U.S. Coast Guard National Pollution Funds Center: Improved Controls Needed for Oil Removal Disbursements and Action Needed for Sustainable Funding
Released: 2015-09-15T00:00:00

Letter

Background

Legal Framework Establishing Responsibilities to Pay Damage Claim and Oil Removal Costs

The legal framework for addressing and paying for maritime oil spills is established by OPA, which places the primary burden of liability and the costs of oil spills on the owner and operator of the vessel or onshore facility and the lessee or permittee of the area in which an offshore facility is located. This “polluter pays” framework requires that the responsible party or parties assume the burden of spill response, natural resource restoration, and compensation to those damaged by the spill, up to a specified limit of liability.

In general, the level of potential exposure under OPA depends on the kind of vessel or facility from which a spill originates and is limited in amount unless, among other reasons, the oil discharge is the result of gross negligence or willful misconduct or a violation of federal operation, safety, and construction regulations, in which case liability under OPA is unlimited. Subject to certain exceptions, such as removal cost claims by states, all nonfederal claims for OPA-compensable removal or damages must be submitted first to the responsible party or the responsible party’s guarantor. If the responsible party denies a claim or does not settle it within 90 days, a claimant may present the claim to the federal government to be considered for payment.

OPA authorizes use of the Fund, subject to limitations on the amount and types of costs, to pay specified damage claims above a responsible party’s liability limit, to pay damage claims or removal costs when a responsible party does not pay or cannot be identified, and to pursue reimbursement from the responsible party for oil removal and damage claims paid by the Fund. Under OPA, the amount that may be paid from the Fund for one incident is limited to $1 billion. Further, within the $1 billion cap, the costs for conducting a natural resource damage assessment and damages paid in connection with any single incident cannot exceed $500 million.

OPA defines the costs for which responsible parties are liable and for which the Fund is made available for compensation in the event that the responsible party does not pay, cannot pay, or is not identified. “OPA- compensable” costs include two main types: damage claims and oil removal.

Damage Claim Costs

OPA-compensable damages cover a wide range of both actual and potential adverse impacts from an oil spill. For example, damages from an oil spill include the loss of profits to the owner of a commercial charter boat if the boat was trapped in port because the Coast Guard closed the waterway in order to remove the oil, or personal property damage to the owner of a recreational boat or waterfront property that was damaged by oil from the spill, for which a claim may be made first to any of the responsible parties, then to the Fund. (See table 1.)

Oil removal costs are incurred by the federal government or any other entity when responding to, containing, and cleaning up a spill. For example, removal costs include cleaning up adjoining shoreline affected by the oil spill and the equipment used in the response—skimmers to pull oil from the water, booms to contain the oil, planes for aerial observation—as well as salaries, travel, and lodging costs for responders.

The NPFC Damage Claim Process

Individual and business claimants may seek reimbursement from the Fund for damages caused by an oil spill by submitting a claim to NPFC. In general, if a responsible party is identified, the claimant must first submit the claim to the responsible party. If the responsible party is unable or unwilling to pay the claim within 90 days of submission, the claimant may then elect to submit the claim to NPFC for adjudication or pursue a lawsuit against the responsible party.

Certain circumstances exist where a claimant may submit a claim to NPFC without first submitting it to the responsible party. These include instances where (1) NPFC advertises that claimants may submit claims directly to the Fund, (2) NPFC notifies claimants in writing that they may submit claims directly to the Fund, (3) a responsible party submits a claim for costs incurred beyond its liability, (4) the governor of a state submits a claim for removal costs incurred by the state, and (5) a U.S. claimant submits a claim to the Fund when a foreign offshore unit has discharged oil causing damage for which the Fund is available.

Once NPFC receives a claim, NPFC staff conduct an initial review to reasonably assure basic regulatory compliance. The claim is assigned to a claims manager who reviews the claim to reasonably assure it is payable under OPA, has not been paid by the responsible party, and is under the $1 billion per-incident cap. As a part of the adjudication process, any claim payment over $100,000 is sent to the Coast Guard Judge Advocate General’s Office of Claims and Litigation for review. If NPFC agrees to pay the claim, the claimant is notified and has 60 days to accept the offer. After acceptance of the offer, NPFC forwards payment information to the Coast Guard’s Finance Center to be processed. If the claim is denied, NPFC sends the claimant the reason for denial and advises that within 60 days, the claimant can resubmit the claim for reconsideration. (See fig. 1 for an illustration of the claim process.)

The NFPC Oil Removal Costs Process

Responding to oil spills involves a coordinated effort by various parties, including (1) the Coast Guard or the Environmental Protection Agency (EPA) as Federal On-Scene Coordinator (FOSC); (2) federal, state, local, and Indian tribal government agencies; (3) private companies that specialize in oil spill cleanup; and (4) the responsible parties, their guarantors, and qualified individuals designated by responsible parties to respond to oil spills. To fund government agencies’ oil spill removal costs, the FOSC issues authorizations to quickly obtain services and assistance from government agencies and private companies, verifies that the services or goods were received and are consistent with the National Oil and Hazardous Substances Pollution Contingency Plan, commonly called the National Contingency Plan, and certifies the supporting documentation. The FOSC then forwards the contractor invoice or Military Interdepartmental Purchase Request documentation to the contracting officer at the Shore Infrastructure Logistics Center (SILC) and the Pollution Removal Funding Authorization documentation to the case officer at NPFC for review and authorization to pay. Once payment is authorized, the Coast Guard’s Finance Center pays the government agencies and private companies. (See fig. 2 for an illustration of the payment process related to oil spill removal costs.)

