United States General Accounting Office

GAO Report to the Assistant Secretary of the

Army for Financial Management and

Comptroller

August 1996 ENVIRONMENTAL

CLEANUP

Cash Management

Practices at Rocky

Mountain Arsenal

G O A

years

1921 - 1996

GAO/NSIAD-96-145

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-260433 

August 16, 1996

The Honorable Helen T. McCoy

Assistant Secretary of the Army for

Financial Management and Comptroller

Dear Ms. Secretary:

This report discusses cash management practices associated with

environmental cleanup costs at the Rocky Mountain Arsenal. The Army

and Shell Oil Company share these costs under a formula set forth in a

1989 settlement agreement and the associated financial manual.1

 We noted

weaknesses in Army cash management practices permitted by the

settlement agreement as we reviewed the cost and schedule of the

arsenal’s cleanup at the request of the Chairman, Subcommittee on

National Security, International Affairs, and Criminal Justice, House

Committee on Government Reform and Oversight.2

 This report discusses

the frequency of billing, the time permitted for payment, and the method of

payment.

Results in Brief The settlement agreement between the Army and Shell Oil Company does

not provide for timely or efficient collection of what is expected to exceed

$500 million in cleanup costs from Shell. When the government does not

collect receivables in a timely manner, it loses the opportunity to invest

these funds until needed for federal purposes. Since the 1989 settlement

agreement with Shell, cash management practices have cost the

government more than a million dollars. We noted three weaknesses in the

cash management practices followed at the arsenal that contribute to this

cost.

First, the Army bills Shell quarterly, rather than monthly, as is usual

business practice. This extended billing cycle alone has cost the

government about half a million dollars. The settlement agreement calls

for quarterly billing. However, Army officials said that it does so only

because their accounting systems were not able to process disbursements

on a monthly basis at the time the agreement was signed in early 1989.

1

The arsenal’s financial manual, which outlines the financial management practices to be used by Shell

and the Army, was incorporated into the settlement agreement.

2

Environmental Cleanup: Progress in Resolving Long-Standing Issues at the Rocky Mountain Arsenal

(GAO/NSIAD-96-32, Mar. 29, 1996).

Page 1 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

Since late 1989 or early 1990, the Army has had the capability to bill Shell

on a monthly basis.

Second, the payment cycle allows 90 days—rather than the 60 days called

for in the settlement agreement—to document cost claims, prepare a

quarterly statement, and pay the amount due. The 30-day extension has

cost the government over half a million dollars since 1989.

Finally, the Army and Shell exchange payments through the mail rather

than electronically, which further delays access to the funds. Nine of the

10 checks we reviewed were deposited after the due date, including 1 for

about $12 million. The government loses the use of the money in the

interim between the payment’s due date and deposit—an interval of as

long as 10 days. The associated cost from the delayed deposits in these

nine cases—which represent about a third of the total number of

checks—exceeded $22,000 in lost interest. Although payment by mail is

specified by the settlement agreement, the Army and Shell have the

capability to set up electronic transactions.

Background The Army manufactured chemical weapons and conventional munitions at

the Rocky Mountain Arsenal, near Denver, Colorado, from the 1940s into

the 1960s. The Army destroyed weapons there into the early 1980s. Shell

Oil Company leased a portion of the arsenal from 1952 to 1987 to produce

herbicides and pesticides. In July 1987, the Environmental Protection

Agency placed the Rocky Mountain Arsenal on its list of the nation’s most

heavily contaminated sites—the National Priorities List. Under the

settlement agreement and the Comprehensive Environmental Response,

Compensation, and Liability Act (CERCLA) of 1980 as amended,3

 the Army

and Shell Oil Company are both responsible for the extensive soil and

groundwater contamination at the Rocky Mountain Arsenal.

According to the terms of the settlement agreement, Shell’s portion of the

shared cleanup costs is expected to be about $500 million, and the

government’s share about $1.6 billion, toward the estimated $2.1 billion

cleanup.4

 In essence, the Army and Shell each incurs costs for cleanup

activities as they proceed; then quarterly, the two entities reconcile which

3

CERCLA created the framework for cleaning up the nation’s most dangerous hazardous waste sites.

CERCLA imposes liability for cleanup on a variety of potentially responsible parties, including facility

owners, operators, and others who generated hazardous substances.

4

The $500 million only includes Shell’s portion of shared costs. Shell is also responsible for paying to

remove contamination caused solely by Shell.

Page 2 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

costs belong to which entity and bill one another accordingly. In most of

the quarters since 1989, Shell has owed the Army.

