Long-Term Commitments
Improving the Budgetary Focus on Environmental Liabilities Gao ID: GAO-03-219 January 24, 2003Although environmental liabilities resulting from federal programs and activities represent the third largest category of the federal government's liabilities, the current cash- and obligation-based budget does not provide information on estimated cleanup costs before waste-producing assets are purchased. As a result, policymakers do not have the opportunity to weigh the full costs of a proposal with their judgment of its benefits. The Chairman of the House Committee on the Budget asked GAO to examine and report on various ways budgeting might be improved for environmental cleanup costs, including some of the benefits, limitations, and challenges associated with each.
The federal government is legally required to clean up hazardous wastes that result from its operations. Agencies are currently required to report these environmental liabilities in their financial statements, but these estimates are not recognized until after a waste-producing asset is placed into service. Although agencies are supposed to consider cleanup and disposal costs associated with these assets as part of the acquisition process, they typically do not request the related budget authority until many years after the government has committed to the operation creating the waste, when cleanup is imminent. Alternative approaches to promote up-front consideration of the full costs of environmental cleanup and disposal for assets being proposed for purchase fall along a continuum ranging from supplemental information to enactment of additional budget authority. While each approach has potential benefits and challenges, agencies' lack of experience in estimating future cleanup/disposal costs up front suggest starting at the more modest end of the continuum--providing supplemental information to decision makers. Eventually, however, accruing budget authority for the tail-end cleanup/disposal cost along with the front-end purchase cost estimates would do the most to ensure that these costs are considered before the government incurs the liability.
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Report to the Chairman, Committee on the Budget, House of
Representatives:
January 2003:
LONG-TERM COMMITMENTS:
Improving the Budgetary Focus on Environmental Liabilities:
GAO-03-219:
GAO Highlights:
Highlights of GAO-03-219, a report to the Chairman of the Committee on
the
Budget, House of Representatives:
January 2003:
LONG-TERM COMMITMENTS:
Improving the Budgetary Focus on Environmental Liabilities:
Why GAO Did This Study:
Although environmental liabilities resulting from federal programs and
activities represent the third largest category of the federal
government‘s
liabilities, the current cash- and obligation-based budget does not
provide
information on estimated cleanup costs before waste-producing assets
are
purchased. As a result, policymakers do not have the opportunity to
weigh
the full costs of a proposal with their judgment of its benefits. The
Chairman
of the House Committee on the Budget asked GAO to examine and report on
various ways budgeting might be improved for environmental cleanup
costs,
including some of the benefits, limitations, and challenges associated
with
each.
What GAO Found:
The federal government is legally required to clean up hazardous wastes
that result from its operations. Agencies are currently required to
report
these environmental liabilities in their financial statements, but
these
estimates are not recognized until after a waste-producing asset is
placed
into service. Although agencies are supposed to consider cleanup and
disposal
costs associated with these assets as part of the acquisition process,
they
typically do not request the related budget authority until many years
after
the government has committed to the operation creating the waste, when
cleanup
is imminent.
Alternative approaches to promote up-front consideration of the full
costs
of environmental cleanup and disposal for assets being proposed for
purchase
fall along a continuum ranging from supplemental information to
enactment of
additional budget authority. (See figure below.) While each approach
has
potential benefits and challenges, agencies‘ lack of experience in
estimating
future cleanup/disposal costs up front suggest starting at the more
modest
end of the continuum”providing supplemental information to decision
makers.
Eventually, however, accruing budget authority for the tail-end
cleanup/
disposal cost along with the front-end purchase cost estimates would do
the
most to ensure that these costs are considered before the government
incurs
the liability.
Figure: Continuum of Alternatiave Approaches to Improve Budgeting for
Environmental Liabilities:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the Director of the Office of Management and Budget
(OMB) require supplemental reporting in the budget to disclose future
environmental cleanup/disposal costs for new acquisitions. Agency and
OMB
officials should consult with legislative branch officials to ensure
that
useful information is provided to congressional decision makers.
www.gao.gov/cgi-bin/getrpt?GAO-03-219 To view the full report,
including the
scopeand methodology, click on the link above. For more information,
contact Susan Irving on (202) 512-9142 or irvings@gao.gov.
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
Environmental Liabilities Largely Associated with Defense and Energy:
Current Budget Information Does Not Include Environmental Liabilities
Before Acquisition:
Alternative Approaches to Consider Environmental Liabilities:
Each Approach Has Potential Benefits and Challenges:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Breakout of Environmental Liabilities:
Tables:
Table 1: Breakdown of DOE and DOD Federal Environmental Liabilities,
Fiscal Year 2001:
Table 2: Environmental Liabilities, by Agency, Fiscal Year 2001:
Figures:
Figure 1: Flow of Cleanup/Restoration and Disposal Funds for DOD:
Figure 2: Flow of Cleanup Funds for DOE:
Figure 3: Continuum of Alternative Approaches to Improve Budgeting for
Environmental Liabilities:
Figure 4: Possible Flow of Funds through Accounts:
Abbreviations:
CBO: Congressional Budget Office:
DERP: Defense Environmental Restoration Program:
DOD: Department of Defense:
DOE: Department of Energy:
EM: Environmental Management:
EPA: Environmental Protection Agency:
FUDS: Formerly Used Defense Sites:
NRC: Nuclear Regulatory Commission:
O&M: Operation and Maintenance:
OMB: Office of Management and Budget:
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Letter:
January 24, 2003:
The Honorable Jim Nussle
Chairman
Committee on the Budget
House of Representatives:
Dear Mr. Chairman:
The federal government undertakes a wide range of programs and
activities--such as federal employee pensions, retiree health, and
federal credit--that may create commitments for future spending.