In conducting a coastal oil spill response, the lead federal authority, or FOSC, is usually the nearest Coast Guard Sector and is headed by the Coast Guard captain of the port. When notice of an oil spill is received by the Coast Guard, and as soon as the source is identified, NPFC must notify the responsible party or parties of NPFC’s designation. According to NPFC guidance, “the has primary responsibility for response to a spill incident, including setting up the [Incident Command System] and joining with the FOSC and state on-scene coordinator (SOSC) in the .” However, as reflected in the National Contingency Plan, NPFC guidance explains that “even when the responsible party leads a reasonable response effort, the FOSC is always in ultimate command and may decide to direct specific action or, for whatever reason it is deemed necessary, actually take the lead role in the response.” If there is a potential for claims activity, the NPFC will issue a Notice of Designation to the responsible party requiring advertisement to potential injured parties to advise them of their rights to file claims. If the responsible party is unknown or fails to take action, NPFC will advertise and accept claims for adjudication.

The Fund’s Financial Obligations and Resources

The Fund is divided into two major components: the Emergency Fund and the Principal Fund. The Emergency Fund constitutes $50 million the President may make available each year to cover immediate expenses associated with mitigating the threat of an oil spill, costs of oil spill containment, countermeasures, and cleanup and disposal activities, as well as to pay for other costs to initiate natural resource damage assessments. The $50 million is transferred annually from the Principal Fund to the Emergency Fund. Amounts made available remain available until expended. The Principal Fund is used to provide funds for claims, such as natural resource damage claims, loss of profits and earning capacity claims, and loss of government revenues. Congress has appropriated money from the Principal Fund to certain agencies, such as the Coast Guard, EPA, and the Department of the Interior—each of which has received an annual appropriation from the Fund to cover administrative, operational, personnel, and enforcement costs. Congress appropriated the following from the Fund for fiscal year 2014:

Department of Transportation, Pipeline and Hazardous Materials Safety Administration: $18.573 million

Coast Guard: $45.0 million

Department of the Interior, Bureau of Safety and Environmental Enforcement: $14.899 million

EPA’s Inland Oil Spills Programs: $18.209 million

Department of the Treasury, Bureau of the Fiscal Service: $165,000 The Fund is required annually to provide funds to the Denali Commission and the Prince William Sound Oil Spill Recovery Institute. Specifically, section 8102 of OPA provided for the eventual transfer of the remainder of the balance in the Trans-Alaska Pipeline Liability Fund to the Fund. The Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 provided that the interest produced from the investment of the Trans-Alaska Pipeline Liability Fund shall be transferred annually to the Denali Commission for a program to repair or replace bulk fuel storage tanks in Alaska. In fiscal year 2014, the Fund transferred $6.5 million to the Denali Commission. Similarly, OPA established the Prince William Sound Oil Spill Recovery Institute, in part, to identify and develop the best available techniques, equipment, and materials for dealing with oil spills in the Arctic and sub-Arctic marine environments. The institute’s annual funding is paid by the Fund based on interest earned on a $35.3 million trust, which is held by the Department of the Treasury. In fiscal year 2014, the institute received $854,833.

The Fund’s primary revenue source is an 8-cent per-barrel tax on both domestically produced and imported petroleum products. Another significant source of revenue has been transfers from other existing pollution funds. OPA consolidated into the Fund the liability and compensation requirements of certain prior federal oil pollution laws and their supporting funds, including the Federal Water Pollution Control Act, Deepwater Port Act, Trans-Alaska Pipeline System Authorization Act, and Outer Continental Shelf Lands Act. Total transfers into the Fund since 1990 have exceeded $550 million. However, no additional funds from these sources remain. Other revenue sources include recoveries from responsible parties for costs of removal and damages, fines and penalties paid pursuant to various statutes, and interest earned on the Fund’s U.S. Treasury investments. (See fig. 3.)

NPFC’s Internal Control Policies and Procedures

NPFC utilizes three different policy and procedural guides as part of its internal control framework over the damage claim and oil removal process. The policy and procedural guides include (1) the 2011 Standard Operating Procedures of the Claims Adjudication Division, which contains the policies and procedures related to the damage claim process; (2) the 2007 Case Management Division Standard Operating Procedures, which contains policies and procedures related to the oil removal process, and to a lesser extent, the damage claim process; and (3) the NPFC User Reference Guide, which is a reference tool for Coast Guard and EPA FOSCs.

Standards for Internal Control in the Federal Government

Standards for Internal Control in the Federal Government provides the overall framework for establishing and maintaining internal control across the federal government and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. Standards for Internal Control in the Federal Government states that internal controls comprise the plans, methods, and procedures used to meet missions, goals, and objectives. To achieve this, management is responsible for developing the detailed policies, procedures, and practices to fit the agency’s operations and to reasonably assure that they are built into and are integral to operations.

Controls Provided Reasonable Assurance That Damage Claim Disbursements Were Appropriately Disbursed, but Deficiencies in Design and Implementation of Controls for Oil Removal Disbursements Were Identified

NPFC has implemented a system of internal controls over damage claim and oil removal disbursements. For damage claim disbursements, we did not identify any deficiencies in the design and implementation of the controls we tested. However, our review of a statistical sample of oil removal disbursements identified internal control deficiencies that were caused by design deficiencies or by staff not adhering to certain key controls as designed. These included missing invoice certifications, missing supporting cost documentation, and high visibility spills not identified. Our review also identified other deficiencies in the design of controls related to oil removal disbursements. These include the lack of policies and procedures for taking advantage of vendor discounts, for ensuring that document retention policies are consistently followed, and for EPA disbursements.