Numerous laws and related federal regulations dictate prompt recording,

collection, and deposit of receivables.5

 The objective of these laws and

regulations is to improve funds availability and the efficiency and

effectiveness with which funds are transferred. Commonly accepted

business principles also require efficient cash management

practices—based on the same “time value of money” concept.

Quarterly Rather Than

Monthly Billing

Despite commonly accepted management practices that call for timely

billing to maximize cost recovery, the Army and Shell exchange bills on a

quarterly basis as specified in the settlement agreement. The consequent

loss from the delayed recovery has in some cases been considerable; Shell

owes the Army, on average, about $4 million per quarter, but has owed as

much as $12 million for one quarter.

According to Shell officials, the quarterly cycle represents a compromise

negotiated by the parties in 1988/1989. Shell had proposed monthly

billing—consistent with its commercial practice, the Army had proposed

annual billing, and through negotiation the two parties settled on quarterly

billing. According to Army officials, the arsenal’s financial manual

specifies a quarterly billing cycle because the arsenal did not have the

capacity to process disbursement documents on a monthly basis until after

the agreement was executed. The financial manual could have been

amended to take advantage of this new capacity, but it was not. Currently,

the Army is processing bills monthly and retaining them for quarterly

submission to Shell.

We estimate that the government has incurred about $500,000 in additional

interest costs since 1989 because the Army billed Shell on a quarterly

rather than a monthly basis.6

 According to Army officials, a change to

monthly billing could be accomplished without any additional costs to the

government. According to Shell officials, monthly billing is preferable, and

the only cost to Shell would be lost interest on the extended use of those

funds.

5

31 U.S.C. ch. 33; 31 Code of Federal Regulations Part 206; Department of Defense Financial

Management Regulation, vol. 10, ch. 18; and the GAO Policy and Procedures Manual for Guidance of

Federal Agencies, title 4, ch. 9.

6

We calculated the government’s lost income opportunity by assuming an average interest rate of

5 percent over the period 1989 to 1996.

Page 3 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

Payment Cycle Allows

30 Extra Days

The Army and Shell are taking 30 days longer than the 60 days allowed by

the settlement agreement to exchange quarterly payments. Under the

agreement, payments are due 60 days7

 after the end of each quarter in

order to give both parties time to document and exchange cost claims,

prepare quarterly statements, and remit payments. In practice, however,

payments are not made until 90 days after the quarter closes.

The extra 30 days occurs because the 3-month periods used for billing

purposes and accounting purposes do not match. According to the

financial manual, the quarters are to begin on January 1, April 1, July 1,

and October 1. The cost information supporting the quarterly statements,

however, comes from an accounting period that is 1 month behind; that is,

the quarters for which costs are captured begin on December 1, March 1,

June 1, and September 1. Thus, the payment due dates shown on each

quarterly billing statement are 90 days after the end of the quarter for

which costs have been presented.

We estimate the extra 30 days in each billing period cost the government

approximately $500,000 in additional interest costs since 1989.8

 According

to Army officials, the 30 extra days are allowed at the front end of the

payment cycle to facilitate data collection requirements. In effect, they

allow 30 days to elapse before starting the clock on the 60-day process

outlined in the financial manual. Shell officials said that billing has always

been delayed an additional 30 days to accommodate Shell’s accounting

system. Shell needed the additional time to close its books and present a

cost claim to the Army for incurred cleanup costs.

When asked if they could comply with the 60 days called for in the

financial manual, rather than the 90 days currently allowed, Shell officials

expressed concern about whether this would allow sufficient time to

process the quarterly statement. They agreed, however, that if the

quarterly billing cycle were replaced by a monthly cycle, the processing

and payment functions could probably be accomplished within the 

60 days. According to an Army official, time can be trimmed from the data

collection, claims, and billing functions. However, he believes that the

Army and Shell would want to revisit the time frames allotted to each

function by the financial manual. For example, the parties may want to

allow more time for preparation and less for billing.

7

The financial manual allows 20 business days to prepare the quarterly billing statement and another

30 calendar days for payment; according to Army officials, this works out to be about 60 calendar days.

8

We used the same method discussed in footnote 6 to calculate the government’s lost income

opportunity.

Page 4 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

According to an Army official, a change from a 90-day payment process to

a 60-day payment process could be accomplished without any additional

cost to the government. According to Shell officials, the only cost to Shell

would be lost interest on the extended use of those funds.

