure that EPA identifies relevant bankruptcy filings to
pursue and bankruptcy actions to monitor, EPA should develop a formal
process for monitoring bankruptcy proceedings and maintain data on
bankruptcy filings reviewed, for example using an EPA Intranet site
that would be readily available to all relevant staff.
Finally, we recommend that EPA revise and update its guidance on
participation in bankruptcy cases to more clearly identify some actions
needed to better protect the government's interest, such as steps to
take to better ensure that the courts do not inappropriately discharge
environmental liabilities and to specify that staff evaluating new
bankruptcy filings should routinely determine whether EPA has any
existing liens related to the filings.
Agency Comments and Our Evaluation:
We provided EPA with a draft of this report for review and comment. In
commenting on the draft, EPA generally agreed with many of the
recommendations and said the agency will further evaluate its response
to others. Appendix III contains the full text of the agency's comments
and our responses.
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report until
30 days from the report date. At that time, we will send copies to the
Administrator, EPA; the Attorney General, Department of Justice; the
Director, Office of Management and Budget; appropriate congressional
committees; and other interested parties. In addition, the report will
be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or [Hyperlink, stephensonj@gao.gov].
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who
made major contributions to this report are listed in appendix IV.
Signed by:
John B. Stephenson:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
GAO was asked to (1) determine how many businesses with liability under
federal law for environmental cleanups have declared bankruptcy and how
many such cases the Justice Department has pursued in bankruptcy court;
(2) identify key challenges that EPA faces in holding bankrupt and
other financially distressed businesses responsible for their cleanup
obligations; and (3) identify actions EPA could take, if any, to better
ensure that bankrupt and other financially distressed businesses pay
the costs of cleaning up their contaminated sites to the maximum extent
practicable.
To determine how many businesses with liability under federal law for
hazardous waste cleanup costs have declared bankruptcy, we obtained
bankruptcy case filing information from the Administrative Office of
the U.S. Courts, which compiles data on the number of bankruptcy
filings. Specifically, we obtained bankruptcy case filing information
on the number of business bankruptcy filings under Chapters 7, 11, and
13 of the bankruptcy code for fiscal years 1998 through 2003. While the
bankruptcy courts collect data on the number of businesses that file
for bankruptcy each year and the Administrative Office of the U.S.
Courts maintains these data in a national database, neither the courts,
EPA, nor private providers of business data collect information on how
many of these businesses have environmental liabilities. As a result,
we were not able to report on the number of business bankruptcies with
hazardous waste liabilities. To determine how many bankruptcy cases
with liability under federal law the Justice Department has pursued in
bankruptcy court on behalf of EPA, we spoke with officials from the
Justice Department about the cases it received from EPA to determine
which cases the department had pursued. We obtained data on the cases
the Justice Department pursued on behalf of EPA where a proof of claim
was filed for fiscal years 1998 through 2003.
To identify key challenges that EPA faces in holding bankrupt and other
financially distressed businesses responsible for their cleanup
obligations and to identify actions EPA could take to better ensure
that bankrupt and other financially distressed businesses pay the costs
of cleaning up their hazardous waste sites to the maximum extent
practicable, we reviewed federal statutes and policies associated with
hazardous waste management and cleanup, the federal bankruptcy code and
procedures, and academic and professional literature addressing the
intersection of environmental and bankruptcy law, corporate limited
liability, forms of business organization, and asset management. We
also interviewed enforcement officials from EPA headquarters and its 10
regional offices about how the agency identifies, pursues, and recovers
federal environmental liabilities from financially distressed or
bankrupt businesses; the challenges EPA faces in these tasks; and the
extent to which the agency has used available enforcement tools in this
effort. Finally, we attended EPA-sponsored training sessions on RCRA
closure and post-closure financial assurances and on bankruptcy-related
issues for EPA attorneys in order to learn more about these challenges
as well as the financial assurances and other enforcement tools and
procedures available to EPA to address these challenges.
We performed our work between September 2003 and July 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Chronology of EPA's Efforts to Develop Financial Assurance
Requirements for Businesses Handling Hazardous Substances:
December 1980:
Congress enacted the Comprehensive Environmental Compensation,
Response, and Liability Act of 1980 (CERCLA, or the Superfund law),
calling for, among other things, EPA to develop financial assurance
requirements for businesses handling hazardous substances to
demonstrate their ability to pay for environmental cleanup costs
(CERCLA Section 108(b)(1)).
Early 1980s:
EPA and its contractors produced issue papers on such topics as gaps in
existing financial assurance requirements, the definition of
"facility," and data sources for classifying facilities.
1983:
In May, EPA published a Federal Register notice announcing the
beginning of a process of identifying facility classes and seeking
public comment on several issues related to identifying risk-based
classes of industries and facilities handling hazardous substances. In
November, the Director of EPA's Office of Solid Waste informed the
Assistant Administrator for the Office of Solid Waste and Emergency
Response that work on the facility classification effort was being
halted because of a lack of contract funding and staff availability. In
December, the statutory deadline passed for EPA to identify classes of
facilities for which regulations would first be developed.
1987:
EPA revisited the Superfund financial assurance requirements as part of
a broader review of the Superfund program spurred by the 1986
amendments to the Superfund law. According to EPA officials, the agency
developed recommendations to the Assistant Administrator for the Office
of Solid Waste and Emergency Response for developing the regulations.
However, EPA never acted upon these recommendations.
2004:
An EPA internal review of the Superfund program recommended that the
Office of Solid Waste and Emergency Response study whether promulgating
financial assurance regulations under CERCLA could reduce Superfund
liabilities for facilities not covered under RCRA financial assurance
requirements. In response, EPA created a work group that is collecting
and evaluating information on the types of facilities that have become
Superfund National Priorities List sites as well as the industries
represented among these sites.
[End of section]
Appendix III: Comments from the Environmental Protection Agency:
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY:
WASHINGTON, D.C. 20460:
JUL 14 2005:
Mr. John B. Stephenson:
Director:
Natural Resources and Environment:
Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Stephenson:
This letter is in response to the Government Accountability Office
(GAO) final draft report titled "Environmental Liabilities: EPA Should
Do More to Ensure that Liable Parties Meet Their Cleanup Obligations
(GAO-OS-658, July 2005)." We appreciate GAO's recognition of the
challenges that EPA faces when holding bankrupt and other financially
distressed businesses responsible for their cleanup obligations.
Generally, EPA agrees with many of the recommendations, or is in the
process of evaluating information to determine whether such
recommendations should be pursued. In fact, EPA has already undertaken
a number of activities to address bankruptcy and financial assurance
requirements for parties responsible for environmental contamination.
These activities include designating financial assurance as an
enforcement priority; soliciting advice from EPA's Environmental
Financial Advisory Board on insurance, financial tests and whether to
extend financial assurance to activities not currently covered;
assessing the fiscal impact of various categories of facilities in the
Superfund program and the utility of using authorities under CERCLA for
financial assurance in response to recommendations from an internal EPA
study; and providing training to states and regions on cost estimation
and other financial assurance mechanisms. Our responses to the
recommendations are provided in an enclosure to this letter.