NPFC’s Design and Implementation of Internal Controls for Its Damage Claim Disbursements Provide Reasonable Assurance That Expenses Are Appropriately Disbursed from the Fund

Our testing of the 27 selected high dollar damage claim disbursements, which accounted for 93 percent of the total damage claim disbursements for fiscal years 2011 through 2013, found that the design and implementation of relevant key controls provide reasonable assurance that damage claim expenses are appropriately disbursed. For example, our tests of 18 key controls included determining if a claim was submitted within the 3-year statutory period and if NPFC’s Legal Division and Office of Claims and Litigation reviewed the claim. We did not identify any deficiencies during our testing of the 27 damage claim disbursements.

Deficiencies Identified in the Statistical Sample of Oil Removal Disbursements

In testing a stratified random sample of 200 oil removal disbursements each valued at less than or equal to $500,000, we found that 9 of the 12 controls tested were effectively designed and implemented, while 1 control was effectively designed but was not effectively implemented and 2 controls were not effectively designed or implemented. Specifically, these internal controls were not effective for (1) certifying invoices, (2) maintaining supporting documentation, and (3) indicating whether an oil spill is classified as a high visibility oil spill. Based on the results of our stratified random sample, we estimate that $2.5 million from the population of $108 million in oil removal disbursements each valued less than or equal to $500,000 made during fiscal years 2011 through 2013 could contain one or more of the following control deficiencies, increasing the risk of improper payments from the Fund.

Invoice Certifications Missing

In responding to oil spills, the FOSC has available both private contractors and government agencies to provide an appropriate response. For example, if a cleanup contractor is required, the FOSC would place an order for the cleanup contractor with a delivery order under the Basic Ordering Agreement administered by SILC. The contracting officer issues the order and a contract for the necessary services. A copy of the FOSC’s documentation is provided to NPFC as documentation of these expenses. Government agencies can also be called upon to provide services during a spill response. The FOSC monitors the performance of the contractors and government agencies, reporting on progress via periodic pollution reports. When oil removal services are completed, the contractor or federal agency provides documentation to the FOSC. The FOSC reviews the documentation and certifies that services have been received. The FOSC then forwards the documentation to SILC’s contracting officer or NPFC’s case officer, as appropriate. The documentation is reviewed and payments are authorized. Certification of invoices is an important internal control as it reduces the risk of processing ineligible invoices. However, during testing of our stratified random sample of oil removal disbursements, we identified five oil removal disbursements that lacked FOSC certification. Two of these five disbursements were made to EPA and the certifications were not requested by NPFC. The remaining three certifications could not be located. In addition, during our testing of the 61 high dollar oil removal disbursements over $500,000, we identified two additional disbursements that lacked FOSC certification.

Standards for Internal Control in the Federal Government states that control activities, such as verifications, should be effective and efficient in accomplishing the agency’s control objectives. The Coast Guard and EPA entered into a memorandum of understanding dated June 11, 2012, stating that the EPA FOSC shall review all costs incurred during the removal operation and certify that they are proper and consistent with the National Contingency Plan. The National Contingency Plan states that during all phases of response, the lead agency (the Coast Guard or EPA) shall complete and maintain documentation to support all actions taken under the plan and to form the basis for cost recovery. It also designates the FOSC to coordinate and direct responses. In addition, NPFC’s 2007 Case Management Division Standard Operating Procedures states, “As the services are provided, the FOSC certifies that the services were received and are consistent with the National Contingency Plan then certifies eligibility for reimbursement.”

NPFC officials provided various explanations for the missing certifications. The officials stated that (1) for three of the five invoices from our stratified random sample of oil removal disbursements, NPFC could not produce certified invoices because the invoices were likely filed incorrectly; (2) for the remaining two disbursements from the stratified random sample, which were EPA disbursements, the invoices were already being processed when the memorandum of understanding between the Coast Guard and EPA was signed; and (3) for the two high dollar disbursements tested, NPFC officials stated that the contracting officer had firsthand knowledge of the receipt of services, so it was not necessary to rely on the FOSC’s certification. SILC officials further stated that the contracting officer is not bound by the 2007 Case Management Division Standard Operating Procedures because, under the Federal Acquisition Regulation (FAR), acceptance of services is the responsibility of the contracting officer. However, the FAR also states that acceptance generally constitutes acknowledgment that the supplies or services conform with applicable contract quality and quantity requirements, and when this responsibility is assigned to a cognizant contract administration office or to another agency, acceptance by that office or agency is binding on the government. Because the Case Management Standard Operating Procedures assign the responsibility to the FOSC to certify the receipt of goods, the FOSC should have certified the disbursements. In addition, the 2007 Case Management Division Standard Operating Procedures has guidance and related checklists that include obtaining FOSC certification.

Processing invoices that lack FOSC certification puts NPFC at risk of improper payments. For instance, a payment could be made for services or supplies that the FOSC did not authorize. Although NPFC has established policies and procedures, the documentation issues identified demonstrate that management has not reasonably assured that the policies and procedures are consistently followed.

Required Supporting Cost Documentation Missing

We found three oil removal disbursements in our stratified random sample that did not include appropriate supporting documentation. Specifically, NPFC was unable to provide two travel orders and a contract invoice to support three oil removal disbursements. These were in addition to the three FOSC-certified invoices NPFC could not provide, as discussed earlier. According to NPFC staff, the documentation was not included in the case file because it was likely filed incorrectly. We found that NPFC did not have policies and procedures requiring supervisory review of the filing process. Having policies and procedures that require periodic checks of the files could provide reasonable assurance that documentation is properly maintained.

According to NPFC’s 2007 Case Management Division Standard Operating Procedures, cost documentation, including contract invoices and travel orders, should be maintained. In addition, Standards for Internal Control in the Federal Government provides that control activities should be effective and efficient in accomplishing the agency’s control objectives. Specifically, transactions should be clearly documented, the documentation should be readily available for examination, and supervisory activity should occur in the course of operations. The lack of documented transactions could lead to the payment of unauthorized transactions or payment for the wrong amounts.

