Taxpayers must compensate for shortfalls
In December 2017, the EPA released a final rule stating that the Agency would not follow through on an Obama-era proposal to exercise its authority under Section 108(b) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund) to require that the hard-rock mining industry establish and maintain evidence of financial responsibility to address the risk of hazardous substances used or generated by the sector. Risk here applies to taxpayer funded cleanups—meaning that by not requiring mining companies to hold financial assurance instruments (e.g., insurance, surety bond, or self-insurance), there is a risk U.S. taxpayers will be forced to cover the cost of environmental response or remediation should a company lack the financial resources to do so.
In the final rule, the Agency said the proposal was based on older mining practices that have been abandoned and replaced with more environmentally safe management of hazardous substances. In addition, the sector is regulated by other federal agencies (e.g., the U.S. Forest Service and the Bureau of Land Management) that require financial assurance. Furthermore, financial assurance for hard-rock mining is required by some states, making a federal requirement redundant. Finally, the EPA said it already has authority under other CERCLA sections (e.g., Sections 106 and 122) to require that responsible parties possess the financial assurance needed to conduct CERLA actions.
The EPA came to the conclusion that the current management of financial assurance under CERCLA is adequate and that no further Agency rulemaking is needed. But that conclusion has now been challenged in a report from EPA’s Office of Inspector General (OIG). According to the OIG, the EPA does not currently review all Superfund financial liabilities for companies with multiple facilities/sites to verify that their financial assurance mechanisms are sufficient. This absence of review also applies to financial assurance required for entities under the Resource Conservation and Recovery Act (RCRA). OIG’s report concentrates on EPA’s flawed oversight of CERCLA and RCRA self-insurance by responsible parties.
The OIG states:
“The inability to validate a company’s self-insurance is a high-risk issue for the EPA. If self-insurance is not valid, a company may default on its obligation to pay for cleanup or closure activities, in some cases necessitating a government response. This threatens the effectiveness of cleanup programs, as the EPA—and, ultimately, the taxpayers—could be left with billions of dollars in cleanup costs. The EPA could mitigate the risks by requiring full disclosure of all self-insured environmental liabilities, or the Agency could seek regulatory or statutory changes.”
Based on its investigation, the OIG sent 14 recommendations to the EPA. The Agency agreed to undertake most of these but did not agree with OIG’s main recommendation—that the EPA conduct comprehensive rulemaking to require full disclosure of all self-insured liabilities and also eliminate the use of self-insured instruments. The EPA responded that this approach would require a regulatory impact analysis (RIA) that would be extremely resource intensive. Instead, the Agency proposed less comprehensive alternatives. The OIG states that it is working with the EPA to reach agreement on the unresolved recommendations.
The statutes
Financial assurance is meant to provide documentation or proof that those responsible for cleaning up contaminated sites have the financial resources to properly do so, preventing costs from being passed on to taxpayers.
RCRA Subtitle C and related regulations require owners and operators of facilities that treat, store, or dispose of hazardous waste to obtain financial assurance for closure, post-closure care, and corrective action costs. Most states have been authorized to implement the Subtitle C program. Under CERCLA, the EPA requires financial assurance from potentially responsible parties (PRPs) to cover the estimated cost of site cleanups.
If an owner, operator, or PRP defaults or is otherwise unable to fund a cleanup, the EPA has the authority to (1) step in and provide taxpayer-funded resources to clean up a site and/or (2) use its enforcement authority to bring the party into compliance. However, a goal of both Superfund and RCRA is for the polluter to pay for cleanup activities. Some companies are responsible for cleanups at multiple sites across the nation. The EPA is responsible for establishing internal controls regarding oversight and management of financial assurance instruments.
RCRA, its related regulations, and the Superfund program allow companies to either obtain financial assurance from a third party or provide self-insurance after passing a self-insurance test. Guarantees from the parent corporation are another form of self-insurance. When financial assurance is not sufficient and a party defaults, the EPA may need to step in and use taxpayer dollars to finance the cleanup. In addition, without sufficient financial assurance, contamination at sites can remain unaddressed for long periods, leading to larger problems such as more complicated cleanups, higher costs, and the potential enlargement of the contaminated area.
EPA’s current system
According to the OIG, EPA’s review process for self-insurance instruments involves two data systems: RCRA’s Information System (RCRAInfo), and Superfund’s Enterprise Management System (SEMS). The review process for self-insurance instruments also includes receipt of financial assurance documentation; input of financial assurance information into RCRAInfo or the SEMS; review of the financial assurance documentation for validity; and enforcement action, if needed, for noncompliance.
Disclosure and data gaps
Based on its 2-year investigation, the OIG found that:
- Most RCRA regulations and CERCLA guidance do not require full disclosure of all environmental liabilities, and the EPA lacks the information needed to independently validate all forms of self-insured environmental liabilities. In addition, EPA guidance does not include procedures that require regional staff to check whether a company has multiple liabilities in other regions when validating a self-insurance instrument.