Payment by Mail

Delays Collection

Under the terms of the 1989 settlement agreement, the party that owes

more at the end of the quarter is to send the remittance to the other party

by mail. Mail remittance has remained the sole payment transfer

mechanism for both parties throughout the agreement. However, remitting

these payments electronically, rather than by mail, would expedite

deposits of Shell’s payments to the U.S. Treasury. This is significant

because in 25 of the 29 quarters that payments were transferred, Shell has

owed money to the Army.

Shell mails its payments from Houston, Texas, to the Army Finance and

Accounting Center in Indianapolis, Indiana. According to Army officials,

the Army has received all of Shell’s payments on or before the due date.

However, in the interval between the payment’s due date and its

processing (i.e., deposit) date, the government is losing the use of the

funds. Nine of the 10 checks we examined were deposited after the due

date. For these nine checks, the interim between the due date and the

processing date ranged from 1 to 10 days.

We could calculate only a portion of the lost interest arising from the

interval between the payment due date and the processing date because

we were unable to obtain the processing date for 15 of the 25 payments

from Shell to the Army. Further, we identified the deposit date for only 

10 of the more recent payments—those made between March 1992 and

December 1995. These 10 payments ranged from about $1 million to

$12 million. The aggregate cost to the government for the nine checks

processed after the due date was more than $22,000.9

Both Army and Shell officials agreed that electronic payment makes good

financial management sense. Among the advantages cited were that

electronic funds transfers cost less to use, accelerate the availability of

funds to the receiving party, improve internal controls through greater

security and reliability, reduce remittance processing time, and lessen

paper and postage requirements.

9

We used the same method discussed in footnote 6 to calculate the government’s lost income

opportunity.

Page 5 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

In fact, Shell Oil Company is already making electronic payments to

another federal entity. According to an official of the Department of the

Interior’s Minerals Management Service, Shell makes some royalty

payments by electronic funds transfer. The Minerals Management Service

requires that all payers whose aggregate royalty payment obligation totals

$10,000 or more must make payment by electronic funds transfer.

To accomplish electronic funds transfers for the Rocky Mountain Arsenal,

the Army must approve a “deviation” from standard cash management

practices and then work with the Department of the Treasury to set up an

account. According to Defense and Treasury officials, the cost and time

frame for establishing the electronic process would be minimal.

Recommendations We recommend that the Assistant Secretary of the Army (Financial

Management & Comptroller) instruct the program manager at Rocky

Mountain Arsenal to work with Shell to amend the financial manual

accompanying the settlement agreement to achieve the following:

• bill monthly rather than quarterly,

• eliminate the extra 30 days currently allowed for the payment cycle, and

• establish networks to exchange payments by way of electronic funds

transfer, rather than by mail.

Agency Comments We obtained official oral comments on a draft of this report from the

Department of Defense’s designated spokesperson in the office of the

Deputy Under Secretary of Defense for Environmental Security stating

that the Department concurs with the information in the report and

intends to implement its three recommendations.

Scope and

Methodology

We reviewed applicable laws, regulations, and documents such as the

settlement agreement, the financial manual governing transactions

between the Army and Shell, quarterly statements and supporting

documentation, and records of Shell’s payments. We interviewed officials

from the U.S. Army located at the arsenal and at the Army Environmental

Center in Aberdeen, Maryland; the Defense Finance and Accounting

Service in Washington, D.C., and its centers in Columbus, Ohio, and

Indianapolis, Indiana; the U.S. Treasury Department in Washington, D.C.;

and Shell Oil Company, both at the arsenal and at the corporate

headquarters in Houston, Texas.

Page 6 GAO/NSIAD-96-145 Environmental Cleanup
B-260433 

We did our work between June 1995 and June 1996 in accordance with

generally accepted government auditing standards.

We would appreciate your advising us, within 30 days, of the actions you

are taking in response to our recommendations. We are sending copies of

this report to the Chairman, Subcommittee on National Security,

International Affairs, and Criminal Justice, House Committee on

Government Reform and Oversight, and to the Secretary of Defense.

Please contact me at (303) 572-7317 if you or your staff have any questions.

Major contributors to this report are listed in appendix I.

Sincerely yours,

Thomas J. Brew

Regional Manager, Denver

Page 7 GAO/NSIAD-96-145 Environmental Cleanup
Appendix I 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Uldis Adamsons

Denver Field Office Patricia Foley Hinnen

Tony Leonard

Wendy Matthews

Pam Tumler

(709117) Page 8 GAO/NSIAD-96-145 Environmental Cleanup
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