This is the accessible text file for GAO report number GAO-03-219 
entitled 'Long-Term Commitments: Improving the Budgetary Focus on 
Environmental Liabilities' which was released on February 24, 2003.



This text file was formatted by the U.S. General Accounting Office 

(GAO) to be accessible to users with visual impairments, as part of a 

longer term project to improve GAO products’ accessibility. Every 

attempt has been made to maintain the structural and data integrity of 

the original printed product. Accessibility features, such as text 

descriptions of tables, consecutively numbered footnotes placed at the 

end of the file, and the text of agency comment letters, are provided 

but may not exactly duplicate the presentation or format of the printed 

version. The portable document format (PDF) file is an exact electronic 

replica of the printed version. We welcome your feedback. Please E-mail 

your comments regarding the contents or accessibility features of this 

document to Webmaster@gao.gov.



Report to the Chairman, Committee on the Budget, House of 

Representatives:



January 2003:



LONG-TERM COMMITMENTS:



Improving the Budgetary Focus on Environmental Liabilities:



GAO-03-219:



GAO Highlights: 



Highlights of GAO-03-219, a report to the Chairman of the Committee on 
the 

Budget, House of Representatives:



January 2003:



LONG-TERM COMMITMENTS:



Improving the Budgetary Focus on Environmental Liabilities:



Why GAO Did This Study: 



Although environmental liabilities resulting from federal programs and 

activities represent the third largest category of the federal 
government’s 

liabilities, the current cash- and obligation-based budget does not 
provide 

information on estimated cleanup costs before waste-producing assets 
are 

purchased. As a result, policymakers do not have the opportunity to 
weigh 

the full costs of a proposal with their judgment of its benefits. The 
Chairman 

of the House Committee on the Budget asked GAO to examine and report on 

various ways budgeting might be improved for environmental cleanup 
costs, 

including some of the benefits, limitations, and challenges associated 
with 

each.  



What GAO Found: 



The federal government is legally required to clean up hazardous wastes 

that result from its operations.  Agencies are currently required to 
report 

these environmental liabilities in their financial statements, but 
these 

estimates are not recognized until after a waste-producing asset is 
placed 

into service. Although agencies are supposed to consider cleanup and 
disposal 

costs associated with these assets as part of the acquisition process, 
they 

typically do not request the related budget authority until many years 
after 

the government has committed to the operation creating the waste, when 
cleanup 

is imminent.



Alternative approaches to promote up-front consideration of the full 
costs 

of environmental cleanup and disposal for assets being proposed for 
purchase 

fall along a continuum ranging from supplemental information to 
enactment of 

additional budget authority.  (See figure below.)  While each approach 
has 

potential benefits and challenges, agencies’ lack of experience in 
estimating 

future cleanup/disposal costs up front suggest starting at the more 
modest 

end of the continuum—providing supplemental information to decision 
makers. 

Eventually, however, accruing budget authority for the tail-end 
cleanup/

disposal cost along with the front-end purchase cost estimates would do 
the 

most to ensure that these costs are considered before the government 
incurs 

the liability.



Figure: Continuum of Alternatiave Approaches to Improve Budgeting for 

Environmental Liabilities:



[See PDF for image]



[End of figure]



What GAO Recommends: 



GAO recommends that the Director of the Office of Management and Budget 

(OMB) require supplemental reporting in the budget to disclose future 

environmental cleanup/disposal costs for new acquisitions.  Agency and 
OMB 

officials should consult with legislative branch officials to ensure 
that 

useful information is provided to congressional decision makers.



www.gao.gov/cgi-bin/getrpt?GAO-03-219 To view the full report, 
including the 

scopeand methodology, click on the link above. For more information, 

contact Susan Irving on (202) 512-9142 or irvings@gao.gov.



Letter:



Results in Brief:



Background:



Objectives, Scope, and Methodology:



Environmental Liabilities Largely Associated with Defense and Energy:



Current Budget Information Does Not Include Environmental Liabilities 

Before Acquisition:



Alternative Approaches to Consider Environmental Liabilities:



Each Approach Has Potential Benefits and Challenges:



Conclusions:



Recommendations for Executive Action:



Agency Comments:



Appendixes:



Appendix I: Breakout of Environmental Liabilities:



Tables:



Table 1: Breakdown of DOE and DOD Federal Environmental Liabilities, 

Fiscal Year 2001:



Table 2: Environmental Liabilities, by Agency, Fiscal Year 2001:



Figures:



Figure 1: Flow of Cleanup/Restoration and Disposal Funds for DOD:



Figure 2: Flow of Cleanup Funds for DOE:



Figure 3: Continuum of Alternative Approaches to Improve Budgeting for 

Environmental Liabilities:



Figure 4: Possible Flow of Funds through Accounts:



Abbreviations:



CBO: Congressional Budget Office:



DERP: Defense Environmental Restoration Program:



DOD: Department of Defense:



DOE: Department of Energy:



EM: Environmental Management:



EPA: Environmental Protection Agency:



FUDS: Formerly Used Defense Sites:



NRC: Nuclear Regulatory Commission:



O&M: Operation and Maintenance:



OMB: Office of Management and Budget:



This is a work of the U.S. Government and is not subject to copyright 

protection in the United States. It may be reproduced and distributed 

in its entirety without further permission from GAO. It may contain 

copyrighted graphics, images, or other materials. Permission from the 

copyright holder may be necessary should you wish to reproduce 

copyrighted materials separately from GAO’s product. 



Letter:



January 24, 2003:



The Honorable Jim Nussle

Chairman

Committee on the Budget

House of Representatives:



Dear Mr. Chairman:



The federal government undertakes a wide range of programs and 

activities--such as federal employee pensions, retiree health, and 

federal credit--that may create commitments for future spending. 

Environmental liabilities,[Footnote 1] which result from some federal 

programs and activities, are one example of these future commitments 

and represent the third largest category of the federal government’s 

liabilities reported in the 2001 Financial Report of the U.S. 