High Visibility Spills Not Always Identified

Our testing of the stratified random sample of oil removal disbursements identified five oil spills each of which had a total cost over $5 million and was not identified in NPFC’s Case Information Management System (CIMS) as high visibility spills. Per NPFC’s 2007 Case Management Division Standard Operating Procedures, the identification of a spill as high visibility prompts NPFC to incorporate additional oversight procedures for the oil spill. The additional procedures are necessary to provide the careful consideration required while reviewing a high visibility case. CIMS was designed to allow NPFC case managers to identify any case over $5 million as high visibility. In addition to the five oil spills found in our stratified random sample that were not identified in CIMS as high visibility oil spills, we identified two additional oil spills during testing of the high dollar oil removal disbursements that were not identified in CIMS as high visibility oil spills. NPFC’s 2007 Case Management Division Standard Operating Procedures states that among other criteria, any case with a ceiling higher than $5 million should be identified as a high visibility case. NPFC’s practice has changed from using the high visibility identifier, which is specified in the current policy, to routinely discussing all high visibility cases of any value during weekly staff meetings with high-level officials, including the Director, Deputy Director, and the Legal Division Chief. The details of the weekly staff meetings are documented in the meeting minutes and are posted to NPFC’s internal website; notification of recent meeting minutes is sent to all staff via e-mail. In response to our inquiry, NPFC officials stated that they plan to eliminate the requirement to identify cases as high visibility in CIMS as the identification of high visibility oil spills take place during the weekly staff meetings where the high visibility oil spills are discussed.

According to Standards for Internal Control in the Federal Government, control activities should be effective and efficient in accomplishing the agency’s control objectives. Specifically, internal controls need to be clearly documented and properly managed and maintained to reasonably assure relevance. Following a practice that differs from policy may cause NPFC to inconsistently monitor high visibility spills and miss identifying or reacting to other important events.

Deficiencies Identified in Other Oil Removal Disbursements

SILC Does Not Have Certain Disbursement-Related Policies and Procedures, and the Finance Center Did Not Follow Procedures

We found that for three disbursements from the high dollar sample, SILC and the Finance Center did not take the discount for early payment offered by the vendors. Some vendors offer cash discounts on the amount owed when a customer pays within specified time frames as a means of encouraging faster payment. However, we found that SILC did not consistently identify available discounts and the Finance Center did not consistently take available discounts. Specifically, in one instance SILC identified the discount terms and the Finance Center paid the vendor within the time frame required to receive the discount, but the Finance Center did not take advantage of the discount when processing the payment. Finance Center officials stated that the discount was not taken because of personnel oversight. We also found two other disbursements where SILC did not identify the discount terms offered by the vendor so the discounts were not taken.

These occurred for two reasons. One, we found that SILC does not have documented policies and procedures for reasonably assuring that available discounts are identified. Second, we found that although the Finance Center has established procedures for the appropriate processing of available vendor discounts, it does not have a mechanism to reasonably assure that its procedures are followed. SILC’s lack of policies and procedures for identifying discounts and the Finance Center’s failure to follow documented procedures increases the risk that they will not take advantage of opportunities to save the government money.

In addition, while testing the stratified random sample, we found that SILC made an overpayment to a vendor for one disbursement. Specifically, a vendor presented a charge on an invoice for Pollution Control Services to a contracting officer in SILC that contained a math error; the charge had a corresponding administrative fee of 10 percent. The contracting officer identified the math error and correctly reduced the charge but failed to also reduce the related administrative fee. We found that SILC does not have documented policies and procedures to reasonably assure that invoice amounts are correctly calculated. The lack of such policies and procedures increases the risk of overpayments.

According to Standards for Internal Control in the Federal Government, control activities should be effective and efficient in accomplishing the agency’s control objectives. Specifically, policies and procedures should be clearly documented to reasonably assure stewardship of government resources. According to the Commercial Payables Branch, Commercial Payments Section Contracts Desk Guide, the Department of Homeland Security advises that any component that has earned a discount must take the discount unless it is not advantageous to do so. In addition, according to Office of Management and Budget (OMB) Circular No. A- 123, an improper payment is any payment that should not have been made or that was made in an incorrect amount. Incorrect amounts are overpayments or underpayments that are made to eligible recipients. The failure to take the discount when the payment was made early and the overpayment to the vendor for the incorrect administrative fee meet the definition of improper payments.

NPFC Does Not Have Sufficient Policies and Procedures for Processing Cash Advances

In January 2013, the Coast Guard and EPA updated their existing June 2012 memorandum of understanding for use of the Fund in an appendix to the memorandum for the provision of cash advances. Per the appendix, EPA requests a cash advance based upon paid and pending invoices for oil removal activities and NPFC validates the documentation supporting the requested amount. The advance is then approved and forwarded to the Finance Center for payment. Subsequently, the appendix requires EPA to submit oil removal cost documentation to an NPFC case officer for review and approval. The information is then forwarded to the Finance Center, where the amount is taken against the advance. According to NPFC officials, EPA is the only agency to which NPFC advances funds, and EPA requested this process change because of cash flow constraints.

Our review found that NPFC does not maintain the cost documentation that supports the EPA cash advances. In addition, NPFC does not verify amounts supporting the requested cash advance. According to NPFC officials, the cost documentation, which is a summary of expenses, is not maintained because of the large size of EPA’s submitted files, and NPFC does not verify the amounts contained in the summary of expenses because NPFC does not obtain detailed support, such as invoices, for the EPA summary. NPFC has not developed policies and procedures for providing cash advances from the Fund that include tracking and maintaining supporting documentation for the amounts advanced, reconciling amounts advanced to amounts expensed, and providing approval to the Finance Center to liquidate the advances. Without such policies and procedures to reasonably assure that the key control activities over cash advances are performed, the risk of improperly processing transactions, such as overpaying EPA, is increased.

