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Report to Congressional Requesters: 

August 2005: 

Environmental Liabilities: 

EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup 
Obligations: 

GAO-05-658: 

GAO Highlights: 

Highlights of GAO-05-658, a report to congressional requesters: 

Why GAO Did This Study: 

The burden of cleaning up Superfund and other hazardous waste sites is 
increasingly shifting to taxpayers, particularly since businesses 
handling hazardous substances are no longer taxed under Superfund and 
the backlog of sites needing cleanup is growing. While key 
environmental laws rely on the “polluter pays” principle, the extent to 
which liable parties cease operations or restructure—such as through 
bankruptcy—can directly affect the cleanup costs faced by taxpayers. 
GAO was asked to (1) determine how many businesses with liability under 
federal law for environmental cleanups have declared bankruptcy, and 
how many such cases the government has pursued in bankruptcy court; (2) 
identify challenges the Environmental Protection Agency (EPA) faces in 
holding bankrupt and other financially distressed businesses 
responsible for their cleanup obligations; and (3) identify actions EPA 
could take to better ensure that such businesses pay for their 
cleanups. 

What GAO Found: 

While more than 231,000 businesses operating in the United States filed 
for bankruptcy in fiscal years 1998 through 2003, the extent to which 
these businesses had environmental liabilities is not known because 
neither the federal government nor other sources collect this 
information. Information on bankrupt businesses with federal 
environmental liabilities is limited to data on the bankruptcy cases 
that the Justice Department has pursued in court on behalf of EPA. In 
that regard, the Justice Department initiated 136 such cases from 1998 
through 2003. 

In seeking to hold liable businesses responsible for their 
environmental cleanup obligations, EPA faces significant challenges 
that often stem from the differing goals of environmental laws that 
hold polluting businesses liable for cleanup costs and other laws that, 
in some cases, allow businesses to limit or avoid responsibility for 
these liabilities. For example, businesses can legally organize or 
restructure in ways that can limit their future expenditures for 
cleanups by, for example, separating their assets from their 
liabilities using subsidiaries. While many such actions are legal, 
transferring assets to limit liability may violate federal law in some 
cases. However, such cases are difficult for EPA to identify and for 
the Justice Department to prosecute successfully. In addition, 
bankruptcy law presents a number of challenges to EPA’s ability to hold 
parties responsible for their cleanup obligations, challenges that are 
largely related to the law’s intent to give debtors a fresh start. 
Moreover, by the time a business files for bankruptcy, it may have few, 
if any, assets remaining to distribute among creditors. The bankruptcy 
process also poses procedural and informational challenges for EPA. For 
example, EPA lacks timely, complete, and reliable information on the 
thousands of businesses filing for bankruptcy each year. 

Notwithstanding these challenges, EPA could better ensure that bankrupt 
and other financially distressed businesses meet their cleanup 
obligations by making greater use of existing authorities. For example, 
EPA has not implemented a 1980 statutory mandate under Superfund to 
require businesses handling hazardous substances to demonstrate their 
ability to pay for potential environmental cleanups—that is, to provide 
financial assurances. EPA has cited competing priorities and lack of 
funds as reasons for not implementing this mandate, but its inaction 
has exposed the Superfund program and U.S. taxpayers to potentially 
enormous cleanup costs at gold, lead, and other mining sites and at 
other industrial operations, such as metal-plating businesses. Also, 
EPA has done little to ensure that businesses comply with its existing 
financial assurance requirements in cleanup agreements and orders. 
Greater oversight and enforcement of financial assurances would better 
guarantee that cleanup funds will be available if needed. Also, greater 
use of other existing authorities—such as tax offsets, which allow the 
government to redirect tax refunds it owes businesses to agencies with 
claims against them—could produce additional payments for cleanups from 
financially distressed businesses. 

What GAO Recommends: 

GAO’s nine recommendations include EPA’s (1) implementing a financial 
assurance mandate for businesses handling hazardous substances and (2) 
enhancing its oversight and enforcement of existing financial 
assurances and authorities. EPA generally agreed with many of the 
recommendations, stating its intent to further evaluate some of them. 

www.gao.gov/cgi-bin/getrpt?GAO-05-658. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John B. Stephenson at 
(202) 512-3841 or stephensonj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The Number of Business Bankruptcies Involving Environmental Liabilities 
Is Not Known: 

EPA Faces Significant Challenges When Seeking to Hold Businesses 
Responsible for Their Cleanup Obligations, Particularly Businesses in 
Bankruptcy and Other Financial Distress: 

EPA Could Make Greater Use of Available Authorities and Enforcement 
Tools to Pursue Hazardous Waste Cleanup Costs from Bankrupt and Other 
Financially Distressed Businesses: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Chronology of EPA's Efforts to Develop Financial Assurance 
Requirements for Businesses Handling Hazardous Substances: 

Appendix III: Comments from the Environmental Protection Agency: 

GAO Comments: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Financial Assurance Mechanisms Generally Accepted by EPA: 

Table 2: Relative Financial Risk, Necessary Oversight and Enforcement 
Effort, and Costs of Financial Assurance Mechanisms: 

Abbreviations: 

BLM: Bureau of Land Management: 

CERCLA: Comprehensive Environmental Response, Compensation and 
Liability Act: 

EFAB: Environmental Financial Advisory Board: 

EPA: Environmental Protection Agency: 

IG: inspector general: 

NPL: National Priorities List: 

RCRA: Resource Conservation and Recovery Act: 

Letter August 17, 2005: 

The Honorable James M. Jeffords: 
Ranking Minority Member: 
Environment and Public Works Committee: 
United States Senate: 

The Honorable Patrick J. Leahy: 
Ranking Minority Member: 
Committee on Judiciary: 
United States Senate: 

The Honorable Barbara Boxer: 
The Honorable Maria Cantwell: 
United States Senate: 

Key federal environmental statutes, such as the Resource Conservation 
and Recovery Act (RCRA) and the Comprehensive Environmental Response, 
Compensation, and Liability Act (CERCLA),[Footnote 1] which established 
the Superfund program, require that parties statutorily responsible for 
pollution bear the cost of cleaning up contaminated sites.[Footnote 2] 
In many cases, liable parties have met their cleanup responsibilities. 
However, parties responsible for cleaning up some Superfund sites 
include businesses that no longer exist, having been liquidated through 
bankruptcy or otherwise dissolved. In the past, most of the costs for 
these "orphan" Superfund sites were borne by a Superfund trust fund 
supported primarily by a tax on crude oil and certain chemicals and an 
environmental tax on corporations. However, authority to collect these 
taxes expired in 1995, and the fund is now mostly depleted. As a 
result, the government--the Environmental Protection Agency (EPA)--now 
largely pays for hazardous waste cleanups with appropriations from the 
general fund when responsible parties do not.[Footnote 3]

In light of the substantial federal deficit, EPA's management of its 
financial risks associated with Superfund and RCRA is increasingly 
important. For example, the extent to which responsible parties with 
liabilities cease operations or restructure--often through bankruptcy 
proceedings--can directly affect the Superfund costs that will be borne 
by the government. According to recent studies, it will cost $140 
million, on average, to clean up each of the 142 largest Superfund 
sites, for a total of almost $20 billion.[Footnote 4] Importantly, 
cleanups at 60 of these megasites are already being funded either 
wholly or partially by EPA. In addition, the cleanup burden borne by 
EPA and other government entities will be increased if operating 
businesses, including those regulated under RCRA, fail to fulfill their 
cleanup obligations. For example, businesses may simply close and 
abandon contaminated properties--or they may go through bankruptcy 
proceedings--leaving contaminated properties for state programs or 
EPA's Superfund program to clean them up. 

In implementing the Superfund and RCRA programs, EPA uses some risk 
management approaches, such as requiring that certain responsible 
parties--generally businesses--provide the agency with evidence of 
their ability to pay their expected future cleanup costs because the 
cleanups often take many years and the financial position of liable 
businesses can change during that time. Financial assurances are meant 
to assure EPA that the businesses will have the money to finish the 
cleanups in the future. Thus, when negotiating Superfund and RCRA 
cleanup agreements with EPA, businesses generally agree to provide 
financial assurances aimed at demonstrating their ability to meet the 
requirements of the agreements.[Footnote 5] These financial assurances 
include bank letters of credit, trust funds, and, under certain 
conditions, guarantees that businesses or their parent corporations 
have the financial wherewithal to meet the obligations. 

According to EPA officials, businesses file for bankruptcy protection 
generally for economic reasons unrelated to environmental liabilities, 
with some notable exceptions. When businesses file for bankruptcy in 1 
of 90 U.S. bankruptcy courts, they seek either to liquidate all assets 
and go out of business or to reorganize--which can include a partial 
liquidation--and remain in business. EPA has set up an informal process 
to identify bankruptcy cases that involve environmental liabilities and 
to assess whether the assets available for creditors, which include 
EPA, warrant referring a case to the Department of Justice, which files 
claims in bankruptcy court on behalf of EPA. 

In this context, our objectives were to (1) determine how many 
businesses with liability under federal law for environmental cleanups 
have declared bankruptcy and how many such cases the Justice Department 
has pursued in bankruptcy court, (2) identify key challenges that EPA 
faces in holding bankrupt and other financially distressed businesses 
responsible for their cleanup obligations, and (3) identify any actions 
EPA could take to better ensure that bankrupt and other financially 
distressed businesses pay the costs of cleaning up their hazardous 
waste sites to the maximum extent practicable. 

To address these objectives, we reviewed federal statutes and policies 
associated with hazardous waste management and cleanup, the federal 
bankruptcy code and procedures, and academic and professional 
literature addressing the intersection of environmental and bankruptcy 
law, corporate limited liability, forms of business organization, and 
asset management. In addition, we interviewed EPA headquarters and 
regional enforcement officials about how the agency identifies, 
pursues, and recovers federal environmental liabilities from 
financially distressed or bankrupt businesses; the challenges EPA faces 
in these tasks; and the extent to which the agency has used available 
authorities and enforcement tools in this effort. We also analyzed 
bankruptcy data for fiscal years 1998 through 2003 from the 
Administrative Office of the U.S. Courts. In addition, for the same 
period, we analyzed Justice Department data on bankruptcies involving 
environmental liabilities that the department pursued in bankruptcy 
court on behalf of EPA. More detail on our scope and methodology can be 
found in appendix I. We performed our work between September 2003 and 
July 2005 in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

While national bankruptcy data show that more than 231,000 businesses 
operating in the United States filed for bankruptcy in fiscal years 
1998 through 2003, the extent to which these businesses had existing 
environmental liabilities is not known because neither the federal 
government nor other sources collect this information. EPA seeks to 
identify information on those business bankruptcies that involve 
environmental liabilities owed to EPA by, among other things, reviewing 
bankruptcy notices. However, EPA does not maintain information on the 
results of its reviews of bankruptcy cases. According to EPA officials, 
the agency does not maintain information on the results of all of its 
reviews of bankruptcy cases--including whether environmental 
liabilities are involved--because of the large volume of bankruptcy 
notices it receives and the limited resources available to track such 
information. Thus, information on businesses in bankruptcy proceedings 
with federal environmental liabilities is limited to data on the 
bankruptcy cases that the Justice Department has pursued in court on 
behalf of EPA and other agencies. In that regard, the Justice 
Department initiated 136 such cases from 1998 through 2003, most of 
which were for hazardous waste liabilities under Superfund and RCRA. 

In seeking to hold bankrupt and other financially distressed businesses 
responsible for their cleanup obligations, EPA faces significant 
challenges that often stem from the differing goals of environmental 
laws that hold polluting businesses liable for cleanup costs and other 
laws that, in some cases, allow businesses to limit or avoid 
responsibility for those liabilities. For example, businesses can 
legally reorganize or restructure in ways that can limit their future 
expenditures for environmental cleanups by separating their assets from 
their liabilities using subsidiaries. Importantly, the long-term nature 
of many environmental cleanups--particularly under Superfund--gives 
businesses a significant amount of time to make such corporate changes. 
While many such actions are legal, transferring assets to limit 
liability may be prohibited under certain circumstances. However, such 
cases are difficult both for EPA to identify and for the Justice 
Department to prosecute successfully. In addition, federal bankruptcy 
law, like corporate law, presents a number of significant challenges to 
EPA's efforts to hold bankrupt and other financially distressed 
businesses responsible for their cleanup obligations. Bankruptcy law 
serves both to provide insolvent debtors a measure of financial relief-
-including a fresh start--and to equitably distribute their funds to 
maximize creditors' interests in receiving payment. However, these 
goals can conflict with the Superfund and other environmental laws, 
which generally require the cleanup of environmental contamination and 
the imposition of costs on the parties responsible for the pollution. 
These challenges are partly related to the bankruptcy law's discharging 
of a debtor's liability for pre-bankruptcy debts. Moreover, by the time 
a business files for bankruptcy, it may have few, if any, assets 
remaining to distribute among creditors. The bankruptcy process also 
poses procedural and informational challenges for EPA. For example, 
EPA's efforts to identify bankruptcies that may warrant pursuit in 
bankruptcy court are hampered by the lack of timely, complete, and 
reliable information on the many thousands of businesses filing for 
bankruptcy each year. 

Notwithstanding these inherent challenges, EPA could better ensure that 
bankrupt and other financially distressed businesses carry out their 
cleanup responsibilities by making greater use of existing authorities 
and enforcement tools. For example, EPA has not yet implemented a 1980 
statutory mandate under Superfund to require businesses handling 
hazardous substances to maintain financial assurances that would 
provide evidence of their ability to pay to clean up potential spills 
or other environmental contamination that could result from their 
operations. By its inaction on this mandate, EPA has continued to 
expose the Superfund program, and ultimately the U.S. taxpayers, to 
potentially enormous cleanup costs at facilities that currently are not 
required to have financial assurances for cleanup costs, such as many 
gold, lead, and other hardrock mining sites and metal-plating 
facilities. Although implementing the requirement could help avoid the 
creation of additional Superfund sites and could provide funds to help 
pay for cleanups, EPA has cited, among other things, competing 
priorities and lack of funds as reasons for having made no progress in 
this area for nearly 25 years. Additionally, although EPA's current 
practice is to include requirements in settlement agreements and orders 
under Superfund and RCRA for businesses to provide financial assurances 
within a specified period of time, EPA has done little to ensure that 
the businesses comply with the financial assurance requirements. For 
example, EPA has not collected data on the financial assurances 
businesses are required to have in place under the Superfund and RCRA 
corrective action programs, such as the type of assurance required, the 
amount of financial assurance they provide, and whether the financial 
assurance is still authorized or is in force. The one study on this 
issue, conducted by an EPA regional office, found that (1) about half 
of the responsible parties subject to Superfund financial assurance 
requirements in that region were not in compliance with them and (2) 
the agency could not locate relevant financial assurance documents to 
evaluate compliance in many cases--22 percent. Providing greater 
oversight and enforcement of financial assurances would better 
guarantee that cleanup funds will be available if needed. 

In addition to financial assurances, EPA has on occasion used other 
enforcement authorities to obtain payments for cleanups. For example, 
in a few instances, EPA has used tax offsets, which allow the federal 
government to redirect tax refunds it owes businesses to federal 
agencies with claims against these businesses. Greater emphasis on and 
use of such authorities could produce additional payments for cleanups 
from bankrupt and other financially distressed businesses. We are 
making nine recommendations to the Administrator, EPA, aimed at 
improving EPA's ability to ensure that liable parties meet their 
environmental cleanup obligations, including implementing the statutory 
mandate under Superfund to develop financial assurance regulations for 
businesses handling hazardous substances; enhancing its efforts to 
manage and enforce its existing financial assurance requirements; 
evaluating the financial assurances the agency accepts; and seeking 
opportunities to more fully use its enforcement tools, particularly tax 
and other offsets. In commenting on a draft of the report, EPA 
generally agreed with many of the recommendations and said the agency 
will further evaluate the others (app. III contains EPA's comments and 
our responses). 

Background: 

At the federal level, the cleanup of hazardous waste sites is primarily 
addressed under the Superfund and RCRA corrective action programs. The 
Superfund program is directed primarily at addressing contamination 
resulting from past activities at inactive or abandoned sites or from 
spills that require emergency action. The RCRA corrective action 
program primarily addresses contamination at operating industrial 
facilities. In addition to these cleanup response programs, another 
RCRA program--the closure/post-closure program--is designed to prevent 
environmental contamination by ensuring that hazardous waste facilities 
are closed in a safe manner and monitored after closure to the extent 
necessary to protect human health and the environment. 

CERCLA created the Superfund program, under which EPA may compel 
parties statutorily responsible for contaminated sites to clean them up 
or to reimburse EPA for its cleanup costs.[Footnote 6] In many cases, 
liable parties have met their cleanup responsibilities under Superfund. 
For example, EPA has reported that, as a result of its enforcement 
activities, liable parties participate in cleanup work at about 70 
percent[Footnote 7] of the sites on the Superfund National Priorities 
List (NPL), EPA's list of seriously contaminated sites.[Footnote 8] 
However, in some cases, parties responsible for the contamination 
cannot be identified (for example, at long-abandoned landfills where 
many parties may have dumped hazardous substances) or the parties do 
not have sufficient financial resources to perform or pay for the 
entire cleanup. In the latter case, EPA often settles environmental 
claims with businesses for less than the cleanup costs if paying for 
the cleanup would present "undue financial hardship," such as depriving 
a business of ordinary and necessary assets or resulting in an 
inability to pay for ordinary and necessary business expenses. (EPA 
said it also often settles environmental claims for less than the total 
cleanup costs if the agency believes making the business pay the full 
cost would be inequitable.) Further, when parties file for bankruptcy 
protection, EPA's recovery of cleanup costs may be reduced or 
eliminated, particularly when there are few other parties with cleanup 
liabilities at the Superfund site. 

To help EPA pay for cleanups and related program activities, the 
Superfund law established a trust fund. Among other things, the trust 
fund can be used to pay for cleaning up sites on the NPL. Cleaning up 
NPL sites has often been a very lengthy process--in many cases, it has 
taken 10 to 20 years. The cleanup process begins when EPA either 
conducts cleanup studies for the sites or negotiates with liable 
parties to conduct such studies. These studies identify the types and 
quantities of contamination at sites and consider alternative cleanup 
remedies. EPA then chooses the cleanup remedies it considers most 
appropriate and performs the cleanups itself or negotiates settlements 
with liable parties for them to finance and perform cleanups.[Footnote 
9]

Historically, a tax on crude oil and certain chemicals and an 
environmental tax on corporations were the primary sources of revenues 
for the Superfund trust fund; however, the authority for these taxes 
expired in 1995. The trust fund continues to receive revenues in the 
form of recoveries of Superfund-related costs from liable parties, 
interest on the fund balance, fines and penalties, and general revenue 
fund appropriations that supplement the trust fund balance. Since 
fiscal year 2000, the Superfund program has increasingly relied on 
revenue from general revenue fund appropriations.[Footnote 10] For 
fiscal year 2004, for example, EPA's Superfund appropriation of $1.2 
billion was from general revenue only.[Footnote 11] In contrast, 
through the 1990s, Superfund trust fund revenues other than general 
fund appropriations provided more than $1 billion a year in program 
funding.[Footnote 12] Further, appropriations for the Superfund program 
(from both general revenue and trust fund revenues) has decreased from 
$1.9 billion to $1.2 billion, in constant 2003 dollars, from fiscal 
year 1993 to fiscal year 2004. 

Although funding for the Superfund program has decreased, sites 
continue to be added to the NPL to address serious risks to health and 
the environment. As of September 30, 2004, there were 1,236 NPL 
sites.[Footnote 13] According to a recent study, the cleanup costs for 
a majority of these sites are under $50 million each and will cost $12 
million on average. However, there are 142 Superfund megasites--NPL 
sites whose cleanup is estimated to cost more than $50 million each-- 
for which the average cost is expected to be $140 million. According to 
EPA estimates, the vast majority of costs for most NPL sites will be 
incurred getting to the construction completion stage.[Footnote 14] EPA 
officials said that 933 NPL sites have reached the construction 
complete stage as of July 2005. 

Despite EPA's significant progress, a backlog of NPL sites is ready to 
proceed to construction of a long-term cleanup remedy--which is 
typically the most expensive stage of a cleanup. The decrease in 
Superfund funding in recent years and this backlog of sites ready for 
additional funding may make the already lengthy NPL cleanup process 
even lengthier. According to EPA, many sites in this backlog are large, 
complex, and costly.[Footnote 15] Further complicating the funding 
situation, as we reported in 2003, the number of sites that do not have 
an identifiable nonfederal source to fund their cleanup is growing, and 
several factors indicate the potential for additional growth in the 
future.[Footnote 16] For example, officials in 8 of the 10 EPA regions 
noted that they expected more liable parties to declare bankruptcy in 
the future. Thus, the number of taxpayer-funded cleanups could 
increase, especially at sites where there are no (or few) other liable 
parties. 

In contrast to the Superfund program, the corrective action program 
under the Resource Conservation and Recovery Act of 1976 (RCRA), as 
amended, primarily addresses contamination at operating industrial 
facilities.[Footnote 17] Among other things, RCRA regulates the 
management of hazardous waste from "cradle to grave"--that is, from the 
time hazardous waste is created and throughout its lifetime, even after 
it enters a landfill or is incinerated. While EPA has overall 
responsibility for implementing the act, and retains enforcement 
authority, it has authorized most states to administer all or part of 
RCRA's hazardous waste program. 

RCRA requires owners and operators of hazardous waste facilities--those 
used to treat, store, or dispose of hazardous waste and often called 
"TSDFs"--to obtain operating permits specifying how hazardous waste 
will be safely managed at the facilities. Owners and operators of 
hazardous waste facilities are also required to prepare closure plans 
and cost estimates for removing or securing wastes, decontaminating 
equipment, and other activities required when they eventually cease 
operations--such as capping a landfill when it is full. In addition, 
under the RCRA corrective action program, these owners or operators 
must clean up contamination occurring at their facilities.[Footnote 18] 
This is consistent with one of RCRA's primary purposes, which is to 
ensure the proper management of hazardous waste so as to minimize 
present and future health and environmental threats. 