Government.[Footnote 2] Federal, state, or local laws and regulations 

require cleanup that may be done many years after the activity creating 

the environmental liability is undertaken. However, because the federal 

budget is primarily calculated on a cash basis, information on the 

estimated cleanup costs is not included in the budget when budgeting 

decisions are being made about such activities.



You asked us to examine and report on various ways budgeting might be 

improved for environmental cleanup costs, including some of the 

benefits, limitations, and challenges associated with each. 

Accordingly, we reviewed current budgeting practices at the departments 

of Energy and Defense, since they account for about 98 percent of the 

government’s reported environmental liabilities. In addition, we 

discussed alternative approaches with staff within these departments, 

as well as staff in the Office of Management and Budget (OMB) and the 

Congressional Budget Office (CBO). The focus of this report is forward-

looking. That is, it explores alternative ways to ensure that the 

cleanup costs of hazardous waste are considered by decision makers 

before the government has committed to the operation creating the 

waste.[Footnote 3]



Results in Brief:



The federal government is legally required to clean up hazardous wastes 

that result from its operations. Although these cleanup costs represent 

the third largest category of federal liabilities, they are not usually 

addressed until many years after the government has committed to the 

operation creating the waste. Under current budget guidance, agencies 

include in their budget request for a given year only the funds they 

expect to obligate for cleanup during that budget year. As a result, at 

the time decisions are being made, the full costs of a program that 

will have cleanup costs are not recognized in the budget, nor are 

estimates of these future costs provided elsewhere in budget documents. 

The budget does not provide policymakers the information to compare the 

full costs of certain programs with their judgment of benefits.



Once waste-producing assets are acquired and placed into service, 

agencies must estimate and report in their financial statements the 

environmental liabilities associated with both retired assets and those 

that are currently being used in support of federal programs and 

activities.[Footnote 4]



About 98 percent of the $307 billion in environmental liabilities that 

was reported in fiscal year 2001 financial statements was associated 

with the departments of Energy and Defense. Estimates of disposal and 

cleanup costs for new assets are not, however, routinely estimated 

before making the commitment to purchase the asset. Given the large 

number of years that frequently occur between acquisition and cleanup, 

estimates for new assets are likely to change during that period for a 

variety of reasons, including changes over time in technology and 

regulatory standards. This, however, is also true to some degree when 

agencies estimate cleanup costs at the end of asset lives when they 

begin to request funding for the cleanup. While cleanup cost estimates 

made before committing to purchase an asset would need to be 

periodically reassessed, they would provide more information than is 

currently provided.



Alternative approaches exist to promote more complete consideration of 

the full costs of environmental cleanup and disposal associated with 

the acquisition of new assets. They fall along a continuum representing 

the degree of certainty that the costs will be considered in decision 

making. At one end of the continuum, the government could increase 

awareness of full costs by reporting the long-term environmental 

liability costs associated with new assets as supplemental information 

along side budget authority and outlay figures in the budget. While 

this puts it closer to the budget numbers than would a separate report, 

there is no assurance that this information will be considered in 

budget decision making. However, it will help ensure that information 

is generated and made more transparent. Alternatively, budget process 

mechanisms could be established to require explicit disclosure and 

prompt consideration of the full costs of environmental liabilities 

associated with a proposed asset acquisition. For example, Congress 

could revise its rules to permit a point of order against legislation 

that does not disclose estimates for environmental liabilities 

associated with the acquisition of new assets to be funded in the bill. 

Such a process mechanism might increase attention paid to these costs 

even though they would not actually require funding until far into the 

future. Finally, it is generally assumed that costs included in primary 

budget data receive the most attention.[Footnote 5] At this end of the 

continuum, budget authority needed for environmental cleanup for new 

assets could be accrued in the budget. OMB is currently working on a 

proposal along these lines. It is important to note that this approach 

would not change the costs of future cleanup--these have already been 

created by the decision to acquire the asset. Rather, it would only 

shift the timing of when the costs are recognized.



No proposal can be viewed independently of associated implementation 

and estimation issues. For example, clear definitions for hazardous 

waste need to be developed as well as mechanisms for dealing with the 

inevitable cost reestimates. As a first step, OMB should require 

supplemental reporting in the budget to disclose future environmental 

cleanup/disposal costs for new acquisitions. Also, OMB should discuss 

with Congress how best to make the information useful to congressional 

decision makers. Thus, even if the ultimate goal would be to include 

cleanup costs in budget authority requests for new assets, 

implementation and estimation challenges may suggest starting with the 

supplemental information approach.



Background:



Historically, federal outlays and receipts generally have been reported 

on a cash basis. That is, receipts are recorded when received and 

outlays are recorded when paid without regard to the period in which 

the taxes and fees were assessed or the costs resulting in the outlay 

were incurred. This has an advantage in that the deficit (or surplus) 

closely approximates the cash borrowing needs (or cash in excess of 

immediate needs) of the government.[Footnote 6] However, over the years 

analysts and researchers have raised concerns that the current cash-and 

obligation-based budget does not adequately reflect the cost of some 

programs--such as federal credit or insurance--in which the government 

makes a commitment now to incur a cost, but some or most of the cash 

flows come much later. This means that for some programs the current 

cash-and obligation-based budget does not recognize the full costs up 

front when decisions are made or provide policymakers the information 

to compare the full costs of a proposal with their judgment of its 

benefits. Programs such as federal employee pensions, retiree health 

care, and environmental liabilities are examples where the cash basis 

of accounting does not represent the government’s full commitments.



Environmental liabilities are the result of federal operations that 

create hazardous waste that federal, state, or local laws and/or 

regulations require the federal government to clean up. Because these 

cleanup costs are not usually paid until many years after the 

government has committed to the operation creating the waste, 

policymakers have not been provided complete cost information when 

making decisions about undertaking the waste-creating operation. 