Environmental liabilities,[Footnote 1] which result from some federal
programs and activities, are one example of these future commitments
and represent the third largest category of the federal government‘s
liabilities reported in the 2001 Financial Report of the U.S.
Government.[Footnote 2] Federal, state, or local laws and regulations
require cleanup that may be done many years after the activity creating
the environmental liability is undertaken. However, because the federal
budget is primarily calculated on a cash basis, information on the
estimated cleanup costs is not included in the budget when budgeting
decisions are being made about such activities.
You asked us to examine and report on various ways budgeting might be
improved for environmental cleanup costs, including some of the
benefits, limitations, and challenges associated with each.
Accordingly, we reviewed current budgeting practices at the departments
of Energy and Defense, since they account for about 98 percent of the
government‘s reported environmental liabilities. In addition, we
discussed alternative approaches with staff within these departments,
as well as staff in the Office of Management and Budget (OMB) and the
Congressional Budget Office (CBO). The focus of this report is forward-
looking. That is, it explores alternative ways to ensure that the
cleanup costs of hazardous waste are considered by decision makers
before the government has committed to the operation creating the
waste.[Footnote 3]
Results in Brief:
The federal government is legally required to clean up hazardous wastes
that result from its operations. Although these cleanup costs represent
the third largest category of federal liabilities, they are not usually
addressed until many years after the government has committed to the
operation creating the waste. Under current budget guidance, agencies
include in their budget request for a given year only the funds they
expect to obligate for cleanup during that budget year. As a result, at
the time decisions are being made, the full costs of a program that
will have cleanup costs are not recognized in the budget, nor are
estimates of these future costs provided elsewhere in budget documents.
The budget does not provide policymakers the information to compare the
full costs of certain programs with their judgment of benefits.
Once waste-producing assets are acquired and placed into service,
agencies must estimate and report in their financial statements the
environmental liabilities associated with both retired assets and those
that are currently being used in support of federal programs and
activities.[Footnote 4]
About 98 percent of the $307 billion in environmental liabilities that
was reported in fiscal year 2001 financial statements was associated
with the departments of Energy and Defense. Estimates of disposal and
cleanup costs for new assets are not, however, routinely estimated
before making the commitment to purchase the asset. Given the large
number of years that frequently occur between acquisition and cleanup,
estimates for new assets are likely to change during that period for a
variety of reasons, including changes over time in technology and
regulatory standards. This, however, is also true to some degree when
agencies estimate cleanup costs at the end of asset lives when they
begin to request funding for the cleanup. While cleanup cost estimates
made before committing to purchase an asset would need to be
periodically reassessed, they would provide more information than is
currently provided.
Alternative approaches exist to promote more complete consideration of
the full costs of environmental cleanup and disposal associated with
the acquisition of new assets. They fall along a continuum representing
the degree of certainty that the costs will be considered in decision
making. At one end of the continuum, the government could increase
awareness of full costs by reporting the long-term environmental
liability costs associated with new assets as supplemental information
along side budget authority and outlay figures in the budget. While
this puts it closer to the budget numbers than would a separate report,
there is no assurance that this information will be considered in
budget decision making. However, it will help ensure that information
is generated and made more transparent. Alternatively, budget process
mechanisms could be established to require explicit disclosure and
prompt consideration of the full costs of environmental liabilities
associated with a proposed asset acquisition. For example, Congress
could revise its rules to permit a point of order against legislation
that does not disclose estimates for environmental liabilities
associated with the acquisition of new assets to be funded in the bill.
Such a process mechanism might increase attention paid to these costs
even though they would not actually require funding until far into the
future. Finally, it is generally assumed that costs included in primary
budget data receive the most attention.[Footnote 5] At this end of the
continuum, budget authority needed for environmental cleanup for new
assets could be accrued in the budget. OMB is currently working on a
proposal along these lines. It is important to note that this approach
would not change the costs of future cleanup--these have already been
created by the decision to acquire the asset. Rather, it would only
shift the timing of when the costs are recognized.
No proposal can be viewed independently of associated implementation
and estimation issues. For example, clear definitions for hazardous
waste need to be developed as well as mechanisms for dealing with the
inevitable cost reestimates. As a first step, OMB should require
supplemental reporting in the budget to disclose future environmental
cleanup/disposal costs for new acquisitions. Also, OMB should discuss
with Congress how best to make the information useful to congressional
decision makers. Thus, even if the ultimate goal would be to include
cleanup costs in budget authority requests for new assets,
implementation and estimation challenges may suggest starting with the
supplemental information approach.
Background:
Historically, federal outlays and receipts generally have been reported
on a cash basis. That is, receipts are recorded when received and
outlays are recorded when paid without regard to the period in which
the taxes and fees were assessed or the costs resulting in the outlay
were incurred. This has an advantage in that the deficit (or surplus)
closely approximates the cash borrowing needs (or cash in excess of
immediate needs) of the government.[Footnote 6] However, over the years
analysts and researchers have raised concerns that the current cash-and
obligation-based budget does not adequately reflect the cost of some
programs--such as federal credit or insurance--in which the government
makes a commitment now to incur a cost, but some or most of the cash
flows come much later. This means that for some programs the current
cash-and obligation-based budget does not recognize the full costs up
front when decisions are made or provide policymakers the information
to compare the full costs of a proposal with their judgment of its
benefits. Programs such as federal employee pensions, retiree health
care, and environmental liabilities are examples where the cash basis
of accounting does not represent the government‘s full commitments.