A 2002 EPA study on the implementation of RCRA's corrective action 
program reported that nearly 900 facilities had undertaken cleanup 
measures and/or had selected a cleanup remedy by 1997.[Footnote 19] EPA 
reported that spills were a major source of contamination at over half 
of the facilities. The study suggests that those industries with a high 
risk for contamination requiring clean up under the corrective action 
program include chemical manufacturing, wood preserving, petroleum 
refining or other manufacturing industries, and the service sector that 
includes dry cleaning. In addition, EPA reported that required cleanups 
under the RCRA corrective action program could be as costly as cleanups 
at many Superfund sites--EPA estimated that between 2 and 16 percent of 
the nearly 900 RCRA facilities would have total cleanup costs in excess 
of $50 million. 

RCRA's closure/post-closure and corrective action programs regulate 
facilities that treat, store, or dispose of hazardous wastes--but, 
importantly, RCRA does not regulate some facilities that make or use 
hazardous substances that are not considered listed or characteristic 
hazardous wastes under RCRA, but that nevertheless may in some 
circumstances present a high risk for environmental contamination. 
Businesses may generally store waste on site in compliance with 
specified requirements for up to 90 days without needing a permit or 
being subject to the regulations governing hazardous waste storage 
facilities.[Footnote 20]Thus, for example, chemical companies that 
manufacture and sell highly hazardous substances, such as chlorine 
products, may not be required to obtain a RCRA permit if they do not 
store their hazardous waste--even though the products themselves may 
pose environmental risk. 

RCRA authorizes EPA to issue regulations for the operation of hazardous 
waste treatment, storage, and disposal facilities, including such 
additional qualifications as to financial responsibility as may be 
necessary or desirable.[Footnote 21] EPA has issued regulations under 
the closure/post-closure program requiring that owners and operators of 
certain hazardous waste facilities provide evidence to EPA, or a state 
regulator, that they have sufficient financial resources to clean up as 
required for proper closure, and, if necessary, for post-closure 
care.[Footnote 22] EPA regulations also require a facility seeking a 
permit to provide financial assurances to cover any corrective action 
responsibilities identified in the permit.[Footnote 23] The principal 
purpose of financial assurance requirements is to ensure that the 
parties responsible for environmental contamination assume the costs of 
cleanup rather than forcing the general public to pay for or otherwise 
bear the consequences of businesses' environmental liabilities. 
[Footnote 24] That is, financial assurances can help ensure that 
resources are available to fulfill the businesses' cleanup obligations 
as they arise. The fact that the parties responsible for the 
contamination are also responsible for cleaning it up encourages 
businesses to adopt responsible environmental practices. 

Under the RCRA closure and post-closure and other EPA programs, 
financial assurances can include, among other things, bank letters of 
credit that guarantee payment by the financial institutions that issue 
them and, under certain conditions, guarantees that businesses or their 
parent corporations have the financial wherewithal to meet their 
obligations. While EPA has not issued financial assurance regulations 
under the RCRA corrective action program, EPA typically requires that 
owners and operators provide financial assurances for cleanups of 
spills or other contamination at hazardous waste facilities in 
administrative orders the agency issues under this program.[Footnote 
25] Also, as noted above, EPA regulations require a facility seeking a 
permit to provide financial assurances to cover any corrective action 
responsibilities identified in the permit. Since, as discussed above, 
generators of hazardous waste generally are not subject to the RCRA 
corrective action and closure and post-closure requirements, they are 
not required to provide financial assurances for any RCRA cleanups that 
may be needed as a result of their operations. 

EPA also has not issued financial assurance regulations for the 
Superfund program, but in some cases does require liable businesses to 
obtain financial assurances demonstrating their ability to pay cleanup 
costs for existing contamination at Superfund sites. Specifically, when 
EPA reaches settlement agreements with parties regarding site cleanups, 
the agency generally requires the businesses to provide financial 
assurance demonstrating their ability to pay for the agreed-upon 
cleanup activities. In this regard, EPA has included financial 
assurance requirements in its "model agreements" for staff to use in 
negotiating Superfund settlements. However, if EPA and a liable party 
do not reach a settlement, there is no regulatory requirement under 
Superfund that the party provide financial assurance that it will be 
able to pay its cleanup liabilities. There is, however, a statutory 
mandate under Superfund law that EPA has not implemented requiring it 
to issue financial assurance regulations for facilities that handle 
hazardous substances. As discussed further in this report, these 
regulations could cover a number of facilities not currently covered by 
financial assurances under RCRA. 

Businesses that may incur environmental liabilities under Superfund or 
RCRA run the gamut in terms of organization type and size--they include 
large U.S. and international corporations as well as small businesses, 
such as sole proprietorships. These entities may be publicly held--that 
is, their stock is traded on public stock exchanges--or they may be 
closely (privately) held. The different forms of organization--such as 
corporations and partnerships--have different legal and tax attributes. 
A corporation is a legal entity that exists independently of its owners 
or investors, called shareholders. A key attribute of corporations is 
that they limit the liability of their owners, the shareholders. That 
is, corporations are liable for the debts and obligations of their 
businesses, while the shareholders are liable only for what they have 
invested. In contrast to shareholders, the owners of unincorporated 
businesses, such as partnerships and sole proprietorships, are 
generally liable for all debts and liabilities incurred by their 
businesses but also have tax advantages that corporation owners do not. 
However, another unincorporated organizational form that is relatively 
new but is becoming more popular for businesses of all sizes--the 
limited liability company--provides owners limited liability similar to 
a corporation as well as tax treatment similar to partnerships and sole 
proprietorships.[Footnote 26] Like many corporations, these "hybrids" 
can have any number of investors (owners), and the investors may 
include partnerships, corporations, individuals, and others.[Footnote 
27]

In general, more financial and ownership information is available about 
publicly held corporations, which must comply with more federal 
reporting requirements, such as those of the U.S. Securities and 
Exchange Commission (SEC), than about privately held corporations. 
Information about limited liability companies, including those in 
offshore locations such as the Bahamas, may be limited or unavailable. 
Information may also be limited or unavailable about special purpose 
entities--legal entities created to carry out a specified purpose or 
activity, such as to consummate a specific transaction or a series of 
transactions with a narrowly defined purpose. Some large corporations, 
such as Enron, allegedly have used special purpose entities to hide the 
true financial condition of the companies.[Footnote 28] Following the 
bankruptcy of Enron and other corporate failings, the Congress passed 
the Sarbanes-Oxley Act of 2002 to protect investors by improving the 
accuracy and reliability of corporate disclosures. Among other things, 
the law includes requirements governing financial disclosures and 
audits for publicly held corporations. 

In addition, in 2003 the Financial Accounting Standards Board, the 
organization that establishes financial accounting and reporting 
standards for the private sector, issued revised guidance on accounting 
for special purpose entities and is currently working on further 
accounting guidance for them. 

While some financially distressed businesses simply cease operations, 
others file for bankruptcy protection. The bankruptcy code is a uniform 
body of federal law that governs all bankruptcy cases and gives 
debtors--individuals or businesses--a fresh start or some measure of 
relief from burdensome debts.[Footnote 29] Filing a bankruptcy petition 
gives the petitioner some immediate relief in the form of an automatic 
stay, which generally bars creditors from commencing or continuing any 
debt collection actions against the entity while it is in 
bankruptcy.[Footnote 30]

In bankruptcy, debt can be placed in one of three broad categories: 
secured, priority unsecured, and general unsecured, which are generally 
satisfied in that order when a debtor's assets are distributed in a 
bankruptcy proceeding. The actual, necessary costs and expenses of 
preserving the bankruptcy estate are administrative expenses, which 
must be paid in full before any other class of claims are paid. By 
definition, administrative expenses must be incurred post-petition 
because the bankruptcy estate is created by the filing of the 
bankruptcy petition. Response costs incurred by EPA under the Superfund 
law post-petition with respect to property of the estate may be 
entitled to administrative priority. However, environmental response 
costs at property the debtor does not own are typically considered 
general unsecured debts, and often are paid at pennies on the dollar-- 
if at all--in a bankruptcy proceeding. 

The two types of bankruptcy cases most relevant to EPA are chapter 7 
business liquidations and chapter 11 corporate reorganizations. 
Businesses file for bankruptcy under chapter 7 when they are ceasing 
operations.[Footnote 31] While some financially distressed businesses 
cease operations without the formality of bankruptcy proceedings, those 
that file under chapter 7 use a court-supervised procedure in which a 
trustee collects the assets of the business (the bankruptcy estate), 
reduces them to cash, and makes distributions to creditors. In many 
chapter 7 cases, however, few or no assets are available for 
distribution. 

Alternatively, businesses facing financial difficulties may want to 
continue to operate. These businesses can use the chapter 11 bankruptcy 
process to restructure unmanageable debt burdens. Most bankruptcy 
claims EPA pursues in court are chapter 11 reorganizations. EPA's goals 
in participating in chapter 11 cases include collecting environmental 
costs owed to the government, ensuring that the debtor complies with 
applicable environmental laws and regulations, and ensuring that 
cleanup obligations are satisfied. The chapter 11 debtor generally has 
120 days during which it has the exclusive right to file a plan of 
reorganization. However, the bankruptcy court can extend or reduce this 
period.[Footnote 32] The debtor must provide creditors with a 
disclosure statement containing information adequate to enable 
creditors to evaluate the plan, including how the existing debts will 
be paid. The court ultimately approves (confirms) or disapproves the 
plan of reorganization. Confirmation of the plan generally discharges 
eligible debts that were incurred prior to the plan's confirmation. 
Certain cleanup obligations, however, such as future cleanup 
liabilities under RCRA, are not dischargeable under bankruptcy. The 
debtor normally goes through a period of consolidation and emerges with 
a reduced debt load and a reorganized business. However, many chapter 
11 reorganizations are not successful in that many reorganized 
businesses subsequently fail and go through liquidation. 

Bankruptcy cases are heard by U.S. bankruptcy judges in 90 federal 
bankruptcy courts, which are under 12 regional federal appellate 
circuit courts.[Footnote 33] In many instances, applicable law on key 
questions is unsettled and interpretations may vary among the circuits. 
For example, interpretations may vary concerning the extent to which 
post-petition response costs incurred by EPA under CERCLA with respect 
to property of the bankruptcy estate may be entitled to administrative 
priority. Businesses may generally file for bankruptcy protection in a 
bankruptcy court in a state either in which (a) their facilities are 
located or (b) they are incorporated. In fact, many businesses file for 
bankruptcy protection in the second and third circuits, which include 
Delaware and the Southern District of New York. 

EPA has established a bankruptcy work group comprised of several EPA 
headquarters staff members, along with one or two staff members from 
each of the 10 regions, many of whom are Superfund enforcement 
attorneys who handle bankruptcy matters as a collateral duty. The work 
group helps identify bankruptcy cases in which EPA may have a claim and 
assists in resolving other issues that involve contaminated property or 
otherwise affect EPA's interests in bankruptcies, among other things. 
In addition, several Justice Department attorneys participate in the 
work group. 

The Number of Business Bankruptcies Involving Environmental Liabilities 
Is Not Known: 

Information on the number of bankruptcies involving environmental 
liabilities is very limited. For example, while the bankruptcy courts 
collect data on the number of businesses that file for bankruptcy each 
year and the Administrative Office of the U.S. Courts maintains these 
data in a national database, neither the courts, EPA, nor private 
providers of business data collect information on how many of these 
businesses have environmental liabilities.[Footnote 34] Thus, although 
national bankruptcy data show that 231,630 businesses operating in the 
United States filed for bankruptcy in fiscal years 1998 through 2003-- 
an average of about 38,600 businesses a year--how many of these had 
environmental liabilities is not known. Currently, information on 
bankrupt businesses with federal environmental liabilities is limited 
to data on the bankruptcy cases that the Justice Department has pursued 
in court on behalf of EPA and other agencies, such as the Department of 
the Interior. In fiscal years 1998 through 2003, the Justice Department 
filed 136 such claims, 112 of which related to hazardous waste 
liabilities under Superfund and RCRA. The gap in data between 
businesses that file for bankruptcy and those with environmental 
liabilities that the Justice Department has pursued in court is large: 
what is not known is how many of the other 231,494 businesses that 
filed for bankruptcy during this time period had environmental 
liabilities. 

EPA may learn of bankruptcy filings that involve environmental 
liabilities in various ways--for example, from the businesses 
themselves or from other federal or state agencies. However, the most 
systematic notification is from the bankruptcy courts. These courts 
mail notices of filings to EPA when the agency is listed as a creditor 
in the bankruptcy filing.[Footnote 35] Although EPA reviews information 
about the businesses identified in the bankruptcy notices to determine 
whether it should request the Justice Department to pursue an 
environmental claim in the bankruptcy proceedings, the agency does not 
keep records on the bankruptcy filings it has researched, its basis for 
deciding whether to pursue a claim related to environmental 
liabilities, or the characteristics of the businesses involved, such as 
industry type. Among the factors EPA considers in deciding whether to 
pursue a claim in bankruptcy court is whether the debtor has any assets 
remaining to be divided among creditors. In many cases, particularly 
when the company is ceasing operations under chapter 7, EPA decides not 
to pursue a claim in bankruptcy court because it concludes that the 
business involved has few, if any, remaining assets. Similarly, EPA may 
choose not to pursue a claim when the claim is small relative to the 
resources needed for the government to pursue it. 

According to EPA officials, the agency does not routinely collect or 
maintain information on the bankruptcy cases it reviews but decides not 
to pursue in bankruptcy because of the volume of bankruptcy notices it 
receives--including many that do not involve EPA liabilities--and the 
limited resources available to track such information. While EPA would 
incur a cost to routinely collect and maintain information about 
bankruptcies involving environmental liabilities--including those that 
EPA decides not to pursue--such information would be useful as a 
management tool, for example, in identifying (1) the types of 
businesses that have avoided or limited their environmental liabilities 
by filing for bankruptcy protection and (2) individual business owners 
who have a history of filing for such bankruptcy protection. 

The 112 companies with hazardous waste liabilities that the Justice 
Department pursued in bankruptcy court between 1998 and 2003 represent 
a variety of industries, including some that could be expected to have 
significant environmental liabilities, such as chemical companies, 
metal finishers, hazardous waste recyclers, and paper mills. Other 
companies, such as Fruit of the Loom and Kmart Corporation, represent 
industries not immediately associated with a great likelihood of 
creating environmental liabilities.[Footnote 36] Most of the companies 
for which the Justice Department filed a bankruptcy claim on behalf of 
EPA were undergoing reorganization in bankruptcy rather than 
liquidating and going out of business. Further, 100 of the cases 
involved liabilities under the Superfund program, and 12 involved 
liabilities under RCRA.[Footnote 37] As of February 2005, 35 of the 112 
bankruptcy cases the Justice Department pursued had essentially been 
completed, and more than half--59--were still ongoing. For example, W. 
R. Grace and Company and many of its subsidiaries filed for bankruptcy 
under chapter 11 in April 2001, and this bankruptcy case is still under 
way as of July 2005. The remaining 18 cases were dismissed by the 
bankruptcy court for various reasons. In such cases, EPA and other 
creditors are no longer barred from pursuing claims against these 
businesses directly. However, EPA may have little success in recovering 
costs or ensuring compliance with environmental responsibilities if 
these businesses are, in fact, financially distressed. 

Over time, the current information gap that exists between businesses 
filing for bankruptcy and the subset of those for which the Justice 
Department files an environmental claim in bankruptcy court may be 
reduced because of new filing requirements that became effective 
recently. Since 2003, bankruptcy petitions and the accompanying 
Statement of Financial Affairs have required companies filing for 
bankruptcy to provide information identifying sites they own or possess 
that have actual or potential environmental problems, including any 
sites that pose or allegedly pose an imminent threat to public health 
and safety.[Footnote 38] However, this additional environmental 
information is not yet readily available electronically from the 90 
bankruptcy courts in the United States. That is, the systems cannot be 
queried to identify filings with information on sites with 
environmental liabilities. However, EPA has sought assistance in this 
regard from the U.S. trustees who participate in all bankruptcy cases 
except those filed in Alabama and North Carolina.[Footnote 39] In 
August 2004, the Acting General Counsel, Executive Office for U.S. 
Trustees, sent a memorandum to all U.S. trustees instructing them to 
coordinate with EPA in bankruptcy cases involving contaminated 
property. 

The trustees are to alert the appropriate EPA contact by email when 
they become aware of an affirmative response to the questions asking 
petitioners to identify sites with actual or potential environmental 
liabilities, and to attach the bankruptcy petition and appropriate 
schedules. EPA officials told us that they have received some 
notifications from U. S. trustees since this August 2004 memorandum. 

Because these environmental disclosure requirements are relatively new, 
little is known about the thoroughness and accuracy of the data on 
environmental liabilities that companies in bankruptcy have submitted 
to the courts. We note that the information businesses provide about 
their environmental liabilities would likely be subject to the same 
data quality issues as other self-reported data. For example, studies 
on other bankruptcy filing information from debtor companies, such as 
information on assets and liabilities, have found that such self- 
reported data tend to be flawed.[Footnote 40] Consequently, it is too 
soon to know the extent to which this additional information provided 
to bankruptcy courts will help fill the existing data gap relating to 
bankrupt companies with environmental liabilities. 

EPA Faces Significant Challenges When Seeking to Hold Businesses 
Responsible for Their Cleanup Obligations, Particularly Businesses in 
Bankruptcy and Other Financial Distress: 

In its efforts to hold businesses responsible for their cleanup 
obligations, particularly when they are in bankruptcy or other 
financial distress, EPA faces significant challenges, often stemming 
from the differing goals of environmental laws that hold polluting 
businesses liable for cleanup costs and other laws that, in some cases, 
allow businesses to limit or avoid responsibility for such liabilities. 
Further, the complexities of the federal bankruptcy code and its 
associated procedures, along with the complexities of the environmental 
cleanup process and EPA's many information needs when dealing with 
bankruptcies, present challenges to EPA's ability to hold businesses 
responsible for their environmental cleanup obligations. 

Businesses Can Organize and Restructure Themselves in Ways That May 
Allow Them to Limit Their Expenditures for Environmental Cleanups: 

A key legal attribute of corporations is that the liability of their 
owners--the shareholders--is limited. That is, corporations are liable 
for the debts and obligations of their businesses, while the 
shareholders are liable only for what they have invested. Aimed at 
encouraging shareholder investment to generate capital, the limited 
liability principle enables corporations to engage in enterprises that 
might not attract sufficient funding if shareholders were not protected 
in this way. Shareholders generally include individuals, corporations, 
and unincorporated business forms, such as partnerships. 

Many businesses take advantage of this limited liability principle to 
protect their assets by using a parent and subsidiary corporate 
structure in which the subsidiary is largely or wholly owned by the 
parent corporation--in other words, the parent is the subsidiary's 
shareholder. For example, using this structure, a subsidiary that is 
engaged in a business that is at risk of incurring substantial 
liability, such as mining or chemical manufacturing, can protect its 
assets by transferring the most valuable ones--such as equipment and 
patents--to a related entity, such as the parent or other subsidiary 
engaged in less risky endeavors. The high-risk subsidiary can continue 
to use the transferred assets, as appropriate, by leasing or renting 
them. It has become common practice for experts in asset protection to 
recommend that corporations protect their assets in this way. A goal is 
to continually draw down on the subsidiary's remaining assets, such as 
cash from the sale of equipment, to pay operating expenses, including 
rental and lease payments and salaries. If a liability arises, under 
the limited liability principle, the high-risk subsidiary's remaining 
assets may be reached--but generally not those of the parent 
corporation or other subsidiaries to which assets were transferred. And 
if the subsidiary incurs an environmental liability and does not have 
sufficient resources to fund the cleanup, the burden for the cleanup 
may be shifted to taxpayers. For example, the subsidiary could plead 
financial hardship, and under its ability-to-pay process, EPA may 
reduce the amount of funding the subsidiary has to provide, with the 
balance coming from the Superfund trust fund in the absence of other 
liable parties. Alternatively, the subsidiary could seek reorganization 
under the bankruptcy act, which could result in the discharge of the 
liability. 

While these asset protection strategies are generally legal depending 
on the circumstances, it is generally unlawful to transfer assets with 
the intent to hinder or defraud creditors. Under federal bankruptcy 
law, a transfer may be invalidated if it occurred within 1 year prior 
to the bankruptcy filing and if the transfer (1) occurred with the 
intent to defraud creditors or (2) in certain circumstances yielded 
less than reasonably equivalent value for the debtor.[Footnote 41] In 
addition, most states have enacted the Uniform Fraudulent Transfer Act, 
which contains prohibitions on fraudulent transfers analogous to the 
bankruptcy provision. Creditors generally must seek to invalidate such 
transfers within 4 years of their occurrence. 

Perhaps for these reasons, publications by financial and legal advisors 
have suggested that asset transfers be implemented in stages over time 
to avoid calling attention to them.[Footnote 42] The goal is to make 
them indistinguishable from ordinary business decisions and 
transactions and to implement them as early as possible, preferably 
well in advance of claims. From an asset protection standpoint, this 
approach makes sense because it helps protect transfers from legal 
challenges by the mere passage of time. However, the use of such 
strategies by parties liable for environmental cleanups presents a 
significant challenge to EPA in obtaining cleanup costs because it is 
hard for the agency to know about such transfers, much less obtain 
sufficient information to successfully challenge them within the time 
permitted by law or to challenge businesses' claims that paying the 
cleanup costs represents an undue economic hardship. Further, because 
businesses typically are aware of Superfund liabilities for many years 
before they actually have to fund the cleanups, they have ample time to 
reorganize and structure themselves in ways that can limit the 
expenditures they may be required to make in the future. For example, 
it is not unusual for it to take 10 or more years in total for sites to 
be placed on the National Priorities List, for cleanup remedies to be 
selected, and for the cleanups to be conducted. 

