Of the eight coal mine operator bankruptcies we identified, three resulted in a transfer of estimated benefit liability from the coal operator to the Trust Fund and five did not, according to DOL. Figure 1 shows how many operators were self-insured or commercially insured at the time of bankruptcy, and if responsibility for benefits was shifted from the bankrupt operator to the Trust Fund. Federal law generally requires coal mine operators to secure their black lung benefit liability. A self-insured coal mine operator assumes the financial responsibility for providing black lung benefits to its eligible employees by paying claims as they are incurred. Operators are allowed to self-insure if they meet certain DOL conditions. For instance, operators applying to self-insure must obtain collateral in the form of an indemnity bond, deposit or trust, or letter of credit in an amount deemed necessary and sufficient by DOL to secure their liability. Operators that do not self-insure are generally required to obtain coverage from commercial insurance companies, state workers’ compensation insurance funds, or other entities authorized under state law to insure workers’ compensation. From 2014 through 2016, three self-insured coal mine operator bankruptcies resulted in a transfer of $865 million of benefit liabilities from the coal operators to the Trust Fund, according to DOL estimates (see table 1). DOL estimates for how these bankruptcies will affect the Trust Fund have considerably increased from what DOL had previously reported. In June 2019, we reported that DOL estimated that between $313 million to $325 million in benefit liabilities would transfer to the Trust Fund as a result of these bankruptcies. In January 2020, however, DOL provided updated estimates stating that $865 million in benefit liabilities would transfer to the Trust Fund as a result of these bankruptcies. According to DOL, their estimates increased, among other reasons, to account for higher black lung benefit award rates that occurred from fiscal years 2016 through 2019, and higher medical treatment cost inflation in recent years. Additionally, DOL’s prior estimate for the Patriot Coal (Patriot) bankruptcy did not account for future claims and their effect on the Trust Fund. The amount of collateral DOL required from these operators to self-insure did not fully cover their estimated benefit liabilities. When this occurs, benefit liabilities in excess of the collateral can be transferred to the Trust Fund. For example, the collateral DOL required from Alpha Natural Resources (Alpha) was about $12 million and approximately $494 million of estimated benefit liability transferred to the Trust Fund, according to DOL. The three other self-insured coal mine operator bankruptcies we identified did not affect the Trust Fund. Specifically, Arch Coal, Peabody Energy, and Walter Energy were also self-insured operators, but DOL officials said that their federal black lung benefit liabilities were assumed by a reorganized company or by a purchaser, and therefore did not transfer to the Trust Fund. Insurance contracts or policies to secure operators’ benefit liabilities are required by law to include a provision that insolvency or bankruptcy of an operator does not release the insurer from the obligation to make benefit payments. Additionally, state insurance regulation, insurer underwriting, risk management practices, and state guaranty funds help to protect the Trust Fund from having to assume responsibility for paying black lung benefits on behalf of bankrupt coal operators. Thus, by being commercially insured, the two operators we identified that filed for bankruptcy between 2014 and 2016—Energy Future Holdings and Xinergy Ltd—did not affect the Trust Fund, according to DOL (see fig. 1). Since 2016, several other self-insured operators have also filed for bankruptcy, according to DOL officials, including Cambrian Coal, Cloud Peak Energy, Murray Energy, and Westmoreland Coal. DOL officials said that about $17.4 million in estimated black lung benefit liability will transfer to the Trust Fund as a result of Westmoreland Coal’s bankruptcy. Given the uncertainty of the bankruptcy process in terms of whether liabilities will or will not transfer to the Trust Fund, however, DOL officials said that they could not speculate on how these other bankruptcies may affect the Trust Fund. In overseeing coal mine operator self-insurance in the past, DOL did not estimate future benefit liability when setting collateral or regularly review operators to monitor their changing financial conditions. DOL regulations require that collateral be obtained from operators in an amount deemed necessary and sufficient to secure the payment of the operators’ liability. To determine collateral amounts under the former process, agency procedures stated that an operator’s net worth be assessed by reviewing, among other factors, the operator’s audited financial statements and black lung claims information. The amount of collateral was to be equal to 3, 5, or 10 years of the operator’s annual black lung benefit payments made at the time of a coal operator’s self-insurance application depending on its net worth. Specifically, if net worth was $1 billion or greater, agency procedures set collateral equal to 3 years of benefit payments. If net worth ranged from $500 million to $1 billion, collateral was equal to 