Environmental liabilities are the result of federal operations that
create hazardous waste that federal, state, or local laws and/or
regulations require the federal government to clean up. Because these
cleanup costs are not usually paid until many years after the
government has committed to the operation creating the waste,
policymakers have not been provided complete cost information when
making decisions about undertaking the waste-creating operation.
Although all agencies are not yet in compliance, current federal
accounting standards require agencies to estimate and report in their
financial statements their liability for cleanup costs when they are
deemed probable and measurable. Traditionally, budget guidance has
required agencies to estimate the funds expected to be obligated for
cleanup activities during the budget year in which the funds are
needed.[Footnote 7] However, in recent years OMB also has issued
guidance for agencies to estimate life-cycle costs when purchasing
capital assets. Among the items to be included in the total amount of
these life-cycle costs are decommissioning and disposal costs. The
life-cycle cost estimates are reported to OMB in budget Exhibit 300 and
do not separately break out cleanup and disposal costs. The exhibits
are for OMB‘s informational purposes only; they are not included in the
President‘s budget request or agency‘s budget justification provided to
Congress. Department of Energy (DOE) and Department of Defense (DOD)
officials told us that the cleanup portion of these total costs has
traditionally not been separated out or identified at the time of
purchase. This is because estimates developed at that time were very
preliminary, often based only on a percentage of total costs rather
than specific unit costs.
Objectives, Scope, and Methodology:
To examine ways that budgeting might be improved for environmental
liabilities, we focused on three key questions: (1) What are the
federal government‘s reported environmental liabilities? (2) How are
environmental liabilities currently valued for financial statements and
budgeted at selected programs within DOD and DOE? and (3) How could
budgeting for these environmental liabilities be improved?
To determine the federal government‘s reported environmental
liabilities, we extracted data from agencies‘ fiscal year 2001
consolidated balance sheets. Because this analysis showed that about 98
percent of the government‘s reported environmental liabilities were
associated with DOD and DOE, we focused our review on the practices of
these two departments. We reviewed published reports, related guidance,
and budget and financial statement documentation from each agency. We
also interviewed DOD, DOE, and OMB staff to discuss current budget
practices.
To develop alternative approaches to improve budgeting for
environmental liabilities, we discussed ideas with staff from DOD, DOE,
OMB, and CBO. We also met with appropriations subcommittee staff with
jurisdiction over DOD and DOE to discuss the type of information that
they would find most helpful. We analyzed the pros and cons of the
approaches based on the extent to which they would (1) provide
meaningful, full-cost information to decision makers up front, (2)
provide disincentives for artificially low cost estimates, and (3)
present implementation issues, such as additional administrative
burdens for agencies or increased complexity to the budget and
appropriations process. Finally, to understand how private
organizations provide for environmental cleanup, we conducted limited
research of private sector budgeting practices. However, little
information was available about up-front decision making.
Our work was done in Washington, D.C., in accordance with generally
accepted government auditing standards. We provided a draft of this
report to the Secretary of Defense, the Secretary of Energy, and the
Director of OMB. Comments are summarized in the ’Agency Comments“
section.
Environmental Liabilities Largely Associated with Defense and Energy:
Nearly all of the $307 billion in environmental liabilities reported
for fiscal year 2001 was associated with DOD and DOE. About 78 percent
of these liabilities were associated with DOE and represent the
environmental legacy resulting from the production of nuclear weapons.
The 21 percent associated with DOD is primarily for environmental
restoration of military installations and disposal of nuclear
materials.[Footnote 8] The remaining environmental liabilities
associated with other federal agencies include such things as
replacement of underground storage tanks, asbestos removal, and lead
abatement. Some of this remaining 1 percent will be paid out of
Treasury‘s judgment fund.[Footnote 9]
DOD and DOE manage environmental cleanup quite differently: DOD‘s
decentralized activities are managed within the individual services, at
the program level, while DOE‘s activities are centralized within its
Environmental Management (EM) program. For example, DOD considers
environmental liabilities in two categories: (1) disposal and
(2) environmental restoration/cleanup. Army‘s chemical weapons and
Navy‘s nuclear-powered carriers, ships, and submarines dominate DOD‘s
disposal liabilities. Funding for disposal is provided to the Army,
Navy, and Air Force Operation and Maintenance (O&M) accounts.
Restoration/cleanup activities are largely addressed through the
Defense Environmental Restoration Program (DERP), which is funded
through five environmental restoration accounts for Army, Navy, Air
Force, Formerly Used Defense Sites (FUDS), and Defense-wide. The funds
in these accounts are then transferred to the service levels‘ O&M
budgets. In contrast, within DOE, facilities that have reached the end
of their useful lives and require cleanup typically are transferred to
EM, along with some additional funds for surveillance and maintenance.
EM also receives budget authority directly through an appropriation.
Thus, budgeting and funding for cleanup is almost entirely handled by
EM, not individual program offices. EM‘s program emphasis is on site
closure and project completion. Its activities include environmental
restoration, waste management, and nuclear material and facility
stabilization. Figures 1 and 2 illustrate the flow of cleanup funds for
these two departments.
Figure 1: Flow of Cleanup/Restoration and Disposal Funds for DOD:
[See PDF for image]
[A] In some instances, funds may be transferred to other accounts, such
as military construction or procurement, for similar cleanup purposes.
[B] Although the Army, as executive agent, receives funding from the
FUDS DERP account, the sites in FUDS may have been owned by any of the
services.