In addition, to protect assets even further, businesses may be 
structured with multiple organizational layers--beyond the two-tier 
parent/subsidiary construct--as well as with different types of 
corporate entities, such as limited liability companies. As outlined in 
a recent book on asset protection, dispersing assets among as many 
different types of entities and jurisdictions as possible is also a 
useful way to protect them from creditors.[Footnote 43] The goal of 
this approach is to create complex structures that, in effect, provide 
multiple protective trenches around assets, making it challenging and 
burdensome for creditors to pursue their claims. Because it is easier 
and less costly to set up and maintain limited liability companies than 
corporations, this relatively new hybrid form of business organization 
facilitates the establishment of complex, multi-layered businesses 
using corporations and limited liability companies.[Footnote 44]

Creditors may go to court to obtain the assets of a corporation's 
shareholders (including, for example, a parent corporation) to satisfy 
the corporation's debts. This is called "piercing the corporate veil," 
and it is difficult to achieve.[Footnote 45] EPA occasionally attempts 
to secure cleanup costs from a parent corporation under a veil-piercing 
theory. However, these cases are extremely complex and resource 
intensive, according to EPA officials. The strategy recommended to 
businesses to use multiple organizational layers to protect assets 
recognizes this challenge and seeks to make any challenge as difficult 
and costly as possible. Along these lines, an EPA enforcement official-
-who said that EPA is seeing more and more cases in which companies are 
restructuring using various layers and thereby shielding corporate 
assets--noted that the "transaction cost" for EPA to try to follow such 
cases to ensure that these companies satisfy their environmental 
liabilities can be prohibitively high. 

Finally, some EPA officials stated that a 1998 Supreme Court case has 
further complicated efforts to obtain cleanup costs from parent 
corporations. Under the Superfund law, past and present owners and 
operators are among the parties generally liable for cleanup costs at a 
contaminated site. The Supreme Court decision in United States v. 
Bestfoods held that a corporate parent could be liable (1) indirectly 
(as an owner) if the corporate veil could be pierced; and (2) directly 
(as an operator) if the corporate parent actively participated in, and 
exercised control over, the operations of the contaminated facility 
itself.[Footnote 46] The Bestfoods decision confirmed that the 
government could hold a parent corporation directly liable under the 
Superfund law for a subsidiary's cleanup costs under certain 
circumstances. However, EPA officials noted that prior to the Bestfoods 
decision, some courts had found a parent corporation liable where it 
exercised control over the subsidiary even if the parent did not 
control the contaminated facility. In addition, while the Bestfoods 
case recognized that the government could hold a parent corporation 
directly liable under the Superfund law, these officials stated that 
the case also helped establish a road map for observing corporate 
formalities that companies could follow to insulate themselves from 
this liability. 

Legal and Informational Challenges Constrain EPA's Ability to Hold 
Businesses in Bankruptcy Responsible for Their Cleanup Obligations: 

An obvious challenge that EPA faces when it attempts to ensure that 
businesses in bankruptcy carry out their environmental cleanup 
obligations is that the businesses may have little or no financial 
resources to pay EPA or any other creditors. However, EPA faces further 
challenges when companies file for bankruptcy, stemming from the 
differing goals of the bankruptcy code and federal environmental laws, 
the complexities of bankruptcy procedures and environmental cleanup 
programs, and EPA's many information needs when dealing with 
bankruptcies. 

Differing Statutory Goals and Program Complexities Present EPA with 
Challenges: 

Federal bankruptcy and environmental laws seek to address vastly 
different problems using solutions that frequently come into conflict. 
Specifically, while environmental laws generally impose cleanup costs 
on the parties responsible for pollution, one purpose of bankruptcy law 
is to give the debtor a fresh start by discharging existing claims 
against the debtor, including environmental claims in some cases. For 
example, when businesses with liability under the Superfund law file 
for bankruptcy protection, payment of cleanup costs may be nonexistent 
or substantially reduced in some cases, depending in part on the type 
of financial assurance the businesses agreed to provide under 
settlement agreements to meet the obligations.[Footnote 47] As a 
result, cleanup costs may be shifted to the general public, especially 
when the site has no other liable parties.[Footnote 48]

The inherent conflict between the goals of environmental cleanup laws 
and the bankruptcy code represents only the first of several key 
challenges EPA faces in attempting to hold businesses in bankruptcy 
responsible for their environmental cleanup obligations. For example, 
conflicts relating to the timing of events can have a significant 
impact on EPA's ability to recover costs in bankruptcy proceedings. One 
timing issue relates to the interpretations by various bankruptcy 
courts of when an environmental liability arises as a claim subject to 
discharge in bankruptcy. For example, bankruptcy courts in the Second 
Circuit[Footnote 49]--where many chapter 11 bankruptcies are filed-- 
generally hold that a claim arises when a release of a hazardous 
substance into the environment (such as a spill) occurs.[Footnote 50] 
In many bankruptcy cases involving responsible parties under Superfund, 
the relevant releases took place prior to the filing of the bankruptcy 
petition, making all claims for such releases subject to discharge even 
if EPA has not yet incurred cleanup or other response costs. 

Another challenge EPA faces is the need to provide timely estimates of 
cleanup costs that will form the basis for claims. Bankruptcy courts 
aim to resolve cases expeditiously and set specific time frames for 
proceedings, but it can be difficult for EPA to estimate the dollar 
amount of cleanup work needed at sites within the court's time frames. 
In particular, Superfund sites often require long-term investigations 
to both identify the nature and extent of contamination and to develop 
cleanup requirements and cost estimates. For many Superfund NPL sites, 
these processes may take a number of years. Depending upon where EPA is 
in these processes, it may be challenging to provide an estimate of 
future cleanup costs. For example, the extent of contamination may 
still be unknown or the cleanup remedy may not yet have been 
determined. Nonetheless, the Justice Department must submit a "proof of 
claim" in the bankruptcy court in order for EPA to have a chance for 
any cost recovery. With incomplete information regarding future cleanup 
costs, EPA may underestimate these costs in its claims to bankruptcy 
courts. Further, if EPA provides a cost estimate that the court rejects 
because it considers the estimate to be speculative, or if EPA does not 
have the time or resources to develop an estimate to support its 
bankruptcy claim, the government can lose any opportunity to recover at 
least some of the cleanup costs for such sites.[Footnote 51]

Provided that EPA is able meet these challenges and develops a 
supportable claim for the Justice Department to file in the bankruptcy 
case, provisions of the bankruptcy code may result in the claim being 
assigned a low status in the distribution of the debtor's assets. Many 
of EPA's claims may be considered general unsecured claims--the last to 
be paid after claims for creditors holding secured and priority 
unsecured claims have been paid. Further, although EPA may submit a 
claim for environmental penalties and/or fines, under chapter 7, these 
claims may rank even lower than most other unsecured claims. In some 
cases, a bankruptcy judge may deem certain EPA claims to be entitled to 
priority as administrative expenses--for example, if the expenses were 
incurred to address conditions endangering public health and the 
environment. Often, however, insufficient funds are available from the 
bankruptcy estate to pay cleanup and/or closure costs, or they provide 
only "pennies on the dollar" of the claims amounts when a debtor's 
assets are distributed. In these cases, the responsibility for cleaning 
up a Superfund site or closing and monitoring an RCRA hazardous waste 
facility may fall to EPA or a state agency unless, for example, other 
liable parties pay the cleanup costs or sufficient financial assurances 
are in place to cover these costs. 

Another important challenge facing EPA in bankruptcy cases results from 
the automatic stay provision, which preserves the status quo during 
bankruptcy proceedings, both giving debtors a "breathing spell" from 
their creditors and preventing the piecemeal distribution of a debtor's 
remaining assets in ways that could be preferential to some creditors 
and detrimental to others. However, the bankruptcy code expressly 
allows an exemption from the automatic stay for a governmental unit to 
begin or continue a proceeding to enforce its police or regulatory 
power, or to carry out a court judgment (other than a money judgment) 
to enforce its police or regulatory power. If EPA can successfully 
argue that the environmental proceedings fall within this exception to 
the stay, it can take action in federal district court while the 
bankruptcy proceedings continue. If EPA is unsuccessful in avoiding the 
automatic stay, it must pursue the claim in the bankruptcy court, along 
with other creditors. The key to when a court will permit an 
environmental action to avoid application of the automatic stay is how 
the court defines the phrase "money judgment."

As we reported in 1986, the stay can interfere with efforts of federal 
and state agencies to ensure that owners carry out their environmental 
responsibilities, such as cleaning up and properly closing hazardous 
waste facilities according to RCRA requirements.[Footnote 52] For 
example, although companies undergoing liquidation under chapter 7 are 
required to comply with federal and state environmental laws to the 
same extent as any other party, they may argue that the automatic stay 
allows them to avoid expending funds to carry out compliance actions. 
Companies reorganizing under chapter 11 are also obliged to comply with 
environmental laws while they are in bankruptcy proceedings even if it 
requires the debtor to incur additional expenses. Moreover, EPA 
enforcement officials noted, during a company's period of 
reorganization under chapter 11, EPA can pursue administrative expense 
penalties if the company continues to operate in violation of 
environmental laws, and has in some cases been successful in this 
regard. However, an EPA enforcement official also noted that the agency 
has limited leverage to ensure that such companies continue facility 
closures, site cleanups, and other environmental responsibilities 
during the bankruptcy proceedings--that can take years to complete-- 
unless EPA can convince a bankruptcy judge that a company must carry 
out these activities to address an imminent threat to human health or 
the environment.[Footnote 53]

The automatic stay also prevents creditors, such as federal and state 
agencies, from immediately collecting on certain court judgments. Thus, 
while courts may order businesses to pay environmental fines and/or 
cleanup costs to EPA, the government's ability to collect these 
payments may be reduced or negated by bankruptcy filings. For example, 
in August 2003, W.R. Grace and Company, the primary liable party at the 
Libby Asbestos Superfund site in Libby, Montana, was ordered by a U. S. 
district court to reimburse EPA $54.5 million for costs the agency had 
incurred in investigating and conducting certain emergency cleanup 
actions at the site.[Footnote 54] (Total long-term cleanup costs at 
this site are expected to rise to at least $179 million.) However, 
because W.R. Grace filed for bankruptcy protection in 2001 and is 
protected by the automatic stay, the company does not have to pay this 
judgment until the reorganized company emerges from 
bankruptcy.[Footnote 55] Moreover, EPA officials noted that because any 
reimbursement of the $54.5 million will be subject to the repayment 
terms agreed to in the company's reorganization plan, it has not yet 
been determined how much the federal government will be reimbursed for 
these cleanup costs. However, according to the lead EPA attorney 
working on this case, it is likely that creditors, including EPA, will 
receive a substantial return in this bankruptcy case once the company's 
reorganization plan has been confirmed by the court.[Footnote 56] In 
the meantime, according to EPA, the agency continues to pay for and 
oversee the cleanup work to address the most hazardous conditions at 
the site, at an estimated cost to taxpayers of $18 million per year 
over the past several years. 

Information Gaps Regarding Bankruptcies Also Present EPA with 
Challenges: 

In evaluating bankruptcy filings to determine whether EPA should 
request that the Justice Department pursue cases in bankruptcy court, 
EPA faces further challenges because it does not consistently have 
accurate and readily available information on which to base these 
evaluations. As a result, EPA cannot be assured that it is aware of all 
relevant bankruptcy filings. 

EPA officials have acknowledged that the agency could miss identifying 
some relevant bankruptcy cases. According to the chair of EPA's 
bankruptcy work group, one of the more common reasons EPA is likely to 
miss identifying some relevant bankruptcies is that the debtor fails to 
include EPA on its list of creditors in bankruptcy filings, which means 
that bankruptcy courts will not send the notices of bankruptcy filing 
that are routinely sent to creditors to inform them of the filings. In 
addition, EPA could also miss relevant bankruptcy cases for other 
reasons, including the following: 

* Because businesses may change their names over time for various 
reasons--including reorganizations and mergers--and because a business 
filing for bankruptcy may be affiliated with a number of different 
company names, EPA staff may not recognize the business name or names 
cited in bankruptcy filings. In addition, owners of businesses 
sometimes file for bankruptcy in their own names, rather than in the 
business names, which EPA may be more likely to recognize. 

* Data quality problems in EPA's Superfund database limit the 
usefulness of automated searches to match the businesses associated 
with the bankruptcy notices sent to EPA with businesses with 
environmental liabilities nationwide.[Footnote 57] Further, even if EPA 
staff search program and enforcement databases to identify contaminated 
sites associated with a company, the searches may not be reliable 
because the current name or names associated with the bankruptcy filing 
may not be reflected in EPA's databases. For this reason, some EPA 
staff do not routinely search these databases for such matches because 
the information is likely to be incomplete or outdated. However, EPA's 
most recent bankruptcy guidance, discussed later, recommends that staff 
search the Superfund and other relevant databases to help them 
determine whether an environmental claim or issue of interest is 
involved. 

* EPA officials said that the agency has some difficulty identifying 
from its program and enforcement databases which companies have large 
liabilities, particularly when those liabilities are dispersed across 
states in several regions. As a result, certain companies in bankruptcy 
may not capture EPA's attention as being worthwhile cases for the 
government to pursue. 

Overall, EPA's current system of identifying bankruptcies of concern to 
the agency relies heavily on the availability of staff with knowledge 
of the companies and their related environmental liabilities to 
identify cases that the agency should pursue in bankruptcy court in 
time to meet the court's deadlines. Although the chair of EPA's 
bankruptcy work group believes that their current approach to timely 
identification of relevant bankruptcies has worked well under these 
limitations, she acknowledged that EPA has no assurance that it has not 
missed some relevant bankruptcies. As discussed above, EPA does not 
maintain records on all bankruptcy cases that the agency has identified 
and researched, and the reason the cases were either pursued in 
bankruptcy court or not. Consequently, information to evaluate EPA's 
efforts in identifying and researching relevant bankruptcies is not 
available. Further, because the bankruptcies of small and medium-sized 
businesses are not as widely reported in the business press, EPA is 
more at risk of not identifying relevant bankruptcies of such 
companies. 

Some members of EPA' s bankruptcy work group noted that, in their view, 
developing a fail-safe system for identifying relevant bankruptcies 
could require significant additional resources and might not be a cost- 
effective endeavor. For example, in many bankruptcy cases there may be 
few, if any, assets available for distribution to creditors. 
Nonetheless, on May 10, 2005, EPA issued an interim protocol for 
coordination of bankruptcy matters under the Superfund program that, 
among other things, (1) recommends actions to better ensure that EPA 
receives relevant bankruptcy notices and (2) identifies additional 
actions that may be relevant in bankruptcy cases other than filing 
claims, such as opposing abandonment of contaminated properties and 
objecting to terms of plans of reorganization or sales of property. 
Further, available technologies, such as an EPA Intranet site, could be 
an efficient and effective tool for the agency to track bankruptcy 
cases it identifies and reviews. For example, such a site could contain 
an EPA data sheet on each bankruptcy case identified, as well as key 
court documents as appropriate and available, that would be readily 
accessible to EPA staff across the agency to review and update. 

Even when EPA identifies relevant bankruptcy filings to assess, the 
agency is hampered by other information limitations. For example, as 
previously discussed, in many cases, EPA does not yet have adequate 
information on the extent of contamination at relevant sites and has 
difficulty in developing supportable cleanup cost estimates for the 
claim in the bankruptcy case. In other cases, the bankruptcy filings 
include lengthy lists of sites, some of which EPA may have no 
information about, including whether there is any liability under 
federal environmental law. Lack of information about sites can present 
challenges to EPA in negotiating bankruptcy settlement agreements with 
large companies, such as Exide Technologies and Kaiser Aluminum, which 
cover numerous contaminated sites. An EPA attorney who worked on the 
Kaiser Aluminum case said that the tight time frames under which they 
had to obtain information about the relevant contaminated sites and the 
significantly larger resources the company had to support its 
negotiations made this effort challenging. 

Another challenge EPA faces is that companies may send EPA notice of 
their bankruptcy filings identifying sites with no related enforcement 
actions. According to an EPA official, if a company provides EPA with 
notice of its bankruptcy filing and EPA does not submit a proof of 
claim in the bankruptcy court--likely in this situation since EPA would 
not be aware of any environmental hazard--the claim could be discharged 
in the bankruptcy process.[Footnote 58] Consequently, reviews of the 
environmental disclosures in Exhibit C of the debtor's bankruptcy 
petition and the Statement of Financial Affairs are important to 
identify those sites for which EPA may file a claim as well as those 
sites about which the agency has no knowledge and can potentially 
challenge discharge requests to the bankruptcy court.[Footnote 59] We 
note that EPA's May 10, 2005, interim bankruptcy protocol recommends 
that the agency's bankruptcy coordinators review these documents in 
determining whether an environmental claim or issue of interest is 
involved. 

Finally, it is a challenge for EPA to have timely and accurate 
information to identify those instances in which fraudulent transfers 
of assets may have occurred and which a bankruptcy court would nullify 
if such transfers were brought to its attention. Generally, EPA has 
limited, if any, information on the complex organizational structures 
businesses may be using and on any transfers among entities that may 
have taken place. Similarly, information is not readily available about 
privately held corporations or limited liability companies--an 
organizational form being used by many businesses. For instance, 
limited liability companies registered in Nevada do not have to provide 
information about all of the owners, making it difficult for EPA or 
others to identify transactions among related companies that may be 
illegal. Because the liable parties often are aware of environmental 
liabilities for years before they must pay for the cleanups, they have 
time to reduce their net worth by making business decisions that result 
in the redistribution of assets--and thus make these resources 
unavailable for payment of environmental liabilities. According to an 
EPA enforcement official, it is extremely difficult for the agency to 
look back on the business decisions a company has made over three or 
more years to determine whether its actions may have been fraudulent. 

EPA Could Make Greater Use of Available Authorities and Enforcement 
Tools to Pursue Hazardous Waste Cleanup Costs from Bankrupt and Other 
Financially Distressed Businesses: 

EPA has authorities and enforcement tools that it could use more fully 
to obtain cleanup costs from liable businesses, especially those in 
bankruptcy or other financial distress. Specifically, EPA has not 
implemented a 1980 statutory mandate under the Superfund law to require 
that businesses handling hazardous substances maintain financial 
assurances that would provide evidence of their ability to pay to clean 
up potential spills or other environmental contamination that could 
result from their operations. As a result of EPA's inaction, the 
federal treasury continues to be exposed to potentially enormous 
cleanup costs associated with businesses not currently required to 
provide financial assurances. Also, although EPA requires financial 
assurances from businesses entering into settlement agreements and 
orders under Superfund and, as a matter of policy, includes them in 
settlement agreements and orders under RCRA, the agency has done little 
to ensure compliance with these requirements. EPA has on occasion used 
other enforcement authorities, including (1) obtaining offsets, which 
allow the government to redirect payments or tax refunds it owes 
businesses to federal agencies with claims against these businesses and 
(2) filing liens on property for which the government has incurred 
expenses under Superfund.[Footnote 60] Greater use of these authorities 
could produce additional payments for cleanups from liable businesses, 
even in bankruptcies. 

EPA Has Not Implemented a Statutory Mandate under Superfund to 
Establish Financial Assurance Requirements for Certain Businesses 
Handling Hazardous Substances: 

Despite a requirement to do so in the 1980 statute creating the 
Superfund program, EPA has not issued regulations requiring certain 
businesses that handle hazardous substances to demonstrate their 
ability to pay for environmental cleanup costs.[Footnote 61] 
Specifically, the statute required EPA to issue requirements "that 
classes of facilities establish and maintain evidence of financial 
responsibility consistent with the degree and duration of the risk 
associated with the production, transportation, treatment, storage or 
disposal of hazardous substances."

Such regulations could help to fill several significant gaps in EPA's 
environmental financial assurance coverage, thereby reducing the risk 
that the general public (i.e., taxpayers) will eventually have to 
assume financial responsibility for cleanup costs. One gap involves 
types of waste that are excluded from RCRA coverage. Some wastes 
associated with mining activities can result in substantial cleanup 
costs but are excluded from the definition of hazardous wastes and, 
therefore, are not regulated under RCRA's hazardous waste provisions. A 
second gap in EPA's financial assurance coverage is that hazardous 
waste generators (such as metal-plating facilities and dry cleaners) 
are generally not required to maintain any financial assurances. 
Specifically, businesses may generally store waste in compliance with 
specified requirements for up to 90 days without needing a permit or 
being subject to the regulations governing hazardous waste storage 
facilities. Finally, a third gap is that none of EPA's current 
financial assurance regulations require companies or industries that 
pose a significant risk of environmental contamination to provide 
assurance that they could meet cleanup obligations associated with 
future accidents or spills of hazardous substances or wastes.[Footnote 
62] These gaps may be more significant since the authority for an 
environmental tax on corporations, crude oil, and certain chemicals, 
which had largely funded the Superfund program, expired in 1995. As a 
result, the federal government's general appropriations fund is 
increasingly funding the cleanups paid for by the Superfund trust fund 
when responsible parties do not. For example, for fiscal year 2004, 
EPA's appropriation for the Superfund program was from general revenues 
only.[Footnote 63]

Regarding the financial assurance requirements in the Superfund 
statute, which could help to address these gaps, the statute requires 
EPA to develop financial assurance regulations for businesses handling 
hazardous substances. As previously noted, EPA was to use a risk-based 
approach for both (1) identifying the entities that would be covered 
and (2) specifying the financial assurance coverage they would be 
required to have.[Footnote 64] The law requires EPA to give priority in 
developing these requirements to those classes of facilities, owners, 
and operators that the agency determined present the highest level of 
risk of injury. Once identified, the different classes of facilities 
that handle hazardous substances--which could, for example, include all 
businesses in a given industry or all those handling a specific 
hazardous substance--would be required to maintain evidence of 
financial ability to cover actual and potential cleanup costs 
consistent with the degree and duration of risk associated with the 
production, transportation, treatment, storage, or disposal of 
hazardous substances.[Footnote 65]

Implementation of this requirement could help to close the financial 
assurance gaps discussed above because under the Superfund law EPA 
could require financial assurances for cleaning up existing and future 
contamination at facilities that handle hazardous substances but are 
not subject to RCRA's closure/post-closure or corrective action 
programs, including many mining sites and facilities that generate, but 
do not treat, store, or dispose of hazardous waste. EPA may also wish 
to give priority in developing these requirements to facility owners 
whose prior actions indicate they may pose a high risk of default on 
their environmental obligations. Factors EPA may wish to consider in 
evaluating owner risk include compliance history--such as a history of 
noncompliance with environmental laws, including cleanup obligations, 
and magnitude of past, current, and potential environmental 
liabilities. 