Standards for Internal Control in the Federal Government states that control activities should be effective and efficient in accomplishing the agency’s control objectives. Specifically, internal controls need to be clearly documented and properly managed and maintained to reasonably assure relevance. Further, all documentation should be properly managed and maintained, and the documentation should be readily available for examination.

NPFC Controls Provide Reasonable Assurance That Responsible Parties Were Designated and Billed for Damage Claim and Oil Removal Disbursements over $500,000

NPFC has established a system of internal controls over designation and billing of responsible parties for damage claim and oil removal disbursements that are over $500,000. Through our testing of internal controls for the designation and billing of disbursements, we did not identify any deficiencies with the design and implementation of internal controls in this area.

NPFC’s Internal Controls over Damage Claim Disbursements Provided Reasonable Assurance That Responsible Parties Were Designated and Billed for the Amounts over $500,000

We identified and tested the key internal controls for the 27 selected unreimbursed high dollar damage claim disbursements for fiscal years 2011 through 2013. We tested and confirmed that when a responsible party was found liable, NPFC case officers entered the responsible party’s identifying information, including a valid name and address, into NPFC’s case management system. We determined that the internal controls provided reasonable assurance that responsible parties were designated and billed, as appropriate, for damage claim disbursements that are over $500,000.

NPFC’s Internal Controls over Oil Removal Cost Disbursements Provided Reasonable Assurance That Responsible Parties Were Designated and Billed for the Amounts over $500,000

We identified and tested key internal controls for the 61 selected unreimbursed high dollar oil removal disbursements for fiscal years 2011 through 2013. We tested and confirmed that when a responsible party was found liable, the FOSC forwarded the responsible party’s identifying information to NPFC, and that NPFC case officers entered the responsible party’s identifying information, including a valid name and address, into NPFC’s case management system. We determined that the internal controls provided reasonable assurance that the responsible parties were designated and billed, as appropriate, for the oil removal disbursements that are over $500,000.

The Fund Has Received Limited Reimbursement for Damage Claim and Oil Removal Disbursements, and Certain Revenue Sources for the Fund Are Set to Expire

NPFC disbursed in total over $360 million from the Fund for damage claim and oil removal costs in fiscal years 2011 through 2013. During this same period, NPFC billed in total $272 million to responsible parties, and collected in total $39 million. For certain incidents, the Fund was not fully reimbursed, which was appropriate in the circumstances. We found that NPFC was unable to bill for a large percentage of high dollar claim disbursements because either the responsible parties had reached their limit of liability or the spills were classified as mystery spills.

In addition to the collections from billed responsible parties, the Fund is primarily funded by an 8-cent per-barrel tax that increases to 9 cents a barrel in 2017 and expires on December 31, 2017. As the Fund may not be fully reimbursed for damage claim and oil removal costs, the per-barrel excise tax is the only consistent source of funding for the Fund, as discussed later in this report. Although the balance of the Fund was $4.6 billion as of September 30, 2014, the loss of the funding source and the potential for future spills and the cost of their associated cleanup contribute to uncertainty regarding the sufficiency of the funding sources for the Fund in the future.

Disbursements Made from the Fund in Fiscal Years 2011 through 2013

For fiscal years 2011 through 2013, $146 million was disbursed from the Fund in total for damage claims. There were 409 damage claim disbursement transactions during this period. In addition, for fiscal years 2011 through 2013, NPFC disbursed approximately $214 million in total for oil removal. There were 11,188 oil removal disbursement transactions during this period. (See table 2.)

Amounts Billed to and Collected from Responsible Parties in Fiscal Years 2011 through 2013

As shown in table 3, NPFC sent bills to responsible parties totaling $272 million and collected $39 million in total for fiscal years 2011 through 2013 for both damage claim and oil removal disbursements. It is important to note that collections are for the period indicated and are not necessarily tied to billings made in the same period.

Because of the unique nature of each spill, cycle times vary for when amounts are disbursed, when bills are sent, and when payments are collected. For example, in March 2011 an oil spill occurred offshore of Louisiana that was determined to have been caused by a company plugging subsea wells. NPFC paid expenses associated with the spill from April 2011 through May 2012 and then sent bills to the responsible party for the expenses in May and June 2012. The responsible party made multiple payments from August through November 2012. As such, the cycle time for this oil spill was 20 months and spanned 3 different fiscal years. According to NPFC staff, typically the larger the spill, the longer the cycle is.

A Significant Amount of Disbursements from the Fund Are Not Fully Reimbursable

The high dollar damage claim disbursements we tested for fiscal years 2011 through 2013 included damage claim disbursements for spills that occurred as early as 2004. We identified 95 oil removal disbursements and 27 damage claim disbursements during the period that exceeded $500,000. As discussed previously, of these, 61 oil removal disbursements and 27 damage claim disbursements during the period were not fully reimbursed. These disbursements ranged from a damage claim of $505,084 for the F/V Milky Way sinking, which was located in Washington State, to a damage claim of $20,257,121 for the T/V Athos I oil spill, which affected Delaware, New Jersey, and Pennsylvania. Certain spills had multiple disbursements over $500,000 during this period. For instance, the M/V Jireh oil spill, which was located in Puerto Rico, resulted in 14 oil removal disbursements over $500,000 in fiscal years 2011 through 2013, and the M/V Selendang Ayu oil spill, which affected Alaska, resulted in 13 damage claim disbursements over $500,000. More information on the individual disbursements over $500,000 that were not fully reimbursed is presented in appendixes II and III. We analyzed unreimbursed high dollar disbursements for fiscal years 2011 through 2013, which totaled $201 million, and determined that 79 percent or $158 million will most likely not be reimbursed because the responsible party had reached its limit of liability or the spill source could not be determined. The following examples illustrate circumstances when the Fund will not be reimbursed for all expenses it incurs because (1) the responsible party reached its legal liability limit on paying for damage claims or oil removal costs, (2) not all elements of liability were established, or (3) a responsible party could not be determined.