5 years of benefit payments. If net worth ranged from $10 million to $500 million, DOL set collateral equal to 10 years of benefit payments. Agency procedures did not permit operators with net worth less than $10 million to self-insure. DOL’s former process for determining collateral did not routinely consider potential future claims for which an operator could be responsible. The agency periodically reauthorized coal operators to self-insure by reviewing an operator’s most recent audited financial statement and claims information, among other things. DOL prepared memos documenting these reviews, and communicated with coal operators about whether their financial circumstances warranted increasing or decreasing their collateral. Regulations state that DOL may adjust the amount of collateral required from self-insured operators when experience or changed conditions so warrant, but regular monitoring of self-insured operators was not conducted. In reviewing the most recent reauthorization memos for each of the self-insured operators, we found that while some of these operators had been reauthorized more recently, others had not been in decades. One operator in particular had not been reauthorized since 1988. There were no written procedures that specified how often reauthorizations should occur after an operator’s initial 18-month reauthorization. DOL has other tools available to mitigate financial losses to the Trust Fund. These include revoking an operator’s ability to self-insure; fining mine operators for operating without insurance; and placing liens on operator assets. Based on our review of agency documentation, however, we found instances when officials did not use these tools to protect the Trust Fund, or were hindered from doing so because of an operator’s ongoing appeal or bankruptcy. James River. In September 2001, DOL required $5 million in additional collateral from James River Coal (James River), which would have increased its collateral from $0.4 million to $5.4 million. Although DOL did not receive the additional collateral, it did not revoke the operator’s authority to self-insure, which is a potential option under agency regulations. Further, DOL had not reauthorized James River at any point from August 2001 until it filed for bankruptcy in April 2014. If James River’s ability to self-insure had been revoked, DOL could have potentially prevented the Trust Fund from being responsible for claims based on a miner’s employment from 2001 through 2016, when James River liquidated. Additionally, if the operator had been unable to obtain commercial insurance, the agency could have potentially fined the operator for each day it operated without insurance. Instead, no action was taken during these years and estimated benefit liability of $141 million was shifted to the Trust Fund, according to DOL. DOL officials stated that they do not have records explaining why James River did not provide the additional collateral or why they did not revoke its authority to self-insure. Patriot. In August 2014, DOL required an additional $65 million in collateral from Patriot, increasing its collateral from $15 million to $80 million. Patriot appealed this decision and, in the 8 months that followed before Patriot filed for bankruptcy in May 2015, DOL did not obtain additional collateral, or revoke Patriot’s ability to self-insure because the appeal was still pending. DOL officials said they would not typically revoke an operator’s authority to self-insure during an ongoing appeal. As a result, DOL was hindered from using this enforcement tool. Liens on operator assets can be an effective tool to protect the Trust Fund if an operator defaults on its benefit liability, but DOL officials said they are hindered from using this tool if an operator files for bankruptcy. DOL can place a lien on a coal operator’s assets under federal law if they refuse the demand to pay the black lung benefit payments for which they are liable. In the event of bankruptcy or insolvency, federal law states that the lien imposed shall be treated in the same manner as a lien for taxes due and owing to the United States under certain laws. However, DOL officials said that operators rarely stop paying benefits until after they file for bankruptcy. Once a bankruptcy occurs, DOL officials said that they are generally prevented by the court from placing a lien and taking an operator’s assets in lieu of payment of current and future benefit liability. Under bankruptcy law, DOL officials said that they have no special status over other creditors with outstanding financial claims. DOL officials said that obtaining sufficient collateral is a better way to protect the Trust Fund. In July 2019, DOL began implementing a new process for coal mine operator self-insurance that may help to address some past deficiencies, if implemented effectively. Among other things, DOL will require operators to periodically submit financial and claims information, including an actuarial estimate of the operator’s current and future benefit liability. DOL plans to use this information to assess the insolvency risk of each operator. Depending on the results of their analysis, DOL plans to categorize the risk-level of each applicant as low, medium, or high. DOL will then set the amount of collateral required to self-insure by linking the operator’s risk category to a corresponding percentage of