We are confident that the efforts described in informal comments
submitted to your office previously and in the enclosure here will
result in improvements to the way EPA addresses bankruptcy and
financial assurance issues for responsible parties. Further, we
appreciate GAO's examination of EPA's past and current activities in
this area.
Sincerely,
Signed by:
Thomas P. Dunne:
Deputy Assistant Administrator:
Office of Solid Waste and Emergency Response:
Signed by:
Thomas V. Skinner:
Acting Assistant Administrator:
Office of Enforcement and Compliance Assurance:
Enclosure: EPA General Comments on GAO Draft Report: Environmental
Liabilities July 2005:
Financial Assurance:
While the GAO report recognizes that OECA has focused on financial
assurance compliance and enforcement as an issue, EPA is concerned that
the report does not capture the significance of those efforts. First,
EPA has already recognized that this area needs added attention and has
identified financial assurance as an OECA national priority in FY06/07.
Second, in advance of FY06/07, EPA has undertaken significant efforts
to enhance the capabilities of EPA and the States by providing multiple
training sessions over the past two years on the RCRA financial
assurance mechanisms. Participants from 34 states have attended these
financial assurance training sessions. Third, OECA has already devoted
significant levels of FTE and contractor dollars to assist EPA and
State personnel in enhancing the compliance with, and enforcement of,
financial assurance requirements. In short, OECA is already focusing on
financial assurance compliance and enforcement and will continue to do
so. While EPA recognizes issues with various financial assurance
mechanisms, we think in the short run the largest gains will accrue
from effective enforcement, compliance assistance, training and
guidance.
As with virtually all enforcement priorities, OECA's implementation
will include specific goals, targeting of enforcement resources, a
communication strategy, and a capacity building component. The Report
offers a number of suggestions with respect to financial assurance
compliance and enforcement. EPA appreciates the suggestions offered and
will consider those suggestions as it moves forward in its enforcement
priority implementation. As part of its implementation, OECA will need
to focus its resources to obtain the largest return on its compliance
and enforcement efforts. The Report's identification of the greater
risk where there are fewer entities available for funding a cleanup
obligation recognizes an important component of financial assurance
compliance and enforcement resource allocation.
EPA has also undertaken efforts to provide additional guidance and
training on other important components of financial assurance. For
example, OECA and OSWER are funding, and will continue to fund,
training to EPA and State personnel on cost estimation software that
can be used in reviewing cost estimates submitted by owners/operators
for RCRA corrective action (RACER) and closure/post-closure care
(CostPro). In addition to the training, EPA is purchasing licensed
copies of the software for each individual that attends the training.
Both RCRA Regional and State personnel have identified cost estimating
as a necessary component of having adequate financial assurances at
RCRA facilities and EPA has stepped forward to provide an important
tool in helping to characterize expected cleanup costs, and attendant
financial assurance obligations, at RCRA facilities. EPA anticipates
that the cost estimation training (and software) will have been
provided in each Region, for State and Regional personnel, by the end
of 2006. We also want to note State efforts to improve cost estimation.
For example, California has reported reviewing its cost estimates and
in many cases has increased them substantially.
Moreover, as the Report recognizes, OSWER and OECA issued corrective
action policy guidance in late 2003 explaining that requiring financial
assurance earlier than remedy selection for corrective action can be
appropriate and is one available mechanism for reducing the likelihood
of taxpayers bearing the burdens of corrective action costs. The cost
estimation training and software should enhance the ability of EPA and
States to seek financial assurance prior to remedy selection in
appropriate circumstances. EPA will continue to urge Regions and States
to examine whether financial assurances can be provided earlier than
remedy selection on a case by case basis. Additionally, EPA is in the
process of modifying the RCRAInfo and CERCLIS information systems to
capture financial assurance information. This important effort should
help close many of the data gaps identified in the Report and increase
EPA and the States implementation of financial assurance requirements.
On page 52, the Draft Report asserts that only one Region has performed
a review of its financial assurance documentation. It does not mention
the financial assurance review that was performed in Region III. In
this review, Region III examined all issued RD/RA UAOs and CDs to
determine if the bankruptcy or insolvency of any responsible party
resulted in the incomplete work becoming the responsibility of EPA.
Under this review, Region III identified 119 enforceable documents that
related to 93 different sites. The total value of work to be performed
under those documents exceeded $1,400,000,000. As of the date of the
completion of the first phase of this review, less than $9,000,000 of
this work was defaulted upon requiring intervention by the Superfund.
This review indicates that Region III was taking pro-active steps to
evaluate the viability of its financial assurance agreements before it
knew of the GAO study. This review concluded that, to date, more than
99.4% of the work has been completed without a negative impact on the
Superfund or the taxpayers.
As the report points out, RCRA Subtitle C financial assurance is
required to ensure funds are available for closure and post-closure
care. However, a critical component of financial assurance that the
report should emphasize is the preventative aspect under RCRA Subtitle
C associated with the financial assurance requirements. By requiring
financial assurance for closure or post-closure care in the event the
owner or operator is unable or unwilling to perform cleanup, the owner
or operator has an incentive to operate in a way that will minimize the
costs required for closure, meaning that by running an efficient, clean
operation, it should be easier in the future to perform closure. By
requiring the owner or operator to post financial assurance there is a
deterrent effect because the owner or operator is obligated to perform
closure and has secured the financing for that closure in advance.
The report should specify, in each instance, which type of financial
assurance is the subject of the report's analysis. This is critical to
clarify in each instance because RCRA Subtitle C (closure, post-closure
and liability) is a preventative program and has specific financial
assurance regulations. In contrast, the RCRA corrective action and
Superfund programs deal with existing releases and do not have a
financial assurance regulatory framework. The difference in these
programs must be clear in the report to provide a better understanding
of the enforcement actions available and limitations of these programs.
A list of clarified references to RCRA Subtitle C, RCRA corrective
action, or CERCLA financial assurance is included in the technical
comments.
Further points of clarification that are crucial to understanding EPA's
actions are that, the current RCRA Subtitle C regulations, facility
owners and operators can choose any of the permissible financial
mechanisms, as long as the mechanisms meet the regulatory standards.
Additionally, EPA does not "approve" insurance instruments. Instead the
RCRA Subtitle C regulations require that an insurance policy contain
the language in the regulations and that if there are any
inconsistencies between the policy language and the regulations,
inconsistent policy terms are automatically amended to conform with the
regulations. This provision protects EPA from having to approve each
insurance submission.
CERCLA 108(b):
GAO recommends that the EPA Administrator should expeditiously
implement the statutory mandate under Superfund to develop financial
assurance regulations for those businesses EPA believes pose the
highest level of risk for financial assurance failure. EPA has underway
several analyses of the cost of unfunded sites in response to the 120
Day Study, an internal self-assessment of the Superfund program. These
analyses may also have implications for EPA's financial assurance
programs and whether to extend financial assurance to operations that
do not currently have requirements to provide financial assurance. The
results of this analysis for any category of sites could lead to
regulatory action under § 108(b), revisions to existing financial
assurance regulators, or other actions to address financial assurance
shortfalls. Given these activities and the need to evaluate the most
effective means by which to address financial assurance
vulnerabilities, we believe that a conclusion that EPA should pursue
108(b) rulemaking to the exclusion of other options is premature.