Responsible Party Reached Its Legal Liability Limit

M/V Selendang Ayu. On December 8, 2004, the M/V Selendang Ayu cargo ship ran aground off Unalaska Island in western Alaska’s Aleutian Islands after its engine failed, resulting in a large oil spill. The company (responsible party) that owned the ship assumed responsibility for the spill and worked with the Coast Guard and state of Alaska to address the spill, including directly paying the oil removal costs and damage claims associated with the spill. The company was not found to be grossly negligent, so its liability under OPA was capped at $24 million. The response costs and damage claims paid by the company totaled $149 million. The company filed a damage claim request with NPFC for approximately $125 million, which comprised the $149 million in total costs and damages minus the $24 million liability cap. Of these damage claims, $88 million was found compensable and reimbursed from the Fund in fiscal years 2012 through 2013.

T/V Athos I. The T/V Athos I departed Venezuela for the Citgo Asphalt Refinery in Paulsboro, New Jersey, on November 20, 2004, carrying approximately 13 million gallons of crude oil. On November 26, 2004, tug operators assisting the T/V Athos I with docking at the refinery notified the Coast Guard that the tanker was leaking oil into the Delaware River. The vessel had struck several submerged objects while maneuvering to its berth, including an 18,000-pound anchor. The Coast Guard determined that the anchor punctured the vessel’s number seven center cargo and port ballast tanks, allowing oil to spill into the river. The Coast Guard estimated that 263,371 gallons had spilled into the Delaware River. As of September 30, 2013, oil removal costs disbursed by the Fund were $47.6 million and damage claims disbursed by the Fund were $162.7 million. The Coast Guard determined in 2006 that the responsible party had reached its liability of $45.5 million under OPA, which means the responsible party had paid oil removal claims, damage claims, or both that equaled or exceeded its liability limit, and therefore the Fund will be not reimbursed for any further expenses.

Not All Elements of Liability Were Established

Evolution Petrol Corp. An oily sheen was discovered on a creek in Louisiana on August 1, 2007. The EPA FOSC determined on or about August 2, 2007, that the oily sheen was from Evolution Petrol Corp saltwater tanks. EPA explained that if Evolution did not take responsibility, EPA would hire contractors for cleanup, which could be more expensive, and that Evolution could be subject to penalties of up to $32,500 per day. Evolution chose to accept responsibility and hired a contractor to handle the cleanup. Evolution received over $777,000 in reimbursement for the cleanup from its insurance company. The insurance company presented a claim of approximately $715,000 to the Fund for reimbursement of the oil removal costs based on its analysis that Evolution was not responsible for the spill. NPFC determined that based on its analysis and evidence provided, the oily sheen did not originate at the Evolution facility. The Fund paid the insurance company approximately $696,000 in fiscal year 2011 and because no liability was established, the Fund will not be reimbursed for its expenses.

A Responsible Party Could Not Be Determined

S.S. Montebello. On December 23, 1941, the S.S. Montebello was torpedoed by a Japanese submarine off the coast of Cambria, California, sinking the 8,272 ton tanker carrying 3 million gallons of crude oil that may still have been in its holds. On December 2, 2010, the FOSC determined that there was a substantial threat of a discharge of oil in part due to the reported volume of oil carried by the vessel and the potential damage that a release might have on the marine ecosystem in the surrounding area. In September 2011, the Coast Guard awarded a contract to Global Diving and Salvage, Inc. to conduct a survey to determine the intensity and immediacy (of the threat) and to develop further courses of action for removal if necessary. The survey was conducted in October 2011, at which time a Unified Command led by the Coast Guard and California Department of Fish and Game’s Office of Spill Prevention and Response assessed cargo and fuel tanks of the sunken ship. The Unified Command determined that there was no substantial oil threat from the S.S. Montebello to California waters and shorelines. The cost of the project was $3.2 million. These removal costs were not billed because there was not a responsible party.

Mystery spills. The FOSC is unable to determine the source of these spills, so a responsible party cannot be identified. During fiscal years fiscal years 2011 through 2013, NPFC made about $16 million ($2.3 million in damage claims and $13.9 million in oil removal) in disbursements for mystery spills. These disbursements are for mystery spills that occurred during fiscal years 2004 through 2013.

The Per-Barrel Tax Expires in 2017

Uncertainties exist regarding the primary revenue source of the Fund, an 8-cent per-barrel tax on petroleum products. This tax is set to expire in 2017. If the Fund’s primary source of revenue expires, this could affect future oil spill response and may increase risk to the federal government. As discussed above, the Fund at times is unable to bill and collect reimbursements from responsible parties. The Fund enables the Coast Guard and EPA to respond to oil spills as the Fund can be used to cover expenses associated with mitigating the threat of an oil spill as well as the costs associated with containment, countermeasures, and cleanup and disposal activities. During fiscal year 2014, NPFC reported 408 oil spills; the Coast Guard and EPA responded to 324 of these. In the remaining 84 cases, the claimants sustained damages and directly submitted claims to NPFC.

The per-barrel tax was increased and extended by a provision of the Energy Improvement and Extension Act of 2008, through December 31, 2017. The act also eliminated a restriction on the growth of the balance of the Fund beyond $2.7 billion. As shown in figure 4, the Fund’s revenue sources include per-barrel tax, interest earned on the Fund’s investments in Department of the Treasury securities, fines and penalties paid pursuant to various statutes, and cost reimbursements from responsible parties for costs of removal and damages. The average amount of the Fund’s revenue from the per-barrel tax was 60 percent of the total revenue for fiscal years 2011 through 2013.