Although all agencies are not yet in compliance, current federal 

accounting standards require agencies to estimate and report in their 

financial statements their liability for cleanup costs when they are 

deemed probable and measurable. Traditionally, budget guidance has 

required agencies to estimate the funds expected to be obligated for 

cleanup activities during the budget year in which the funds are 

needed.[Footnote 7] However, in recent years OMB also has issued 

guidance for agencies to estimate life-cycle costs when purchasing 

capital assets. Among the items to be included in the total amount of 

these life-cycle costs are decommissioning and disposal costs. The 

life-cycle cost estimates are reported to OMB in budget Exhibit 300 and 

do not separately break out cleanup and disposal costs. The exhibits 

are for OMB’s informational purposes only; they are not included in the 

President’s budget request or agency’s budget justification provided to 

Congress. Department of Energy (DOE) and Department of Defense (DOD) 

officials told us that the cleanup portion of these total costs has 

traditionally not been separated out or identified at the time of 

purchase. This is because estimates developed at that time were very 

preliminary, often based only on a percentage of total costs rather 

than specific unit costs.



Objectives, Scope, and Methodology:



To examine ways that budgeting might be improved for environmental 

liabilities, we focused on three key questions: (1) What are the 

federal government’s reported environmental liabilities? (2) How are 

environmental liabilities currently valued for financial statements and 

budgeted at selected programs within DOD and DOE? and (3) How could 

budgeting for these environmental liabilities be improved?



To determine the federal government’s reported environmental 

liabilities, we extracted data from agencies’ fiscal year 2001 

consolidated balance sheets. Because this analysis showed that about 98 

percent of the government’s reported environmental liabilities were 

associated with DOD and DOE, we focused our review on the practices of 

these two departments. We reviewed published reports, related guidance, 

and budget and financial statement documentation from each agency. We 

also interviewed DOD, DOE, and OMB staff to discuss current budget 

practices.



To develop alternative approaches to improve budgeting for 

environmental liabilities, we discussed ideas with staff from DOD, DOE, 

OMB, and CBO. We also met with appropriations subcommittee staff with 

jurisdiction over DOD and DOE to discuss the type of information that 

they would find most helpful. We analyzed the pros and cons of the 

approaches based on the extent to which they would (1) provide 

meaningful, full-cost information to decision makers up front, (2) 

provide disincentives for artificially low cost estimates, and (3) 

present implementation issues, such as additional administrative 

burdens for agencies or increased complexity to the budget and 

appropriations process. Finally, to understand how private 

organizations provide for environmental cleanup, we conducted limited 

research of private sector budgeting practices. However, little 

information was available about up-front decision making.



Our work was done in Washington, D.C., in accordance with generally 

accepted government auditing standards. We provided a draft of this 

report to the Secretary of Defense, the Secretary of Energy, and the 

Director of OMB. Comments are summarized in the “Agency Comments” 

section.



Environmental Liabilities Largely Associated with Defense and Energy:



Nearly all of the $307 billion in environmental liabilities reported 

for fiscal year 2001 was associated with DOD and DOE. About 78 percent 

of these liabilities were associated with DOE and represent the 

environmental legacy resulting from the production of nuclear weapons. 

The 21 percent associated with DOD is primarily for environmental 

restoration of military installations and disposal of nuclear 

materials.[Footnote 8] The remaining environmental liabilities 

associated with other federal agencies include such things as 

replacement of underground storage tanks, asbestos removal, and lead 

abatement. Some of this remaining 1 percent will be paid out of 

Treasury’s judgment fund.[Footnote 9]



DOD and DOE manage environmental cleanup quite differently: DOD’s 

decentralized activities are managed within the individual services, at 

the program level, while DOE’s activities are centralized within its 

Environmental Management (EM) program. For example, DOD considers 

environmental liabilities in two categories: (1) disposal and 

(2) environmental restoration/cleanup. Army’s chemical weapons and 

Navy’s nuclear-powered carriers, ships, and submarines dominate DOD’s 

disposal liabilities. Funding for disposal is provided to the Army, 

Navy, and Air Force Operation and Maintenance (O&M) accounts. 

Restoration/cleanup activities are largely addressed through the 

Defense Environmental Restoration Program (DERP), which is funded 

through five environmental restoration accounts for Army, Navy, Air 

Force, Formerly Used Defense Sites (FUDS), and Defense-wide. The funds 

in these accounts are then transferred to the service levels’ O&M 

budgets. In contrast, within DOE, facilities that have reached the end 

of their useful lives and require cleanup typically are transferred to 

EM, along with some additional funds for surveillance and maintenance. 

EM also receives budget authority directly through an appropriation. 

Thus, budgeting and funding for cleanup is almost entirely handled by 

EM, not individual program offices. EM’s program emphasis is on site 

closure and project completion. Its activities include environmental 

restoration, waste management, and nuclear material and facility 

stabilization. Figures 1 and 2 illustrate the flow of cleanup funds for 

these two departments.



Figure 1: Flow of Cleanup/Restoration and Disposal Funds for DOD:



[See PDF for image] 



[A] In some instances, funds may be transferred to other accounts, such 

as military construction or procurement, for similar cleanup purposes.



[B] Although the Army, as executive agent, receives funding from the 

FUDS DERP account, the sites in FUDS may have been owned by any of the 

services.



[C] Includes the Defense Logistics Agency, Defense Threat Reduction 

Agency, and Deputy Undersecretary of Defense (Installations & 

Environment).



[End of figure] 



Figure 2: Flow of Cleanup Funds for DOE:



[See PDF for image]



[A] May also receive additional surveillance and monitoring funds from 

program offices and power administrations.



[End of figure]



Current Budget Information Does Not Include Environmental Liabilities 

Before Acquisition:



Current budget guidance and accounting standards both require agencies 

to estimate cleanup and disposal costs. However, neither requires that 

these costs be separately estimated for decisions when assets are being 

considered for purchase--before the government is legally committed to 

paying these costs. While information about private sector decision 

making on these costs is limited, at least some organizations set aside 

funds to address these future cleanup and disposal costs.