In the Agency's charge to the Environmental Financial Advisory Board
(EFAB) regarding financial assurance, the Agency has included a number
of issues, including "Should Financial Assurance Requirements Be
Extended to Operations That Are Not Currently Required to Meet Them?"
While the EFAB may wait until analysis of the 120 Day Study has been
completed to determine if they will evaluate this question, the EFAB's
advice would help guide the Agency in decisions on targeting specific
categories of sites for CERCLA § 108 rulemaking, revising RCRA
financial assurance regulations, or undertaking other actions that
would reduce the impact of unfunded cleanups on Superfund and states.
Consultation with the Environmental Financial Advisory Board:
EPA has already begun investigations that anticipate some of the
recommendations of the GAO's report. The Agency sought the advice of
the Environmental Financial Advisory Board (EFAB) on several financial
assurance matters and is currently awaiting recommendations from them.
Among the questions we asked the Board are:
1) "Whether financial assurance requirements or similar mechanisms are
appropriate for categories of facilities not currently covered by such
requirements." This question preceded your recommendation that EPA
develop financial assurance requirements for operations which are not
currently covered. We understand that the Board has first undertaken
work on the financial test and insurance because they believe that they
should first understand how well the mechanisms work before
recommending any extension of financial assurance.
2) "What are the strengths and pitfalls of the financial test and
corporate guarantee?" The EFAB held a meeting in New York City in June
2004 on the financial test and corporate guarantee and has received
comments on the draft letter that was produced as a result of that
meeting. EPA believes it would be inappropriate to accept the draft
findings based upon a draft letter from the EFAB since the final letter
may differ with the draft.
3) "Should EPA continue to allow corporate siblings to guarantee the
obligations of another subsidiary or should guarantees only be allowed
for parents or higher level companies?" The draft report cites issues
with corporate structures and the movement of assets among
subsidiaries. EPA recognized this possibility when it raised this
question to the EFAB.
4) "What are the strengths and pitfalls of insurance?" "Should there be
minimum ratings of insurers that provide financial assurance?" "Should
there be minimum capitalization requirements for captive or other
insurers who provide policies for financial assurance and, if so, what
requirements would best assure funds are available for protection of
the environment, including closure, post-closure, corrective action and
other environmental clean- up?" "Should policies written by captives
and commercial insurers be treated as equally acceptable mechanisms?"
"What are appropriate safeguards (such as capitalization, rating,
coverage, etc.), if any, for insurance for a Brownfields cleanup?" All
of the above are insurance questions EPA asked the EFAB and the EFAB
held a day of hearings to solicit answers. As with the financial test
questions, EPA is awaiting recommendations from the EFAB, particularly
on captive insurance.
EPA appreciates the fact that GAO's identification of issues
surrounding the financial test, corporate guarantee and captive
insurance confirm the Agency's judgment that these are key issues.
However, pending a review of the findings of the EFAB, internal
investigations of the number of RCRA facilities going to Superfund, and
its own Inspector General's upcoming report, EPA believes it would be
premature to commit to revisions to the financial test or its insurance
requirements for financial assurance in response to the GAO
recommendations based upon the draft comments of the EFAB.
Insurance:
Beginning on page 48, the Draft Report discusses the use of insurance
as a form of financial assurance. The Draft Report focuses on the
relative "riskiness" of insurance in comparison to letters of credit,
bonds or trusts. The Draft Report also discusses the risk inherent in
accepting insurance from captive insurers. The Draft Report, however,
ignores the growing market in insurance products offered by third party
independent insurers that are specifically designed to meet financial
assurance requirements. Depending on the program (RCRA Subtitle C,
corrective action, or Superfund), there may be a variety of insurance
products designed to address several types of risks. For example, there
are insurance products associated with CERCLA or corrective action to
address cleanup risks (e.g. cost overrun insurance, which provides
reimbursement if cleanup costs exceed a certain amount, remediation
completion insurance, which - like a surety bond - provides for
completion of the cleanup if the PRP becomes insolvent, etc.) While not
all of these insurance products are appropriate for every site, many of
them, used independently or in conjunction with other forms of
financial assurance, may provide effective, cost efficient financial
assurance. This is especially true in the context of short term
response actions (e.g., one to two year durations). The Draft Report
failed to mention that EPA, at both the HQ and Regional levels, is
actively reviewing the viability of such insurance for financial
assurance and providing training for its staff on this issue.
Bankruptcy:
Our initial concern with the Draft Report is the first paragraph of the
summary/highlights page. This sentence states: "While more than 231,000
businesses operating in the United States filed for bankruptcy in
fiscal years 1998 through 2003, the extent to which these businesses
had environmental liabilities is not known because neither the federal
government nor other sources collect this information. Information on
bankrupt businesses with federal environmental liabilities is limited
to data on the bankruptcy cases that the Justice Department has pursued
in court on behalf of EPA. In that regard, the Justice Department
initiated 136 such cases from 1998 through 2003." We believe this
paragraph is misleading and implies a lack of will or ability on the
part of EPA to pursue environmental bankruptcy cases. It is not
appropriate to begin this Draft Report with such a statement that leads
a reader to believe that EPA is not willing to pursue more
environmental bankruptcy cases. Also, the statement does not
acknowledge that it is unknown how many of the 231,000 bankruptcy
filings had either environmental liability or any assets remaining to
warrant our intervention. What can be said is that there were 136 cases
that involved potential federal environmental claims. Since this is the
leading paragraph and sets the tone of the Draft Report, we suggest the
introduction be re-written so that the reader is not focused on the 136
cases out of 231,000 filings ratio.
The Draft Report states on pages 18 and 31 that EPA does not maintain
information on bankruptcies that it does not pursue. This is not
completely accurate. The EPA Bankruptcy Workgroup is currently
exploring the possibility of using - on a Nationwide basis - the
comprehensive database developed in Region III. During some of its
monthly conference calls, the Bankruptcy Workgroup has discussed the
steps that would be necessary to extend the database Agency-wide. In
its current form, the database tracks all bankruptcies that come into
the Region, even those in which the Agency does not file a claim. To
capture this information, the database has a data field to indicate if
the bankruptcy were "closed out" (i. e. the Region choose not to file a
claim).
In addition to the database, since May 5, 2003, Region III has had a
bankruptcy protocol which provides for a formal decision not to pursue
a bankruptcy case. The "close out" memo documents the efforts to
discover potential claims and the result. The memo then provides the
basis for not pursuing a claim (e.g. no claims discovered, debtor
assets too insignificant to pursue, transaction costs would exceed
expected recovery, etc.) This close out process is a natural outgrowth
of the recent EPA Bankruptcy Protocols (May 2005). The information
collected pursuant to the Bankruptcy Protocols provides sufficient
documentation to justify and explain the Agency's decision to pursue or
not pursue a claim in a particular bankruptcy. The only additional step
that EPA would need to take in order to meet the GAO critique regarding
this issue is to make a formal documentation of its decision.