The Fund’s balance has increased over the years, as shown in figure 5. The significant increase in the balance from fiscal years 2012 through 2013 is primarily the result of the two judgments that resulted in assessments of fines to BP PLC and Transocean Ltd. for the Deepwater Horizon oil spill that collectively totaled approximately $1.3 billion. Although the Fund’s balance was about $4.6 billion as of September 30, 2014, the potential for large spills exists, and if a responsible party is unwilling, unable, or not required to pay, the Fund will be needed to pay for the cleanup, including removal costs and damage claims. As previously discussed, the costs and claims from oil spills can continue for a number of years depending on the circumstances, and a significant amount of disbursements from the Fund are not fully reimbursed for various reasons.

The President’s fiscal year 2016 budget request included a proposal to increase the excise tax on each barrel of oil produced domestically or imported by 1 cent, to a total of 9 cents per barrel for January 1, 2016, through December 31, 2016, and by another cent to a total of 10 cents per barrel starting January 1, 2017. The President’s budget request did not include an extension of the tax past December 31, 2017.

Bills have been introduced in recent sessions of Congress that included provisions to extend the excise tax beyond 2017. Without such an extension, the primary source of revenue for the Fund will cease to exist after 2017.

Conclusions

Hundreds of oil spills occur annually on U.S. land and in U.S. coastal waters. NPFC has an opportunity to improve its internal controls for processing oil removal disbursements by developing and updating policies and procedures. Improving its internal controls contributes to reasonably assuring that the Fund is used efficiently and effectively to pay for oil spill cleanup costs and damage claims. Because the Fund has disbursed more funding than it has been able to recover, its primary source of funding has been the per-barrel oil tax. However, the per-barrel oil tax is set to expire in 2017, creating uncertainty with regard to future funding. Given this, it will be important for Congress to determine what mechanism it would like to rely on to provide sustained funding for the Fund.

Matter for Congressional Consideration

Congress should consider the options for sustaining the Oil Spill Liability Trust Fund as well as the optimal level of funding to be maintained in the Fund, in light of the expiration of the Fund’s per-barrel tax funding source in 2017.

Recommendations for Executive Action

We recommend that the Secretary of Homeland Security direct the Commandant of the Coast Guard to take the following four actions to improve the design and implementation of NPFC’s internal controls over Fund disbursements.

Develop and implement a plan to reasonably assure that NPFC staff comply with invoice certification policies and procedures.

Develop and implement policies and procedures for reasonably assuring consistent supervisory oversight of the filing process related to transaction documentation.

Update NPFC’s high visibility oil spill policy to reasonably assure that it reflects management’s current practice of weekly meetings to identify and discuss high visibility oil spills.

Develop policies and procedures for processing of cash advances from the Fund, covering processes for (1) tracking the amounts advanced, (2) reconciling amounts advanced to amounts spent, (3) providing approval to the Finance Center to liquidate an advance, and (4) maintaining supporting documentation.

We recommend that the Secretary of Homeland Security direct the Commandant of the Coast Guard to take the following two actions to improve the design and implementation of SILC’s internal controls over Fund disbursements.

Develop and implement policies and procedures related to identifying available vendor discounts.

Develop and implement policies and procedures to reasonably assure that all amounts presented on an invoice are calculated correctly.

We also recommend that the Secretary of Homeland Security direct the Commandant of the Coast Guard to develop and implement a mechanism for the Finance Center to reasonably assure that its procedures for processing available discounts related to Fund disbursements are followed.

Agency Comments

We provided the Department of Homeland Security with a draft of this report for review and comment. In written comments, reprinted in appendix IV, the Department of Homeland Security concurred with our recommendations and described actions taken or planned to address each recommendation. The Department of Homeland Security also provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees and the Secretary of Homeland Security. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-2623 or davisbh@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 key contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

The Coast Guard Authorization Act of 2010 included a provision for GAO to conduct an audit of Oil Spill Liability Trust Fund (Fund) disbursements. This report examines the extent to which (1) the National Pollution Funds Center (NPFC) has designed and implemented internal controls over damage claim and oil removal disbursements to reasonably assure that amounts are appropriately disbursed from the Fund; (2) NPFC has designed and implemented internal controls to reasonably assure that responsible parties are designated and billed, as appropriate, for disbursements from the Fund that are over $500,000; and (3) the Fund was reimbursed for damage claim and oil removal costs in fiscal years 2011 through 2013. We also report on the Fund’s reliance on the per- barrel oil tax, which is its primary source of revenue. We excluded information about the Deepwater Horizon oil spill, as we had previously conducted work on that specific spill. In addition, it is the only spill of national significance to occur since the Oil Pollution Act of 1990 (OPA) passed, and its size and cost would have skewed our analysis.

We obtained NPFC’s damage claim and oil removal disbursement data for fiscal years 2011 through 2013 and performed procedures to determine whether the data were reliable enough for our purposes. Specifically, we interviewed knowledgeable agency officials about the quality control procedures the agency had in place when collecting and creating the data and electronically tested the data for unusual items. Based on the results of these procedures, we determined that the data were reliable enough for our purposes. We used these data to identify 27 damage claim disbursements and 95 oil removal disbursements for fiscal years 2011 through 2013 that exceeded $500,000. Of these 122 disbursements, we selected and tested all disbursements that were not fully reimbursed, resulting in a total of 88 disbursements for both damage claim and oil removal disbursements, which is further explained below.