Agencies have little or no budgetary incentive to develop estimates of 

future cleanup costs. With respect to primary budget data, agencies do 

not reflect associated cleanup costs in their budget requests for new 

waste-producing assets. Funding for such cleanup costs is not requested 

until many years later when the waste produced is ready to be cleaned 

up or disposed of. Budget guidance does require agencies to estimate 

cleanup costs as part of total life-cycle costs when requesting funds 

for new assets. However, agencies are not required to specifically 

break out the cleanup portion of these costs.[Footnote 10] DOD and DOE 

officials told us that separating out the cleanup/disposal component 

from total life-cycle costs would be relatively difficult because their 

estimates of cleanup costs are very preliminary. Often, a percentage of 

the purchase price instead of a specific unit cost is used as the cost 

estimate. Moreover, they noted that future, unknown changes in 

regulatory requirements and technology make it difficult to develop 

what they believe to be reasonable and credible cost estimates at the 

time an asset is acquired. However, since estimates for retiring assets 

are being made under today’s regulatory requirements and technology, 

the same methodology might be used for preliminary estimates with 

respect to new assets. This would permit comparisons between or across 

different assets. Over time, as laws and technology change, periodic 

cleanup cost reestimates could be made. Clear definitions for hazardous 

substances also may need to be resolved to ensure that reasonable 

estimates are developed. For example, the Federal Accounting Standards 

Advisory Board (FASAB) defines hazardous wastes in relatively broad 

terms (see footnote 1) for accounting purposes. However, the 

Comprehensive Environmental Response, Compensation, and Liability Act 

of 1980 (CERCLA), which requires the cleanup of waste sites, provides a 

substantially more detailed definition.



While accounting standards promote an earlier recognition of 

environmental liabilities than does the budget, they do not call for 

estimates of environmental liabilities before an acquisition decision 

is made because they recognize these cleanup costs only after a 

transaction has occurred and an asset is put into service.[Footnote 11] 

Given that these conditions are met, agencies must estimate the 

environmental liabilities associated with all existing assets. Despite 

this, not all agencies comply with accounting standard requirements to 

estimate the environmental liabilities associated with all of their 

assets. For example, DOD typically records the liabilities associated 

with assets for which cleanup or disposal is imminent. DOD’s inability 

to comply with requirements for environmental liabilities was one of 

several reasons why independent auditors were not able to render an 

opinion about DOD’s fiscal year 2001 financial statements. Absent 

budgetary incentives to estimate future environmental liabilities, 

these cost estimates will not be developed as assets are considered for 

purchase--the time when decision makers still have an opportunity to 

judge whether the government should commit to these costs.



Data about how non-federal organizations consider environmental 

liabilities when planning to purchase assets or start new projects were 

largely unavailable. However, there are cases where companies set aside 

funds for future cleanup costs. For example, the Nuclear Regulatory 

Commission (NRC) requires private utilities to accumulate the funds 

necessary to decommission their nuclear power plants and most 

established sinking funds so that the decommissioning funds are 

accumulated over the operational life of a nuclear power plant as part 

of the cost charged to customers for the electricity they use. With the 

deregulation of electric utilities and the resultant industry 

restructuring, we recently reported that in most of the requests to 

transfer licenses to own or operate nuclear power plants approved by 

NRC, the financial arrangements have either maintained or enhanced the 

assurance that adequate funds will be available to decommission those 

plants.[Footnote 12] For example, projected decommissioning funds were 

generally prepaid by the selling utility. Also, an Environmental 

Protection Agency contracted study recommended that a Canadian 

hydroelectric company establish a liability fund to accumulate funds to 

finance asset removal, decommissioning, irradiated fuel disposal, and 

low-to-intermediate radioactive waste disposal.[Footnote 13]



Alternative Approaches to Consider Environmental Liabilities:



Alternative approaches to promote more complete consideration of the 

full costs of environmental cleanup and disposal associated with the 

acquisition of new assets fall along a continuum from provision of 

supplemental information to accrual of those costs in budget authority 

up front, as assets are acquired. We explored three approaches along 

this continuum ranging from the relatively simple one of providing more 

information but making little other change to current budgeting, to a 

more complicated one involving significant changes to what is included 

in primary budget data. The approaches along this continuum represent 

the degree of certainty that the costs will be considered in decision 

making. Figure 3 summarizes the three approaches along the continuum.



Figure 3: Continuum of Alternative Approaches to Improve Budgeting for 

Environmental Liabilities:



[See PDF for image] 



[End of figure] 



The first approach would be to report long-term environmental liability 

costs associated with new assets as supplemental information along with 

the budget authority and outlay amounts requested in the budget. For 

example, the program and financing schedules within the President’s 

budget appendix could be expanded to report these associated costs by 

budget account or program. This would enable those being asked to make 

a decision to see the full cost information along with currently 

requested funds. Although the estimates provided in the supplemental 

information would not be precisely correct, they would clearly be 

closer to correct than the current implication of no cost. If a running 

tally of total environmental liabilities is desired, periodic 

reestimates would be needed.



A second approach would move beyond providing supplemental information 

to establishing budget process mechanisms to require explicit 

disclosure and prompt consideration of the full costs of the 

environmental liability associated with a proposed asset acquisition. 

Thus, Congress could revise its rules to permit a point of order 

against legislation that does not disclose estimates for environmental 

liabilities associated with the acquisition of new assets to be funded 

in the bill. This would have the effect of requiring cleanup cost 

estimates to be made, either by the executive branch or CBO, so that 

the estimates could be considered.



At the other end of the continuum is the more comprehensive approach of 

accruing amounts for environmental liabilities associated with new 

assets in any requested budget authority for new assets.[Footnote 14] 

This approach represents the largest departure from current budgeting 

practices. Along these lines, OMB is developing a legislative proposal 

to require programs that generate hazardous waste to “pay the accruing 

cost to clean up contaminated assets at the end of their useful life. 