Therefore, the foregoing demonstrates that EPA is actively taking steps
to better track and document all bankruptcies of which it receives
notice.
The following are GAO's comments on the Environmental Protection
Agency's letter dated July 14, 2005.
GAO Comments:
1. We acknowledge and commend EPA for the actions the agency has
initiated and for its plan to develop and implement other actions to
improve compliance with the enforcement of financial assurance
requirements, as EPA highlights in this and the next three paragraphs.
The management challenges EPA faces in this regard are complex, but the
potential benefits the agency can receive from effective financial
assurances are substantial. We believe that if EPA implements our
recommendations as part of its compliance and enforcement efforts
focusing on financial assurance, EPA's ability to hold liable parties
responsible for their environmental cleanup obligations will be
substantially improved.
2. Although we obtained information about region III's review of
financial assurances, we did not cite it in our report for several
reasons. For example, unlike the other regional review, the region III
review is not a compliance audit of financial assurances in Superfund
settlements. As such, this review does not identify either Superfund
settlement agreements that do not include financial assurances or the
number of sites that do not have settlements in place. In addition, the
reported financial impact on the government for the sites in region
III's review is preliminary and will remain so until the cleanups at
the sites reviewed are completed because the financial assurances may
not reflect the actual cleanup costs. For example, as discussed
earlier, EPA often settles for less than the full cleanup cost as a
result of equitable factors or ability-to-pay issues. In addition, the
financial assurances may relate to work to identify the potential
cleanup remedies and not to the cost of the cleanup, which may not yet
be known. An example of a case included in the study that substantially
understates the negative impact on the Superfund and the taxpayers is
the Metachem/Standard Chlorine case discussed in our report. According
to the official who conducted this review, while the review identifies
a loss of $3.75 million associated with the Metachem site, EPA expects
the government will have to spend about $100 million to clean up the
site.
3. We disagree with EPA's view that the report does not highlight the
preventive aspect of financial assurance. In discussing the purpose of
financial assurance, the draft and final reports point out that the
fact that the parties responsible for the contamination are also
responsible for cleaning it up encourages businesses to adopt
responsible environmental practices. While EPA's comments acknowledging
the benefits of prospective financial assurance are limited to the RCRA
closure and post-closure programs, we hope that the agency recognizes
that these same preventive benefits can be more broadly attained by
implementing the financial assurance requirements mandated by the
Superfund law under section 108(b), which also provide for prospective
financial assurances from businesses at risk for environmental
contamination.
4. EPA's comment suggests that the agency's enforcement options are
limited under its RCRA corrective action and Superfund programs because
the agency has not developed financial assurance regulations for these
programs. If this is the case, EPA should seek to correct this
situation as it develops specific goals to address financial assurance
as a national enforcement priority.
5. We have revised the final report to reflect that under EPA's current
regulations for financial assurance for closure and post-closure,
facility owners and operators may choose any of the permissible
mechanisms, as long as the mechanism meets the regulatory standards.
However, these regulations do not apply to the Superfund and RCRA
corrective action programs, and therefore do not constrain EPA's
authority to accept or decline a proffered financial assurance
mechanism related to a cleanup under these programs. Similarly, with
respect to insurance, the RCRA regulations EPA cites apply only to the
closure and post-closure programs. Thus, for Superfund and RCRA
corrective action, regulatory vigilance over the terms of the policies
is still necessary.
6. The Superfund law requires EPA to develop financial assurance
regulations for classes of facilities that pose a risk for
environmental contamination, starting with those that pose the "highest
level of risk of injury." This requirement is not, as EPA's comments
suggest, limited to those that pose the highest risk for financial
assurance failure. Our recommendation is for EPA to comply with the
requirements in the Superfund statute. In its comments, EPA misstates
the GAO recommendation by focusing on classes of facilities at risk for
financial assurance failure. We are concerned that the agency is
narrowly construing a broad statutory mandate that requires the agency
to establish, as appropriate, prospective financial assurance
requirements for entities at risk for environmental pollution. Further,
EPA may miss the forest for the trees by focusing too narrowly on its
ongoing study of NPL Superfund sites as a basis or rationale for
implementing the section 108(b) mandate. The universe of businesses at
risk for environmental contamination is much broader than Superfund NPL
sites--for example, NPL sites represent about 10 percent of
contaminated sites identified in the Superfund database. Finally, we
did not conclude, as EPA asserts, that EPA should pursue section 108(b)
rule makings to the exclusion of other options. Nonetheless, we reject
any assertion by EPA that implementing section 108(b) is optional. EPA
is required to carry out the terms of the statute, and nothing in
section 108(b) authorizes EPA to determine that such actions are
unnecessary. By passing section 108(b), the Congress has determined
that its provisions are necessary; should EPA believe otherwise, it
must seek legislative relief. During the 25 years section 108(b) has
been in effect, EPA has not sought amendment or repeal of the
requirement.
7. EPA's comment that it will not consider whether to implement section
108(b) until certain evaluations are complete indicates that it views
implementation of the statutory mandate under the Superfund law to
establish financial assurance for classes of facilities at high risk
for environmental contamination as optional. However, as noted above,
it is not. We believe the efforts of the Environmental Financial
Advisory Board (EFAB) and EPA under the 120-day study may provide
important and useful information to aid EPA's implementation of section
108(b) and the agency's other financial assurance responsibilities.
However, these efforts cannot provide a basis for the agency to simply
decline to carry out the actions required under section 108(b).
8. Our report provides some general information and issues about
insurance as one of the approved financial assurance mechanisms.
However, the scope of our work did not include an analysis of the types
of insurance products currently available or of all of EPA's actions
regarding insurance products. Instead, our work focused on issues and
concerns about some insurance products identified by the EPA Inspector
General and others.
9. In response to the questions posed by our requesters, we report the
number of business bankruptcies and inform readers that information to
identify how many of these bankruptcies involved environmental
liabilities does not exist. We also report, as requested, on the number
of bankruptcy cases that EPA and the Justice Department have pursued in
bankruptcy court. EPA believes that this information in the first
section of the report will lead readers to conclude that the agency is
not willing to pursue more environmental bankruptcy cases. We disagree.
For example, we report that without information on the number of
bankruptcy cases involving environmental liabilities, EPA's efforts in
identifying and pursuing relevant bankruptcies cannot be evaluated.
Further, our report provides information on some of the reasons EPA may
choose not to pursue bankruptcy cases in court--for example, many
chapter 7 bankruptcies involve businesses with few or no assets.
10. Our report accurately reflects that EPA does not maintain
information on bankruptcies it does not pursue. EPA's comments show
that only one region maintains such data. Further, while EPA states
that there have been discussions concerning collecting these data
agencywide, the agency does not report a decision or plan to do so.