[C] Includes the Defense Logistics Agency, Defense Threat Reduction
Agency, and Deputy Undersecretary of Defense (Installations &
Environment).
[End of figure]
Figure 2: Flow of Cleanup Funds for DOE:
[See PDF for image]
[A] May also receive additional surveillance and monitoring funds from
program offices and power administrations.
[End of figure]
Current Budget Information Does Not Include Environmental Liabilities
Before Acquisition:
Current budget guidance and accounting standards both require agencies
to estimate cleanup and disposal costs. However, neither requires that
these costs be separately estimated for decisions when assets are being
considered for purchase--before the government is legally committed to
paying these costs. While information about private sector decision
making on these costs is limited, at least some organizations set aside
funds to address these future cleanup and disposal costs.
Agencies have little or no budgetary incentive to develop estimates of
future cleanup costs. With respect to primary budget data, agencies do
not reflect associated cleanup costs in their budget requests for new
waste-producing assets. Funding for such cleanup costs is not requested
until many years later when the waste produced is ready to be cleaned
up or disposed of. Budget guidance does require agencies to estimate
cleanup costs as part of total life-cycle costs when requesting funds
for new assets. However, agencies are not required to specifically
break out the cleanup portion of these costs.[Footnote 10] DOD and DOE
officials told us that separating out the cleanup/disposal component
from total life-cycle costs would be relatively difficult because their
estimates of cleanup costs are very preliminary. Often, a percentage of
the purchase price instead of a specific unit cost is used as the cost
estimate. Moreover, they noted that future, unknown changes in
regulatory requirements and technology make it difficult to develop
what they believe to be reasonable and credible cost estimates at the
time an asset is acquired. However, since estimates for retiring assets
are being made under today‘s regulatory requirements and technology,
the same methodology might be used for preliminary estimates with
respect to new assets. This would permit comparisons between or across
different assets. Over time, as laws and technology change, periodic
cleanup cost reestimates could be made. Clear definitions for hazardous
substances also may need to be resolved to ensure that reasonable
estimates are developed. For example, the Federal Accounting Standards
Advisory Board (FASAB) defines hazardous wastes in relatively broad
terms (see footnote 1) for accounting purposes. However, the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA), which requires the cleanup of waste sites, provides a
substantially more detailed definition.
While accounting standards promote an earlier recognition of
environmental liabilities than does the budget, they do not call for
estimates of environmental liabilities before an acquisition decision
is made because they recognize these cleanup costs only after a
transaction has occurred and an asset is put into service.[Footnote 11]
Given that these conditions are met, agencies must estimate the
environmental liabilities associated with all existing assets. Despite
this, not all agencies comply with accounting standard requirements to
estimate the environmental liabilities associated with all of their
assets. For example, DOD typically records the liabilities associated
with assets for which cleanup or disposal is imminent. DOD‘s inability
to comply with requirements for environmental liabilities was one of
several reasons why independent auditors were not able to render an
opinion about DOD‘s fiscal year 2001 financial statements. Absent
budgetary incentives to estimate future environmental liabilities,
these cost estimates will not be developed as assets are considered for
purchase--the time when decision makers still have an opportunity to
judge whether the government should commit to these costs.
Data about how non-federal organizations consider environmental
liabilities when planning to purchase assets or start new projects were
largely unavailable. However, there are cases where companies set aside
funds for future cleanup costs. For example, the Nuclear Regulatory
Commission (NRC) requires private utilities to accumulate the funds
necessary to decommission their nuclear power plants and most
established sinking funds so that the decommissioning funds are
accumulated over the operational life of a nuclear power plant as part
of the cost charged to customers for the electricity they use. With the
deregulation of electric utilities and the resultant industry
restructuring, we recently reported that in most of the requests to
transfer licenses to own or operate nuclear power plants approved by
NRC, the financial arrangements have either maintained or enhanced the
assurance that adequate funds will be available to decommission those
plants.[Footnote 12] For example, projected decommissioning funds were
generally prepaid by the selling utility. Also, an Environmental
Protection Agency contracted study recommended that a Canadian
hydroelectric company establish a liability fund to accumulate funds to
finance asset removal, decommissioning, irradiated fuel disposal, and
low-to-intermediate radioactive waste disposal.[Footnote 13]
Alternative Approaches to Consider Environmental Liabilities:
Alternative approaches to promote more complete consideration of the
full costs of environmental cleanup and disposal associated with the
acquisition of new assets fall along a continuum from provision of
supplemental information to accrual of those costs in budget authority
up front, as assets are acquired. We explored three approaches along
this continuum ranging from the relatively simple one of providing more
information but making little other change to current budgeting, to a
more complicated one involving significant changes to what is included
in primary budget data. The approaches along this continuum represent
the degree of certainty that the costs will be considered in decision
making. Figure 3 summarizes the three approaches along the continuum.
Figure 3: Continuum of Alternative Approaches to Improve Budgeting for
Environmental Liabilities:
[See PDF for image]
[End of figure]
The first approach would be to report long-term environmental liability
costs associated with new assets as supplemental information along with
the budget authority and outlay amounts requested in the budget. For
example, the program and financing schedules within the President‘s
budget appendix could be expanded to report these associated costs by
budget account or program. This would enable those being asked to make
a decision to see the full cost information along with currently
requested funds. Although the estimates provided in the supplemental
information would not be precisely correct, they would clearly be
closer to correct than the current implication of no cost. If a running
tally of total environmental liabilities is desired, periodic
reestimates would be needed.