In applying the Superfund law's risk-based criterion for developing 
financial assurance requirements, EPA may want to consider hardrock 
mining a high priority--for example, gold, copper, and iron ore mining-
-because it presents taxpayers with an especially serious risk of 
having to pay cleanup costs associated with wastes from thousands of 
abandoned, inactive, and operating mines on private lands in the United 
States. Using a statutory provision that allows solid waste from 
certain mining activities to be excluded from regulation as hazardous 
waste under RCRA, EPA has excluded several types of mining wastes from 
the definition of hazardous waste under RCRA, characterizing them as 
"low toxicity, high volume wastes."[Footnote 66] This exclusion has 
resulted in a significant gap in financial assurance, as discussed 
above. In addition, mining activities on private lands are not covered 
by the financial assurance requirements the Department of the 
Interior's Bureau of Land Management (BLM) requires for mines on 
federal land it manages.[Footnote 67] However, some mining facilities 
handle hazardous substances as defined under the Superfund law, and 
therefore financial assurance regulations issued under the Superfund 
law could apply to these facilities.[Footnote 68]

According to the EPA Inspector General, mining sites can cause 
significant environmental problems, and these sites are typically 
large, complex, and costly to clean up. A March 2004 report by EPA's 
Office of Inspector General identified 63 hardrock mining sites on the 
Superfund's National Priority List (NPL) and another 93 sites with the 
potential of being added to the list.[Footnote 69] At least 19 of the 
63 existing NPL mining sites had estimated cleanup costs of $50 million 
or more. In total, the 63 sites were estimated to cost up to $7.8 
billion to clean up, $2.4 billion of which is expected to be borne by 
taxpayers rather than the parties responsible for the contamination. 
The EPA Inspector General reported that at least one "clearly viable" 
party has been identified for 70 percent of the 63 NPL mining sites 
(including 11 percent where the viable party was a federal agency, such 
as the Department of the Interior). However, the report also emphasized 
that EPA should be concerned about the viability of these parties over 
time because of the long-term nature of the cleanup liabilities at 
mines. For example, the report states that the projected operation and 
maintenance period for the cleanup remedy ranges from 40 years to "in 
perpetuity." The costs to taxpayers would increase if the liable 
parties expected to pay for the cleanup remedies proved to be unable to 
do so.[Footnote 70]

Some mine owners have defaulted on environmental liabilities associated 
with their mines on multiple occasions, and the cleanup costs for these 
sites are being or are expected to be borne largely by taxpayers. These 
owners may reasonably be viewed as at high risk for defaulting on 
environmental obligations associated with mines or businesses that they 
currently own. For example, one individual is associated with several 
businesses that have filed for bankruptcy protection.[Footnote 71] Like 
other mine owners with serial bankruptcies involving contaminated 
mining sites, this owner continues to operate businesses with 
significant contamination that need to be cleaned up, potentially via 
the Superfund. If EPA developed and implemented the financial assurance 
regulations that the Superfund law requires, EPA could require such 
owners to provide financial assurances now for existing and future 
cleanups, thereby reducing the amount that taxpayers would otherwise 
likely be required to pay. 

A Superfund site in Delaware provides an example of the exposure of the 
federal treasury to enormous cleanup costs associated with industries 
not currently required to provide EPA with financial assurances 
because, as generators of hazardous waste, they were not covered by 
RCRA's financial assurance requirements. In the 1980s, when this 
facility was owned by Standard Chlorine Corporation, it experienced two 
major chemical releases--including a 569,000-gallon release of 
hazardous chemicals that contaminated soil, sediment, a groundwater 
aquifer, and nearby surface water. Because the facility did not treat 
or dispose of hazardous waste, and did not store waste for more than 90 
days, however, Standard Chlorine did not have to provide financial 
assurance under RCRA for the cleanups.[Footnote 72] In 1987, EPA added 
the site to the Superfund NPL because of the extensive contamination. 
Subsequently a limited liability business, Charter Oak Capital Partners 
LP, established a subsidiary corporation called Metachem Products, 
which acquired substantially all of Standard Chlorine's assets 
including the facility in 1998, and Metachem accordingly became liable 
for the Superfund cleanup. However, in May 2002, Metachem declared 
bankruptcy and abandoned the chlorinated benzene manufacturing 
facility. EPA estimates that it has incurred about $28 million in 
cleanup costs to date at this site and that the total cleanup cost will 
eventually rise to $100 million. 

Despite the clear benefits that EPA could derive from implementing 
financial assurance requirements under the Superfund statute, over the 
past 25 years, EPA has made only sporadic efforts to do so. For 
example, EPA took some steps early on to identify high-priority classes 
of facilities but did not complete this effort, although the statute 
included a December 1983 deadline for this task (see app. II for more 
detail). In 1983, the Director of EPA's Office of Solid Waste stated 
that resources were insufficient to develop and implement the Superfund 
financial assurance requirements. But EPA never asked the Congress to 
provide additional funds for this purpose. 

In 1987, we recommended that EPA set milestones leading to the timely 
implementation of Superfund financial assurance regulations, but EPA 
did not implement this recommendation.[Footnote 73] More recently, an 
April 2004 internal review of EPA's Superfund program recommended that 
the Office of Solid Waste and Emergency Response study whether 
promulgating new regulations under the broad financial assurance 
authorities contained in the Superfund law could reduce future 
Superfund liabilities with respect to facilities not covered under RCRA 
financial assurance requirements. In response to this recommendation, 
EPA created a work group that is collecting and evaluating information 
on the industries and types of facilities that have been listed on the 
Superfund program's National Priorities List (NPL).[Footnote 74]

While this study should provide useful and relevant information to EPA-
-in particular on gaps in the coverage of RCRA's corrective action 
program--we believe that the issue for implementing the financial 
assurance requirement under the Superfund law is broader than the 
question of which industries have sites that have been listed on the 
NPL. That is, the key issue is identifying industries at high risk for 
environmental contamination. EPA and the states have a wealth of 
information from both existing studies and from the knowledge base of 
EPA's and states' enforcement staff across the country. For example, 
EPA's 2002 study on the almost 900 RCRA facilities undergoing cleanup 
measures under the corrective action program provides relevant 
information on industries at risk for environmental contamination and 
on the costs of those cleanups. 

EPA Does Not Effectively Manage Its Existing Portfolio of Financial 
Assurances for Cleanups: 

In addition to not establishing the financial assurance requirements 
called for in the Superfund law, EPA is not ensuring that the benefits 
that could be derived from its existing financial assurance 
requirements for Superfund and RCRA corrective action cleanups are 
realized. Specifically, in negotiating compliance orders and 
settlements for these cleanups, EPA generally accedes to the financial 
assurance mechanism the liable party suggests without routinely 
determining the risk of the proposed mechanism in light of such factors 
as the strengths and limitations of the various mechanisms, the 
financial histories of liable parties, any existing agreements that 
have reduced the amounts businesses are required to pay for cleanups on 
the basis of ability-to-pay analyses, and the estimated total 
environmental liability of individual parties. In addition, EPA has 
increased the financial risk to the government by not providing 
adequate oversight and enforcement to ensure that the parties 
responsible for Superfund and RCRA cleanups obtain and maintain the 
required financial assurances. EPA has acknowledged that its 
enforcement of financial assurances has been inadequate and has 
initiated some actions to address this problem. 

EPA Allows Companies to Choose among Financial Assurance Mechanisms 
That Carry Varying Degrees of Financial Risk to the Government, Rather 
Than Taking into Account Information on the Extent of Default Risk That 
Companies May Pose: 

EPA has generally given companies significant flexibility to choose the 
type of financial assurance mechanism they will use to demonstrate 
their ability to meet their obligations under the RCRA corrective 
action and Superfund programs. While the closure/post-closure program 
has regulations governing financial assurances, the corrective action 
and Superfund programs do not. EPA generally accepts the same financial 
assurance mechanisms in the Superfund and RCRA corrective action 
programs as are outlined in the RCRA closure/post-closure regulations. 
Under the closure/post-closure regulations EPA must generally accept 
the financial assurance mechanism chosen by the party, so long as the 
party meets the relevant regulatory requirements for that mechanism. 
The financial assurance mechanisms EPA generally accepts in all three 
programs are outlined in table 1. 

Table 1: Financial Assurance Mechanisms Generally Accepted by EPA: 

Mechanism: Corporate financial test; 
Description: A company may demonstrate its ability to meet its 
obligations by passing one of two financial tests, one of which 
evaluates certain financial ratios, and one of which requires a minimum 
bond rating. Both tests require that the company have at least $10 
million in tangible net worth and demonstrate that this tangible net 
worth is equal to at least 6 times the sum of the current estimates of 
the cleanup, closure/post-closure, or other costs for which the company 
is using the financial test as its financial assurance. Use of the 
corporate financial test is also called self-insurance. 

Mechanism: Corporate guarantee; 
Description: A company may demonstrate its ability to meet its 
obligations by obtaining a written guarantee from an affiliated entity, 
such as a parent corporation. For EPA to accept this guarantee, the 
affiliated entity must meet one of the two corporate financial tests 
described above. 

Mechanism: Insurance; 
Description: Ability to meet obligations may be demonstrated by an 
insurance policy covering the estimated cost of these obligations. 

Mechanism: Letter of credit; 
Description: To demonstrate its ability to meet its obligations, a 
company may provide an irrevocable standby letter of credit issued by a 
financial institution guaranteeing payment of the obligations up to a 
specified amount. 

Mechanism: Surety bond; 
Description: A company may obtain a bond from an approved surety 
company[A] guaranteeing that its obligations will be met. 

Mechanism: Trust fund; 
Description: A company may establish a trust fund with a financial 
institution to demonstrate its ability to meet its obligations. The 
release of funds from the trust fund may be directed only by EPA or 
other regulator. 

Source: EPA closure and post-closure regulations. 

[A] To be approved, a surety company must be listed on U.S. Department 
of the Treasury's Circular 570. 

[End of table]

Financial assurance mechanisms vary in: 

* the financial risks they pose to the government--and thus to 
taxpayers who may ultimately have to pay for environmental cleanups if 
the responsible parties default on their obligations;

* the oversight and enforcement challenges they pose to the regulators, 
such as EPA, who are responsible for enforcing them; and: 

* the costs companies may incur to obtain them. 

For example, as shown in table 2, while the costs to companies of the 
corporate financial test and the corporate guarantee mechanisms are low 
compared with other forms of financial assurance, the relative 
financial risk to the government and the amount of oversight needed are 
relatively high. In contrast, letters of credit present comparatively 
low financial risk to the government and need less oversight but impose 
relatively high costs on companies. In essence, as the table shows, 
those financial assurance mechanisms that impose the lowest costs on 
the companies using them also typically pose the highest financial 
risks to the government entity accepting them. We note that EPA 
continues to allow financial assurances that are simply promises to 
pay--the corporate financial test and the corporate guarantee--even 
though its 2003 guidance on financial assurance for the RCRA corrective 
action program underscores the importance of having resources set aside 
"in the event a company hits a financial decline."

Table 2: Relative Financial Risk, Necessary Oversight and Enforcement 
Effort, and Costs of Financial Assurance Mechanisms: 

Mechanism: Corporate financial test; 
Relative financial risk to the government: High; If a company that 
passed the test later files for bankruptcy or becomes insolvent, the 
company in essence is no longer providing financial assurance because 
it may no longer have the financial capacity to meet its obligations. 
Such financial deterioration can occur quickly. While companies no 
longer meeting the financial test are to obtain other financial 
assurance, they may not be able to obtain or afford to purchase it; 
Oversight and enforcement effort needed: High; The test requires 
regulators to have expertise in financial analysis and monitor 
companies' financial condition. For example, the regulator is expected 
to review companies' annual financial submissions showing that they 
continue to pass the test. Regulators should also monitor the business 
press for adverse news about the company, indicating that it may no 
longer pass the test; 
Cost to the company: Low; The corporate financial test and the 
corporate guarantee (discussed below) are the lowest-cost options for 
companies because they do not have to set aside funds for future 
payments or pay fees or premiums to third parties, such as banks. 

Mechanism: Corporate guarantee; 
Relative financial risk to the government: High; Same issues as with 
the corporate financial test; 
Oversight and enforcement effort needed: High; Same issues as with the 
corporate financial test; 
Cost to the company: Low; See discussion concerning the corporate 
financial test. 

Mechanism: Insurance; 
Relative financial risk to the government: Varies; Several factors 
affect financial risk. For example, "captive" insurance companies--
those not independent of the liable business--can pose greater risk 
than independent insurance providers. Also, if there is conflicting 
language between an insurance policy and EPA's regulatory requirements, 
recovery on the policy may be delayed; 
Oversight and enforcement effort needed: Moderate; However, extent of 
oversight needed can vary based on the type of insurance. Captive 
insurance, in particular, poses many of the same challenges as the 
corporate financial test and corporate guarantee (see above) because 
the captive insurer is not a true third-party provider of assurance. 
Even with an independent insurance provider, however, significant 
oversight is needed; 
Cost to the company: Moderate; However, cost can vary based on the type 
of insurance. For example, captive insurance can pose lower costs than 
insurance from an independent provider. Also, many independent 
providers are underwriting environmental insurance using finite or 
fully funded policies--which limit their risk. Such policies resemble 
trust funds and, like trusts, present higher costs to the company than 
do conventional insurance policies. 

Mechanism: Letter of credit; 
Relative financial risk to the government: Low; Financial institutions 
issuing letters of credit are required to pay the amounts specified if 
EPA requests such payments within the periods of time specified in the 
letters; 
Oversight and enforcement effort needed: Low; Requires periodic 
monitoring to verify that the letter of credit remains in force and is 
maintained in a secure place and that the financial institution issuing 
the letter of credit is still viable; 
Cost to the company: High; Companies typically pay fees to obtain 
letters of credit and may be required to set aside substantial 
collateral. Fees may be up to 1 percent of the amount guaranteed, 
depending on the company's creditworthiness, according to EPA. 

Mechanism: Surety; Bond; 
Relative financial risk to the government: Low to moderate; Surety 
companies are required to pay the amounts specified in the bonds upon 
receipt of demand letters by the regulator.[A]; 
Oversight and enforcement effort needed: Low to moderate; Periodic 
monitoring is required to verify that the bond remains in force and 
that the surety company is still approved; 
Cost to the company: Moderate to high; Companies pay annual premiums to 
surety companies and generally are required to provide substantial cash 
collateral. 

Mechanism: Trust fund; 
Relative financial risk to the government: Low; There is a risk that 
the trust may not be fully funded if the company is allowed the 
flexibility of paying over time; 
Oversight and enforcement effort needed: Low to moderate; Periodic 
monitoring is required to ensure, among other things, that the 
financial institution has the authority to act as trustee; 
Cost to the company: High; The company must set aside funds into the 
trust to cover its anticipated obligations. In addition, the company 
usually pays a fee for the administrative services provided by the 
trustee. 

Source: GAO analysis. 

[A] In some cases, EPA allows performance bonds to be used; the surety 
guarantees that it will either perform the required work or will pay 
out the amount specified in the bond upon receiving notification from 
the regulator that the company for which the surety has provided a 
performance bond has failed to carry out its obligations. 

[End of table]

The mechanisms that pose the greatest financial risk to the government-
-the corporate financial test, the corporate guarantee, and some 
insurance products--also require specialized expertise to oversee. 
Concerns have been raised, both within EPA and by others, that the 
corporate financial test and the corporate guarantee offer EPA minimal 
long-term assurance that the company with environmental liability will 
be able to fulfill its financial obligations. In 2000, the Department 
of the Interior's Bureau of Land Management (BLM) identified similar 
concerns when it decided to prohibit new corporate guarantees for 
future reclamation work to restore lands when mining operations cease. 
In making this decision, BLM cited both the agency's lack of expertise 
to perform the periodic reviews of companies' assets, liabilities, and 
net worth that would be necessary to oversee guarantees and the fact 
that even with annual reviews by skilled staff, a default risk would 
remain.[Footnote 75]

Further, some concerns about the financial test, such as the following, 
stem from limitations inherent in relying on financial indicators 
rather than secured guarantees: 

* The corporate financial test rests on the assumption that a company's 
recent financial performance is a reasonable predictor of its financial 
future. However, the financial test cannot anticipate sudden changes in 
market conditions or other factors that can dramatically change a 
company's financial picture--and a company's ability to meet its 
environmental obligations. 

* Once a company's financial condition declines to the point that the 
company can no longer pass the financial test, it can be very difficult 
for the company to meet the requirements, or pay the costs, of 
obtaining an alternative form of financial assurance from a third-party 
provider. 

* The financial test is only as sound as the data used to calculate the 
financial ratios underpinning the test--if a company's accounting of 
its net assets or liabilities is questionable, or the quality of its 
assets is weak, one or more of the ratios may not represent the 
company's true financial condition. EPA officials noted that the 
passage of the Sarbanes-Oxley Act of 2002, with its requirements aimed 
at improving the accuracy and reliability of corporate disclosures, may 
have reduced some of these data-related concerns about the financial 
test, at least for publicly held companies. 

In addition to these limitations, weaknesses in the financial test 
itself are actively under discussion. For example, EPA's Environmental 
Financial Advisory Board, a federal advisory committee that provides 
advice and recommendations to EPA on environmental finance issues, has 
been charged by EPA with reviewing financial assurance mechanisms. In 
March 2005, the project work group leading this review submitted to the 
full board for consideration the first draft of a proposed letter to 
the EPA Administrator commenting on the financial test. In this draft 
letter, the work group stated that the current test is "an inadequate 
mechanism for determining financial capacity." The draft letter also 
stated that while the EPA financial test is transparent and objective, 
the test is not sufficiently comprehensive in what it assesses, does 
not examine and incorporate historical trends, and is not sufficiently 
rigorous to protect against manipulation. The membership of the full 
board is reviewing the draft letter, and the board has received 
substantive comments on the draft letter from outside parties. The work 
group is reviewing comments on the draft letter and expects to develop 
a revised draft letter for full board review and approval outlining the 
board's findings and recommendations concerning the financial test. 

Another concern about the financial test relates to the threshold a 
company must meet to qualify for the test--a company must have at least 
$10 million in tangible net worth. EPA has not adjusted the standard 
since 1982 when the RCRA financial assurance regulations were 
implemented.[Footnote 76] The Environmental Financial Advisory Board 
subcommittee noted that the $10 million threshold may be inadequate and 
should either be recalibrated or have standards of proportionality. We 
believe that the $10 million standard is likely to no longer be 
appropriate given, for example, the rate of inflation since 1982. 

In addition, the financial test requires that EPA and state regulators 
have the financial skills to assess whether a company's representation 
of its financial condition is reasonable. An EPA regional enforcement 
official said that the assessment of whether a company meets the 
financial test can be particularly difficult given that companies have 
an incentive to pass the test--therefore, companies may try to paint 
their financial position as "rosier" than it actually is to avoid 
having to pay for higher-cost financial assurance. (As recent court 
cases, such as those involving Enron and Worldcom, have shown, serious 
misstatements of financial position aimed at demonstrating strong 
financial position may occur for a number of other reasons as well--for 
example, to protect or improve the value of the corporate stock.) 
Because EPA and state staff who oversee the implementation of these 
mechanisms may not have sufficient expertise to provide the desired 
level of financial analysis, the Environmental Financial Advisory 
Board's March 2005 draft letter to the EPA Administrator noted that the 
financial test may be better served if companies retained credit 
services to provide independent financial analysis. 

Moreover, in a March 2001 report, EPA's Inspector General identified 
other factors that complicate overseeing the financial test.[Footnote 
77] In this report, officials cited difficulties in predicting 
companies' long-term financial viability. For example, in reviewing the 
financial assurances of a sample of hazardous waste facilities required 
to have financial assurances, the Inspector General found that some 
facilities that had established financial assurance through the 
corporate financial test no longer met the requirements of the test a 
year later. Other difficulties officials cited in overseeing the 
financial test included evaluating data from companies that have 
hazardous waste facilities in many states and factoring in the impact 
of mergers and acquisitions, among other things. 

In a 2003 paper summarizing its review of RCRA financial assurances, 
the Association of State and Territorial Solid Waste Management 
Officials[Footnote 78] reported that waste and remediation managers 
from various states believe that EPA should reconsider the financial 
test and corporate guarantee as financial assurance mechanisms due to 
the financial meltdown of Enron and many other publicized financial 
scandals of Fortune 500 companies with audited financial 
statements.[Footnote 79] The paper states that EPA's position is that 
eliminating these financial assurances could add substantially to the 
cost of the financial assurance regulations.[Footnote 80]

As table 2 shows, the corporate financial test and the corporate 
guarantee are the least costly financial assurances for companies to 
use, so eliminating them would increase compliance costs. At the same 
time, these two financial assurance mechanisms are the most costly for 
the government because of the high oversight costs associated with 
them, as discussed above, and because the government, rather than the 
companies, is carrying the default risk. 

In addition to the risks posed by the use of the corporate financial 
test and the corporate guarantee, the use of insurance polices as 
financial assurance has typically presented higher financial risk to 
the government than letters of credit, surety bonds, and trust funds. 
For example, concerns have been raised about the increased use of 
policies written by "captive" insurance companies--that is, by wholly- 
owned subsidiaries controlled by parent companies and established to 
insure the parent companies or other subsidiaries. 

In 2001, for example, EPA's Office of Inspector General found that 
financial assurance provided by a "captive" company did not provide 
adequate assurance of funding for closure and post-closure activities 
at hazardous waste facilities.[Footnote 81] EPA acknowledges that the 
financial health and solvency of a captive insurance company may be 
closely connected to the financial condition of the company with 
environmental liabilities, and therefore, if the company faces 
financial difficulties, the insurer may also be in financial distress 
and not be able to cover claims made on its policies. 

The Congress has also raised questions about the use of insurance as 
financial assurance at solid waste landfills, which have a separate set 
of financial assurance regulations.[Footnote 82] A June 2000 House 
committee report directed EPA to conduct a study of financial assurance 
agreements at solid waste landfills to determine if sufficient 
safeguards have been properly maintained and future liabilities 
minimized. According to the EPA official responsible for preparing this 
report, the concerns that led to this mandate dealt largely with 
captive insurance. EPA's draft report in response to the mandate was 
being reviewed within the agency as of June 2005; no expected issuance 
date has been announced yet. Because the report is still in draft form, 
EPA officials were not willing to discuss its findings or potential 
recommendations. 