11. The fact that one region is documenting its decisions regarding
bankruptcy cases does not demonstrate that the agency as a whole is
taking steps to better track and document all bankruptcies of which it
receives notice. We note that expanding the use agencywide of the close-
out memo used by region III is the type of action/documentation we had
in mind in recommending that EPA develop a formal process for
monitoring bankruptcy proceedings and maintaining data on bankruptcy
filings reviewed.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
John B. Stephenson, (202) 512-3841:
Staff Acknowledgments:
In addition to the individual named above, Christine Fishkin, Assistant
Director; Nancy Crothers; Richard Johnson; Les Mahagan; and Susan
Swearingen made key contributions to this report. Also, Catherine
Hurley; William O. Jenkins, Jr; Jean McSween; Jamie Meuwissen; Mary
Mohiyuddin; Jennifer Popovic; Aaron Shiffrin; and Gary Stofko made
important contributions. Finally, Greg Carroll; Terrance N. Horner, Jr;
Mike Kaufman; Jerry Laudermilk; Karla Springer; and Joseph D. Thompson
provided important assistance during final report review.
[End of section]
Related GAO Products:
[End of section]
Superfund Program: Breakdown of Appropriations Data. [Hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-787R]. Washington, D.C.: May
14, 2004.
Superfund Program: Updated Appropriation and Expenditure Data.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-475R]. Washington,
D.C.: February 18, 2004.
Superfund Program: Current Status and Future Fiscal Challenges.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-850]. Washington,
D.C.: July 31, 2003.
Hazardous Materials: EPA's Cleanup of Asbestos in Libby, Montana, and
Related Actions to Address Asbestos-Contaminated Materials.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-469]. Washington,
D.C.: April 14, 2003.
Superfund: Half the Sites Have All Cleanup Remedies in Place or
Completed. GAO/RCED-99-245. Washington, D.C.: July 30, 1999.
Superfund: Progress Made by EPA and Other Federal Agencies to Resolve
Program Management Issues.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-99-111].
Washington, D.C.: April 29, 1999.
Hazardous Waste: Progress under the Corrective Action Program Is
Limited, but New Initiatives May Accelerate Cleanups.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-3].
Washington, D.C.: October 21, 1997.
Superfund: Duration of the Cleanup Process at Hazardous Waste Sites on
the National Priorities List.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-97-238R].
Washington, D.C.: September 24, 1997.
Superfund: Number of Potentially Responsible Parties at Superfund Sites
Is Difficult to Determine.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-96-75].
Washington, D.C.: March 27, 1996.
Superfund: EPA Has Opportunities to Increase Recoveries of Costs.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-94-196].
Washington, D.C.: September 28, 1994.
Hazardous Waste: An Update on the Cost and Availability of Pollution
Insurance.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/PEMD-94-16].
Washington, D.C.: April 5, 1994.
Superfund: More Settlement Authority and EPA Controls Could Increase
Cost Recovery.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-91-144].
Washington, D.C.: July 18, 1991.
Hazardous Waste: Funding of Postclosure Liabilities Remains Uncertain.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-90-64].
Washington, D.C.: June 1, 1990.
Superfund: A More Vigorous and Better Managed Enforcement Program Is
Needed.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-90-22].
Washington, D.C.: December 14, 1989.
Hazardous Waste: Environmental Safeguards Jeopardized When Facilities
Cease Operating.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-86-77].
Washington, D.C.: Feb. 11, 1986.
(360386):
FOOTNOTES
[1] For simplicity in this report, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 will generally be
referred to as the Superfund law.
[2] The Superfund law generally applies to cleanups of contaminated
sites that are no longer in use. RCRA generally applies to operating
businesses that treat, store, or dispose of hazardous wastes.
[3] See GAO, Superfund Program: Current Status and Future Fiscal
Challenges, GAO-03-850 (Washington, D.C.: July 31, 2003).
[4] National Advisory Council for Environmental Policy and Technology
Superfund Subcommittee Final Report, April 2004, and Katherine N.
Probst and David M. Konisky: Superfund's Future: What Will It Cost?
(Washington, D.C.: Resources for the Future, 2001).
[5] Permits are also a vehicle for establishing financial assurance
requirements for businesses required to obtain RCRA operating permits.
[6] Courts have interpreted the liability of responsible parties under
CERCLA to be strict, joint and several, and retroactive. Under strict
or "no fault" liability, a party may be liable for cleanup even though
its actions were not considered improper when it disposed of the
wastes. Under joint and several liability, when the harm done is
indivisible, one party can be held responsible for the full cost of the
remedy even though that party may have disposed of only a portion of
the hazardous substances at the site. Under retroactive liability,
parties can be held responsible for actions that took place before
CERCLA was enacted.
[7] This percentage does not address the percentage of cleanup costs
paid by liable parties versus that paid by the government. According to
EPA, the agency has information on cleanup amounts liable parties
commit to through enforcement instruments but does not have access to
information on amounts the liable parties actually spend at the cleanup
sites.
[8] To determine which sites are eligible for listing on the NPL, EPA
uses its Hazard Ranking System, a numerical scoring system that
assesses the hazards a site poses to human health and the environment
as its principal determining factor. Once EPA has determined that the
risks posed by a site make it eligible for the NPL, EPA regions then
consider many other factors in selecting the sites to submit to EPA
headquarters for proposal to the NPL, including the availability of
alternative federal or state programs that could be used to clean up
the site, the status of responsible parties associated with the site,
and the cleanup's cost and complexity.
[9] In reality, sites rarely move through the cleanup process in a
linear, step-by-step manner. Most sites are divided early in the
cleanup process into multiple projects, known as operable units.
Cleanup activity at sites with multiple operable units is generally
staggered. Operable units may move through the cleanup pipeline at
different paces because of a number of factors, such as the
availability of funding, the complexity of the cleanup, or the level of
cooperation of responsible parties. The discovery of new information
about the site can even push an operable unit backward to an earlier
stage of the cleanup process.
[10] See GAO, Superfund Program: Breakdown of Appropriations Data, GAO-
04-787R (Washington, D.C.: May 14, 2004).
[11] EPA officials noted that in fiscal year 2004, the agency also
received $148 million from settlement payments from liable parties.
[12] For the first half of the 1990s, the trust fund received the
Superfund taxes.
[13] Of the 1,236 sites currently on the NPL, 158 are federal
facilities. These properties are owned or used by a federal agency,
typically either the Department of Defense or the Interior.
[14] According to EPA, "construction completion" means that physical
construction (if needed) to address contamination at an NPL site--such
as construction of a pump-and-treat system to address groundwater
contamination--is complete, regardless of whether final cleanup levels
have been achieved; all immediate threats from the contamination have
been addressed, and all long-term threats are under control. Most of
these sites then enter into the operation and maintenance phase, when
the responsible party or the state ensures that the cleanup remedy
continues to be protective of human health and the environment.
Eventually, when EPA and the state determine that no further remedial
activities at the site are appropriate, EPA deletes the site from the
NPL.
[15] EPA, Superfund: Building on the Past, Looking to the Future
(Washington, D.C.: Apr. 22, 2004).
[16] GAO-03-850. We also reported that states play a significant role
in the cleanup of hazardous waste sites. However, many state cleanup
programs have limited capacity to address costly and complex sites that
do not have responsible parties to pay for the cleanup.