the operator’s actuarial estimated benefit liability. DOL policies state that they would require a high-risk operator to secure with collateral 90 percent of estimated benefit liability, a medium-risk operator to secure 45 percent, and a low-risk operator to secure 15 percent. However, in February 2020, DOL officials said they plan to revise these percentages to 100 percent, 85 percent, and 70 percent for high-risk, medium-risk, and low-risk operators, respectively. Coal mine operators that are already authorized to self-insure will be required to submit, among other things, an annual renewal application. DOL plans to use this information to update their insolvency risk analysis. If an operator’s risk category changes (e.g., from low-to medium-risk), DOL plans to send a form to the operator requiring an additional amount or type of collateral. Upon receiving the completed form, and proof that the collateral has been obtained, DOL stated that they will notify the operator that its authority to self-insure has been reauthorized. DOL’s new self-insurance process made important changes, but overlooked other key internal control improvements that are needed to protect the financial interests of the Trust Fund. DOL’s new requirements for setting collateral and for the more frequent review of self-insured operators are key components of internal controls, which call for agency management to implement control activities through policy. However, DOL’s new self-insurance procedures do not specify (1) the duration of an operator’s self-insurance authority, (2) the time frames for submitting renewal applications and supporting documentation, and (3) the conditions under which an operator’s self-insurance authority would not be renewed. Our report recommends that DOL implement procedures for coal mine operator self-insurance renewal that clarifies how long an operator is authorized to self-insure; when an operator must submit its renewal application and supporting documentation; and the conditions under which an operator’s self-insurance authority would not be renewed. DOL agreed with this recommendation and stated that it will ensure letters granting or renewing self-insurance authority will inform operators that their authorization expires in one year and that they must submit renewal information three months in advance of the expiration date. DOL staff are hindered from taking enforcement action during an operator’s ongoing appeal, as previously mentioned. DOL policies state that an operator may request reconsideration if its self-insurance application has been denied or if it believes the collateral required by DOL is too high to secure its benefit liability. However, DOL lacks procedures that specify, among other things, the length of time that operators have to submit supporting information. Further, DOL does not specify a goal for how much time DOL appeals decisions should take. For example, in October 2015, DOL recommended revoking Murray Energy’s (Murray) authority to self-insure due to deteriorating financial conditions. Murray appealed this decision, and DOL officials said they postponed responding to the appeal until their new self-insurance process was implemented. However, Murray filed for bankruptcy in October 2019 and DOL had not revoked its authority to self-insure or requested additional collateral because Murray’s appeal was still pending and DOL was still evaluating how much collateral it would require from the operator under its new self- insurance process. Our report recommends that DOL develop and implement procedures for self-insured coal mine operator appeals that identify time lines for self- insured operators to submit documentation supporting their appeals and that identify a goal for how much time DOL should take to make appeals decisions. DOL agreed with this recommendation and stated that they will ensure letters denying self-insurance will inform operators that they have a 30-day appeal period (limited to one extension), and that DOL has set a goal of resolving all appeals within 90 days of the denial letter. We found that DOL does not monitor coal mine operators that do not self- insure and, thus, must commercially insure their federal black lung liabilities to make certain they maintain adequate and continuous coverage as required by law. In the absence of effective DOL monitoring, we evaluated the potential risk that uninsured operators could pose to the Trust Fund. Specifically, in examining the 13 largest coal mine operators that do not self-insure, we found that some insurers erred in reporting black lung policies and in one instance an operator did not have adequate coverage. We found six operators (parent or subsidiary) that were not insured for the entire 3-year period from 2016 through 2018, according to our review of DOL data. When we discussed our findings with DOL, agency officials had to research each operator individually and in some cases contact the operator or their insurer to find out whether or not they had been covered. DOL concluded that these entities were insured. However, the insurers had not properly reported the federal black lung endorsement on new policies or subsequent renewals, in addition to other reporting issues. One of these six operators also had, inadvertently, not maintained adequate commercial coverage for its mining operations in Texas, and had not self-insured those