Environmental Liabilities: EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations
Published: 2005-08-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: Key federal environmental statutes, such as the Resource Conservation and  Recovery Act (RCRA) and the Comprehensive Environmental Response,  Compensation, and Liability Act (CERCLA), which established the  Superfund program, require that parties statutorily responsible for  pollution bear the cost of cleaning up contaminated sites. 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.
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.  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.  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.
subsections: section_title: Background
paragraphs: 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. 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 of the sites on the  Superfund National Priorities List (NPL), EPA’s list of seriously  contaminated sites. 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.
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. For fiscal year 2004, for example, EPA’s Superfund  appropriation of $1.2 billion was from general revenue only. In contrast,  through the 1990s, Superfund trust fund revenues other than general fund  appropriations provided more than $1 billion a year in program funding.  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.  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. 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. 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. 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.  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. 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. 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.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. 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. EPA regulations also require a  facility seeking a permit to provide financial assurances to cover any  corrective action responsibilities identified in the permit. 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. 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. 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. Like  many corporations, these “hybrids” can have any number of investors  (owners), and the investors may include partnerships, corporations,  individuals, and others.
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. 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. 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.
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.
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. 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. 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.
section_title: The Number of Business Bankruptcies Involving Environmental Liabilities Is Not Known
paragraphs: 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. 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. 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. 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. 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. 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. 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. 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.
section_title: EPA Faces Significant Challenges When Seeking to Hold Businesses Responsible for Their Cleanup Obligations, Particularly Businesses in Bankruptcy and Other Financial Distress
paragraphs: 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.
subsections: section_title: Businesses Can Organize and Restructure Themselves in Ways That May Allow Them to Limit Their Expenditures for Environmental Cleanups
paragraphs: 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. 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. 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. 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.
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. 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. 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.
section_title: Legal and Informational Challenges Constrain EPA’s Ability to Hold Businesses in Bankruptcy Responsible for Their Cleanup Obligations
paragraphs: 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.
subsections: section_title: Differing Statutory Goals and Program Complexities Present EPA with Challenges
paragraphs: 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. As a result, cleanup costs may be shifted to the general  public, especially when the site has no other liable parties.
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—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. 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.
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. 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.
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. (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. 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. 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.
section_title: Information Gaps Regarding Bankruptcies Also Present EPA with Challenges
paragraphs: 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. 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. 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. 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.
section_title: EPA Could Make Greater Use of Available Authorities and Enforcement Tools to Pursue Hazardous Waste Cleanup Costs from Bankrupt and Other Financially Distressed Businesses
paragraphs: 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. Greater use of these authorities could  produce additional payments for cleanups from liable businesses, even in  bankruptcies.
subsections: section_title: EPA Has Not Implemented a Statutory Mandate under Superfund to Establish Financial Assurance Requirements for Certain Businesses Handling Hazardous Substances
paragraphs: 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. 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. 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.
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. 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.
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.” 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. 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.
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. 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.
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. 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. 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. 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).
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.
section_title: EPA Does Not Effectively Manage Its Existing Portfolio of Financial Assurances for Cleanups
paragraphs: 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.
subsections: section_title: 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
paragraphs: 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.
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.”
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.
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. 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. 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  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. The paper states that EPA’s position is  that eliminating these financial assurances could add substantially to the  cost of the financial assurance regulations.
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. 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. 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. 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.
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. 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.
section_title: EPA Has Further Increased the Financial Risk to the Government by Not Providing Adequate Oversight and Enforcement of Financial Assurance Requirements for Cleanups
paragraphs: 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.
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.
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.
section_title: EPA Could More Fully Utilize Other Enforcement Authorities, Such as Claiming Payments the Government Owes to Liable Businesses and Filing Liens on Superfund Properties
paragraphs: 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.
subsections: section_title: EPA May Obtain Tax Refund and Other Administrative Offsets to Help Pay for Costs of Environmental Cleanups
paragraphs: 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.
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.
section_title: EPA’s Authority to File Liens on Superfund Properties Can Help the Agency Recover Costs Associated with Environmental Cleanups
paragraphs: 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.  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.  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.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or 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.
section_title: Objectives, Scope, and Methodology
paragraphs: 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.
section_title: Chronology of EPA’s Efforts to Develop Financial Assurance Requirements for Businesses Handling Hazardous Substances
subsections: section_title: December 1980
paragraphs: 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)).
section_title: Early 1980s
paragraphs: 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.
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.
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.
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.
section_title: Comments from the Environmental Protection Agency
paragraphs: The following are GAO’s comments on the Environmental Protection  Agency’s letter dated July 14, 2005.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products
paragraphs: Superfund Program: Breakdown of Appropriations Data. GAO-04-787R.  Washington, D.C.: May 14, 2004.
Superfund Program: Updated Appropriation and Expenditure Data.  GAO-04-475R. Washington, D.C.: February 18, 2004.
Superfund Program: Current Status and Future Fiscal Challenges. 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. 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. 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. 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. GAO/RCED-97-238R. Washington, D.C.:  September 24, 1997.
Superfund: Number of Potentially Responsible Parties at Superfund Sites  Is Difficult to Determine. GAO/RCED-96-75. Washington, D.C.: March 27,  1996.
Superfund: EPA Has Opportunities to Increase Recoveries of Costs.  GAO/RCED-94-196. Washington, D.C.: September 28, 1994.
Hazardous Waste: An Update on the Cost and Availability of Pollution  Insurance.  GAO/PEMD-94-16. Washington, D.C.: April 5, 1994.
Superfund: More Settlement Authority and EPA Controls Could Increase  Cost Recovery. GAO/RCED-91-144. Washington, D.C.: July 18, 1991.
Hazardous Waste: Funding of Postclosure Liabilities Remains  Uncertain. GAO/RCED-90-64. Washington, D.C.: June 1, 1990.
Superfund: A More Vigorous and Better Managed Enforcement Program  Is Needed. GAO/RCED-90-22. Washington, D.C.: December 14, 1989.
Hazardous Waste: Environmental Safeguards Jeopardized When  Facilities Cease Operating. GAO/RCED-86-77. Washington, D.C.: Feb. 11,  1986.