[17] While RCRA primarily applies to operating facilities, it may also
apply to facilities that are no longer operating. RCRA is an amendment
to the Solid Waste Disposal Act of 1965, the first federal law
regulating solid wastes--a broad category of materials including such
materials as garbage from homes or businesses and waste materials
resulting from industrial, commercial, or agricultural activities.
Under the general statutory RCRA definition, a waste is considered
hazardous if either (1) the waste has at least one of the following
characteristics--it is ignitable, reactive, corrosive, or contains
certain toxic constituents such as arsenic or lead (sometimes called
characteristic wastes) or (2) the agency has specifically named the
waste on a list of products or chemicals, such as pesticides or acids,
that the agency has determined are hazardous (sometimes called listed
wastes). For purposes of permitting and other RCRA Subtitle C
requirements, a waste is considered hazardous if it is a solid waste,
which is not exempted or excluded by the Subtitle C regulations, and if
it is either specifically listed as a hazardous waste or meets the
characteristics of a hazardous waste in those regulations.
[18] The corrective action can be specified in the facility's operating
permit or in a separate corrective action permit. Such permits must
require the facility to provide financial assurance that the cleanup
actions specified in the permit will be carried out. EPA may also use
its enforcement authority to require facilities to clean up hazardous
waste contamination by issuing to the facility an enforcement order
specifying the corrective action it must take.
[19] Using a stratified random sample of 65 of these facilities, this
study examined relevant information on industries at risk for
environmental contamination and on costs of these cleanups.
[20] Specifically, a generator may generally accumulate hazardous waste
on site for 90 days or less provided that, among other things, the
waste is placed in containers, tanks, containment buildings, or on drip
pads in compliance with applicable EPA regulations. Generators of
hazardous waste are also required to comply with certain RCRA
requirements intended to ensure the safe management of hazardous
wastes.
[21] 42 U.S.C. § 6924(a)(6). Financial responsibility may be
established in accordance with EPA regulations by any one or a
combination of the following: insurance, guarantee, surety bond, letter
of credit, or qualification as a self-insurer. 42 U.S.C. § 6924(t)(1).
[22] See RCRA closure/post-closure financial assurance regulations at
40 C.F.R. Part 264, Subpart H.
[23] 40 C.F.R. § 264.101(b). See footnote 18.
[24] Financial assurance requirements serve several purposes, including
fairness, economic efficiency, and pollution deterrence. See James
Boyd, Financial Responsibility for Environmental Obligations: Are
Bonding and Assurance Rules Fulfilling Their Promise? (Washington,
D.C.: Resources for the Future, August 2001). Courts have recognized
that financial assurance regulations play a critical role in deterring
environmental misconduct and ensuring the safe design and operation of
hazardous waste facilities, e.g., Safety-Kleen v. Wyche, 274 F.3d 846,
866 (4th Cir. 2001).
[25] Although EPA has not issued financial assurance regulations for
the corrective action program, the agency issued guidance on this topic
in 2003.
[26] Limited liability companies originated in Wyoming in 1977. Today,
all states allow this form of business organization.
[27] Certain corporations, called subchapter S corporations, also
provide limited liability and more favorable tax treatment but
ownership is limited in terms of the number of allowable owners and
type of owners. For example, all shareholders in a subchapter S
corporation must be individuals.
[28] The May 1, 2003, Justice Department indictment of former Enron
officials included charges of conspiring to improve Enron's balance
sheet using special purpose entities. See also Special Purpose
Entitles: Uses and Abuses, Presentation to the International Monetary
Fund by Janet Tavakoli, President, Tavokoli Structured Finance, April
2005.
[29] The bankruptcy code was substantially revised in April 2005,
primarily to address consumer bankruptcies.
[30] Environmental enforcement actions seeking injunctive relief
against companies in bankruptcy are generally excepted from the
automatic stay pursuant to the "police power" exemption in the
bankruptcy code. Administrative or judicial proceedings to fix the
amount of a penalty or establish the amount of cost recovery owed are
also exempt from the automatic stay. However, once a penalty is
assessed or a judgment is obtained, the automatic stay prohibits
collection activities other than through the bankruptcy process.
[31] In some cases, companies filing for bankruptcy protection under
chapter 11 also cease operations and go through liquidation rather than
reorganization.
[32] Bankruptcy courts routinely grant extensions of this exclusivity
period, according to the chair of EPA's bankruptcy work group. For
example, the exclusivity period has been repeatedly extended during the
4 years since W.R. Grace and Company filed for bankruptcy in April
2001.
[33] Bankruptcy judges are judicial officers of the district courts and
are appointed for 14-year terms by the court of appeals for the
appellate circuit in which the bankruptcy court is located. A
bankruptcy court order is appealed first to the relevant federal
district court and then to the relevant court of appeals.
[34] Private sources of data on business bankruptcies include companies
such as Dun and Bradstreet and Moody's Investors Service.
[35] These notices may be sent to EPA regional offices or to EPA
headquarters.
[36] Fruit of the Loom, a leading international apparel company, filed
for bankruptcy in 1999. The company's significant environmental
obligations principally pertain to environmental management and cleanup
costs at seven sites owned by a related corporation, formerly owned by
Fruit of the Loom. Kmart Corporation, one of the largest discount
retailers in the United States, had environmental liabilities
associated with disposal of hazardous waste products from its auto
repair shops when it filed for bankruptcy in 2002.
[37] Some of the cases cover environmental liabilities under both
Superfund and RCRA and some cases also include claims under other
environmental laws, such as the Clean Water Act or the Clean Air Act.
[38] Specifically, the Statement of Financial Affairs requires that
companies filing for bankruptcy identify every site for which they have
received a notice of potential environmental liability or reported a
release of a hazardous substance. They must also identify all legal
proceedings under any environmental law to which they have been a
party. In addition, Exhibit C of the bankruptcy petition requires that
debtors identify any property they own or possess that poses, or is
alleged to pose, a threat of imminent harm to public health or safety.
However, according to EPA officials, debtors rarely complete Schedule
C.
[39] The U.S. Trustees program, a component of the Justice Department,
is responsible for overseeing the administration of bankruptcy cases in
all but two states. The program has 21 regional U.S. Trustees offices
and an executive office in Washington, D.C. The Administrative Office
of the U.S. Courts, part of the judicial branch, oversees the
administration of cases filed in bankruptcy courts in Alabama and North
Carolina.
[40] For example, see Jennifer Connors Frasier, "Caught in a Cycle of
Neglect: The Accuracy of Bankruptcy Statistics," Commercial Law Journal
(Winter 1996).
[41] EPA officials noted the agency's recent participation in a
successful challenge to a fraudulent transfer associated with an
ongoing bankruptcy case. The Department of Justice, on behalf of EPA,
intervened in an action brought against Sealed Air Corporation by the
official bankruptcy committees representing personal injury and
property damage claimants of W.R. Grace. The committees contended that
(1) the sale of one of W.R. Grace's divisions was fraudulent under New
Jersey's fraudulent transfer statute because W.R. Grace was not paid a
reasonably equivalent value for the Sealed Air division and (2) W.R.