These payments would go to funds responsible for the cleanup.”[Footnote 

15]



Implementation of an approach that would include budget authority for 

environmental liabilities would require development of new budgeting 

mechanisms. The provision to accumulate budget authority over an 

asset’s life would require a means of “fencing off” the budget 

authority to ensure that it is actually used for cleanup. Also, since 

no such amounts were set aside for existing assets, it would be 

necessary to continue financing the cleanup of existing assets while 

implementing the new approach for new assets. One way to do this is to 

use a pair of accounts--a liquidating account and a cleanup fund 

account--in each department involved in budgeting for the cleanup 

costs. The liquidating account would obtain discretionary budget 

authority for the past share of cleanup costs of assets already in 

operation and for the cleanup costs of retired assets. It would pay the 

past share of cleanup costs for operating assets to the cleanup fund 

and would conduct or contract for the cleanup of assets no longer in 

use at the inception of this new approach. Given technological and 

other changes, regular reestimates of cleanup costs would be necessary.



The cleanup fund account would obtain budget authority from two 

sources: (1) from the liquidating account for the past share of the 

cleanup cost for assets that are in operation when the new approach is 

established and (2) for new assets, from programs that operate assets 

that generate cleanup needs. The cleanup fund account would receive 

annual accruing cost payments from programs based on the estimated (and 

reestimated) cost of cleanup for all operating assets--those purchased 

after the new approach is implemented and those already in service. 

These payments would be a required part of the discretionary 

appropriations for running any program that generates cleanup costs. 

When needed, the cleanup fund accounts could also request additional 

budget authority for the assets in operation at its inception. These 

appropriations could be made to the liquidating account and paid to the 

cleanup fund account when the assets are ready for cleanup. Once in the 

cleanup fund account, the budget authority from the programs and 

liquidating accounts could be permanent, indefinite authority available 

for cleanup, subject only to the usual apportionment process.[Footnote 

16] Figure 4 below illustrates one possible flow of funds through 

accounts.



Figure 4: Possible Flow of Funds through Accounts:



[See PDF for image] 



[End of figure] 



Each Approach Has Potential Benefits and Challenges:



Each of the three approaches described offer both potential benefits 

and challenges to consider. All three would be likely to improve the 

quality of cleanup estimates. Although agencies are required to develop 

these estimates for financial statement purposes, they are not 

developed until after the asset is purchased. Also, not all agencies 

have completely complied with financial accounting standards. For 

example, in December 2001, we reported that DOD was not estimating and 

reporting liabilities associated with a significant portion of 

property, plant, and equipment that was no longer being used in its 

operations.[Footnote 17] Moreover, DOD’s financial statements did not 

provide cleanup cost information on all of its closed or inactive 

operations known to result in hazardous wastes. In addition, in 1997 

and 1998 we issued a series of reports on DOD environmental liabilities 

that were not being reported, even though they could be reasonably 

estimated.[Footnote 18]



Each of the three approaches would result in decision makers having 

information about costs and benefits of a proposed acquisition while 

there is still the opportunity to make a choice--before the government 

actually incurs an environmental liability. Since the cleanup costs for 

any asset will become a future claim on federal resources regardless of 

whether these costs were considered at the outset, good budgeting 

principles call for up-front consideration of these costs. Given that 

agencies are not currently experienced in separately estimating 

cleanup/disposal costs before assets are purchased, reasonable and 

credible estimates may take time to develop. This, however, is not an 

insurmountable issue. We have reported on numerous occasions that 

environmental liabilities can be estimated and have pointed out how 

estimation methodologies can be improved. For example, in December 2001 

we recommended that, among other things, DOD correct real property 

records, develop and implement standard methodologies for estimating 

related cleanup costs, and systematically accumulate and maintain the 

site inventory and cost information needed to report this liability.



Of the three approaches described, the supplemental information and the 

budget process mechanism approaches would be easiest to implement and 

could be done separately or together. Neither requires the enactment of 

budget authority and so would not increase reported budget totals. 

Supplemental reporting requirements would be the easiest to implement 

since OMB could require it under OMB’s current authority. However, 

unless agencies see that the new supplemental information is used in 

decision making, they may have less incentive to develop meaningful 

estimates. The budget process mechanism approach would increase the 

perceived importance of these estimates by permitting a point of order 

that could block legislation lacking appropriate cost information. For 

example, unfunded mandates legislation permits a point of order to be 

raised against proposed legislation containing significant 

intergovernmental mandates if a CBO estimate of the cost of the mandate 

has not been published in the committee report or the Congressional 

Record.[Footnote 19] Unlike supplemental reporting alone, the budget 

mechanism approach has the potential to promote improved estimates 

because it could present members an opportunity to challenge 

legislation without appropriate cost information. Implementing a budget 

process approach with a point of order would require an amendment 

either to the Congressional Budget Act of 1974 or a change to committee 

rules.



The third approach, accruing budget authority over the life of the 

asset, represents the largest departure from current budgeting 

practices. By requiring that agencies obtain budget authority before 

acquiring new assets, this approach would ensure consideration of 

environmental cleanup costs before an asset is acquired. Such an 

approach would require legislation. If Congress and the Administration 

agree to take such action, it would ensure that each program’s costs 

are fully reflected in program budgets. Requiring that agencies accrue 

budget authority for cleanup costs would likely increase the attention 

paid to improving the quality of estimates. All in all, given the 

current quality of agency estimates and significant implementation 

issues, such an approach may best be viewed as something to be 

considered in the future.