A second approach would move beyond providing supplemental information
to establishing budget process mechanisms to require explicit
disclosure and prompt consideration of the full costs of the
environmental liability associated with a proposed asset acquisition.
Thus, Congress could revise its rules to permit a point of order
against legislation that does not disclose estimates for environmental
liabilities associated with the acquisition of new assets to be funded
in the bill. This would have the effect of requiring cleanup cost
estimates to be made, either by the executive branch or CBO, so that
the estimates could be considered.
At the other end of the continuum is the more comprehensive approach of
accruing amounts for environmental liabilities associated with new
assets in any requested budget authority for new assets.[Footnote 14]
This approach represents the largest departure from current budgeting
practices. Along these lines, OMB is developing a legislative proposal
to require programs that generate hazardous waste to ’pay the accruing
cost to clean up contaminated assets at the end of their useful life.
These payments would go to funds responsible for the cleanup.“[Footnote
15]
Implementation of an approach that would include budget authority for
environmental liabilities would require development of new budgeting
mechanisms. The provision to accumulate budget authority over an
asset‘s life would require a means of ’fencing off“ the budget
authority to ensure that it is actually used for cleanup. Also, since
no such amounts were set aside for existing assets, it would be
necessary to continue financing the cleanup of existing assets while
implementing the new approach for new assets. One way to do this is to
use a pair of accounts--a liquidating account and a cleanup fund
account--in each department involved in budgeting for the cleanup
costs. The liquidating account would obtain discretionary budget
authority for the past share of cleanup costs of assets already in
operation and for the cleanup costs of retired assets. It would pay the
past share of cleanup costs for operating assets to the cleanup fund
and would conduct or contract for the cleanup of assets no longer in
use at the inception of this new approach. Given technological and
other changes, regular reestimates of cleanup costs would be necessary.
The cleanup fund account would obtain budget authority from two
sources: (1) from the liquidating account for the past share of the
cleanup cost for assets that are in operation when the new approach is
established and (2) for new assets, from programs that operate assets
that generate cleanup needs. The cleanup fund account would receive
annual accruing cost payments from programs based on the estimated (and
reestimated) cost of cleanup for all operating assets--those purchased
after the new approach is implemented and those already in service.
These payments would be a required part of the discretionary
appropriations for running any program that generates cleanup costs.
When needed, the cleanup fund accounts could also request additional
budget authority for the assets in operation at its inception. These
appropriations could be made to the liquidating account and paid to the
cleanup fund account when the assets are ready for cleanup. Once in the
cleanup fund account, the budget authority from the programs and
liquidating accounts could be permanent, indefinite authority available
for cleanup, subject only to the usual apportionment process.[Footnote
16] Figure 4 below illustrates one possible flow of funds through
accounts.
Figure 4: Possible Flow of Funds through Accounts:
[See PDF for image]
[End of figure]
Each Approach Has Potential Benefits and Challenges:
Each of the three approaches described offer both potential benefits
and challenges to consider. All three would be likely to improve the
quality of cleanup estimates. Although agencies are required to develop
these estimates for financial statement purposes, they are not
developed until after the asset is purchased. Also, not all agencies
have completely complied with financial accounting standards. For
example, in December 2001, we reported that DOD was not estimating and
reporting liabilities associated with a significant portion of
property, plant, and equipment that was no longer being used in its
operations.[Footnote 17] Moreover, DOD‘s financial statements did not
provide cleanup cost information on all of its closed or inactive
operations known to result in hazardous wastes. In addition, in 1997
and 1998 we issued a series of reports on DOD environmental liabilities
that were not being reported, even though they could be reasonably
estimated.[Footnote 18]
Each of the three approaches would result in decision makers having
information about costs and benefits of a proposed acquisition while
there is still the opportunity to make a choice--before the government
actually incurs an environmental liability. Since the cleanup costs for
any asset will become a future claim on federal resources regardless of
whether these costs were considered at the outset, good budgeting
principles call for up-front consideration of these costs. Given that
agencies are not currently experienced in separately estimating
cleanup/disposal costs before assets are purchased, reasonable and
credible estimates may take time to develop. This, however, is not an
insurmountable issue. We have reported on numerous occasions that
environmental liabilities can be estimated and have pointed out how
estimation methodologies can be improved. For example, in December 2001
we recommended that, among other things, DOD correct real property
records, develop and implement standard methodologies for estimating
related cleanup costs, and systematically accumulate and maintain the
site inventory and cost information needed to report this liability.
Of the three approaches described, the supplemental information and the
budget process mechanism approaches would be easiest to implement and
could be done separately or together. Neither requires the enactment of
budget authority and so would not increase reported budget totals.
Supplemental reporting requirements would be the easiest to implement
since OMB could require it under OMB‘s current authority. However,
unless agencies see that the new supplemental information is used in
decision making, they may have less incentive to develop meaningful
estimates. The budget process mechanism approach would increase the
perceived importance of these estimates by permitting a point of order
that could block legislation lacking appropriate cost information. For
example, unfunded mandates legislation permits a point of order to be
raised against proposed legislation containing significant
intergovernmental mandates if a CBO estimate of the cost of the mandate
has not been published in the committee report or the Congressional
Record.[Footnote 19] Unlike supplemental reporting alone, the budget
mechanism approach has the potential to promote improved estimates
because it could present members an opportunity to challenge
legislation without appropriate cost information. Implementing a budget
process approach with a point of order would require an amendment
either to the Congressional Budget Act of 1974 or a change to committee
rules.