Grace was rendered insolvent by the transaction. In its complaint,
Justice alleged a fraudulent transfer claim under the Federal Debt
Collection Procedures Act against Sealed Air Corporation. The Justice
Department was granted leave to intervene to specifically assist with
the fair valuation of environmental liabilities at the time of the
contested transaction. According to EPA, the parties have reached a
settlement agreement, which includes cash and stock valued at more than
$1 billion, that has been submitted to the bankruptcy court for
approval.
[42] For example, see Asset Protection: Concepts and Strategies for
Protecting Your Wealth, Jay D. Adkisson and Christopher M. Riser,
McGraw-Hill, 2004.
[43] Ibid.
[44] From a regulatory standpoint, limited liability businesses can be
more difficult to monitor than corporations because they are required
to provide only limited information to the public.
[45] For example, the Supreme Court has stated that "Ordinarily a
corporation which chooses to facilitate the operation of its business
by the employment of another corporation as a subsidiary will not be
penalized by a judicial determination of liability for the legal
obligations of the subsidiary." United States v. Bestfoods, 524 U.S.
51, 61 (1998).
[46] 524 U.S. 51 (1998).
[47] As discussed in the next section of this report, some financial
assurances that businesses provide to EPA to show their ability to meet
their financial obligations make specific funds available to EPA for
cleanups in the event businesses default, while others do not. However,
if the party with Superfund liabilities has not reached a settlement
agreement with EPA, it is not required to provide a financial
assurance. Moreover, enforcing financial assurance requirements against
bankrupt parties under Superfund may be more difficult than under
programs such as the RCRA closure/post-closure program that have
comprehensive financial assurance regulations in place. See, e.g.,
Safety-Kleen v. Wyche, 274 F.3d 846, 864-65 (4th Cir. 2001) (upholding
state enforcement of RCRA closure/post-closure financial assurance
regulations against a party in bankruptcy).
[48] At some Superfund NPL sites, such as large hazardous waste
landfills, there may be hundreds or even thousands of liable parties
from whom EPA may attempt to obtain cleanup costs. If one liable party
at such a Superfund site files for bankruptcy, EPA may compel other
liable parties to pay for the cleanup rather than having to turn to
taxpayers for funding. However, EPA will not do so when it believes
seeking such payments would be inequitable under the circumstances.
[49] The Second Circuit includes the states of Connecticut, New York,
and Vermont.
[50] Other courts have considered a broader array of factors in
deciding whether a claim subject to discharge has arisen, e.g., Matter
of Chicago, Milwaukee, St. Paul, and Pacific R. Co., 974 F.2d 775, 782-
86 (7th Cir. 1992).
[51] When a debtor in a chapter 11 bankruptcy continues to own the site
under the reorganization plan, EPA may hold the reorganized company
responsible for cleanup costs incurred after the bankruptcy ends, but
not for those incurred prior to the court's acceptance of the
reorganization plan.
[52] GAO, Hazardous Waste: Environmental Safeguards Jeopardized When
Facilities Cease Operating, GAO/RCED-86-77 (Washington, D.C.: Feb. 11,
1986).
[53] As noted above, the bankruptcy code includes an exception to the
automatic stay, known as the police and regulatory powers exception,
which can permit certain environmental enforcement actions to proceed
during bankruptcy despite the automatic stay. Thus, EPA can continue
compliance enforcement efforts outside the bankruptcy proceedings.
[54] W.R. Grace appealed this ruling in November 2003. The case was
still pending before the U.S. Circuit Court of Appeals for the Ninth
Circuit as of June 2005.
[55] W.R. Grace and Company filed for protection under chapter 11 of
the bankruptcy code in April 2001 and remains in bankruptcy as of June
2005.
[56] According to this EPA attorney, W. R. Grace has proposed a plan of
reorganization, which is moving through the confirmation process by the
bankruptcy court, that would pay all creditors, including EPA, 100
percent of claims allowed by the court. However, the plan may not be
approved as proposed, this official noted; thus, EPA and other
creditors may not receive the full amount of their allowed claims.
[57] EPA, Office of Inspector General, Information Technology:
Comprehensive Environmental Response, Compensation, and Liability
Information System (CERCLIS) Data Quality, 2002-P-00016 (Washington,
D.C.: Sept. 30, 2002).
[58] According to EPA, this occurs because some courts have held that a
claim for cleanup costs arises under the Superfund law when a hazardous
substance release (e.g., leakage from buried drums) occurs, regardless
of whether the release was detected before the bankruptcy filing and
whether EPA has actually incurred any costs; other courts have not
adopted this view of when a claim arises.
[59] Along these lines, an August 1999 United States Attorneys
publication noted that if some companies succeed in using bankruptcy to
shed environmental liabilities of which EPA is not yet aware, their
competitors may also file for bankruptcy reorganization to obtain the
same business advantage. See United States Attorneys' Bulletin,
Environmental Issues in Bankruptcy Cases: Protecting the Public
Interest from Overzealous Debtors, August 1999.
[60] A lien is a claim against property for the payment of a debt or
obligation.
[61] Section 108(b)(1) of CERCLA.
[62] RCRA's closure and post-closure financial assurances cover normal
costs of closing and conducting post-closure care, and do not cover
cleanups stemming from accidental releases. The financial assurance
regulations also require regulated facilities to carry third-party
liability insurance, but these policies only cover third-party bodily
injury and property damage from hazardous releases, not the actual
cleanup costs.
[63] In addition to the appropriated funds in fiscal year 2004, EPA
officials noted that $148 million was deposited into Superfund special
accounts, which receive payments from liable parties for past and
future cleanup costs.
[64] The provision calls for the use of essentially the same financial
assurance mechanisms allowed under the RCRA regulations for financial
assurance for the costs of closure and post-closure care of hazardous
waste facilities. See table 1 for a description of these mechanisms.
[65] The law requires EPA to establish a minimum level of financial
responsibility the agency believes is appropriate, to be based on the
payment experiences for site cleanups by the Superfund, commercial
insurers, and court settlements and judgments. Further, the law
specifies that if the owner or operator of a facility required to have
financial assurance is in bankruptcy, any guarantor providing evidence
of financial responsibility for the owner can be directly liable for
releases of hazardous substances from the facility. The law also
directs EPA to cooperate with the commercial insurance industry to the
maximum extent practicable in developing these financial assurance
requirements.
[66] In October 1980, RCRA was amended by adding section
3001(b)(3)(A)(ii), known as the Bevill amendment, to exclude, among
other things, "solid waste from the extraction, beneficiation, and
processing of ores and minerals" from regulation as hazardous waste
under Subtitle C of RCRA. This exclusion applied pending completion of
a study and a report to Congress, and pending a determination by the
EPA Administrator either to promulgate regulations under Subtitle C or
to declare such regulations unwarranted. Since completing the required
report, EPA has concluded that twenty mineral processing wastes qualify
for the Bevill exclusion as "low toxicity, high volume wastes." Other
mineral processing wastes are regulated under Subtitle C of RCRA,
provided they meet the definition of hazardous waste.
[67] Our report Hardrock Mining: BLM Needs to Better Manage Financial
Assurances to Guarantee Coverage of Reclamation Costs, GAO-05-377
(Washington, D.C.: June 20, 2005) recommends ways for BLM to better
manage financial assurances it requires of operators to guarantee
reclamation costs if they fail to reclaim BLM-managed lands after
operations cease.