Beyond the issue of developing reasonable and credible estimates early 

on, this third approach also would present administrative and 

structural challenges such as developing mechanisms to ensure that (1) 

budget authority provided for cleanup is adequately fenced off for 

cleanup, 

(2) agencies adequately track and manage that budget authority, and 

3) reestimates provide positive incentives to reflect the best 

approximation of the government’s total environmental liabilities. When 

demand for current funding is great, fencing off budget authority for 

future use can be a challenge. One way to address this would be to have 

payments into the cleanup fund come from discretionary appropriations, 

but once in the fund, the budget authority would become permanent, 

subject only to the usual apportionment process.[Footnote 20] Providing 

higher levels of budget authority now for expenses that may not be paid 

until well into the future may be difficult. It is important to note 

that this approach would not in fact change the costs of future 

cleanups--in effect these have already been determined by the decision 

to acquire the asset. Rather, this would only shift the timing of their 

recognition.



Ensuring that agencies adequately track and manage the earmarked budget 

authority would be a second challenge to successful implementation of 

this approach. For example, there is more than one way to manage the 

budget authority needed to clean up assets already in operation at the 

inception of the new approach. One way would be to transfer budget 

authority from a liquidating account to a cleanup fund for such assets 

when they are ready to be cleaned up. Alternatively, the full amount of 

budget authority for the past share of the cleanup cost could be 

enacted in one lump sum for the cleanup fund. This would simplify 

implementation since it would apply the new accrual concept fully to 

all assets in operation. Since this could be a considered a concept 

change, any discretionary caps on budget authority (if renewed) would 

be adjusted upward to accommodate the additional budget authority--but 

it would still increase reported budget authority totals.[Footnote 21] 

Some believe that covering all of the costs immediately would be a 

cleaner, more consistent application of full costing since it would 

eliminate a lengthy and possibly confusing transition period. However, 

such a decision to provide budget authority for retired assets could 

shift the control over the timing of the cleanup from Congress to the 

Administration.



Finally, a way to budget for inevitable reestimates of cleanup costs 

would have to be designed. If agencies must obtain additional budget 

authority for these reestimates, they will have less incentive to make 

artificially low initial estimates but may be reluctant to provide 

upward reestimates. On the other hand, one could envision agencies 

forwarding a low estimate “today” with the idea that they could worry 

about “tomorrow” later. Alternatively, reestimates could be handled as 

they are with credit programs, that is, agencies could automatically 

receive permanent, indefinite budget authority for upward reestimates 

of cleanup costs. This would hold agencies harmless for additional 

costs that result from technological or regulatory changes. It would 

also, however, provide an incentive to make artificially low initial 

estimates.



Conclusions:



Because the federal budget does not recognize the full costs of a 

program that will have cleanup costs when decisions to commit to the 

program are being made, policymakers do not have sufficient information 

to compare the full costs of a particular program with their judgment 

of its benefits. Cleanup costs are in fact a liability associated with 

the ownership of many assets. Decision makers need to consider these 

costs before committing to acquire the waste-producing asset.



Agencies generally do not yet have experience in estimating future 

cleanup/disposal costs up front, before the decision to purchase the 

waste-producing asset is made. Accordingly, all of the alternative 

approaches we discuss for providing this information represent a 

challenge for both agencies and OMB to develop an estimation 

methodology. Increasing the visibility of cost estimates may increase 

the effort spent on them and ultimately improve both the quality of the 

estimates and enhance decision making. As a first step, we believe that 

OMB and agencies should provide supplemental information. This can be 

expected to improve the focus and attention and permit improvements in 

estimating models. As this proceeds, further consideration should be 

given to budget process and budget accounting changes. Ultimately, 

accruing budget authority for the tail-end cleanup/disposal costs along 

with the front-end purchase costs of assets would best ensure that the 

cleanup/disposal costs are considered before the government incurs the 

liability, but raises significant implementation challenges.



Recommendations for Executive Action:



We recommend that the Director of OMB require supplemental reporting in 

the budget to disclose future environmental cleanup/disposal costs for 

new acquisitions. To this end, agency and OMB officials should consult 

with legislative branch officials to ensure that useful information on 

estimated environmental cleanup/disposal costs is provided to 

congressional decision makers when requesting appropriations to acquire 

waste-producing assets.



Agency Comments:



The Secretary of Defense had no comments on our draft report. We did 

not receive comments from the Secretary of Energy in time to be 

considered and included in this report. In consultation with OMB staff, 

GAO was commended for its useful analysis and noted that the ideas 

discussed merit consideration. OMB staff also provided technical 

clarifications, which we incorporated as appropriate.



As agreed with your office, unless you release this report earlier, we 

will not distribute it until 30 days from the date of this letter. At 

that time we will send copies to the Ranking Minority Member of the 

House Committee on the Budget and the chairmen and ranking minority 

members of the Senate Committee on the Budget; the subcommittees on 

Defense and on Energy and Water Development, Senate Committee on 

Appropriations; and the subcommittees on Defense and on Energy and 

Water Development, House Committee on Appropriations. We are also 

sending copies to the Director, Office of Management and Budget. In 

addition, we are sending copies to the Secretary of Defense and of 

Energy. Copies will also be made available to others upon request. In 

addition, the report is available at no charge on GAO’s Web site at 

http://www.gao.gov.



This report was prepared under the direction of Christine Bonham, 

Assistant Director, Strategic Issues, who may be reached at (202) 512-

9576. Other major contributors were Carol Henn and Brady Goldsmith. 

Please contact me at (202) 512-9142 if you or your staff have any 

questions concerning the report.



Sincerely yours,



Susan J. Irving

Director

Federal Budget Analyses

Strategic Issues:



Signed by Susan J. Irving:



[End of section]



Appendix I: Breakout of Environmental Liabilities:



About a dozen federal agencies report environmental liabilities in 

their financial statements. This appendix provides additional detail on 

the environmental liabilities reported by the Department of Energy 

(DOE) and the Department of Defense (DOD) and about those reported by 

the other federal agencies. These data were extracted from agencies’ 

fiscal year 2001 consolidated balance sheets and represent existing 

assets--not proposed acquisitions. Because DOD and the National 

Aeronautics and Space Administration auditors disclaimed an opinion on 

their financial statements, it is not certain that these amounts fairly 

present their liabilities.