Moreover, independent of issues associated with captive insurance 
policies, insurance policies covering corrective action or Superfund 
cleanups can require significant oversight on the part of regulators. 
For example, since insurance policies may contain exclusions that limit 
their coverage, the regulator must carefully review a policy being used 
as financial assurance to verify that it fully covers the anticipated 
environmental claims. Also, the regulator must remain aware of the 
insurer's status--under current EPA requirements, the insurer is not 
required to inform the regulator if its license to operate is revoked 
or it becomes insolvent. In addition, EPA officials noted that insurers 
will sometimes include language in the policy that conflicts with EPA's 
regulatory requirements, which may delay recovery on the 
policy.[Footnote 83] The Association of State and Territorial Solid 
Waste Management Officials has voiced concerns about the level of 
oversight required of insurance as financial assurance, and in 2003, 
recommended that EPA update its guidance on financial assurances, 
particularly its guidance on insurance issues, such as how to make 
claims on policies.[Footnote 84]

In addition to the financial risks to the government resulting from the 
use of certain financial assurance mechanisms, as discussed above, 
several other financial risk factors affecting liable parties' ability 
to fulfill their cleanup obligations make it all the more important 
that EPA or state regulators, if applicable, ensure that liable parties 
provide solid financial assurances that will be available when needed. 
These risk factors include (1) the financial histories of liable 
parties, (2) any existing agreements that have reduced the amounts 
businesses are required to pay on the basis of ability-to-pay analyses, 
and (3) the estimated total environmental liability of individual 
parties. When EPA or a state regulator agrees to a liable party's use 
of a financial assurance mechanism, it would be prudent for the agency 
to consider these factors as well as the risk to the government 
associated with the mechanism itself. 

In some cases, EPA or state regulators have encountered individuals or 
companies with track records that indicate that they are unlikely to 
have the financial resources or the willingness to carry out their 
environmental cleanup responsibilities. The histories of these parties 
may indicate that they are at high risk of failing to comply with 
future requirements, such as cleanup requirements under the corrective 
action program. Parties that present such high risks to EPA and state 
regulators could be required to obtain strong financial assurances to 
ensure that their environmental responsibilities are fulfilled. 

Also, large liabilities--which may stem from one or more megasites 
either under Superfund and/or RCRA or from a series of smaller sites-- 
expose EPA and taxpayers to significant financial risk, especially if 
there is only one or a few parties liable for the cleanups. In such 
cases, choosing financial assurance mechanisms that provide relatively 
low financial risk to the government--that is, that provide at least 
some actual funding--is particularly important. However, EPA and state 
staff overseeing financial assurances generally do not have information 
readily available about a company's total environmental liabilities 
across the United States, nor would they typically have access to 
information about (1) environmental obligations a company may have in 
other countries or (2) the extent to which the company may be using the 
same financial assurance mechanism to back up numerous environmental 
obligations.[Footnote 85] As a result, these regulators may, for 
example, approve the financial test for financial assurance at a RCRA 
site or sites without considering a company's liability for a large 
Superfund site in another state. 

Finally, for RCRA sites, typically an owner or operator is responsible 
for the cleanup. Similarly, at some Superfund sites, there may be few, 
even only one, liable parties. Along these lines, EPA enforcement 
officials said that strong financial assurances are particularly 
critical when a site's cleanup costs are large, but the number of 
liable parties is small. At such sites, strong financial assurances are 
likely to be the only way to avoid having taxpayers pay for these 
cleanups should the liable party experience financial reverses, file 
for bankruptcy, or restructure in a way that leaves the party with 
insufficient assets to pay for the cleanup. 

EPA Has Further Increased the Financial Risk to the Government by Not 
Providing Adequate Oversight and Enforcement of Financial Assurance 
Requirements for Cleanups: 

EPA has conducted limited enforcement of its existing financial 
assurance requirements. As a result, the agency has not ensured that 
the parties responsible for Superfund and RCRA corrective action 
cleanups obtain and maintain the financial assurances they are required 
to provide to demonstrate their ability to meet these environmental 
obligations. In fact, the agency lacks basic information about its 
portfolio of financial assurances. That is, EPA does not have data on 
the financial assurances that businesses are required to have in place 
for Superfund and RCRA cleanups, such as the type of assurance 
required, the amount of financial assurance provided, and whether the 
financial assurance is still authorized or is in force.[Footnote 86]

Further, in late 2003, one EPA regional office conducted an assessment 
of financial assurances for Superfund cleanup settlements negotiated in 
that region and found significant noncompliance with financial 
assurance requirements. Specifically, EPA officials found that only 30 
percent of the liable parties subject to financial assurance 
requirements in Superfund settlements, consent decrees, and EPA cleanup 
orders were in compliance with these requirements. Overall, the 
responsible parties at 48 percent of these sites appeared to be out of 
compliance with relevant financial assurance requirements. In addition, 
the regional staff reported that 22 percent of the cases needed 
additional follow up and review because, among other things, EPA could 
not locate the financial assurance documents and thus could not 
determine whether the liable parties were in compliance with the 
financial assurance requirements. (In some cases, EPA had the 
responsibility for maintaining the financial assurance documents, and 
in others that responsibility had been delegated to state regulators.) 
The staff member leading the assessment reported that locating the 
original financial assurance documents within the region's records was 
"painfully slow."

Moreover, EPA's key databases for Superfund and RCRA do not contain 
data elements related to financial assurances. In addition, although 
EPA's regional offices are responsible for ensuring compliance with 
Superfund settlement agreements, including financial assurance 
requirements, the regional offices have generally not tracked 
information on their portfolios of financial assurances supporting 
settlements for cleanups in their regions. For example, we asked 
several EPA regional offices to provide information on the Superfund 
settlements negotiated in their offices such as (1) the number of 
settlements backed by financial assurances and (2) the number, if any, 
not in compliance with this requirement. Regional EPA officials told us 
that information was not readily available, and that obtaining it would 
entail going back to each individual settlement agreement to identify 
the financial assurance mechanism, if any, and then determining the 
current status of the financial assurance. The situation with financial 
assurances under the RCRA corrective action program is more complex. 
While EPA has overall responsibility for implementing the act, and 
retains enforcement authority, it has authorized most states to 
administer the corrective action program. As a result, to obtain 
information on these financial assurances, EPA would have to request 
that the states gather this information and provide it to EPA. 

Lacking data on the financial assurances that are required, EPA cannot 
be assured that all appropriate financial assurances are in place and 
available, as needed. In addition, the data limitations preclude EPA 
and state officials from conducting other analyses and enforcement- 
related tasks, such as determining whether the financial assurances 
that a company provides will be adequate given the company's cleanup 
liability across the nation and analyzing the effectiveness of the 
various types of financial assurance in providing funding for cleanups. 

Enforcement officials both at EPA headquarters and several regional 
offices acknowledged that the agency has often paid scant attention to 
oversight and enforcement of financial assurance requirements in 
cleanup settlements and cleanup orders. According to EPA officials, the 
agency's focus in the Superfund program has been on the environmental 
issues associated with cleanups, such as ensuring that appropriate 
cleanup remedies are chosen and that the liable parties begin the 
agreed-upon cleanup work. Consequently, when EPA negotiates and 
enforces cleanup settlements, enforcing financial assurance 
requirements, including reviewing complex financial data about 
responsible parties, typically takes a back seat to environmental 
concerns. According to one regional attorney, there are a number of 
important issues to resolve in negotiating settlements, and ensuring 
that a strong financial assurance mechanism is in place often becomes a 
"B list" issue during negotiations. Moreover, one official noted that 
EPA tracks whether its regional enforcement officials reach a 
settlement with liable parties as a key measure of enforcement 
activity--but there is no such results-oriented measure concerning 
enforcement of financial assurances. In addition, the existing model 
language for Superfund settlements does not require that the financial 
assurance be obtained by the time the settlement is signed. Rather, the 
party agreeing to the settlement has 30 days after signing it to obtain 
financial assurance and notify EPA. This arrangement has precluded an 
assessment of the assurance before the settlement is signed. 

Once a Superfund settlement has been signed, enforcement of financial 
assurances--to ensure that they were actually obtained, are sufficient 
to cover anticipated cleanup costs, and remain in force--is likely to 
remain a low priority, according to some EPA enforcement officials. An 
EPA official explained that this enforcement responsibility typically 
falls to the remedial project manager, who has overall responsibility 
for the site cleanup. This remedial project manager's expertise is 
typically in engineering and environmental cleanup issues, not 
financial matters such as determining whether a liable party's 
corporate guarantee provides adequate protection against default on the 
party's cleanup obligations. Moreover, if EPA discovers at some point 
that the liable party's financial assurance is no longer adequate, EPA 
is often reluctant to insist that the company incur the additional cost 
of obtaining further financial assurance as long as the company is 
carrying out at least some of the cleanup work, according to some 
enforcement officials. In fact, EPA and Justice Department officials 
have noted that at times they are faced with this dilemma: whether to 
require companies to use some of their limited resources to obtain 
secure financial assurances versus applying those funds directly to the 
cleanups. 

EPA has begun to recognize that its limited enforcement of its 
financial assurance requirements for Superfund and RCRA cleanups, as 
well as these requirements for closure and post-closure activities at 
hazardous waste facilities, is exposing taxpayers to significant risk 
of having to pay cleanup costs at many current and future Superfund 
sites. As a result, EPA's enforcement office has begun several 
initiatives concerning financial assurances: 

* EPA has added financial assurances to its national enforcement 
priorities beginning in fiscal year 2006.[Footnote 87]

* EPA has taken steps to evaluate the addition of data elements, such 
as the type of financial assurance provided and the name of the company 
providing it, to its key databases for Superfund and RCRA programs. EPA 
estimates that the Superfund database's revisions will be in place by 
the end of fiscal year 2005. The data elements are expected to be added 
prospectively, that is, EPA would add information about financial 
assurances in new Superfund settlements and consent decrees to the 
database as they are reached, but information about existing financial 
assurances would not likely be added. Because the RCRA database 
additions involve coordinating with states and tribes authorized to 
implement RCRA, they are expected to take longer, and no estimate of 
implementation date has been made. 

* EPA has begun efforts to increase the expertise of officials who 
enforce its financial assurance requirements. For example, the agency 
has developed a course on financial assurance mechanisms for officials 
who enforce RCRA financial assurance requirements. 

* In late 2004, EPA made available three cost-estimating tools to help 
regulators estimate the appropriate level of financial assurances 
needed in the RCRA corrective action program. EPA has also begun to 
fund training in the use of cost-estimating software for its staff and 
state agency personnel. 

* In response to a recommendation in EPA's April 2004 internal 
Superfund review, as discussed earlier, EPA has begun a study that, 
among other things, will assess the extent to which facilities that had 
been required to have financial assurances under RCRA's hazardous waste 
program have become taxpayer-funded Superfund cleanups. Also, EPA's 
Office of Inspector General initiated a review in late 2004 on the 
effectiveness of RCRA's financial assurance requirements. 

EPA Could More Fully Utilize Other Enforcement Authorities, Such as 
Claiming Payments the Government Owes to Liable Businesses and Filing 
Liens on Superfund Properties: 

In addition to financial assurances, EPA has other enforcement 
authorities available under certain circumstances to help obtain 
payments for cleanups. For example, EPA may in appropriate 
circumstances (1) seek, in cooperation with the appropriate federal 
agency, tax refund or other administrative offsets, which allow the 
federal government to redirect payments or tax refunds it owes 
businesses to federal agencies with claims against these businesses and 
(2) file liens on property for which the federal government has 
incurred expenses under the Superfund law. These authorities may be 
used regardless of whether a liable party is in bankruptcy. Under the 
bankruptcy code, offsets and these liens may be considered secured 
claims--that is, those the debtor must pay first--which can greatly 
increase the likelihood that EPA will recover at least some of its 
cleanup costs in bankruptcies. 

EPA May Obtain Tax Refund and Other Administrative Offsets to Help Pay 
for Costs of Environmental Cleanups: 

An administrative offset is a procedure allowing a federal agency to 
obtain monies owed to it by a party from payments that the federal 
government owes the same party, such as tax refunds or payments under 
government contracts. EPA officials noted an important advantage of 
offsets as opposed to claims in bankruptcy court: to the extent that 
the offsetting amount will cover the dollar amount of EPA's claim, the 
claim will be paid in "full dollars." In contrast, claims in bankruptcy 
court, as previously discussed, may result in a payment of only pennies 
on the dollar amount of the claim. According to EPA and Justice 
Department enforcement officials, the agency has obtained tax refund 
offsets in several bankruptcy cases and other administrative offsets in 
two cases in the past few years. EPA officials noted one such example: 
in July 2004, after United Airlines filed for bankruptcy protection, 
EPA reached a settlement with the company on its environmental 
liabilities that included a provision to recover $550,000 through an 
offset of a federal tax refund. 

EPA officials also described an instance in which they had not been 
successful in obtaining an offset. Officials in EPA's Philadelphia 
office told us of their failed attempt to obtain an offset from Exide 
Technologies when it filed for bankruptcy reorganization in 2002. One 
of these officials estimated that the company had an environmental 
liability of about $80 million from more than 100 contaminated sites. 
EPA officials believed the company had significant government contracts 
and tried to identify those contracts and the amount the government 
owed the company at that time. However, these officials said they were 
unable to obtain this information in time--that is, before the 
government paid Exide. (Under the Prompt Payment Act, an agency 
acquiring property or services from a business concern must make 
payments by the required payment dates or pay an interest penalty to 
the business on the amount due, and thus information on pending 
government payments must be gathered quickly.) To gain the benefit of 
administrative offsets to help recover some cleanup costs, EPA would 
need to quickly identify government payments owed to bankrupt or 
financially distressed companies with environmental liabilities and 
process its offset claim before the government paid the contractor or 
vendor.[Footnote 88]

To date, EPA has provided little guidance to its enforcement staff on 
how to use its offset authority in recovering cleanup costs. For 
example, EPA's guidance for participating in bankruptcy cases mentions 
offsets but does not provide any instruction on the necessary steps in 
obtaining an offset, such as coordination that may be needed with the 
Internal Revenue Service for a tax refund offset. Similarly, in 
training sessions on bankruptcy issues for EPA attorneys that we 
observed in 2004, EPA and Justice Department bankruptcy experts 
encouraged the use of offsets, but did not include any specific 
information on how to obtain offsets or refer participants to any 
guidance on doing so. Particularly given the time-critical nature of 
any attempt to obtain offsets, procedures and guidance to staff to 
facilitate the use of offsets would both encourage staff to use these 
tools, when appropriate, and support their efforts to do so. For 
example, guidance to EPA staff on how to quickly obtain information on 
government contracts or grants may have helped them identify potential 
offsets for some environmental liabilities associated with 
bankruptcies. In addition, an agencywide process for identifying tax 
payments due to businesses would enable the agency to routinely 
identify whether businesses filing for bankruptcy that have 
environmental liabilities are owed any tax refunds. 

EPA's Authority to File Liens on Superfund Properties Can Help the 
Agency Recover Costs Associated with Environmental Cleanups: 

Under the Superfund law, EPA has a lien, or legal claim, on property if 
the government has incurred costs associated with cleanup at the 
property.[Footnote 89] According to a relevant House committee report, 
one purpose of the lien was to prevent the unjust enrichment of the 
responsible party, who might otherwise benefit from the rise in 
property value resulting from the property's cleanup. According to EPA, 
liens can provide the agency with leverage in obtaining cleanup costs 
generally, and can also assist the agency in obtaining cleanup funds 
under bankruptcy proceedings because liens are classified as secured 
claims--the highest priority category for receiving payments from a 
debtor in a bankruptcy. Thus, a lien can greatly increase the 
likelihood that EPA will recover at least some of its cleanup costs in 
bankruptcy cases. 

However, to establish the priority of a property lien under the 
Superfund program among other secured parties and creditors, EPA must 
file notice of the lien (sometimes called "perfecting a lien") in the 
appropriate governmental office in the state where the property is 
located.[Footnote 90] Importantly, the automatic stay provision under 
bankruptcy law generally prohibits filing or enforcing a lien after a 
debtor has filed for bankruptcy. In addition, the priority of property 
liens is typically based on their filing dates. Thus, it is to EPA's 
advantage to file Superfund liens as soon as possible to secure EPA's 
financial interest in them and to receive as high priority for that 
interest as possible. An example of the benefit liens can provide is a 
bankruptcy case cited by EPA in which the agency recovered $10 million 
in satisfaction of its property lien. (The property was sold for $24 
million at an auction conducted by the bankruptcy court.) If, however, 
EPA does not routinely consider and analyze the use of liens at 
Superfund sites to protect the government's financial interest where 
cost reimbursement may otherwise be difficult or impossible, the agency 
can miss opportunities to have status as a secured creditor in 
bankruptcy cases.[Footnote 91]

In addition, having Superfund liens can also help EPA negotiate 
settlements with liable parties at Superfund sites, according to EPA. 
For example, according to EPA, the liens cover the entire property for 
which Superfund-related costs have been incurred, not just contaminated 
areas--and owners of some properties may wish to sell "clean" portions 
of their properties. Such owners would have an incentive to have the 
lien released, which would happen only if they conducted the cleanup or 
reimbursed EPA for cleanup costs. In fact, EPA has identified instances 
in which even the threat of filing a lien has produced agreements for 
payments with uncooperative parties. With filed liens, the agency may 
also become aware of assets businesses may wish to sell to affiliated 
parties, and which EPA could challenge under fraudulent transfer laws, 
because such transactions would need to be approved by the agency. 

Since the lien provision was added to the Superfund law in 1986, EPA 
has issued guidance to it staff on filing liens and has encouraged 
staff to do so. For example, in 2002, EPA's Director of the Office of 
Site Remediation Enforcement issued a memorandum encouraging the filing 
of liens to secure response costs in Superfund cases. Also, in training 
sessions on bankruptcy issues for EPA enforcement attorneys, such as 
those we observed in 2004, EPA and Justice Department experts in 
bankruptcy encouraged these attorneys to file Superfund liens whenever 
possible. However, we found that EPA headquarters does not require that 
its regions report information to them on liens they have filed, and 
that overall the agency has little centralized information on such 
liens. For example, although the principal database used to manage the 
Superfund program contains data fields for such liens, an EPA official 
with expertise in this database said that the agency has little 
confidence in the completeness or accuracy of these fields. Also, the 
lien-related fields were added in the late 1990s, so liens filed before 
that time are not likely to be included in the national database. Thus, 
it is not clear whether EPA has made good use of its authority to file 
Superfund liens. 

In addition, it is not clear that the agency is consistently and timely 
aware of EPA property liens that it should pursue in bankruptcy cases. 
For example, EPA officials indicated that the agency generally relies 
on its enforcement attorneys to have knowledge of its Superfund liens 
at sites for which the attorneys have enforcement responsibility. 
However, the reliability of this informal system is questionable in 
light of such things as the often voluminous Superfund files we have 
observed--a wall of floor-to-ceiling shelves can be filled with files 
from just one case--staff changes over time, and the need for the 
relevant staff to be available when the notice of bankruptcy is 
circulated via email. In addition, agency guidance on bankruptcy cases 
does not specifically require staff to routinely determine, when 
reviewing notices of bankruptcy filings, whether EPA has filed a lien 
that could become a secured claim in the bankruptcy proceedings. 
Finally, we note that EPA officials highlighted the fact that lien 
filings are not included in the agency's performance measures, and that 
greater attention can be expected to be given to those activities that 
are counted, such as reaching Superfund settlements. 

Conclusions: 

The need for EPA to fully use its existing authorities to execute the 
"polluter pays" principle underlying the Superfund and RCRA laws is 
even more compelling today than it was during the 1980s and 1990s when 
corporate taxes--largely assessed on businesses at risk for 
environmental pollution--provided about $1 billion a year for Superfund 
cleanups. Now, without revenue from Superfund taxes, the cleanup burden 
has increasingly shifted to the general public--and at a time when 
large federal deficits are likely to constrain EPA's ability to obtain 
such funding for these cleanups. In addition, over time, businesses 
have become more sophisticated in using the limited liability principle 
to protect their assets by separating them from their liabilities. They 
use the traditional corporate parent/subsidiary structure as well as 
relatively new business forms--limited liability companies and 
partnerships--often in complex, multilayered organizational structures. 
The result is that businesses of all sizes can easily limit the amounts 
they may be required to pay for environmental cleanups under Superfund 
and RCRA. Compounding the problem, from EPA's perspective, is the long-
term nature of many of the cleanups, which provides businesses with 
ample time to implement complex asset protection plans. Finally, it has 
become more common and acceptable for businesses to use the bankruptcy 
courts as a reorganization tool that enables businesses to emerge with 
discharged or reduced environmental liabilities. 

Collectively, these factors present serious challenges to EPA in 
attempting to enforce environmental laws and to ensure that polluters 
pay for cleanups. For example, the ease with which companies can 
protect their assets can actually encourage businesses to take more 
risks in their operations, thereby increasing the risks of 
environmental contamination. Importantly, this situation also presents 
a significant management challenge for EPA in determining whether 
businesses have resources available to meet their environmental 
obligations. These challenges can seriously hamper EPA's ability to 
achieve its primary mission of protecting human health and the 
environment because they present formidable obstacles to obtaining the 
funding needed for cleanups. That is, it is increasingly difficult for 
EPA to obtain funding to clean up not only existing Superfund sites but 
also those still in the Superfund pipeline. Thus, we believe it is 
imperative for EPA to increase its focus on financial management and to 
fully use its existing authorities to better ensure that those 
businesses that cause pollution also pay to have their contaminated 
sites cleaned up. 

In this regard, EPA has not used its authority under the Superfund law 
to require businesses that handle hazardous substances to provide 
financial assurances covering existing and potential cleanups. This 
statutory mandate recognizes that businesses likely to cause 
environmental contamination and endanger public health can reasonably 
be expected to incur a business cost in order to ensure that they will 
have the financial wherewithal to pay for spills and other 
contamination, whenever they may occur, consistent with the degree of 
risk their operations pose to public health and the environment. Under 
this statutory mandate, EPA is to require, as appropriate, financial 
assurances from businesses to protect public health and the environment 
prospectively. This requirement may be viewed as akin to mortgage 
companies' requirements that borrowers provide homeowners insurance to 
protect the value of the assets against possible damage, except that 
this requirement is not directed at all businesses--it is directed at 
those at risk for contaminating the environment. 

Importantly, using this authority would help to close gaps in EPA's 
existing financial assurance requirements: it would require some 
businesses not subject to RCRA's financial assurance coverage, such as 
producers of certain mining wastes that have caused enormous 
environmental harm, to obtain financial assurance because of the 
environmental problems their operations are likely to continue to 
cause. It would also close the gap that exists under RCRA's financial 
assurance requirements, which generally extend to businesses that 
treat, store, or dispose of hazardous waste, but not to businesses that 
generate hazardous waste, even though they may be at high risk for 
environmental problems, such as chemical spills. 