[68] Most states with significant hardrock mining have established
their own statutory programs and regulate mine activities through mine
permits. However, EPA's Inspector General has reported that some state
statutes and regulations do not provide for adequate financial
assurances for hardrock mines. EPA, Office of Inspector General, EPA
Can Do More to Minimize Hardrock Mining Liabilities, E1DMF6-08-0016-
7100223 (1997).
[69] EPA, Office of Inspector General, Nationwide Identification of
Hardrock Mining Sites, 2004-P-00005 (Washington, D.C.: Mar. 31, 2004).
The report noted that its inventory may be understated because, among
other things, it did not include sites where it was too early in the
evaluation process to determine whether the sites had the potential to
cost the Superfund trust fund $1 million or more.
[70] In addition, taxpayers may also pay for the cleanups to the extent
that EPA settles with liable parties for less than the full cost of the
cleanups. According to EPA, the agency often settles for less than the
full cleanup cost as a result of equitable factors.
[71] In one case, the company (MagCorp) filed for Chapter 11 bankruptcy
protection 7 months after the Justice Department initiated a lawsuit on
behalf of EPA for fines of approximately $900 million for toxic waste
violations. The bankruptcy court permitted the owner to sell MagCorp's
assets to a new company (US Magnesium) controlled by the same owner,
and the bankruptcy case was subsequently converted to a Chapter 7
liquidation with essentially no assets available to pay creditors. This
sale may substantially impede government efforts to collect the
penalties.
[72] As noted above, a generator may generally accumulate hazardous
waste on site for 90 days or less provided that, among other things,
the waste is placed in containers, tanks, containment buildings, or on
drip pads in compliance with applicable EPA regulations. Generators of
hazardous waste are also required to comply with certain RCRA
requirements intended to ensure the safe management of hazardous
wastes.
[73] GAO, Hazardous Waste: Issues Surrounding Insurance Availability,
GAO/RCED-88-2 (Washington, D.C.: Oct. 16, 1987).
[74] The NPL is EPA's list of seriously contaminated sites, and
placement on this list is limited, in part, by funding for the program.
Thousands of contaminated sites exist that are not on the list or
subject to RCRA's corrective action program.
[75] See GAO, Hardrock Mining: BLM Needs to Better Manage Financial
Assurances to Guarantee Coverage of Reclamation Costs, GAO-05-377
(Washington, D.C.: June 20, 2005) for examples of BLM's inability to
collect funds for reclamation when operators of hardrock mines using
corporate guarantees filed for bankruptcy.
[76] EPA last evaluated the net worth requirement in 1991. 56 Fed. Reg.
30201.
[77] EPA, Office of Inspector General, RCRA Financial Assurance for
Closure and Post-Closure, 2001-P-007 (Washington, D.C.: Mar. 30, 2001).
[78] The Association of State and Territorial Solid Waste Management
Officials is an organization that supports state environmental agencies
and trust territories by focusing on their solid and hazardous waste
programs, Superfund and state cleanup programs, underground storage
tank programs, and other programs.
[79] Association of State and Territorial Solid Waste Management
Officials (ASTSWMO), Financial Assurance Review Paper (Washington,
D.C.: April 21, 2003).
[80] CERCLA and RCRA both specifically authorize self-insurance as a
form of financial assurance. 42 U.S.C. § 9608(b)(1); 42 U.S.C. §
6924(t)(1). However, both statutory provisions give EPA broad
discretion in determining the circumstances under which the agency
accepts self-insurance. Moreover, neither provision specifically
applies to financial assurances included in corrective action orders
issued under RCRA.
[81] See footnote 77.
[82] 40 C.F.R. Part 258, Subpart G.
[83] Under the financial assurance regulations for closure/post-
closure, an insurer must submit a certificate to EPA providing, among
other things, that any provision of the policy that is inconsistent
with EPA regulations is automatically amended to eliminate any
inconsistency. 40 C.F.R. § 264.151(e). While EPA officials believe this
certificate resolves any conflict between the regulations and the
policy, they acknowledge it may be necessary to litigate the issue,
leading to a delay in recovery. A recent federal appellate court
analyzing an analogous issue held that in a conflict between EPA's
financial assurance regulations for underground storage tanks and a
state statute, EPA's regulations governed the dispute. In Zurich
American Insurance v. Whittier Properties, 356 F.3d 1132 (9th Cir.
2004), the court held that EPA's financial assurance regulations
governing underground storage tank (UST) operators provided for the
exclusive remedy of prospective cancellation of a UST insurance policy
where the operator had obtained the policy fraudulently. The court held
that because EPA's regulations provided the exclusive remedy, the
insurer could not benefit from a state statute authorizing rescission
of the policy in the event of fraud, and therefore could not avoid
paying on the policy.
[84] See footnote 79.
[85] EPA officials noted that under the RCRA closure/post-closure
program, an owner or operator of a RCRA treatment, storage, or disposal
facility who uses the financial test or corporate guarantee is required
to (1) disclose other sites for which it is using the financial test
and the current closure or post-closure cost estimates for each of
these sites and (2) provide a list of facilities that are not covered
by the financial test submission and the current estimated costs of
closure and post-closure care for these other facilities.
[86] For example, the use of the corporate guarantee is no longer
authorized if the company providing the guarantee no longer meets EPA's
financial test. Other forms of financial assurance, such as bonds and
insurance, may lapse for various reasons.
[87] EPA has financial assurance requirements not only for the programs
discussed in this report, but also for other areas, such as the
Underground Storage Tank Program and the Underground Injection Control
Program for deep injection wells. In 2003, we reported on financial
assurances for Class 1 deep injection wells, which are built to contain
hazardous liquid waste below the lowest underground source of drinking
water. See GAO, Deep Injection Wells: EPA Needs to Involve Communities
Earlier and Ensure That Financial Assurance Requirements Are Adequate,
GAO-03-761 (Washington, D.C.: June 13, 2003).
[88] Although in some cases, EPA could miss out on opportunities for
recoveries because certain payments had already been made, for ongoing
relationships with contractors, grantees, or vendors, the offset
authority could be used against future payments to these entities.
[89] Section 107(l) of the Superfund law establishes a federal lien in
favor of the United States upon property which is subject to or
affected by a removal or remedial action. The lien applies to all
property upon which the response action has been taken, not just the
portion affected by the cleanup activities, and applies to all future
costs incurred at the site.
[90] EPA's lien guidance advises regional officials, who are
responsible for filing such notices, to consider filing notice of a
lien whenever applicable, and, in making such decisions, to take into
account such considerations as whether the property's value will
significantly increase as a result of the cleanup work and whether
there is a likelihood that the owner will file for bankruptcy. EPA
Memorandum: Guidance on Federal Superfund Liens, September 22, 1987.
[91] We recognize that there is a transaction cost in filing Superfund
liens and that this cost should be balanced against the prospect of
more certain cost recovery for the government. In some cases, a lien
may provide no potential cost recovery to EPA because the land has
little or no value.
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