The third approach, accruing budget authority over the life of the
asset, represents the largest departure from current budgeting
practices. By requiring that agencies obtain budget authority before
acquiring new assets, this approach would ensure consideration of
environmental cleanup costs before an asset is acquired. Such an
approach would require legislation. If Congress and the Administration
agree to take such action, it would ensure that each program‘s costs
are fully reflected in program budgets. Requiring that agencies accrue
budget authority for cleanup costs would likely increase the attention
paid to improving the quality of estimates. All in all, given the
current quality of agency estimates and significant implementation
issues, such an approach may best be viewed as something to be
considered in the future.
Beyond the issue of developing reasonable and credible estimates early
on, this third approach also would present administrative and
structural challenges such as developing mechanisms to ensure that (1)
budget authority provided for cleanup is adequately fenced off for
cleanup,
(2) agencies adequately track and manage that budget authority, and
3) reestimates provide positive incentives to reflect the best
approximation of the government‘s total environmental liabilities. When
demand for current funding is great, fencing off budget authority for
future use can be a challenge. One way to address this would be to have
payments into the cleanup fund come from discretionary appropriations,
but once in the fund, the budget authority would become permanent,
subject only to the usual apportionment process.[Footnote 20] Providing
higher levels of budget authority now for expenses that may not be paid
until well into the future may be difficult. It is important to note
that this approach would not in fact change the costs of future
cleanups--in effect these have already been determined by the decision
to acquire the asset. Rather, this would only shift the timing of their
recognition.
Ensuring that agencies adequately track and manage the earmarked budget
authority would be a second challenge to successful implementation of
this approach. For example, there is more than one way to manage the
budget authority needed to clean up assets already in operation at the
inception of the new approach. One way would be to transfer budget
authority from a liquidating account to a cleanup fund for such assets
when they are ready to be cleaned up. Alternatively, the full amount of
budget authority for the past share of the cleanup cost could be
enacted in one lump sum for the cleanup fund. This would simplify
implementation since it would apply the new accrual concept fully to
all assets in operation. Since this could be a considered a concept
change, any discretionary caps on budget authority (if renewed) would
be adjusted upward to accommodate the additional budget authority--but
it would still increase reported budget authority totals.[Footnote 21]
Some believe that covering all of the costs immediately would be a
cleaner, more consistent application of full costing since it would
eliminate a lengthy and possibly confusing transition period. However,
such a decision to provide budget authority for retired assets could
shift the control over the timing of the cleanup from Congress to the
Administration.
Finally, a way to budget for inevitable reestimates of cleanup costs
would have to be designed. If agencies must obtain additional budget
authority for these reestimates, they will have less incentive to make
artificially low initial estimates but may be reluctant to provide
upward reestimates. On the other hand, one could envision agencies
forwarding a low estimate ’today“ with the idea that they could worry
about ’tomorrow“ later. Alternatively, reestimates could be handled as
they are with credit programs, that is, agencies could automatically
receive permanent, indefinite budget authority for upward reestimates
of cleanup costs. This would hold agencies harmless for additional
costs that result from technological or regulatory changes. It would
also, however, provide an incentive to make artificially low initial
estimates.
Conclusions:
Because the federal budget does not recognize the full costs of a
program that will have cleanup costs when decisions to commit to the
program are being made, policymakers do not have sufficient information
to compare the full costs of a particular program with their judgment
of its benefits. Cleanup costs are in fact a liability associated with
the ownership of many assets. Decision makers need to consider these
costs before committing to acquire the waste-producing asset.
Agencies generally do not yet have experience in estimating future
cleanup/disposal costs up front, before the decision to purchase the
waste-producing asset is made. Accordingly, all of the alternative
approaches we discuss for providing this information represent a
challenge for both agencies and OMB to develop an estimation
methodology. Increasing the visibility of cost estimates may increase
the effort spent on them and ultimately improve both the quality of the
estimates and enhance decision making. As a first step, we believe that
OMB and agencies should provide supplemental information. This can be
expected to improve the focus and attention and permit improvements in
estimating models. As this proceeds, further consideration should be
given to budget process and budget accounting changes. Ultimately,
accruing budget authority for the tail-end cleanup/disposal costs along
with the front-end purchase costs of assets would best ensure that the
cleanup/disposal costs are considered before the government incurs the
liability, but raises significant implementation challenges.
Recommendations for Executive Action:
We recommend that the Director of OMB require supplemental reporting in
the budget to disclose future environmental cleanup/disposal costs for
new acquisitions. To this end, agency and OMB officials should consult
with legislative branch officials to ensure that useful information on
estimated environmental cleanup/disposal costs is provided to
congressional decision makers when requesting appropriations to acquire
waste-producing assets.
Agency Comments:
The Secretary of Defense had no comments on our draft report. We did
not receive comments from the Secretary of Energy in time to be
considered and included in this report. In consultation with OMB staff,
GAO was commended for its useful analysis and noted that the ideas
discussed merit consideration. OMB staff also provided technical
clarifications, which we incorporated as appropriate.
As agreed with your office, unless you release this report earlier, we
will not distribute it until 30 days from the date of this letter. At
that time we will send copies to the Ranking Minority Member of the
House Committee on the Budget and the chairmen and ranking minority
members of the Senate Committee on the Budget; the subcommittees on
Defense and on Energy and Water Development, Senate Committee on
Appropriations; and the subcommittees on Defense and on Energy and
Water Development, House Committee on Appropriations. We are also
sending copies to the Director, Office of Management and Budget. In
addition, we are sending copies to the Secretary of Defense and of
Energy. Copies will also be made available to others upon request. In
addition, the report is available at no charge on GAO‘s Web site at
http://www.gao.gov.