In 1980, when the Superfund financial assurance requirement was enacted 
by the Congress, it required EPA to first identify the classes of 
facilities with the highest risk of harm. This task is much easier 
today because EPA and the states now have 25 years of experience with 
Superfund and 29 years with RCRA. We believe EPA can expeditiously 
implement the requirement to identify those industries with the highest 
risk of environmental harm and establish appropriate risk-based 
financial assurance requirements for them. For example, EPA should be 
able to gather relevant information from Superfund and RCRA program 
data, studies, and the many officials involved with these programs over 
the years, among other sources, to identify those industries that pose 
high levels of environmental risk. 

Further, to ensure that financial assurances the agency requires under 
the Superfund and RCRA corrective action programs actually provide 
funding for cleanups in the event the liable parties default on their 
environmental obligations, it is critically important that EPA 
effectively oversee and enforce the financial assurances that 
businesses provide to the agency. The fact that EPA currently cannot 
even readily identify the financial assurances that should be in force 
is a clear indication of inadequate oversight and enforcement. As a 
result, there is an increased risk that taxpayers, rather than the 
parties responsible for the contamination, will ultimately have to pay 
for the cleanups of contaminated sites under Superfund and RCRA. 
Although EPA has begun some efforts to increase its oversight and 
enforcement of financial assurances, the agency will need to sustain 
and increase such efforts if financial assurances are to achieve their 
intended goal of ensuring that responsible parties, not U.S. taxpayers, 
pay to clean up hazardous waste sites. 

Also, we believe that EPA should evaluate the degree of financial risk 
and the oversight costs it is appropriate for the agency to bear. 
Fundamentally, it is a question of whether the industries that pose 
environmental risk or the government charged with protecting the 
environment should carry the financial risk for the contamination that 
the industries may cause. Considering the often very long-term nature 
of the cleanups--during which time it would be reasonable to expect 
businesses to set aside increased resources--as well as the resources 
and skills necessary to oversee the unsecured financial assurances, 
continuing to, in effect, subsidize businesses by accepting unsecured 
assurances may be a luxury the government can no longer afford. 

More specifically, in its evaluation, EPA should consider the different 
financial risks that the various financial assurances pose to the 
government. This is especially important in light of the problems that 
we, the EPA Inspector General, state regulators, and others have 
identified, particularly with respect to the corporate financial test, 
corporate guarantee, and captive insurance. For example, to effectively 
oversee some of the financial assurances, EPA staff--and state staff 
handling RCRA financial assurances for EPA--must have a high level of 
expertise in financial management and insurance, among other fields. 
However, EPA has not taken into account either the variations in number 
of staff or levels of expertise needed that are associated with 
overseeing and enforcing the various financial assurances. Doing so, 
however, could provide EPA with the opportunity to both minimize the 
costs the government needs to bear to effectively oversee and enforce 
its financial assurance portfolio and reduce the government's financial 
risk for environmental cleanups. For example, when faced with the trade-
off between allocating staffing resources to oversee unsecured 
financial assurances and meeting other agency responsibilities, BLM 
decided to no longer accept corporate guarantees, in part because of 
the oversight challenges they present. In so doing, BLM shifted more of 
the financial risk to the businesses they regulate who have to purchase 
financial assurances from independent third parties, such as banks. 

In addition to financial assurances, greater use of other enforcement 
authorities, such as offsets and Superfund liens, could help EPA 
recover more costs from parties liable for environmental cleanups in 
some cases. Although offset authorities are limited to situations in 
which the government owes the company a tax refund or some other 
payment, a greater willingness by EPA to use these authorities--and to 
establish procedures and provide direction to staff in how to use these 
authorities--could help the government better ensure that parties 
responsible for pollution pay the associated cleanup costs to the 
maximum extent practicable. For example, when liable parties are 
unwilling to fulfill their financial obligations for cleanups, EPA 
officials should routinely explore whether tax offsets may be 
available. Staff should be provided with policies and procedures 
detailing the steps that need to be taken to use these enforcement 
tools effectively. 

Finally, companies with environmental liabilities that file for 
bankruptcy present another set of management challenges to EPA. Under 
its current process for identifying and reviewing bankruptcies, the 
agency cannot be confident that companies with EPA liabilities are held 
responsible for their cleanup obligations to the maximum extent 
practicable because the agency cannot ensure that it has identified (1) 
those bankruptcies for which it should request the Justice Department 
to file claims with the bankruptcy courts for cleanup funds and (2) any 
existing rights the agency has that can give its bankruptcy claims a 
priority status, such as liens on Superfund properties, which 
significantly improves the agency's chances of recovering funds under 
bankruptcy proceedings. Importantly, EPA also needs to review the 
specific sites identified in bankruptcy proceedings for purposes other 
than filing claims. One such purpose is to help ensure that discharges 
for businesses reorganizing under bankruptcy proceedings are not 
approved for contaminated sites that EPA has not been previously aware 
of. 

To its credit, EPA has established a bankruptcy work group that seeks 
to identify relevant bankruptcy filings to pursue and bankruptcy 
actions to monitor, such as notices to abandon property. However, the 
process the agency uses to identify relevant bankruptcy cases and 
actions is informal and essentially undocumented. As a result, it is 
not clear whether EPA is devoting sufficient time and resources to 
maximize the cleanup funds it can obtain under bankruptcy proceedings 
and to ensure that businesses are not receiving discharges of 
environmental liabilities inappropriately. We believe that EPA should 
build on the existing informal processes the agency is using and 
formalize and document its process for identifying relevant bankruptcy 
proceedings. In addition, we believe that EPA guidance on bankruptcy 
cases should be revised to emphasize some important actions that are 
not sufficiently addressed in existing guidance, such as routinely 
identifying contaminated sites identified in bankruptcy filings about 
which EPA is not familiar so that the agency can take appropriate steps 
to ensure that courts do not inappropriately discharge such 
environmental liabilities. 

Recommendations for Executive Action: 

To close gaps in financial assurance coverage that expose the 
government to significant financial risk for costly environmental 
cleanups, the EPA Administrator should expeditiously implement the 
statutory mandate under Superfund to develop financial assurance 
regulations for businesses handling hazardous substances, first 
addressing those businesses EPA believes pose the highest level of risk 
of environmental contamination, as the statute requires. 

In addition, to better ensure that the financial assurances EPA does 
require under the Superfund and RCRA corrective action programs provide 
sufficient funds for cleanups in the event liable parties do not 
fulfill their environmental obligations, EPA should enhance its efforts 
to manage and enforce the financial assurance requirements for 
Superfund and RCRA corrective action cleanups by taking the following 
actions: 

* Evaluate the financial assurances the agency accepts in light of such 
factors as the financial risks EPA faces if liable parties do not meet 
their cleanup obligations; the varying financial risks posed by the 
individual financial assurance mechanisms; the agency's capacity to 
effectively oversee the various financial assurance mechanisms--in 
particular, the expertise of staff (federal and state) and the number 
of staff; the information gaps the agency faces in overseeing the 
various financial assurances; and the concerns about certain financial 
assurances, such as the corporate financial tests, corporate 
guarantees, and captive insurance, that have been brought to the 
agency's attention by state regulators, the EPA Inspector General, and 
others. 

* If EPA continues to accept the corporate financial tests and 
corporate guarantees as financial assurance in these programs, it 
should revise and update its financial tests to address the 
deficiencies identified by the EPA Inspector General and others. 

* Implement changes to Superfund and RCRA databases to support the 
efficient identification of EPA's portfolio of financial assurances and 
populate these databases with information on all financial assurances 
that liable parties should have in force, developing quality controls 
to ensure data reliability. 

* Develop a strategy to effectively oversee the agency and state 
portfolios of financial assurances to ensure that all required 
financial assurances are in place and sufficient in the event the 
related businesses encounter financial difficulties, including 
bankruptcy. Such a strategy should include ensuring that adequate 
staffing resources with relevant expertise are available. 

* Require that financial assurances be in place before EPA and liable 
parties finalize Superfund settlement agreements. 

In addition, to better ensure that EPA holds liable parties responsible 
for their cleanup obligations to the maximum extent practicable, the 
agency should seek opportunities to more fully use its enforcement 
tools, particularly tax and other offsets, and provide specific 
guidance to their staff on how and when to use these tools. For 
example, EPA should routinely take advantage of tax offsets when liable 
parties are not meeting their obligations--not just when parties file 
for bankruptcy. 

To better ensure that EPA identifies relevant bankruptcy filings to 
pursue and bankruptcy actions to monitor, EPA should develop a formal 
process for monitoring bankruptcy proceedings and maintain data on 
bankruptcy filings reviewed, for example using an EPA Intranet site 
that would be readily available to all relevant staff. 

Finally, we recommend that EPA revise and update its guidance on 
participation in bankruptcy cases to more clearly identify some actions 
needed to better protect the government's interest, such as steps to 
take to better ensure that the courts do not inappropriately discharge 
environmental liabilities and to specify that staff evaluating new 
bankruptcy filings should routinely determine whether EPA has any 
existing liens related to the filings. 

Agency Comments and Our Evaluation: 

We provided EPA with a draft of this report for review and comment. In 
commenting on the draft, EPA generally agreed with many of the 
recommendations and said the agency will further evaluate its response 
to others. Appendix III contains the full text of the agency's comments 
and our responses. 

As arranged with your offices, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the report date. At that time, we will send copies to the 
Administrator, EPA; the Attorney General, Department of Justice; the 
Director, Office of Management and Budget; appropriate congressional 
committees; and other interested parties. In addition, the report will 
be available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-3841 or [Hyperlink, stephensonj@gao.gov]. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made major contributions to this report are listed in appendix IV. 

Signed by: 

John B. Stephenson: 
Director, Natural Resources and Environment: 

[End of section]

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

GAO was asked to (1) determine how many businesses with liability under 
federal law for environmental cleanups have declared bankruptcy and how 
many such cases the Justice Department has pursued in bankruptcy court; 
(2) identify key challenges that EPA faces in holding bankrupt and 
other financially distressed businesses responsible for their cleanup 
obligations; and (3) identify actions EPA could take, if any, to better 
ensure that bankrupt and other financially distressed businesses pay 
the costs of cleaning up their contaminated sites to the maximum extent 
practicable. 

To determine how many businesses with liability under federal law for 
hazardous waste cleanup costs have declared bankruptcy, we obtained 
bankruptcy case filing information from the Administrative Office of 
the U.S. Courts, which compiles data on the number of bankruptcy 
filings. Specifically, we obtained bankruptcy case filing information 
on the number of business bankruptcy filings under Chapters 7, 11, and 
13 of the bankruptcy code for fiscal years 1998 through 2003. While the 
bankruptcy courts collect data on the number of businesses that file 
for bankruptcy each year and the Administrative Office of the U.S. 
Courts maintains these data in a national database, neither the courts, 
EPA, nor private providers of business data collect information on how 
many of these businesses have environmental liabilities. As a result, 
we were not able to report on the number of business bankruptcies with 
hazardous waste liabilities. To determine how many bankruptcy cases 
with liability under federal law the Justice Department has pursued in 
bankruptcy court on behalf of EPA, we spoke with officials from the 
Justice Department about the cases it received from EPA to determine 
which cases the department had pursued. We obtained data on the cases 
the Justice Department pursued on behalf of EPA where a proof of claim 
was filed for fiscal years 1998 through 2003. 

To identify key challenges that EPA faces in holding bankrupt and other 
financially distressed businesses responsible for their cleanup 
obligations and to identify actions EPA could take to better ensure 
that bankrupt and other financially distressed businesses pay the costs 
of cleaning up their hazardous waste sites to the maximum extent 
practicable, we reviewed federal statutes and policies associated with 
hazardous waste management and cleanup, the federal bankruptcy code and 
procedures, and academic and professional literature addressing the 
intersection of environmental and bankruptcy law, corporate limited 
liability, forms of business organization, and asset management. We 
also interviewed enforcement officials from EPA headquarters and its 10 
regional offices about how the agency identifies, pursues, and recovers 
federal environmental liabilities from financially distressed or 
bankrupt businesses; the challenges EPA faces in these tasks; and the 
extent to which the agency has used available enforcement tools in this 
effort. Finally, we attended EPA-sponsored training sessions on RCRA 
closure and post-closure financial assurances and on bankruptcy-related 
issues for EPA attorneys in order to learn more about these challenges 
as well as the financial assurances and other enforcement tools and 
procedures available to EPA to address these challenges. 

We performed our work between September 2003 and July 2005 in 
accordance with generally accepted government auditing standards. 

[End of section]

Appendix II: Chronology of EPA's Efforts to Develop Financial Assurance 
Requirements for Businesses Handling Hazardous Substances: 

December 1980: 

Congress enacted the Comprehensive Environmental Compensation, 
Response, and Liability Act of 1980 (CERCLA, or the Superfund law), 
calling for, among other things, EPA to develop financial assurance 
requirements for businesses handling hazardous substances to 
demonstrate their ability to pay for environmental cleanup costs 
(CERCLA Section 108(b)(1)). 

Early 1980s: 

EPA and its contractors produced issue papers on such topics as gaps in 
existing financial assurance requirements, the definition of 
"facility," and data sources for classifying facilities. 

1983: 

In May, EPA published a Federal Register notice announcing the 
beginning of a process of identifying facility classes and seeking 
public comment on several issues related to identifying risk-based 
classes of industries and facilities handling hazardous substances. In 
November, the Director of EPA's Office of Solid Waste informed the 
Assistant Administrator for the Office of Solid Waste and Emergency 
Response that work on the facility classification effort was being 
halted because of a lack of contract funding and staff availability. In 
December, the statutory deadline passed for EPA to identify classes of 
facilities for which regulations would first be developed. 

1987: 

EPA revisited the Superfund financial assurance requirements as part of 
a broader review of the Superfund program spurred by the 1986 
amendments to the Superfund law. According to EPA officials, the agency 
developed recommendations to the Assistant Administrator for the Office 
of Solid Waste and Emergency Response for developing the regulations. 
However, EPA never acted upon these recommendations. 

2004: 

An EPA internal review of the Superfund program recommended that the 
Office of Solid Waste and Emergency Response study whether promulgating 
financial assurance regulations under CERCLA could reduce Superfund 
liabilities for facilities not covered under RCRA financial assurance 
requirements. In response, EPA created a work group that is collecting 
and evaluating information on the types of facilities that have become 
Superfund National Priorities List sites as well as the industries 
represented among these sites. 

[End of section]

Appendix III: Comments from the Environmental Protection Agency: 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY: 
WASHINGTON, D.C. 20460: 

JUL 14 2005: 

Mr. John B. Stephenson: 
Director:
Natural Resources and Environment:
Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Stephenson: 

This letter is in response to the Government Accountability Office 
(GAO) final draft report titled "Environmental Liabilities: EPA Should 
Do More to Ensure that Liable Parties Meet Their Cleanup Obligations 
(GAO-OS-658, July 2005)." We appreciate GAO's recognition of the 
challenges that EPA faces when holding bankrupt and other financially 
distressed businesses responsible for their cleanup obligations. 

Generally, EPA agrees with many of the recommendations, or is in the 
process of evaluating information to determine whether such 
recommendations should be pursued. In fact, EPA has already undertaken 
a number of activities to address bankruptcy and financial assurance 
requirements for parties responsible for environmental contamination. 
These activities include designating financial assurance as an 
enforcement priority; soliciting advice from EPA's Environmental 
Financial Advisory Board on insurance, financial tests and whether to 
extend financial assurance to activities not currently covered; 
assessing the fiscal impact of various categories of facilities in the 
Superfund program and the utility of using authorities under CERCLA for 
financial assurance in response to recommendations from an internal EPA 
study; and providing training to states and regions on cost estimation 
and other financial assurance mechanisms. Our responses to the 
recommendations are provided in an enclosure to this letter. 

We are confident that the efforts described in informal comments 
submitted to your office previously and in the enclosure here will 
result in improvements to the way EPA addresses bankruptcy and 
financial assurance issues for responsible parties. Further, we 
appreciate GAO's examination of EPA's past and current activities in 
this area. 

Sincerely, 

Signed by: 

Thomas P. Dunne:
Deputy Assistant Administrator: 
Office of Solid Waste and Emergency Response: 

Signed by: 

Thomas V. Skinner:
Acting Assistant Administrator: 
Office of Enforcement and Compliance Assurance: 

Enclosure: EPA General Comments on GAO Draft Report: Environmental 
Liabilities July 2005: 

Financial Assurance: 

While the GAO report recognizes that OECA has focused on financial 
assurance compliance and enforcement as an issue, EPA is concerned that 
the report does not capture the significance of those efforts. First, 
EPA has already recognized that this area needs added attention and has 
identified financial assurance as an OECA national priority in FY06/07. 
Second, in advance of FY06/07, EPA has undertaken significant efforts 
to enhance the capabilities of EPA and the States by providing multiple 
training sessions over the past two years on the RCRA financial 
assurance mechanisms. Participants from 34 states have attended these 
financial assurance training sessions. Third, OECA has already devoted 
significant levels of FTE and contractor dollars to assist EPA and 
State personnel in enhancing the compliance with, and enforcement of, 
financial assurance requirements. In short, OECA is already focusing on 
financial assurance compliance and enforcement and will continue to do 
so. While EPA recognizes issues with various financial assurance 
mechanisms, we think in the short run the largest gains will accrue 
from effective enforcement, compliance assistance, training and 
guidance. 

As with virtually all enforcement priorities, OECA's implementation 
will include specific goals, targeting of enforcement resources, a 
communication strategy, and a capacity building component. The Report 
offers a number of suggestions with respect to financial assurance 
compliance and enforcement. EPA appreciates the suggestions offered and 
will consider those suggestions as it moves forward in its enforcement 
priority implementation. As part of its implementation, OECA will need 
to focus its resources to obtain the largest return on its compliance 
and enforcement efforts. The Report's identification of the greater 
risk where there are fewer entities available for funding a cleanup 
obligation recognizes an important component of financial assurance 
compliance and enforcement resource allocation. 

EPA has also undertaken efforts to provide additional guidance and 
training on other important components of financial assurance. For 
example, OECA and OSWER are funding, and will continue to fund, 
training to EPA and State personnel on cost estimation software that 
can be used in reviewing cost estimates submitted by owners/operators 
for RCRA corrective action (RACER) and closure/post-closure care 
(CostPro). In addition to the training, EPA is purchasing licensed 
copies of the software for each individual that attends the training. 
Both RCRA Regional and State personnel have identified cost estimating 
as a necessary component of having adequate financial assurances at 
RCRA facilities and EPA has stepped forward to provide an important 
tool in helping to characterize expected cleanup costs, and attendant 
financial assurance obligations, at RCRA facilities. EPA anticipates 
that the cost estimation training (and software) will have been 
provided in each Region, for State and Regional personnel, by the end 
of 2006. We also want to note State efforts to improve cost estimation. 
For example, California has reported reviewing its cost estimates and 
in many cases has increased them substantially. 

Moreover, as the Report recognizes, OSWER and OECA issued corrective 
action policy guidance in late 2003 explaining that requiring financial 
assurance earlier than remedy selection for corrective action can be 
appropriate and is one available mechanism for reducing the likelihood 
of taxpayers bearing the burdens of corrective action costs. The cost 
estimation training and software should enhance the ability of EPA and 
States to seek financial assurance prior to remedy selection in 
appropriate circumstances. EPA will continue to urge Regions and States 
to examine whether financial assurances can be provided earlier than 
remedy selection on a case by case basis. Additionally, EPA is in the 
process of modifying the RCRAInfo and CERCLIS information systems to 
capture financial assurance information. This important effort should 
help close many of the data gaps identified in the Report and increase 
EPA and the States implementation of financial assurance requirements. 

On page 52, the Draft Report asserts that only one Region has performed 
a review of its financial assurance documentation. It does not mention 
the financial assurance review that was performed in Region III. In 
this review, Region III examined all issued RD/RA UAOs and CDs to 
determine if the bankruptcy or insolvency of any responsible party 
resulted in the incomplete work becoming the responsibility of EPA. 
Under this review, Region III identified 119 enforceable documents that 
related to 93 different sites. The total value of work to be performed 
under those documents exceeded $1,400,000,000. As of the date of the 
completion of the first phase of this review, less than $9,000,000 of 
this work was defaulted upon requiring intervention by the Superfund. 
This review indicates that Region III was taking pro-active steps to 
evaluate the viability of its financial assurance agreements before it 
knew of the GAO study. This review concluded that, to date, more than 
99.4% of the work has been completed without a negative impact on the 
Superfund or the taxpayers. 

As the report points out, RCRA Subtitle C financial assurance is 
required to ensure funds are available for closure and post-closure 
care. However, a critical component of financial assurance that the 
report should emphasize is the preventative aspect under RCRA Subtitle 
C associated with the financial assurance requirements. By requiring 
financial assurance for closure or post-closure care in the event the 
owner or operator is unable or unwilling to perform cleanup, the owner 
or operator has an incentive to operate in a way that will minimize the 
costs required for closure, meaning that by running an efficient, clean 
operation, it should be easier in the future to perform closure. By 
requiring the owner or operator to post financial assurance there is a 
deterrent effect because the owner or operator is obligated to perform 
closure and has secured the financing for that closure in advance. 

The report should specify, in each instance, which type of financial 
assurance is the subject of the report's analysis. This is critical to 
clarify in each instance because RCRA Subtitle C (closure, post-closure 
and liability) is a preventative program and has specific financial 
assurance regulations. In contrast, the RCRA corrective action and 
Superfund programs deal with existing releases and do not have a 
financial assurance regulatory framework. The difference in these 
programs must be clear in the report to provide a better understanding 
of the enforcement actions available and limitations of these programs. 
A list of clarified references to RCRA Subtitle C, RCRA corrective 
action, or CERCLA financial assurance is included in the technical 
comments. 

Further points of clarification that are crucial to understanding EPA's 
actions are that, the current RCRA Subtitle C regulations, facility 
owners and operators can choose any of the permissible financial 
mechanisms, as long as the mechanisms meet the regulatory standards. 
Additionally, EPA does not "approve" insurance instruments. Instead the 
RCRA Subtitle C regulations require that an insurance policy contain 
the language in the regulations and that if there are any 
inconsistencies between the policy language and the regulations, 
inconsistent policy terms are automatically amended to conform with the 
regulations. This provision protects EPA from having to approve each 
insurance submission. 