Table 1:  Breakdown of DOE and DOD Federal Environmental Liabilities, 

Fiscal Year 2001:



(Dollars in billions).



DOE; Liability: [Empty].



(Dollars in billions): Agency: DOE: : Closed nuclear weapons complexes; 

Liability: : $184.



(Dollars in billions): Agency: DOE: : Active and surplus facilities--

other programs; Liability: : 31.



(Dollars in billions): Agency: DOE: : High-level waste and spent 

nuclear fuel disposition; Liability: : 15.



(Dollars in billions): Agency: DOE: : Other; Liability: : 8.



(Dollars in billions): Agency: DOE: : 	Subtotal --DOE; Liability: : 

$238.



DOD; Liability: [Empty].



(Dollars in billions): Agency: DOE: : Training range cleanup; 

Liability: : 2.



(Dollars in billions): Agency: DOE: : Other cleanup sites; Liability: : 

14.



(Dollars in billions): Agency: DOE: : Formerly Used Defense Sites; 

Liability: : 18.



(Dollars in billions): Agency: DOE: : Base Realignment and Closure; 

Liability: : 5.



(Dollars in billions): Agency: DOE: : Aircraft carriers/submarines 

disposal; Liability: : 11.



(Dollars in billions): Agency: DOE: : Chemical weapons and other 

disposal; Liability: : 14.



(Dollars in billions): Agency: DOE: : 	Subtotal --DOD[A]; Liability: : $ 

63.



Total[A]; Liability: $302.



[End of table]



Source: DOE and DOD.



Note: Information was taken from DOE’s and DOD’s fiscal year 2001 

consolidated balance sheets and accompanying notes.



[A] Numbers do not add to total due to rounding.



[End of Table]



Table 2: Environmental Liabilities, by Agency, Fiscal Year 2001:



(Dollars in millions).



Department of Energy; (Dollars in millions): Liability: $238,349; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Legacy 

resulting from the production of nuclear weapons..



Department of Defense; (Dollars in millions): Liability: 63,294; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Disclaimed; (Dollars in millions): Nature of liability: Contamination 

resulting from decades of training and preparing for national defense..



Department of Transportation; (Dollars in millions): Liability: 2,178; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Cleanup 

associated with normal Federal Aviation Administration, Coast Guard, 

and Maritime Administration operations (e.g., storage tanks, fuels, 

solvents, and chemicals) or the result of an accident..



National Aeronautics and Space Administration; (Dollars in millions): 

Liability: 1,346; (Dollars in millions): [Empty]; (Dollars in 

millions): Audit opinion: Disclaimed; (Dollars in millions): Nature of 

liability: Groundwater, surface water/sediment, and ecological 

remediation and monitoring..



Tennessee Valley Authority; (Dollars in millions): Liability: 804; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: 

Decommissioning of nuclear-powered generating plants..



Department of the Interior; (Dollars in millions): Liability: 268; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Remediation of 

hazardous conditions and contamination caused by the Department of the 

Interior and which exist on lands held by the department..



Department of Veterans Affairs; (Dollars in millions): Liability: 260; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Asbestos 

removal, lead abatement, replacement of underground oil and gasoline 

tanks, decommissioning of waste incinerators, and decontamination of 

equipment prior to disposal..



General Services Administration; (Dollars in millions): Liability: 144; 

(Dollars in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Removal and 

containment of environmental hazards in federal buildings..



Department of Commerce; (Dollars in millions): Liability: 79; (Dollars 

in millions): [Empty]; (Dollars in millions): Audit opinion: 

Unqualified; (Dollars in millions): Nature of liability: Nuclear 

reactor, Pribiloff Island, and other cleanup..



Environmental Protection Agency (EPA); (Dollars in millions): 

Liability: 15; (Dollars in millions): [Empty]; (Dollars in millions): 

Audit opinion: Unqualified; (Dollars in millions): Nature of liability: 

Cleanup of closed EPA sites plus the decontamination and 

decommissioning of EPA research facilities..



Department of Health and Human Services; (Dollars in millions): 

Liability: 13; (Dollars in millions): [Empty]; (Dollars in millions): 

Audit opinion: Unqualified; (Dollars in millions): Nature of liability: 

Removing, containing, and/or disposing of (1) hazardous waste from 

property or (2) material and/or property that consists of hazardous 

waste at a permanent or temporary closure or shutdown of associated 

property, plant, and equipment..



Department of Justice; (Dollars in millions): Liability: 5; (Dollars in 

millions): [Empty]; (Dollars in millions): Audit opinion: Unqualified; 

(Dollars in millions): Nature of liability: Underground fuel storage 

tank remediation, maintenance, and repair..



Total; (Dollars in millions): Liability: $306,755; (Dollars in 

millions): [Empty]; (Dollars in millions): Audit opinion: [Empty].



[End of table]



Source: GAO.



Note: Data were taken from these agencies’ consolidated balance sheets 

and accompanying notes. Only agencies that reported environmental 

liabilities in their fiscal year 2001 financial statements are shown.



[End of table]



FOOTNOTES



[1] Federal accounting standards define environmental liabilities as 

the cleanup costs of removing, containing, and/or disposing of (1) 

hazardous waste from property or (2) material and/or property that 

consists of hazardous waste at permanent or temporary closure or 

shutdown of associated property, plant, and equipment. Hazardous waste 

is a solid, liquid, or gaseous waste or combination of these wastes 

that, because of its quantity, concentration, or physical, chemical, or 

infectious characteristics, may cause or significantly contribute to an 

increase in mortality or an increase in serious irreversible or 

incapacitating reversible illness or pose a substantial present or 

potential hazard to human health or the environment when improperly 

treated, stored, transported, disposed of, or otherwise managed. As 

used in this report, it may include such things as nuclear or toxic 

waste or unexploded ordnance, among other things. Cleanup may include, 

but is not limited to, decontamination, decommissioning, site 

restoration, site monitoring, closure, and postclosure costs. Federal 

accounting standards define a liability as a probable future outflow of 

resources due to a past governmental transaction or event.