operations. In this instance, the operator obtained an excess loss policy that only pays claims once they exceed a high threshold and, therefore, is not sufficient by itself to secure the payment of the operator’s benefit liability. Designing processes to achieve agency objectives and respond to risks is a principle of effective internal controls. Without a process to monitor operator compliance with program insurance requirements, DOL risks not identifying a lapse or cancellation of operator coverage. This could result in the Trust Fund having to assume responsibility for paying benefits that would otherwise have been paid by an insurer. Our report recommends that DOL should develop and implement a process to monitor operator compliance with commercial insurance requirements and periodically evaluate the effectiveness of this process. DOL agreed with this recommendation and stated that it will modify existing computer systems to identify lapses or cancellations of commercial insurance coverage, and require operators identified as having lapsed or cancelled coverage to obtain or provide proof of coverage within 30 days. Chairwoman Adams, Ranking Member Byrne, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have at this time. If you or your staffs have any questions concerning this testimony, please contact Cindy Brown Barnes at (202) 512-7215 or brownbarnesc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Alicia Puente Cackley, (Director), Blake Ainsworth (Assistant Director), Patrick Ward (Assistant Director), Justin Dunleavy (Analyst-in-Charge), Alex Galuten, Rosemary Torres Lerma, Olivia Lopez, Scott McNulty, and Almeta Spencer. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: In May 2018, GAO reported that the Trust Fund, which pays disability benefits to certain coal miners, faced financial challenges. The Trust Fund has borrowed from the U.S. Treasury's general fund almost every year since 1979 to make needed expenditures. GAO's June 2019 testimony included preliminary observations that coal operator bankruptcies were further straining Trust Fund finances because, in some cases, benefit responsibility was transferred to the Trust Fund. This testimony is based on GAO's report being released today, and describes (1) how coal mine operator bankruptcies have affected the Trust Fund, and (2) how DOL managed coal mine operator insurance to limit financial risk to the Trust Fund. In producing this report, GAO identified coal operators that filed for bankruptcy from 2014 through 2016. GAO analyzed information on commercially-insured and self-insured coal operators, and examined workers' compensation insurance practices in four of the nation's top five coal producing states. GAO also interviewed DOL officials, coal mine operators, and insurance company representatives, among others. Coal mine operator bankruptcies have led to the transfer of about $865 million in estimated benefit responsibility to the federal government's Black Lung Disability Trust Fund (Trust Fund), according to DOL estimates. The Trust Fund pays benefits when no responsible operator is identified, or when the liable operator does not pay. GAO previously testified in June 2019 that it had identified three bankrupt, self-insured operators for which benefit responsibility was transferred to the Trust Fund. Since that time, DOL's estimate of the transferred benefit responsibility has grown—from a prior range of $313 million to $325 million to the more recent $865 million estimate provided to GAO in January 2020. According to DOL, this escalation was due, in part, to recent increases in black lung benefit award rates and higher medical treatment costs, and to an underestimate of one company's (Patriot Coal) future benefit claims. Trust Fund, Filed from 2014 through 2016 DOL's limited oversight of coal mine operator insurance has exposed the Trust Fund to financial risk, though recent changes, if implemented effectively, can help address these risks. In overseeing self-insurance in the past, DOL did not: estimate future benefit liability when setting the amount of collateral required to self-insure; regularly review operators to assess whether the required amount of collateral should change; or always take action to protect the Trust Fund by revoking an operators' ability to self-insure as appropriate. In July 2019, DOL began implementing a new self-insurance process that could help address past deficiencies in estimating collateral and regularly reviewing self-insured operators. However, DOL's new process still lacks procedures for its planned annual renewal of self-insured operators and for resolving coal operator appeals should operators dispute DOL collateral requirements. This could hinder DOL from revoking operators' ability to self-insure should they not comply with DOL requirements. Further, for those operators that do not self-insure, DOL does not monitor them to ensure they maintain adequate and continuous commercial coverage as appropriate. As a result, the Trust Fund may in some instances assume responsibility for paying benefits that otherwise would have been paid by insurers. GAO made three recommendations to DOL to establish procedures for self-insurance renewals and coal operator appeals, and to develop a process to monitor whether commercially-insured operators maintain adequate and continuous coverage. DOL agreed with these recommendations.