CERCLA 108(b): 

GAO recommends that the EPA Administrator should expeditiously 
implement the statutory mandate under Superfund to develop financial 
assurance regulations for those businesses EPA believes pose the 
highest level of risk for financial assurance failure. EPA has underway 
several analyses of the cost of unfunded sites in response to the 120 
Day Study, an internal self-assessment of the Superfund program. These 
analyses may also have implications for EPA's financial assurance 
programs and whether to extend financial assurance to operations that 
do not currently have requirements to provide financial assurance. The 
results of this analysis for any category of sites could lead to 
regulatory action under § 108(b), revisions to existing financial 
assurance regulators, or other actions to address financial assurance 
shortfalls. Given these activities and the need to evaluate the most 
effective means by which to address financial assurance 
vulnerabilities, we believe that a conclusion that EPA should pursue 
108(b) rulemaking to the exclusion of other options is premature. 

In the Agency's charge to the Environmental Financial Advisory Board 
(EFAB) regarding financial assurance, the Agency has included a number 
of issues, including "Should Financial Assurance Requirements Be 
Extended to Operations That Are Not Currently Required to Meet Them?" 
While the EFAB may wait until analysis of the 120 Day Study has been 
completed to determine if they will evaluate this question, the EFAB's 
advice would help guide the Agency in decisions on targeting specific 
categories of sites for CERCLA § 108 rulemaking, revising RCRA 
financial assurance regulations, or undertaking other actions that 
would reduce the impact of unfunded cleanups on Superfund and states. 

Consultation with the Environmental Financial Advisory Board: 

EPA has already begun investigations that anticipate some of the 
recommendations of the GAO's report. The Agency sought the advice of 
the Environmental Financial Advisory Board (EFAB) on several financial 
assurance matters and is currently awaiting recommendations from them. 
Among the questions we asked the Board are: 

1) "Whether financial assurance requirements or similar mechanisms are 
appropriate for categories of facilities not currently covered by such 
requirements." This question preceded your recommendation that EPA 
develop financial assurance requirements for operations which are not 
currently covered. We understand that the Board has first undertaken 
work on the financial test and insurance because they believe that they 
should first understand how well the mechanisms work before 
recommending any extension of financial assurance. 

2) "What are the strengths and pitfalls of the financial test and 
corporate guarantee?" The EFAB held a meeting in New York City in June 
2004 on the financial test and corporate guarantee and has received 
comments on the draft letter that was produced as a result of that 
meeting. EPA believes it would be inappropriate to accept the draft 
findings based upon a draft letter from the EFAB since the final letter 
may differ with the draft. 

3) "Should EPA continue to allow corporate siblings to guarantee the 
obligations of another subsidiary or should guarantees only be allowed 
for parents or higher level companies?" The draft report cites issues 
with corporate structures and the movement of assets among 
subsidiaries. EPA recognized this possibility when it raised this 
question to the EFAB. 

4) "What are the strengths and pitfalls of insurance?" "Should there be 
minimum ratings of insurers that provide financial assurance?" "Should 
there be minimum capitalization requirements for captive or other 
insurers who provide policies for financial assurance and, if so, what 
requirements would best assure funds are available for protection of 
the environment, including closure, post-closure, corrective action and 
other environmental clean- up?" "Should policies written by captives 
and commercial insurers be treated as equally acceptable mechanisms?" 
"What are appropriate safeguards (such as capitalization, rating, 
coverage, etc.), if any, for insurance for a Brownfields cleanup?" All 
of the above are insurance questions EPA asked the EFAB and the EFAB 
held a day of hearings to solicit answers. As with the financial test 
questions, EPA is awaiting recommendations from the EFAB, particularly 
on captive insurance. 

EPA appreciates the fact that GAO's identification of issues 
surrounding the financial test, corporate guarantee and captive 
insurance confirm the Agency's judgment that these are key issues. 
However, pending a review of the findings of the EFAB, internal 
investigations of the number of RCRA facilities going to Superfund, and 
its own Inspector General's upcoming report, EPA believes it would be 
premature to commit to revisions to the financial test or its insurance 
requirements for financial assurance in response to the GAO 
recommendations based upon the draft comments of the EFAB. 

Insurance: 

Beginning on page 48, the Draft Report discusses the use of insurance 
as a form of financial assurance. The Draft Report focuses on the 
relative "riskiness" of insurance in comparison to letters of credit, 
bonds or trusts. The Draft Report also discusses the risk inherent in 
accepting insurance from captive insurers. The Draft Report, however, 
ignores the growing market in insurance products offered by third party 
independent insurers that are specifically designed to meet financial 
assurance requirements. Depending on the program (RCRA Subtitle C, 
corrective action, or Superfund), there may be a variety of insurance 
products designed to address several types of risks. For example, there 
are insurance products associated with CERCLA or corrective action to 
address cleanup risks (e.g. cost overrun insurance, which provides 
reimbursement if cleanup costs exceed a certain amount, remediation 
completion insurance, which - like a surety bond - provides for 
completion of the cleanup if the PRP becomes insolvent, etc.) While not 
all of these insurance products are appropriate for every site, many of 
them, used independently or in conjunction with other forms of 
financial assurance, may provide effective, cost efficient financial 
assurance. This is especially true in the context of short term 
response actions (e.g., one to two year durations). The Draft Report 
failed to mention that EPA, at both the HQ and Regional levels, is 
actively reviewing the viability of such insurance for financial 
assurance and providing training for its staff on this issue. 

Bankruptcy: 

Our initial concern with the Draft Report is the first paragraph of the 
summary/highlights page. This sentence states: "While more than 231,000 
businesses operating in the United States filed for bankruptcy in 
fiscal years 1998 through 2003, the extent to which these businesses 
had environmental liabilities is not known because neither the federal 
government nor other sources collect this information. Information on 
bankrupt businesses with federal environmental liabilities is limited 
to data on the bankruptcy cases that the Justice Department has pursued 
in court on behalf of EPA. In that regard, the Justice Department 
initiated 136 such cases from 1998 through 2003." We believe this 
paragraph is misleading and implies a lack of will or ability on the 
part of EPA to pursue environmental bankruptcy cases. It is not 
appropriate to begin this Draft Report with such a statement that leads 
a reader to believe that EPA is not willing to pursue more 
environmental bankruptcy cases. Also, the statement does not 
acknowledge that it is unknown how many of the 231,000 bankruptcy 
filings had either environmental liability or any assets remaining to 
warrant our intervention. What can be said is that there were 136 cases 
that involved potential federal environmental claims. Since this is the 
leading paragraph and sets the tone of the Draft Report, we suggest the 
introduction be re-written so that the reader is not focused on the 136 
cases out of 231,000 filings ratio. 

The Draft Report states on pages 18 and 31 that EPA does not maintain 
information on bankruptcies that it does not pursue. This is not 
completely accurate. The EPA Bankruptcy Workgroup is currently 
exploring the possibility of using - on a Nationwide basis - the 
comprehensive database developed in Region III. During some of its 
monthly conference calls, the Bankruptcy Workgroup has discussed the 
steps that would be necessary to extend the database Agency-wide. In 
its current form, the database tracks all bankruptcies that come into 
the Region, even those in which the Agency does not file a claim. To 
capture this information, the database has a data field to indicate if 
the bankruptcy were "closed out" (i. e. the Region choose not to file a 
claim). 

In addition to the database, since May 5, 2003, Region III has had a 
bankruptcy protocol which provides for a formal decision not to pursue 
a bankruptcy case. The "close out" memo documents the efforts to 
discover potential claims and the result. The memo then provides the 
basis for not pursuing a claim (e.g. no claims discovered, debtor 
assets too insignificant to pursue, transaction costs would exceed 
expected recovery, etc.) This close out process is a natural outgrowth 
of the recent EPA Bankruptcy Protocols (May 2005). The information 
collected pursuant to the Bankruptcy Protocols provides sufficient 
documentation to justify and explain the Agency's decision to pursue or 
not pursue a claim in a particular bankruptcy. The only additional step 
that EPA would need to take in order to meet the GAO critique regarding 
this issue is to make a formal documentation of its decision. 
Therefore, the foregoing demonstrates that EPA is actively taking steps 
to better track and document all bankruptcies of which it receives 
notice. 

The following are GAO's comments on the Environmental Protection 
Agency's letter dated July 14, 2005. 

GAO Comments: 

1. We acknowledge and commend EPA for the actions the agency has 
initiated and for its plan to develop and implement other actions to 
improve compliance with the enforcement of financial assurance 
requirements, as EPA highlights in this and the next three paragraphs. 
The management challenges EPA faces in this regard are complex, but the 
potential benefits the agency can receive from effective financial 
assurances are substantial. We believe that if EPA implements our 
recommendations as part of its compliance and enforcement efforts 
focusing on financial assurance, EPA's ability to hold liable parties 
responsible for their environmental cleanup obligations will be 
substantially improved. 

2. Although we obtained information about region III's review of 
financial assurances, we did not cite it in our report for several 
reasons. For example, unlike the other regional review, the region III 
review is not a compliance audit of financial assurances in Superfund 
settlements. As such, this review does not identify either Superfund 
settlement agreements that do not include financial assurances or the 
number of sites that do not have settlements in place. In addition, the 
reported financial impact on the government for the sites in region 
III's review is preliminary and will remain so until the cleanups at 
the sites reviewed are completed because the financial assurances may 
not reflect the actual cleanup costs. For example, as discussed 
earlier, EPA often settles for less than the full cleanup cost as a 
result of equitable factors or ability-to-pay issues. In addition, the 
financial assurances may relate to work to identify the potential 
cleanup remedies and not to the cost of the cleanup, which may not yet 
be known. An example of a case included in the study that substantially 
understates the negative impact on the Superfund and the taxpayers is 
the Metachem/Standard Chlorine case discussed in our report. According 
to the official who conducted this review, while the review identifies 
a loss of $3.75 million associated with the Metachem site, EPA expects 
the government will have to spend about $100 million to clean up the 
site. 

3. We disagree with EPA's view that the report does not highlight the 
preventive aspect of financial assurance. In discussing the purpose of 
financial assurance, the draft and final reports point out that the 
fact that the parties responsible for the contamination are also 
responsible for cleaning it up encourages businesses to adopt 
responsible environmental practices. While EPA's comments acknowledging 
the benefits of prospective financial assurance are limited to the RCRA 
closure and post-closure programs, we hope that the agency recognizes 
that these same preventive benefits can be more broadly attained by 
implementing the financial assurance requirements mandated by the 
Superfund law under section 108(b), which also provide for prospective 
financial assurances from businesses at risk for environmental 
contamination. 

4. EPA's comment suggests that the agency's enforcement options are 
limited under its RCRA corrective action and Superfund programs because 
the agency has not developed financial assurance regulations for these 
programs. If this is the case, EPA should seek to correct this 
situation as it develops specific goals to address financial assurance 
as a national enforcement priority. 

5. We have revised the final report to reflect that under EPA's current 
regulations for financial assurance for closure and post-closure, 
facility owners and operators may choose any of the permissible 
mechanisms, as long as the mechanism meets the regulatory standards. 
However, these regulations do not apply to the Superfund and RCRA 
corrective action programs, and therefore do not constrain EPA's 
authority to accept or decline a proffered financial assurance 
mechanism related to a cleanup under these programs. Similarly, with 
respect to insurance, the RCRA regulations EPA cites apply only to the 
closure and post-closure programs. Thus, for Superfund and RCRA 
corrective action, regulatory vigilance over the terms of the policies 
is still necessary. 

6. The Superfund law requires EPA to develop financial assurance 
regulations for classes of facilities that pose a risk for 
environmental contamination, starting with those that pose the "highest 
level of risk of injury." This requirement is not, as EPA's comments 
suggest, limited to those that pose the highest risk for financial 
assurance failure. Our recommendation is for EPA to comply with the 
requirements in the Superfund statute. In its comments, EPA misstates 
the GAO recommendation by focusing on classes of facilities at risk for 
financial assurance failure. We are concerned that the agency is 
narrowly construing a broad statutory mandate that requires the agency 
to establish, as appropriate, prospective financial assurance 
requirements for entities at risk for environmental pollution. Further, 
EPA may miss the forest for the trees by focusing too narrowly on its 
ongoing study of NPL Superfund sites as a basis or rationale for 
implementing the section 108(b) mandate. The universe of businesses at 
risk for environmental contamination is much broader than Superfund NPL 
sites--for example, NPL sites represent about 10 percent of 
contaminated sites identified in the Superfund database. Finally, we 
did not conclude, as EPA asserts, that EPA should pursue section 108(b) 
rule makings to the exclusion of other options. Nonetheless, we reject 
any assertion by EPA that implementing section 108(b) is optional. EPA 
is required to carry out the terms of the statute, and nothing in 
section 108(b) authorizes EPA to determine that such actions are 
unnecessary. By passing section 108(b), the Congress has determined 
that its provisions are necessary; should EPA believe otherwise, it 
must seek legislative relief. During the 25 years section 108(b) has 
been in effect, EPA has not sought amendment or repeal of the 
requirement. 

7. EPA's comment that it will not consider whether to implement section 
108(b) until certain evaluations are complete indicates that it views 
implementation of the statutory mandate under the Superfund law to 
establish financial assurance for classes of facilities at high risk 
for environmental contamination as optional. However, as noted above, 
it is not. We believe the efforts of the Environmental Financial 
Advisory Board (EFAB) and EPA under the 120-day study may provide 
important and useful information to aid EPA's implementation of section 
108(b) and the agency's other financial assurance responsibilities. 
However, these efforts cannot provide a basis for the agency to simply 
decline to carry out the actions required under section 108(b). 

8. Our report provides some general information and issues about 
insurance as one of the approved financial assurance mechanisms. 
However, the scope of our work did not include an analysis of the types 
of insurance products currently available or of all of EPA's actions 
regarding insurance products. Instead, our work focused on issues and 
concerns about some insurance products identified by the EPA Inspector 
General and others. 

9. In response to the questions posed by our requesters, we report the 
number of business bankruptcies and inform readers that information to 
identify how many of these bankruptcies involved environmental 
liabilities does not exist. We also report, as requested, on the number 
of bankruptcy cases that EPA and the Justice Department have pursued in 
bankruptcy court. EPA believes that this information in the first 
section of the report will lead readers to conclude that the agency is 
not willing to pursue more environmental bankruptcy cases. We disagree. 
For example, we report that without information on the number of 
bankruptcy cases involving environmental liabilities, EPA's efforts in 
identifying and pursuing relevant bankruptcies cannot be evaluated. 
Further, our report provides information on some of the reasons EPA may 
choose not to pursue bankruptcy cases in court--for example, many 
chapter 7 bankruptcies involve businesses with few or no assets. 

10. Our report accurately reflects that EPA does not maintain 
information on bankruptcies it does not pursue. EPA's comments show 
that only one region maintains such data. Further, while EPA states 
that there have been discussions concerning collecting these data 
agencywide, the agency does not report a decision or plan to do so. 

11. The fact that one region is documenting its decisions regarding 
bankruptcy cases does not demonstrate that the agency as a whole is 
taking steps to better track and document all bankruptcies of which it 
receives notice. We note that expanding the use agencywide of the close-
out memo used by region III is the type of action/documentation we had 
in mind in recommending that EPA develop a formal process for 
monitoring bankruptcy proceedings and maintaining data on bankruptcy 
filings reviewed. 

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

John B. Stephenson, (202) 512-3841: 

Staff Acknowledgments: 

In addition to the individual named above, Christine Fishkin, Assistant 
Director; Nancy Crothers; Richard Johnson; Les Mahagan; and Susan 
Swearingen made key contributions to this report. Also, Catherine 
Hurley; William O. Jenkins, Jr; Jean McSween; Jamie Meuwissen; Mary 
Mohiyuddin; Jennifer Popovic; Aaron Shiffrin; and Gary Stofko made 
important contributions. Finally, Greg Carroll; Terrance N. Horner, Jr; 
Mike Kaufman; Jerry Laudermilk; Karla Springer; and Joseph D. Thompson 
provided important assistance during final report review. 

[End of section]

Related GAO Products: 

[End of section]

Superfund Program: Breakdown of Appropriations Data. [Hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-787R]. Washington, D.C.: May 
14, 2004. 

Superfund Program: Updated Appropriation and Expenditure Data. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-475R]. Washington, 
D.C.: February 18, 2004. 

Superfund Program: Current Status and Future Fiscal Challenges. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-850]. Washington, 
D.C.: July 31, 2003. 

Hazardous Materials: EPA's Cleanup of Asbestos in Libby, Montana, and 
Related Actions to Address Asbestos-Contaminated Materials. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-469]. Washington, 
D.C.: April 14, 2003. 

Superfund: Half the Sites Have All Cleanup Remedies in Place or 
Completed. GAO/RCED-99-245. Washington, D.C.: July 30, 1999. 

Superfund: Progress Made by EPA and Other Federal Agencies to Resolve 
Program Management Issues. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-99-111]. 
Washington, D.C.: April 29, 1999. 

Hazardous Waste: Progress under the Corrective Action Program Is 
Limited, but New Initiatives May Accelerate Cleanups. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-3]. 
Washington, D.C.: October 21, 1997. 

Superfund: Duration of the Cleanup Process at Hazardous Waste Sites on 
the National Priorities List. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-97-238R]. 
Washington, D.C.: September 24, 1997. 

Superfund: Number of Potentially Responsible Parties at Superfund Sites 
Is Difficult to Determine. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-96-75]. 
Washington, D.C.: March 27, 1996. 

Superfund: EPA Has Opportunities to Increase Recoveries of Costs. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-94-196]. 
Washington, D.C.: September 28, 1994. 

Hazardous Waste: An Update on the Cost and Availability of Pollution 
Insurance. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/PEMD-94-16]. 
Washington, D.C.: April 5, 1994. 

Superfund: More Settlement Authority and EPA Controls Could Increase 
Cost Recovery. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-91-144]. 
Washington, D.C.: July 18, 1991. 

Hazardous Waste: Funding of Postclosure Liabilities Remains Uncertain. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-90-64]. 
Washington, D.C.: June 1, 1990. 

Superfund: A More Vigorous and Better Managed Enforcement Program Is 
Needed. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-90-22]. 
Washington, D.C.: December 14, 1989. 

Hazardous Waste: Environmental Safeguards Jeopardized When Facilities 
Cease Operating. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-86-77]. 
Washington, D.C.: Feb. 11, 1986. 

(360386): 

FOOTNOTES

[1] For simplicity in this report, the Comprehensive Environmental 
Response, Compensation, and Liability Act of 1980 will generally be 
referred to as the Superfund law. 

[2] The Superfund law generally applies to cleanups of contaminated 
sites that are no longer in use. RCRA generally applies to operating 
businesses that treat, store, or dispose of hazardous wastes. 

[3] See GAO, Superfund Program: Current Status and Future Fiscal 
Challenges, GAO-03-850 (Washington, D.C.: July 31, 2003). 

[4] National Advisory Council for Environmental Policy and Technology 
Superfund Subcommittee Final Report, April 2004, and Katherine N. 
Probst and David M. Konisky: Superfund's Future: What Will It Cost? 
(Washington, D.C.: Resources for the Future, 2001). 

[5] Permits are also a vehicle for establishing financial assurance 
requirements for businesses required to obtain RCRA operating permits. 

[6] Courts have interpreted the liability of responsible parties under 
CERCLA to be strict, joint and several, and retroactive. Under strict 
or "no fault" liability, a party may be liable for cleanup even though 
its actions were not considered improper when it disposed of the 
wastes. Under joint and several liability, when the harm done is 
indivisible, one party can be held responsible for the full cost of the 
remedy even though that party may have disposed of only a portion of 
the hazardous substances at the site. Under retroactive liability, 
parties can be held responsible for actions that took place before 
CERCLA was enacted. 

[7] This percentage does not address the percentage of cleanup costs 
paid by liable parties versus that paid by the government. According to 
EPA, the agency has information on cleanup amounts liable parties 
commit to through enforcement instruments but does not have access to 
information on amounts the liable parties actually spend at the cleanup 
sites. 

[8] To determine which sites are eligible for listing on the NPL, EPA 
uses its Hazard Ranking System, a numerical scoring system that 
assesses the hazards a site poses to human health and the environment 
as its principal determining factor. Once EPA has determined that the 
risks posed by a site make it eligible for the NPL, EPA regions then 
consider many other factors in selecting the sites to submit to EPA 
headquarters for proposal to the NPL, including the availability of 
alternative federal or state programs that could be used to clean up 
the site, the status of responsible parties associated with the site, 
and the cleanup's cost and complexity. 

[9] In reality, sites rarely move through the cleanup process in a 
linear, step-by-step manner. Most sites are divided early in the 
cleanup process into multiple projects, known as operable units. 
Cleanup activity at sites with multiple operable units is generally 
staggered. Operable units may move through the cleanup pipeline at 
different paces because of a number of factors, such as the 
availability of funding, the complexity of the cleanup, or the level of 
cooperation of responsible parties. The discovery of new information 
about the site can even push an operable unit backward to an earlier 
stage of the cleanup process. 

[10] See GAO, Superfund Program: Breakdown of Appropriations Data, GAO- 
04-787R (Washington, D.C.: May 14, 2004). 

[11] EPA officials noted that in fiscal year 2004, the agency also 
received $148 million from settlement payments from liable parties. 

[12] For the first half of the 1990s, the trust fund received the 
Superfund taxes. 

[13] Of the 1,236 sites currently on the NPL, 158 are federal 
facilities. These properties are owned or used by a federal agency, 
typically either the Department of Defense or the Interior. 

[14] According to EPA, "construction completion" means that physical 
construction (if needed) to address contamination at an NPL site--such 
as construction of a pump-and-treat system to address groundwater 
contamination--is complete, regardless of whether final cleanup levels 
have been achieved; all immediate threats from the contamination have 
been addressed, and all long-term threats are under control. Most of 
these sites then enter into the operation and maintenance phase, when 
the responsible party or the state ensures that the cleanup remedy 
continues to be protective of human health and the environment. 
Eventually, when EPA and the state determine that no further remedial 
activities at the site are appropriate, EPA deletes the site from the 
NPL. 