This report was prepared under the direction of Christine Bonham,
Assistant Director, Strategic Issues, who may be reached at (202) 512-
9576. Other major contributors were Carol Henn and Brady Goldsmith.
Please contact me at (202) 512-9142 if you or your staff have any
questions concerning the report.
Sincerely yours,
Susan J. Irving
Director
Federal Budget Analyses
Strategic Issues:
Signed by Susan J. Irving:
[End of section]
Appendix I: Breakout of Environmental Liabilities:
About a dozen federal agencies report environmental liabilities in
their financial statements. This appendix provides additional detail on
the environmental liabilities reported by the Department of Energy
(DOE) and the Department of Defense (DOD) and about those reported by
the other federal agencies. These data were extracted from agencies‘
fiscal year 2001 consolidated balance sheets and represent existing
assets--not proposed acquisitions. Because DOD and the National
Aeronautics and Space Administration auditors disclaimed an opinion on
their financial statements, it is not certain that these amounts fairly
present their liabilities.
Table 1: Breakdown of DOE and DOD Federal Environmental Liabilities,
Fiscal Year 2001:
(Dollars in billions).
DOE; Liability: [Empty].
(Dollars in billions): Agency: DOE: : Closed nuclear weapons complexes;
Liability: : $184.
(Dollars in billions): Agency: DOE: : Active and surplus facilities--
other programs; Liability: : 31.
(Dollars in billions): Agency: DOE: : High-level waste and spent
nuclear fuel disposition; Liability: : 15.
(Dollars in billions): Agency: DOE: : Other; Liability: : 8.
(Dollars in billions): Agency: DOE: : Subtotal --DOE; Liability: :
$238.
DOD; Liability: [Empty].
(Dollars in billions): Agency: DOE: : Training range cleanup;
Liability: : 2.
(Dollars in billions): Agency: DOE: : Other cleanup sites; Liability: :
14.
(Dollars in billions): Agency: DOE: : Formerly Used Defense Sites;
Liability: : 18.
(Dollars in billions): Agency: DOE: : Base Realignment and Closure;
Liability: : 5.
(Dollars in billions): Agency: DOE: : Aircraft carriers/submarines
disposal; Liability: : 11.
(Dollars in billions): Agency: DOE: : Chemical weapons and other
disposal; Liability: : 14.
(Dollars in billions): Agency: DOE: : Subtotal --DOD[A]; Liability: : $
63.
Total[A]; Liability: $302.
[End of table]
Source: DOE and DOD.
Note: Information was taken from DOE‘s and DOD‘s fiscal year 2001
consolidated balance sheets and accompanying notes.
[A] Numbers do not add to total due to rounding.
[End of Table]
Table 2: Environmental Liabilities, by Agency, Fiscal Year 2001:
(Dollars in millions).
Department of Energy; (Dollars in millions): Liability: $238,349;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Legacy
resulting from the production of nuclear weapons..
Department of Defense; (Dollars in millions): Liability: 63,294;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Disclaimed; (Dollars in millions): Nature of liability: Contamination
resulting from decades of training and preparing for national defense..
Department of Transportation; (Dollars in millions): Liability: 2,178;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Cleanup
associated with normal Federal Aviation Administration, Coast Guard,
and Maritime Administration operations (e.g., storage tanks, fuels,
solvents, and chemicals) or the result of an accident..
National Aeronautics and Space Administration; (Dollars in millions):
Liability: 1,346; (Dollars in millions): [Empty]; (Dollars in
millions): Audit opinion: Disclaimed; (Dollars in millions): Nature of
liability: Groundwater, surface water/sediment, and ecological
remediation and monitoring..
Tennessee Valley Authority; (Dollars in millions): Liability: 804;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability:
Decommissioning of nuclear-powered generating plants..
Department of the Interior; (Dollars in millions): Liability: 268;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Remediation of
hazardous conditions and contamination caused by the Department of the
Interior and which exist on lands held by the department..
Department of Veterans Affairs; (Dollars in millions): Liability: 260;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Asbestos
removal, lead abatement, replacement of underground oil and gasoline
tanks, decommissioning of waste incinerators, and decontamination of
equipment prior to disposal..
General Services Administration; (Dollars in millions): Liability: 144;
(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Removal and
containment of environmental hazards in federal buildings..
Department of Commerce; (Dollars in millions): Liability: 79; (Dollars
in millions): [Empty]; (Dollars in millions): Audit opinion:
Unqualified; (Dollars in millions): Nature of liability: Nuclear
reactor, Pribiloff Island, and other cleanup..
Environmental Protection Agency (EPA); (Dollars in millions):
Liability: 15; (Dollars in millions): [Empty]; (Dollars in millions):
Audit opinion: Unqualified; (Dollars in millions): Nature of liability:
Cleanup of closed EPA sites plus the decontamination and
decommissioning of EPA research facilities..
Department of Health and Human Services; (Dollars in millions):
Liability: 13; (Dollars in millions): [Empty]; (Dollars in millions):
Audit opinion: Unqualified; (Dollars in millions): Nature of liability:
Removing, containing, and/or disposing of (1) hazardous waste from
property or (2) material and/or property that consists of hazardous
waste at a permanent or temporary closure or shutdown of associated
property, plant, and equipment..
Department of Justice; (Dollars in millions): Liability: 5; (Dollars in
millions): [Empty]; (Dollars in millions): Audit opinion: Unqualified;
(Dollars in millions): Nature of liability: Underground fuel storage
tank remediation, maintenance, and repair..