- The EPA lacks both a data system with the capability to track multiple environmental liabilities and the resources and technical ability to validate self-insurance for companies with multiple environmental liabilities. Survey responses from all 10 EPA regions showed 70 percent of respondents believe insufficient staff training and expertise are moderate or extreme barriers to the efficient management and review of financial assurance instruments.
The OIG states:
“The EPA does not include and verify all self-insured environmental liabilities (estimated cleanup costs for all sites/facilities using financial test or corporate guarantee instruments) in most reviews of the validity of self-insurance instruments. For example, the EPA does not know the number of self-insurance instruments that cover multiple environmental liabilities nationwide. The EPA estimated in February 2017 that there were 17 potentially responsible parties that each provided a corporate guarantee or financial test instruments for more than one Superfund site. At that time, there were 53 Superfund sites for which one of these 17 potentially responsible parties provided financial assurance, and that does not include sites in other environmental programs. The RCRA program could not provide an estimate for the number of RCRA facilities covered by a corporate guarantee or financial test that also covers other CERCLA sites or RCRA facilities owned or operated by the same guaranteed party. The EPA’s data system does not allow for the compilation of this type of information. Due to regulatory and data constraints, the EPA does not have information on all environmental liabilities that would help it to determine whether a self-insurance instrument is valid and sufficient to pass the financial test or allow a corporate guarantee for the estimated cost of cleanup.”
Furthermore, said the OIG, not all RCRA regulations and CERCLA guidance require companies to fully disclose self-insurance environmental liabilities at all sites when applying for or renewing self-insurance at a single site. Instead, the Agency relies on corporations to provide adequate self-insurance and disclose when self-insurance covers more than one facility where required. The EPA said it does not independently verify all self-insurance instruments on a routine basis but could do so on a case-specific basis.
Risks and costs
Invalid financial assurance poses financial risks to both the EPA and the U.S. taxpayer. According to the OIG, EPA data as of January 2017 indicated that an estimated $1.6 billion in costs for sites or facilities recorded in RCRAInfo had expired financial assurance, and $207 million for sites or facilities recorded in RCRAInfo had no financial assurance. The OIG further notes that as of October 2015, one EPA region was aware of 12 facilities that were noncompliant because the PRPs did not provide valid financial assurance. The shortfall was approximately $78.2 million. Seven of those 12 facilities were still noncompliant as of December 2017, the OIG states.
“These seven noncompliant facilities are significant because taxpayer funds could be used to cover the shortfall between the required funds and the financial assurance provided,” says the OIG. “While this example is not limited to self-insurance instruments, it demonstrates the potential cost to the EPA and taxpayers of invalid financial assurance.”
Agency guidance and model
The OIG says the EPA has attempted to increase its awareness of all self-insured environmental liabilities. For example, the Agency issued guidance in 2015 indicating that self-insurance submissions should capture all environmental obligations. Also in 2016, the Agency developed a Superfund model consent decree that states that reviewers of financial assurance submissions should ensure that parties fully and accurately reflect all their financial assurance obligations to determine whether they meet the financial test criteria. The model consent decree also states that regions have the discretion to require that financial assurance be provided through an instrument other than self-insurance.
Despite these actions, the OIG said the Superfund program was unable to provide it with reliable data for insufficient instruments. Furthermore, while the RCRA program provided data that show a reduction in the amount of expired, missing, or insufficient financial assurance, the OIG said the program still faces data system challenges in identifying financial assurance instruments that cover multiple facilities and determining whether the financial assurance provided matches the amount required.
EPA responds
The EPA disagreed with OIG’s contention that billions of dollars are at risk from the use of the financial test and corporate guarantee. “The report derives conclusions based on a dataset which is deficient,” said the Agency. “Thus, statements that billions of taxpayer dollars are at risk are not supported.” The EPA did agree to undertake 10 of the 14 recommendations made by the OIG. These cover development of procedures EPA regions can use to check with each other to see if one responsible party has multiple environmental liabilities; improve staff training and standard operating procedures; and upgrade the data programs to ensure that more essential information is captured.
Regarding OIG’s recommendation that major rulemaking be undertaken to develop requirements for full disclosure of all self-insured environmental liabilities and eliminate the use of corporate self-insurance instruments, the EPA offered an alternative approach:
- Modify existing regulations to include a requirement for full disclosure and incorporation of all environmental liabilities covered by a financial test.
- Modify the regulations to eliminate the use of corporate self-insurance instruments.
- Employ nonregulatory approaches, including further database updates in the RCRAInfo financial assurance module and the SEMS, and improve internal review practices through enhanced standard operating procedures.
The principle difference between OIG’s recommendation and EPA’s alternative is that under the alternative, the Agency would take a series of steps before determining that any rulemaking is necessary.
William C. Schillaci
BSchillaci@blr.com