[15] EPA, Superfund: Building on the Past, Looking to the Future 
(Washington, D.C.: Apr. 22, 2004). 

[16] GAO-03-850. We also reported that states play a significant role 
in the cleanup of hazardous waste sites. However, many state cleanup 
programs have limited capacity to address costly and complex sites that 
do not have responsible parties to pay for the cleanup. 

[17] While RCRA primarily applies to operating facilities, it may also 
apply to facilities that are no longer operating. RCRA is an amendment 
to the Solid Waste Disposal Act of 1965, the first federal law 
regulating solid wastes--a broad category of materials including such 
materials as garbage from homes or businesses and waste materials 
resulting from industrial, commercial, or agricultural activities. 
Under the general statutory RCRA definition, a waste is considered 
hazardous if either (1) the waste has at least one of the following 
characteristics--it is ignitable, reactive, corrosive, or contains 
certain toxic constituents such as arsenic or lead (sometimes called 
characteristic wastes) or (2) the agency has specifically named the 
waste on a list of products or chemicals, such as pesticides or acids, 
that the agency has determined are hazardous (sometimes called listed 
wastes). For purposes of permitting and other RCRA Subtitle C 
requirements, a waste is considered hazardous if it is a solid waste, 
which is not exempted or excluded by the Subtitle C regulations, and if 
it is either specifically listed as a hazardous waste or meets the 
characteristics of a hazardous waste in those regulations. 

[18] The corrective action can be specified in the facility's operating 
permit or in a separate corrective action permit. Such permits must 
require the facility to provide financial assurance that the cleanup 
actions specified in the permit will be carried out. EPA may also use 
its enforcement authority to require facilities to clean up hazardous 
waste contamination by issuing to the facility an enforcement order 
specifying the corrective action it must take. 

[19] Using a stratified random sample of 65 of these facilities, this 
study examined relevant information on industries at risk for 
environmental contamination and on costs of these cleanups. 

[20] Specifically, a generator may generally accumulate hazardous waste 
on site for 90 days or less provided that, among other things, the 
waste is placed in containers, tanks, containment buildings, or on drip 
pads in compliance with applicable EPA regulations. Generators of 
hazardous waste are also required to comply with certain RCRA 
requirements intended to ensure the safe management of hazardous 
wastes. 

[21] 42 U.S.C. § 6924(a)(6). Financial responsibility may be 
established in accordance with EPA regulations by any one or a 
combination of the following: insurance, guarantee, surety bond, letter 
of credit, or qualification as a self-insurer. 42 U.S.C. § 6924(t)(1). 

[22] See RCRA closure/post-closure financial assurance regulations at 
40 C.F.R. Part 264, Subpart H. 

[23] 40 C.F.R. § 264.101(b). See footnote 18. 

[24] Financial assurance requirements serve several purposes, including 
fairness, economic efficiency, and pollution deterrence. See James 
Boyd, Financial Responsibility for Environmental Obligations: Are 
Bonding and Assurance Rules Fulfilling Their Promise? (Washington, 
D.C.: Resources for the Future, August 2001). Courts have recognized 
that financial assurance regulations play a critical role in deterring 
environmental misconduct and ensuring the safe design and operation of 
hazardous waste facilities, e.g., Safety-Kleen v. Wyche, 274 F.3d 846, 
866 (4th Cir. 2001). 

[25] Although EPA has not issued financial assurance regulations for 
the corrective action program, the agency issued guidance on this topic 
in 2003. 

[26] Limited liability companies originated in Wyoming in 1977. Today, 
all states allow this form of business organization. 

[27] Certain corporations, called subchapter S corporations, also 
provide limited liability and more favorable tax treatment but 
ownership is limited in terms of the number of allowable owners and 
type of owners. For example, all shareholders in a subchapter S 
corporation must be individuals. 

[28] The May 1, 2003, Justice Department indictment of former Enron 
officials included charges of conspiring to improve Enron's balance 
sheet using special purpose entities. See also Special Purpose 
Entitles: Uses and Abuses, Presentation to the International Monetary 
Fund by Janet Tavakoli, President, Tavokoli Structured Finance, April 
2005. 

[29] The bankruptcy code was substantially revised in April 2005, 
primarily to address consumer bankruptcies. 

[30] Environmental enforcement actions seeking injunctive relief 
against companies in bankruptcy are generally excepted from the 
automatic stay pursuant to the "police power" exemption in the 
bankruptcy code. Administrative or judicial proceedings to fix the 
amount of a penalty or establish the amount of cost recovery owed are 
also exempt from the automatic stay. However, once a penalty is 
assessed or a judgment is obtained, the automatic stay prohibits 
collection activities other than through the bankruptcy process. 

[31] In some cases, companies filing for bankruptcy protection under 
chapter 11 also cease operations and go through liquidation rather than 
reorganization. 

[32] Bankruptcy courts routinely grant extensions of this exclusivity 
period, according to the chair of EPA's bankruptcy work group. For 
example, the exclusivity period has been repeatedly extended during the 
4 years since W.R. Grace and Company filed for bankruptcy in April 
2001. 

[33] Bankruptcy judges are judicial officers of the district courts and 
are appointed for 14-year terms by the court of appeals for the 
appellate circuit in which the bankruptcy court is located. A 
bankruptcy court order is appealed first to the relevant federal 
district court and then to the relevant court of appeals. 

[34] Private sources of data on business bankruptcies include companies 
such as Dun and Bradstreet and Moody's Investors Service. 

[35] These notices may be sent to EPA regional offices or to EPA 
headquarters. 

[36] Fruit of the Loom, a leading international apparel company, filed 
for bankruptcy in 1999. The company's significant environmental 
obligations principally pertain to environmental management and cleanup 
costs at seven sites owned by a related corporation, formerly owned by 
Fruit of the Loom. Kmart Corporation, one of the largest discount 
retailers in the United States, had environmental liabilities 
associated with disposal of hazardous waste products from its auto 
repair shops when it filed for bankruptcy in 2002. 

[37] Some of the cases cover environmental liabilities under both 
Superfund and RCRA and some cases also include claims under other 
environmental laws, such as the Clean Water Act or the Clean Air Act. 

[38] Specifically, the Statement of Financial Affairs requires that 
companies filing for bankruptcy identify every site for which they have 
received a notice of potential environmental liability or reported a 
release of a hazardous substance. They must also identify all legal 
proceedings under any environmental law to which they have been a 
party. In addition, Exhibit C of the bankruptcy petition requires that 
debtors identify any property they own or possess that poses, or is 
alleged to pose, a threat of imminent harm to public health or safety. 
However, according to EPA officials, debtors rarely complete Schedule 
C. 

[39] The U.S. Trustees program, a component of the Justice Department, 
is responsible for overseeing the administration of bankruptcy cases in 
all but two states. The program has 21 regional U.S. Trustees offices 
and an executive office in Washington, D.C. The Administrative Office 
of the U.S. Courts, part of the judicial branch, oversees the 
administration of cases filed in bankruptcy courts in Alabama and North 
Carolina. 

[40] For example, see Jennifer Connors Frasier, "Caught in a Cycle of 
Neglect: The Accuracy of Bankruptcy Statistics," Commercial Law Journal 
(Winter 1996). 

[41] EPA officials noted the agency's recent participation in a 
successful challenge to a fraudulent transfer associated with an 
ongoing bankruptcy case. The Department of Justice, on behalf of EPA, 
intervened in an action brought against Sealed Air Corporation by the 
official bankruptcy committees representing personal injury and 
property damage claimants of W.R. Grace. The committees contended that 
(1) the sale of one of W.R. Grace's divisions was fraudulent under New 
Jersey's fraudulent transfer statute because W.R. Grace was not paid a 
reasonably equivalent value for the Sealed Air division and (2) W.R. 
Grace was rendered insolvent by the transaction. In its complaint, 
Justice alleged a fraudulent transfer claim under the Federal Debt 
Collection Procedures Act against Sealed Air Corporation. The Justice 
Department was granted leave to intervene to specifically assist with 
the fair valuation of environmental liabilities at the time of the 
contested transaction. According to EPA, the parties have reached a 
settlement agreement, which includes cash and stock valued at more than 
$1 billion, that has been submitted to the bankruptcy court for 
approval. 

[42] For example, see Asset Protection: Concepts and Strategies for 
Protecting Your Wealth, Jay D. Adkisson and Christopher M. Riser, 
McGraw-Hill, 2004. 

[43] Ibid. 

[44] From a regulatory standpoint, limited liability businesses can be 
more difficult to monitor than corporations because they are required 
to provide only limited information to the public. 

[45] For example, the Supreme Court has stated that "Ordinarily a 
corporation which chooses to facilitate the operation of its business 
by the employment of another corporation as a subsidiary will not be 
penalized by a judicial determination of liability for the legal 
obligations of the subsidiary." United States v. Bestfoods, 524 U.S. 
51, 61 (1998). 

[46] 524 U.S. 51 (1998). 

[47] As discussed in the next section of this report, some financial 
assurances that businesses provide to EPA to show their ability to meet 
their financial obligations make specific funds available to EPA for 
cleanups in the event businesses default, while others do not. However, 
if the party with Superfund liabilities has not reached a settlement 
agreement with EPA, it is not required to provide a financial 
assurance. Moreover, enforcing financial assurance requirements against 
bankrupt parties under Superfund may be more difficult than under 
programs such as the RCRA closure/post-closure program that have 
comprehensive financial assurance regulations in place. See, e.g., 
Safety-Kleen v. Wyche, 274 F.3d 846, 864-65 (4th Cir. 2001) (upholding 
state enforcement of RCRA closure/post-closure financial assurance 
regulations against a party in bankruptcy). 

[48] At some Superfund NPL sites, such as large hazardous waste 
landfills, there may be hundreds or even thousands of liable parties 
from whom EPA may attempt to obtain cleanup costs. If one liable party 
at such a Superfund site files for bankruptcy, EPA may compel other 
liable parties to pay for the cleanup rather than having to turn to 
taxpayers for funding. However, EPA will not do so when it believes 
seeking such payments would be inequitable under the circumstances. 

[49] The Second Circuit includes the states of Connecticut, New York, 
and Vermont. 

[50] Other courts have considered a broader array of factors in 
deciding whether a claim subject to discharge has arisen, e.g., Matter 
of Chicago, Milwaukee, St. Paul, and Pacific R. Co., 974 F.2d 775, 782- 
86 (7th Cir. 1992). 

[51] When a debtor in a chapter 11 bankruptcy continues to own the site 
under the reorganization plan, EPA may hold the reorganized company 
responsible for cleanup costs incurred after the bankruptcy ends, but 
not for those incurred prior to the court's acceptance of the 
reorganization plan. 

[52] GAO, Hazardous Waste: Environmental Safeguards Jeopardized When 
Facilities Cease Operating, GAO/RCED-86-77 (Washington, D.C.: Feb. 11, 
1986). 

[53] As noted above, the bankruptcy code includes an exception to the 
automatic stay, known as the police and regulatory powers exception, 
which can permit certain environmental enforcement actions to proceed 
during bankruptcy despite the automatic stay. Thus, EPA can continue 
compliance enforcement efforts outside the bankruptcy proceedings. 

[54] W.R. Grace appealed this ruling in November 2003. The case was 
still pending before the U.S. Circuit Court of Appeals for the Ninth 
Circuit as of June 2005. 

[55] W.R. Grace and Company filed for protection under chapter 11 of 
the bankruptcy code in April 2001 and remains in bankruptcy as of June 
2005. 

[56] According to this EPA attorney, W. R. Grace has proposed a plan of 
reorganization, which is moving through the confirmation process by the 
bankruptcy court, that would pay all creditors, including EPA, 100 
percent of claims allowed by the court. However, the plan may not be 
approved as proposed, this official noted; thus, EPA and other 
creditors may not receive the full amount of their allowed claims. 

[57] EPA, Office of Inspector General, Information Technology: 
Comprehensive Environmental Response, Compensation, and Liability 
Information System (CERCLIS) Data Quality, 2002-P-00016 (Washington, 
D.C.: Sept. 30, 2002). 

[58] According to EPA, this occurs because some courts have held that a 
claim for cleanup costs arises under the Superfund law when a hazardous 
substance release (e.g., leakage from buried drums) occurs, regardless 
of whether the release was detected before the bankruptcy filing and 
whether EPA has actually incurred any costs; other courts have not 
adopted this view of when a claim arises. 

[59] Along these lines, an August 1999 United States Attorneys 
publication noted that if some companies succeed in using bankruptcy to 
shed environmental liabilities of which EPA is not yet aware, their 
competitors may also file for bankruptcy reorganization to obtain the 
same business advantage. See United States Attorneys' Bulletin, 
Environmental Issues in Bankruptcy Cases: Protecting the Public 
Interest from Overzealous Debtors, August 1999. 

[60] A lien is a claim against property for the payment of a debt or 
obligation. 

[61] Section 108(b)(1) of CERCLA. 

[62] RCRA's closure and post-closure financial assurances cover normal 
costs of closing and conducting post-closure care, and do not cover 
cleanups stemming from accidental releases. The financial assurance 
regulations also require regulated facilities to carry third-party 
liability insurance, but these policies only cover third-party bodily 
injury and property damage from hazardous releases, not the actual 
cleanup costs. 

[63] In addition to the appropriated funds in fiscal year 2004, EPA 
officials noted that $148 million was deposited into Superfund special 
accounts, which receive payments from liable parties for past and 
future cleanup costs. 

[64] The provision calls for the use of essentially the same financial 
assurance mechanisms allowed under the RCRA regulations for financial 
assurance for the costs of closure and post-closure care of hazardous 
waste facilities. See table 1 for a description of these mechanisms. 

[65] The law requires EPA to establish a minimum level of financial 
responsibility the agency believes is appropriate, to be based on the 
payment experiences for site cleanups by the Superfund, commercial 
insurers, and court settlements and judgments. Further, the law 
specifies that if the owner or operator of a facility required to have 
financial assurance is in bankruptcy, any guarantor providing evidence 
of financial responsibility for the owner can be directly liable for 
releases of hazardous substances from the facility. The law also 
directs EPA to cooperate with the commercial insurance industry to the 
maximum extent practicable in developing these financial assurance 
requirements. 

[66] In October 1980, RCRA was amended by adding section 
3001(b)(3)(A)(ii), known as the Bevill amendment, to exclude, among 
other things, "solid waste from the extraction, beneficiation, and 
processing of ores and minerals" from regulation as hazardous waste 
under Subtitle C of RCRA. This exclusion applied pending completion of 
a study and a report to Congress, and pending a determination by the 
EPA Administrator either to promulgate regulations under Subtitle C or 
to declare such regulations unwarranted. Since completing the required 
report, EPA has concluded that twenty mineral processing wastes qualify 
for the Bevill exclusion as "low toxicity, high volume wastes." Other 
mineral processing wastes are regulated under Subtitle C of RCRA, 
provided they meet the definition of hazardous waste. 

[67] Our report Hardrock Mining: BLM Needs to Better Manage Financial 
Assurances to Guarantee Coverage of Reclamation Costs, GAO-05-377 
(Washington, D.C.: June 20, 2005) recommends ways for BLM to better 
manage financial assurances it requires of operators to guarantee 
reclamation costs if they fail to reclaim BLM-managed lands after 
operations cease. 

[68] Most states with significant hardrock mining have established 
their own statutory programs and regulate mine activities through mine 
permits. However, EPA's Inspector General has reported that some state 
statutes and regulations do not provide for adequate financial 
assurances for hardrock mines. EPA, Office of Inspector General, EPA 
Can Do More to Minimize Hardrock Mining Liabilities, E1DMF6-08-0016- 
7100223 (1997). 

[69] EPA, Office of Inspector General, Nationwide Identification of 
Hardrock Mining Sites, 2004-P-00005 (Washington, D.C.: Mar. 31, 2004). 
The report noted that its inventory may be understated because, among 
other things, it did not include sites where it was too early in the 
evaluation process to determine whether the sites had the potential to 
cost the Superfund trust fund $1 million or more. 

[70] In addition, taxpayers may also pay for the cleanups to the extent 
that EPA settles with liable parties for less than the full cost of the 
cleanups. According to EPA, the agency often settles for less than the 
full cleanup cost as a result of equitable factors. 

[71] In one case, the company (MagCorp) filed for Chapter 11 bankruptcy 
protection 7 months after the Justice Department initiated a lawsuit on 
behalf of EPA for fines of approximately $900 million for toxic waste 
violations. The bankruptcy court permitted the owner to sell MagCorp's 
assets to a new company (US Magnesium) controlled by the same owner, 
and the bankruptcy case was subsequently converted to a Chapter 7 
liquidation with essentially no assets available to pay creditors. This 
sale may substantially impede government efforts to collect the 
penalties. 

[72] As noted above, a generator may generally accumulate hazardous 
waste on site for 90 days or less provided that, among other things, 
the waste is placed in containers, tanks, containment buildings, or on 
drip pads in compliance with applicable EPA regulations. Generators of 
hazardous waste are also required to comply with certain RCRA 
requirements intended to ensure the safe management of hazardous 
wastes. 

[73] GAO, Hazardous Waste: Issues Surrounding Insurance Availability, 
GAO/RCED-88-2 (Washington, D.C.: Oct. 16, 1987). 

[74] The NPL is EPA's list of seriously contaminated sites, and 
placement on this list is limited, in part, by funding for the program. 
Thousands of contaminated sites exist that are not on the list or 
subject to RCRA's corrective action program. 

[75] See GAO, Hardrock Mining: BLM Needs to Better Manage Financial 
Assurances to Guarantee Coverage of Reclamation Costs, GAO-05-377 
(Washington, D.C.: June 20, 2005) for examples of BLM's inability to 
collect funds for reclamation when operators of hardrock mines using 
corporate guarantees filed for bankruptcy. 

[76] EPA last evaluated the net worth requirement in 1991. 56 Fed. Reg. 
30201. 

[77] EPA, Office of Inspector General, RCRA Financial Assurance for 
Closure and Post-Closure, 2001-P-007 (Washington, D.C.: Mar. 30, 2001). 

[78] The Association of State and Territorial Solid Waste Management 
Officials is an organization that supports state environmental agencies 
and trust territories by focusing on their solid and hazardous waste 
programs, Superfund and state cleanup programs, underground storage 
tank programs, and other programs. 

[79] Association of State and Territorial Solid Waste Management 
Officials (ASTSWMO), Financial Assurance Review Paper (Washington, 
D.C.: April 21, 2003). 

[80] CERCLA and RCRA both specifically authorize self-insurance as a 
form of financial assurance. 42 U.S.C. § 9608(b)(1); 42 U.S.C. § 
6924(t)(1). However, both statutory provisions give EPA broad 
discretion in determining the circumstances under which the agency 
accepts self-insurance. Moreover, neither provision specifically 
applies to financial assurances included in corrective action orders 
issued under RCRA. 

[81] See footnote 77. 

[82] 40 C.F.R. Part 258, Subpart G. 

[83] Under the financial assurance regulations for closure/post- 
closure, an insurer must submit a certificate to EPA providing, among 
other things, that any provision of the policy that is inconsistent 
with EPA regulations is automatically amended to eliminate any 
inconsistency. 40 C.F.R. § 264.151(e). While EPA officials believe this 
certificate resolves any conflict between the regulations and the 
policy, they acknowledge it may be necessary to litigate the issue, 
leading to a delay in recovery. A recent federal appellate court 
analyzing an analogous issue held that in a conflict between EPA's 
financial assurance regulations for underground storage tanks and a 
state statute, EPA's regulations governed the dispute. In Zurich 
American Insurance v. Whittier Properties, 356 F.3d 1132 (9th Cir. 
2004), the court held that EPA's financial assurance regulations 
governing underground storage tank (UST) operators provided for the 
exclusive remedy of prospective cancellation of a UST insurance policy 
where the operator had obtained the policy fraudulently. The court held 
that because EPA's regulations provided the exclusive remedy, the 
insurer could not benefit from a state statute authorizing rescission 
of the policy in the event of fraud, and therefore could not avoid 
paying on the policy. 

[84] See footnote 79. 

[85] EPA officials noted that under the RCRA closure/post-closure 
program, an owner or operator of a RCRA treatment, storage, or disposal 
facility who uses the financial test or corporate guarantee is required 
to (1) disclose other sites for which it is using the financial test 
and the current closure or post-closure cost estimates for each of 
these sites and (2) provide a list of facilities that are not covered 
by the financial test submission and the current estimated costs of 
closure and post-closure care for these other facilities. 

[86] For example, the use of the corporate guarantee is no longer 
authorized if the company providing the guarantee no longer meets EPA's 
financial test. Other forms of financial assurance, such as bonds and 
insurance, may lapse for various reasons. 

[87] EPA has financial assurance requirements not only for the programs 
discussed in this report, but also for other areas, such as the 
Underground Storage Tank Program and the Underground Injection Control 
Program for deep injection wells. In 2003, we reported on financial 
assurances for Class 1 deep injection wells, which are built to contain 
hazardous liquid waste below the lowest underground source of drinking 
water. See GAO, Deep Injection Wells: EPA Needs to Involve Communities 
Earlier and Ensure That Financial Assurance Requirements Are Adequate, 
GAO-03-761 (Washington, D.C.: June 13, 2003). 

[88] Although in some cases, EPA could miss out on opportunities for 
recoveries because certain payments had already been made, for ongoing 
relationships with contractors, grantees, or vendors, the offset 
authority could be used against future payments to these entities. 

[89] Section 107(l) of the Superfund law establishes a federal lien in 
favor of the United States upon property which is subject to or 
affected by a removal or remedial action. The lien applies to all 
property upon which the response action has been taken, not just the 
portion affected by the cleanup activities, and applies to all future 
costs incurred at the site. 

[90] EPA's lien guidance advises regional officials, who are 
responsible for filing such notices, to consider filing notice of a 
lien whenever applicable, and, in making such decisions, to take into 
account such considerations as whether the property's value will 
significantly increase as a result of the cleanup work and whether 
there is a likelihood that the owner will file for bankruptcy. EPA 
Memorandum: Guidance on Federal Superfund Liens, September 22, 1987. 

[91] We recognize that there is a transaction cost in filing Superfund 
liens and that this cost should be balanced against the prospect of 
more certain cost recovery for the government. In some cases, a lien 
may provide no potential cost recovery to EPA because the land has 
little or no value. 

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