Total; (Dollars in millions): Liability: $306,755; (Dollars in
millions): [Empty]; (Dollars in millions): Audit opinion: [Empty].
[End of table]
Source: GAO.
Note: Data were taken from these agencies‘ consolidated balance sheets
and accompanying notes. Only agencies that reported environmental
liabilities in their fiscal year 2001 financial statements are shown.
[End of table]
FOOTNOTES
[1] Federal accounting standards define environmental liabilities as
the cleanup costs of removing, containing, and/or disposing of (1)
hazardous waste from property or (2) material and/or property that
consists of hazardous waste at permanent or temporary closure or
shutdown of associated property, plant, and equipment. Hazardous waste
is a solid, liquid, or gaseous waste or combination of these wastes
that, because of its quantity, concentration, or physical, chemical, or
infectious characteristics, may cause or significantly contribute to an
increase in mortality or an increase in serious irreversible or
incapacitating reversible illness or pose a substantial present or
potential hazard to human health or the environment when improperly
treated, stored, transported, disposed of, or otherwise managed. As
used in this report, it may include such things as nuclear or toxic
waste or unexploded ordnance, among other things. Cleanup may include,
but is not limited to, decontamination, decommissioning, site
restoration, site monitoring, closure, and postclosure costs. Federal
accounting standards define a liability as a probable future outflow of
resources due to a past governmental transaction or event.
[2] The two largest liabilities are federal debt securities held by the
public and federal employee and veteran benefits payable.
[3] We recently issued a report that provides a broad overview of
various program activities, such as environmental liabilities, that may
expose the government to future spending. See U.S. General Accounting
Office, Fiscal Exposures: Improving the Budgetary Focus on Long-Term
Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).
[4] These retired assets include such things as excess facilities at
the Savannah River Site in South Carolina and the Presidio military
base in California.
[5] In this report, primary budget data refers to budget authority,
obligations, outlays, and the deficit/surplus.
[6] Minor exceptions to this include changes in the Department of the
Treasury‘s cash balances, outstanding payment obligations, and net
disbursements by the government‘s loan guarantee and direct loan
accounts.
[7] OMB Circular A-11 refers to a 1978 Executive Order that requires
agencies to prepare annual cost estimates for the control of
environmental pollution and to ensure that sufficient funds for
compliance with applicable pollution control standards are requested in
the agency budget.
[8] Auditors were not able to render an opinion on DOD‘s fiscal year
2001 financial statements, in part because of DOD‘s inability to comply
with requirements for environmental liabilities. Thus, the $63 billion
liability associated with DOD is not known to be a reliable figure.
[9] Treasury‘s judgment fund has permanent, indefinite budget
authority.
[10] DOD and DOE do provide cleanup cost information in various reports
that are available to policymakers. For example, DOD provides an annual
report to Congress on the progress and accomplishments of DERP. DOE
periodically reports on the status of the EM program‘s life-cycle cost
and schedule estimates for completing cleanup. While the information in
these reports may inform future budget planning, it does not include
cleanup cost estimates for assets being proposed for purchase.
[11] Accounting standards require that a liability be recognized (i.e.,
estimated) when a past transaction or event has occurred, a future
outflow or other sacrifice of resources is probable, and the future
outflow or sacrifice of resources is measurable.
[12] U. S. General Accounting Office, Nuclear Regulation: NRC‘s
Assurances of Decommissioning Funding During Utility Restructuring
Could Be Improved, GAO-02-48 (Washington, D.C.: Dec. 3, 2001).
[13] ICF Incorporated, ’Full Cost Accounting“ for Decision Making at
Ontario Hydro: A Case Study (Mar. 22, 1996).
[14] Rather than accruing budget authority over time, the full amount
for cleanup could be enacted at the time an asset is acquired. However,
this would immediately insert the total highly uncertain cleanup cost
estimate into the budget.
[15] Office of Management and Budget, Analytical Perspectives, Budget
of the United States Government, Fiscal Year 2003 (Washington, D.C.:
Feb. 4, 2002), 12.
[16] Any successor reform to the Balanced Budget and Emergency Deficit
Control Act of 1985 would need to recognize this change.
[17] See U.S. General Accounting Office, Environmental Liabilities:
Cleanup Costs From Certain DOD Operations Are Not Being Reported, GAO-
02-117 (Washington, D.C.: Dec. 14, 2001).
[18] See U.S. General Accounting Office, Financial Management: DOD‘s
Liability for Missile Disposal Can Be Estimated, GAO/AIMD-98-50R
(Washington, D.C.: Jan. 7, 1998); Financial Management: DOD‘s Liability
for the Disposal of Conventional Ammunition Can Be Estimated, GAO/AIMD-
98-32 (Washington, D.C.: Dec. 19, 1997); and Financial Management:
DOD‘s Liability for Aircraft Disposal Can Be Estimated, GAO/AIMD-98-9
(Washington, D.C.: Nov. 20, 1997).
[19] Unfunded Mandate Reform Act of 1995, Pub. L. No. 104-4, §423.
[20] Discretionary budget authority is provided in appropriations acts.
Permanent budget authority is available as the result of previously
enacted legislation and does not require new legislation for the
current year. Apportionment is the action by which OMB distributes
amounts available for obligation, by specific time periods (usually
quarters), activities, projects, objects, or a combination thereof. The
amounts apportioned limit the amount of obligations that may be
incurred.
[21] An increase in budget authority totals alone would not affect the
deficit/surplus measure because that calculation is based on the
difference between total federal revenues and spending in a given year.
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