To determine whether the disbursements were reimbursed, we interviewed NPFC staff about the quality control procedures the agency had in place when collecting and creating the data and reviewed the billings to the responsible parties and the subsequent collections. Based on our interviews with the NPFC staff and analyzing of the billings and collection data, we determined that the billing and collection data were reliable enough for our purposes. NPFC sends the responsible party an itemized bill containing direct and indirect costs. The itemized bill typically contains multiple individual disbursements. The responsible party may not always pay 100 percent of the amount billed, but any collection is applied to the total amount billed. Since amounts collected are not applied to individual items, such as disbursements on the bill, we were unable to determine whether individual disbursements were fully reimbursed if the bill was not paid in full. Our analysis found that 32 of the 122 disbursements were fully reimbursed by the responsible party. Additionally, 2 of the 122 disbursements were not fully reimbursed as the responsible party filed bankruptcy and settled with NPFC for a lesser amount; these were excluded from our review, as NPFC recognized these 2 disbursements as paid in full. The remaining 88 items consisted of 27 damage claim disbursements and 61 oil removal disbursements that were over $500,000 (high dollar disbursements) and not fully reimbursed by the responsible party, guarantor(s), or both for fiscal years 2011 through 2013. These 88 disbursements were either fully uncollected or partially reimbursed (see app. II and app. III).

The selected 27 damage claim disbursements totaled $136.1 million, which represented 93 percent of total damage claim dollars disbursed during fiscal years 2011 through 2013. The selected 61 oil removal disbursements totaled $65.4 million, which accounted for 30 percent of the total oil removal dollar disbursements during fiscal years 2011 through 2013 (see tables 4 and 5).

Because of the low dollar coverage for oil removal disbursements, we also selected a stratified random sample of disbursements less than or equal to $500,000. This sample of 200 oil removal disbursements, which was generalizable, was from the population of 11,093 fiscal year 2011 through 2013 oil removal disbursements. (See table 6.)

To determine whether the design of existing internal controls over the damage claim and oil removal processes assure that amounts are appropriately disbursed from the Fund, we (1) reviewed OPA and other federal laws and regulations to obtain an understanding of allowed costs, (2) reviewed Standards for Internal Control in the Federal Government and evaluated the policies and procedures NPFC has in place for damage claim and oil removal disbursements, (3) evaluated potential risks and the effectiveness of NPFC’s controls to mitigate those risks (4) interviewed NPFC officials and staff, and (5) performed walk-throughs of the damage claim and oil removal processes. Based on our review of potential risks and NPFC’s documented controls, we identified key controls for the damage claim and oil removal disbursement processes and tested the implementation of those controls for the damage claim and oil removal disbursements described above and for the statistical sample of oil removal disbursements less than or equal to $500,000. The key controls include verifying that transactions are properly authorized, processed for payment, and recorded. For damage claims, the testing of key controls included reviewing controls to reasonably assure that claimants presented their claims to the responsible party before submitting them to NPFC; reviewing controls related to the processing of claim reconsiderations and reviewing controls related to NPFC’s coordination efforts with the Federal On-Scene Coordinators (FOSC) in adjudicating the claims and identifying responsible parties; reviewing controls to reasonably assure that where applicable, responsible parties were identified and recorded; and reviewing controls to reasonably assure that claim determinations were appropriately reviewed and approved by an appropriate individual, payments were authorized, and each claimant signed a release letter accepting the payment as full and final within the allowable time frame.

For oil removal costs, the testing of key controls included reviewing NPFC’s internal controls related to the review and authorization of oil removal activities; reviewing controls around the FOSC’s certification of the appropriateness of oil removal activities; reviewing NPFC’s coordination efforts with the FOSCs in identifying responsible parties; and reviewing controls to reasonably assure that where applicable, responsible parties were identified and recorded and that payments for removal cost activities were appropriately authorized and recorded in the agency’s accounting records.

We analyzed the results of these tests to determine if the internal controls in place were effective.

To assess the design of internal controls for reasonably assuring that responsible parties were designated and billed, as appropriate, for all disbursements, we (1) reviewed NPFC’s policies and procedures for designating and billing the responsible parties, (2) evaluated potential risks and the effectiveness of NPFC’s controls to mitigate those risks, (3) interviewed NPFC officials and staff, and (4) obtained billings and receipt data for fiscal years 2011 through 2014. To determine if these data were reliable enough for our purposes, we interviewed knowledgeable agency officials about the quality controls associated with the collection of these data. Based on the results of these tests, we concluded that these data were reliable enough for our purposes. Based on our review of potential risks and NPFC’s documented controls, we identified key controls for the designation and billing processes and tested the implementation of these controls for the selected 27 high dollar damage claim disbursements and 61 high dollar oil removal disbursements. We analyzed the results of these tests to determine whether the controls in place were effective.

To understand the extent to which the Fund is reimbursed for damage claim and oil removal costs both under and over $500,000, we interviewed NPFC officials about the billing and reimbursement processes. We analyzed disbursement, billing, and collection data obtained from NPFC. We also identified certain examples of when the disbursement from the Fund is not eligible for reimbursement.

We conducted this performance audit from February 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Damage Claim Disbursements

Tables 7, 8, and 9 show damage claim disbursements over $500,000 for fiscal years 2011 through 2013, which were not fully reimbursed to the Oil Spill Liability Trust Fund as of March 31, 2015. As of that date, two items had been partially collected, as noted in tables 7 and 8.

Appendix III: Oil Removal Disbursements

Tables 10, 11, and 12 show oil removal disbursements over $500,000 for fiscal years 2011 through 2013 that were not fully reimbursed to the Oil Spill Liability Trust Fund as of March 31, 2015.

Appendix IV: Comments from the Department of Homeland Security

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Kim McGatlin (Assistant Director), Teressa Gardner (Analyst-in-Charge), Justin Fisher, Sarah Florino, Wilfred B. Holloway (Assistant Director), Pierre Kamga, Elizabeth Sodipo, and Andrew Stephens made key contributions to this report.