[2] The two largest liabilities are federal debt securities held by the 

public and federal employee and veteran benefits payable.



[3] We recently issued a report that provides a broad overview of 

various program activities, such as environmental liabilities, that may 

expose the government to future spending. See U.S. General Accounting 

Office, Fiscal Exposures: Improving the Budgetary Focus on Long-Term 

Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).



[4] These retired assets include such things as excess facilities at 

the Savannah River Site in South Carolina and the Presidio military 

base in California.



[5] In this report, primary budget data refers to budget authority, 

obligations, outlays, and the deficit/surplus.



[6] Minor exceptions to this include changes in the Department of the 

Treasury’s cash balances, outstanding payment obligations, and net 

disbursements by the government’s loan guarantee and direct loan 

accounts.



[7] OMB Circular A-11 refers to a 1978 Executive Order that requires 

agencies to prepare annual cost estimates for the control of 

environmental pollution and to ensure that sufficient funds for 

compliance with applicable pollution control standards are requested in 

the agency budget.



[8] Auditors were not able to render an opinion on DOD’s fiscal year 

2001 financial statements, in part because of DOD’s inability to comply 

with requirements for environmental liabilities. Thus, the $63 billion 

liability associated with DOD is not known to be a reliable figure.



[9] Treasury’s judgment fund has permanent, indefinite budget 

authority.



[10] DOD and DOE do provide cleanup cost information in various reports 

that are available to policymakers. For example, DOD provides an annual 

report to Congress on the progress and accomplishments of DERP. DOE 

periodically reports on the status of the EM program’s life-cycle cost 

and schedule estimates for completing cleanup. While the information in 

these reports may inform future budget planning, it does not include 

cleanup cost estimates for assets being proposed for purchase.



[11] Accounting standards require that a liability be recognized (i.e., 

estimated) when a past transaction or event has occurred, a future 

outflow or other sacrifice of resources is probable, and the future 

outflow or sacrifice of resources is measurable.



[12] U. S. General Accounting Office, Nuclear Regulation: NRC’s 

Assurances of Decommissioning Funding During Utility Restructuring 

Could Be Improved, GAO-02-48 (Washington, D.C.: Dec. 3, 2001).



[13] ICF Incorporated, “Full Cost Accounting” for Decision Making at 

Ontario Hydro: A Case Study (Mar. 22, 1996).



[14] Rather than accruing budget authority over time, the full amount 

for cleanup could be enacted at the time an asset is acquired. However, 

this would immediately insert the total highly uncertain cleanup cost 

estimate into the budget.



[15] Office of Management and Budget, Analytical Perspectives, Budget 

of the United States Government, Fiscal Year 2003 (Washington, D.C.: 

Feb. 4, 2002), 12.



[16] Any successor reform to the Balanced Budget and Emergency Deficit 

Control Act of 1985 would need to recognize this change.



[17] See U.S. General Accounting Office, Environmental Liabilities: 

Cleanup Costs From Certain DOD Operations Are Not Being Reported, GAO-

02-117 (Washington, D.C.: Dec. 14, 2001).



[18] See U.S. General Accounting Office, Financial Management: DOD’s 

Liability for Missile Disposal Can Be Estimated, GAO/AIMD-98-50R 

(Washington, D.C.: Jan. 7, 1998); Financial Management: DOD’s Liability 

for the Disposal of Conventional Ammunition Can Be Estimated, GAO/AIMD-

98-32 (Washington, D.C.: Dec. 19, 1997); and Financial Management: 

DOD’s Liability for Aircraft Disposal Can Be Estimated, GAO/AIMD-98-9 

(Washington, D.C.: Nov. 20, 1997).



[19] Unfunded Mandate Reform Act of 1995, Pub. L. No. 104-4, §423.



[20] Discretionary budget authority is provided in appropriations acts. 

Permanent budget authority is available as the result of previously 

enacted legislation and does not require new legislation for the 

current year. Apportionment is the action by which OMB distributes 

amounts available for obligation, by specific time periods (usually 

quarters), activities, projects, objects, or a combination thereof. The 

amounts apportioned limit the amount of obligations that may be 

incurred.



[21] An increase in budget authority totals alone would not affect the 

deficit/surplus measure because that calculation is based on the 

difference between total federal revenues and spending in a given year.



GAO’s Mission:



The General Accounting Office, the investigative arm of Congress, 

exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability 

of the federal government for the American people. GAO examines the use 

of public funds; evaluates federal programs and policies; and provides 

analyses, recommendations, and other assistance to help Congress make 

informed oversight, policy, and funding decisions. GAO’s commitment to 

good government is reflected in its core values of accountability, 

integrity, and reliability.



Obtaining Copies of GAO Reports and Testimony:



The fastest and easiest way to obtain copies of GAO documents at no 

cost is through the Internet. GAO’s Web site ( www.gao.gov ) contains 

abstracts and full-text files of current reports and testimony and an 

expanding archive of older products. The Web site features a search 

engine to help you locate documents using key words and phrases. You 

can print these documents in their entirety, including charts and other 

graphics.



Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its 

Web site daily. The list contains links to the full-text document 

files. To have GAO e-mail this list to you every afternoon, go to 

www.gao.gov and select “Subscribe to daily E-mail alert for newly 

released products” under the GAO Reports heading.



Order by Mail or Phone:



The first copy of each printed report is free. Additional copies are $2 

each. A check or money order should be made out to the Superintendent 

of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. 

Orders should be sent to:



U.S. General Accounting Office



441 G Street NW,



Room LM Washington,



D.C. 20548:



To order by Phone: 	



	Voice: (202) 512-6000:



	TDD: (202) 512-2537:



	Fax: (202) 512-6061:



To Report Fraud, Waste, and Abuse in Federal Programs:



Contact:



Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov



Automated answering system: (800) 424-5454 or (202) 512-7470:



Public Affairs:



Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.



General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.



20548: