Long-Term Commitments: Improving the Budgetary Focus on 	 
Environmental Liabilities (24-JAN-03, GAO-03-219).		 
                                                                 
Although environmental liabilities resulting from federal	 
programs and activities represent the third largest category of  
the federal government's liabilities, the current cash- and	 
obligation-based budget does not provide information on estimated
cleanup costs before waste-producing assets are purchased. As a  
result, policymakers do not have the opportunity to weigh the	 
full costs of a proposal with their judgment of its benefits. The
Chairman of the House Committee on the Budget asked GAO to	 
examine and report on various ways budgeting might be improved	 
for environmental cleanup costs, including some of the benefits, 
limitations, and challenges associated with each.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-219 					        
    ACCNO:   A05945						        
  TITLE:     Long-Term Commitments: Improving the Budgetary Focus on  
Environmental Liabilities					 
     DATE:   01/24/2003 
  SUBJECT:   Budget authority					 
	     Budget functions					 
	     Budget obligations 				 
	     Financial analysis 				 
	     Future budget projections				 
	     Government liability (legal)			 
	     Waste disposal					 
	     DOD Defense Environmental Restoration		 
	     Program						 
                                                                 

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GAO-03-219

a

GAO United States General Accounting Office

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

January 2003 LONG- TERM COMMITMENTS Improving the Budgetary Focus on
Environmental Liabilities

GAO- 03- 219

The federal government is legally required to clean up hazardous wastes
that result from its operations. Agencies are currently required to report
these environmental liabilities in their financial statements, but these
estimates are not recognized until after a waste- producing asset is
placed into service. Although agencies are supposed to consider cleanup
and disposal costs associated with these assets as part of the acquisition
process, they typically do not request the related budget authority until
many years after the

government has committed to the operation creating the waste, when cleanup
is imminent.

Alternative approaches to promote up- front consideration of the full
costs of environmental cleanup and disposal for assets being proposed for
purchase fall along a continuum ranging from supplemental information to
enactment of additional budget authority. (See figure below.) While each
approach has potential benefits and challenges, agencies* lack of
experience in estimating future cleanup/ disposal costs up front suggest
starting at the more modest end of the continuum* providing supplemental
information to decision makers. Eventually, however, accruing budget
authority for the tail- end cleanup/ disposal cost along with the front-
end purchase cost estimates would do the most to ensure that these costs
are considered before the government incurs the liability. Continuum of
Alternative Approaches to Improve Budgeting for

Environmental Liabilities

LONG- TERM COMMITMENTS

Improving the Budgetary Focus on Environmental Liabilities

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 219 To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Susan Irving on (202) 512- 9142 or irvings@ gao. gov.
Highlights of GAO- 03- 219, a report to the

Chairman of the Committee on the Budget, House of Representatives January
2003

Although environmental liabilities resulting from federal programs and
activities represent the third largest category of the federal
government*s liabilities, the current

cash- and obligation- based budget does not provide information on
estimated cleanup costs before waste- producing assets are

purchased. As a result, policymakers do not have the opportunity to weigh
the full costs of a proposal with their judgment of its benefits. The
Chairman of the House Committee on the

Budget asked GAO to examine and report on various ways budgeting might be
improved for environmental cleanup costs, including some of the benefits,
limitations, and challenges associated with each. GAO recommends that the
Director

of the Office of Management and Budget (OMB) require supplemental
reporting in the budget to disclose future environmental cleanup/ disposal

costs for new acquisitions. Agency and OMB officials should consult with
legislative branch officials to ensure that useful information is provided
to congressional decision makers.

Page i GAO- 03- 219 Budgeting for Environmental Liabilities

Contents Letter 1

Results in Brief 2 Background 4 Objectives, Scope, and Methodology 5
Environmental Liabilities Largely Associated with Defense and

Energy 7 Current Budget Information Does Not Include Environmental
Liabilities Before Acquisition 9

Alternative Approaches to Consider Environmental Liabilities 12 Each
Approach Has Potential Benefits and Challenges 17 Conclusions 20
Recommendations for Executive Action 21 Agency Comments 21

Appendixes

Appendix I: Breakout of Environmental Liabilities 23 Tables Table 1:
Breakdown of DOE and DOD Federal Environmental

Liabilities, Fiscal Year 2001 23 Table 2: Environmental Liabilities, by
Agency, Fiscal Year 2001 24

Figures Figure 1: Flow of Cleanup/ Restoration and Disposal Funds for DOD
8

Figure 2: Flow of Cleanup Funds for DOE 9 Figure 3: Continuum of
Alternative Approaches to Improve

Budgeting for Environmental Liabilities 13 Figure 4: Possible Flow of
Funds through Accounts 16

Contents

Page ii GAO- 03- 219 Budgeting for Environmental Liabilities Abbreviations

CBO Congressional Budget Office DERP Defense Environmental Restoration
Program DOD Department of Defense DOE Department of Energy EM
Environmental Management EPA Environmental Protection Agency FUDS Formerly
Used Defense Sites NRC Nuclear Regulatory Commission O& M Operation and
Maintenance OMB Office of Management and Budget

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Page 1 GAO- 03- 219 Budgeting for Environmental Liabilities United States
General Accounting Office

Washington, D. C. 20548 Page 1 GAO- 03- 219 Budgeting for Environmental
Liabilities

A

January 24, 2003 Letter

The Honorable Jim Nussle Chairman Committee on the Budget House of
Representatives

Dear Mr. Chairman: The federal government undertakes a wide range of
programs and activities* such as federal employee pensions, retiree
health, and federal credit* that may create commitments for future
spending. Environmental liabilities, 1 which result from some federal
programs and activities, are one

example of these future commitments and represent the third largest
category of the federal government*s liabilities reported in the 2001

Financial Report of the U. S. Government. 2 Federal, state, or local laws
and regulations require cleanup that may be done many years after the
activity creating the environmental liability is undertaken. However,
because the federal budget is primarily calculated on a cash basis,
information on the estimated cleanup costs is not included in the budget

when budgeting decisions are being made about such activities. 1 Federal
accounting standards define environmental liabilities as the cleanup costs
of removing, containing, and/ or disposing of (1) hazardous waste from
property or (2) material and/ or property that consists of hazardous waste
at permanent or temporary closure or shutdown of associated property,
plant, and equipment. Hazardous waste is a solid, liquid, or gaseous waste
or combination of these wastes that, because of its quantity,

concentration, or physical, chemical, or infectious characteristics, may
cause or significantly contribute to an increase in mortality or an
increase in serious irreversible or incapacitating reversible illness or
pose a substantial present or potential hazard to human health or the
environment when improperly treated, stored, transported, disposed of, or
otherwise managed. As used in this report, it may include such things as
nuclear or toxic waste or unexploded ordnance, among other things. Cleanup
may include, but is not limited to, decontamination, decommissioning, site
restoration, site monitoring, closure, and postclosure costs. Federal
accounting standards define a liability as a probable future outflow of
resources due to a past governmental transaction or event.

2 The two largest liabilities are federal debt securities held by the
public and federal employee and veteran benefits payable.

Page 2 GAO- 03- 219 Budgeting for Environmental Liabilities

You asked us to examine and report on various ways budgeting might be
improved for environmental cleanup costs, including some of the benefits,
limitations, and challenges associated with each. Accordingly, we reviewed
current budgeting practices at the departments of Energy and Defense,
since they account for about 98 percent of the government*s reported
environmental liabilities. In addition, we discussed alternative
approaches with staff within these departments, as well as staff in the
Office of Management and Budget (OMB) and the Congressional Budget Office
(CBO). The focus of this report is forward- looking. That is, it explores
alternative ways to ensure that the cleanup costs of hazardous waste are
considered by decision makers before the government has committed to the
operation creating the waste. 3

Results in Brief The federal government is legally required to clean up
hazardous wastes that result from its operations. Although these cleanup
costs represent the

third largest category of federal liabilities, they are not usually
addressed until many years after the government has committed to the
operation creating the waste. Under current budget guidance, agencies
include in their budget request for a given year only the funds they
expect to obligate

for cleanup during that budget year. As a result, at the time decisions
are being made, the full costs of a program that will have cleanup costs
are not recognized in the budget, nor are estimates of these future costs
provided elsewhere in budget documents. The budget does not provide
policymakers the information to compare the full costs of certain programs
with their judgment of benefits.

Once waste- producing assets are acquired and placed into service,
agencies must estimate and report in their financial statements the
environmental liabilities associated with both retired assets and those
that are currently being used in support of federal programs and
activities. 4 About 98 percent of the $307 billion in environmental
liabilities that was

reported in fiscal year 2001 financial statements was associated with the
3 We recently issued a report that provides a broad overview of various
program activities, such as environmental liabilities, that may expose the
government to future spending. See U. S. General Accounting Office, Fiscal
Exposures: Improving the Budgetary Focus on Long- Term Costs and
Uncertainties, GAO- 03- 213 (Washington, D. C.: Jan. 24, 2003).

4 These retired assets include such things as excess facilities at the
Savannah River Site in South Carolina and the Presidio military base in
California.

Page 3 GAO- 03- 219 Budgeting for Environmental Liabilities

departments of Energy and Defense. Estimates of disposal and cleanup costs
for new assets are not, however, routinely estimated before making the
commitment to purchase the asset. Given the large number of years that
frequently occur between acquisition and cleanup, estimates for new assets
are likely to change during that period for a variety of reasons,
including changes over time in technology and regulatory standards. This,
however, is also true to some degree when agencies estimate cleanup costs

at the end of asset lives when they begin to request funding for the
cleanup. While cleanup cost estimates made before committing to purchase
an asset would need to be periodically reassessed, they would provide more
information than is currently provided.

Alternative approaches exist to promote more complete consideration of the
full costs of environmental cleanup and disposal associated with the
acquisition of new assets. They fall along a continuum representing the
degree of certainty that the costs will be considered in decision making.
At one end of the continuum, the government could increase awareness of
full costs by reporting the long- term environmental liability costs
associated with new assets as supplemental information along side budget
authority

and outlay figures in the budget. While this puts it closer to the budget
numbers than would a separate report, there is no assurance that this
information will be considered in budget decision making. However, it will
help ensure that information is generated and made more transparent.
Alternatively, budget process mechanisms could be established to require

explicit disclosure and prompt consideration of the full costs of
environmental liabilities associated with a proposed asset acquisition.
For example, Congress could revise its rules to permit a point of order
against legislation that does not disclose estimates for environmental
liabilities associated with the acquisition of new assets to be funded in
the bill. Such a process mechanism might increase attention paid to these
costs even though they would not actually require funding until far into
the future. Finally, it is generally assumed that costs included in
primary budget data receive the most attention. 5 At this end of the
continuum, budget authority needed for environmental cleanup for new
assets could be accrued in the budget. OMB is currently working on a
proposal along these lines. It is important to note that this approach
would not change the costs of future cleanup* these have already been
created by the decision to acquire the

5 In this report, primary budget data refers to budget authority,
obligations, outlays, and the deficit/ surplus.

Page 4 GAO- 03- 219 Budgeting for Environmental Liabilities

asset. Rather, it would only shift the timing of when the costs are
recognized.

No proposal can be viewed independently of associated implementation and
estimation issues. For example, clear definitions for hazardous waste need
to be developed as well as mechanisms for dealing with the inevitable cost
reestimates. As a first step, OMB should require supplemental reporting in
the budget to disclose future environmental cleanup/ disposal costs for
new acquisitions. Also, OMB should discuss with Congress how best to make
the information useful to congressional decision makers. Thus, even if the
ultimate goal would be to include cleanup costs in budget authority
requests for new assets, implementation and estimation challenges may
suggest starting with the supplemental information approach.

Background Historically, federal outlays and receipts generally have been
reported on a cash basis. That is, receipts are recorded when received and
outlays are

recorded when paid without regard to the period in which the taxes and
fees were assessed or the costs resulting in the outlay were incurred.
This has an advantage in that the deficit (or surplus) closely
approximates the cash borrowing needs (or cash in excess of immediate
needs) of the government. 6 However, over the years analysts and
researchers have raised concerns that the current cash- and obligation-
based budget does

not adequately reflect the cost of some programs* such as federal credit
or insurance* in which the government makes a commitment now to incur a
cost, but some or most of the cash flows come much later. This means that

for some programs the current cash- and obligation- based budget does not
recognize the full costs up front when decisions are made or provide
policymakers the information to compare the full costs of a proposal with

their judgment of its benefits. Programs such as federal employee
pensions, retiree health care, and environmental liabilities are examples
where the cash basis of accounting does not represent the government*s
full commitments.

6 Minor exceptions to this include changes in the Department of the
Treasury*s cash balances, outstanding payment obligations, and net
disbursements by the government*s loan guarantee and direct loan accounts.

Page 5 GAO- 03- 219 Budgeting for Environmental Liabilities

Environmental liabilities are the result of federal operations that create
hazardous waste that federal, state, or local laws and/ or regulations
require the federal government to clean up. Because these cleanup costs
are not usually paid until many years after the government has committed
to the operation creating the waste, policymakers have not been provided
complete cost information when making decisions about undertaking the
waste- creating operation. Although all agencies are not yet in
compliance, current federal accounting standards require agencies to
estimate and

report in their financial statements their liability for cleanup costs
when they are deemed probable and measurable. Traditionally, budget
guidance has required agencies to estimate the funds expected to be
obligated for cleanup activities during the budget year in which the funds
are needed. 7 However, in recent years OMB also has issued guidance for
agencies to

estimate life- cycle costs when purchasing capital assets. Among the items
to be included in the total amount of these life- cycle costs are
decommissioning and disposal costs. The life- cycle cost estimates are
reported to OMB in budget Exhibit 300 and do not separately break out
cleanup and disposal costs. The exhibits are for OMB*s informational
purposes only; they are not included in the President*s budget request or
agency*s budget justification provided to Congress. Department of Energy
(DOE) and Department of Defense (DOD) officials told us that the cleanup
portion of these total costs has traditionally not been separated out or
identified at the time of purchase. This is because estimates developed at
that time were very preliminary, often based only on a percentage of total
costs rather than specific unit costs.

Objectives, Scope, and Methodology

To examine ways that budgeting might be improved for environmental
liabilities, we focused on three key questions: (1) What are the federal
government*s reported environmental liabilities? (2) How are environmental
liabilities currently valued for financial statements and budgeted at
selected programs within DOD and DOE? and (3) How could budgeting for
these environmental liabilities be improved?

To determine the federal government*s reported environmental liabilities,
we extracted data from agencies* fiscal year 2001 consolidated balance

7 OMB Circular A- 11 refers to a 1978 Executive Order that requires
agencies to prepare annual cost estimates for the control of environmental
pollution and to ensure that sufficient funds for compliance with
applicable pollution control standards are requested in the agency budget.

Page 6 GAO- 03- 219 Budgeting for Environmental Liabilities

sheets. Because this analysis showed that about 98 percent of the
government*s reported environmental liabilities were associated with DOD
and DOE, we focused our review on the practices of these two departments.
We reviewed published reports, related guidance, and budget and financial
statement documentation from each agency. We also interviewed DOD, DOE,
and OMB staff to discuss current budget practices.

To develop alternative approaches to improve budgeting for environmental
liabilities, we discussed ideas with staff from DOD, DOE, OMB, and CBO. We
also met with appropriations subcommittee staff with jurisdiction over DOD
and DOE to discuss the type of information that they would find most
helpful. We analyzed the pros and cons of the approaches based on the
extent to which they would (1) provide meaningful, full- cost information
to decision makers up front, (2) provide disincentives for artificially
low cost estimates, and (3) present implementation issues, such as
additional administrative burdens for agencies or increased complexity to
the budget and appropriations process. Finally, to understand how private
organizations provide for environmental cleanup, we conducted limited
research of private sector budgeting practices. However, little
information was available about up- front decision making.

Our work was done in Washington, D. C., in accordance with generally
accepted government auditing standards. We provided a draft of this report
to the Secretary of Defense, the Secretary of Energy, and the Director of
OMB. Comments are summarized in the *Agency Comments* section.

Page 7 GAO- 03- 219 Budgeting for Environmental Liabilities

Environmental Liabilities Largely Associated with Defense and Energy

Nearly all of the $307 billion in environmental liabilities reported for
fiscal year 2001 was associated with DOD and DOE. About 78 percent of
these liabilities were associated with DOE and represent the environmental
legacy resulting from the production of nuclear weapons. The 21 percent
associated with DOD is primarily for environmental restoration of military
installations and disposal of nuclear materials. 8 The remaining
environmental liabilities associated with other federal agencies include
such things as replacement of underground storage tanks, asbestos removal,
and lead abatement. Some of this remaining 1 percent will be paid

out of Treasury*s judgment fund. 9 DOD and DOE manage environmental
cleanup quite differently: DOD*s decentralized activities are managed
within the individual services, at the program level, while DOE*s
activities are centralized within its Environmental Management (EM)
program. For example, DOD considers environmental liabilities in two
categories: (1) disposal and (2) environmental restoration/ cleanup.
Army*s chemical weapons and Navy*s nuclear- powered carriers, ships, and
submarines dominate DOD*s

disposal liabilities. Funding for disposal is provided to the Army, Navy,
and Air Force Operation and Maintenance (O& M) accounts. Restoration/
cleanup activities are largely addressed through the Defense Environmental
Restoration Program (DERP), which is funded through five environmental
restoration accounts for Army, Navy, Air Force, Formerly Used Defense
Sites (FUDS), and Defense- wide. The funds in these accounts are then
transferred to the service levels* O& M budgets. In contrast, within DOE,
facilities that have reached the end of their useful lives and require
cleanup typically are transferred to EM, along with some

additional funds for surveillance and maintenance. EM also receives budget
authority directly through an appropriation. Thus, budgeting and funding
for cleanup is almost entirely handled by EM, not individual

program offices. EM*s program emphasis is on site closure and project
completion. Its activities include environmental restoration, waste
management, and nuclear material and facility stabilization. Figures 1 and
2 illustrate the flow of cleanup funds for these two departments.

8 Auditors were not able to render an opinion on DOD*s fiscal year 2001
financial statements, in part because of DOD*s inability to comply with
requirements for environmental liabilities. Thus, the $63 billion
liability associated with DOD is not known to be a reliable figure. 9
Treasury*s judgment fund has permanent, indefinite budget authority.

Page 8 GAO- 03- 219 Budgeting for Environmental Liabilities

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

a In some instances, funds may be transferred to other accounts, such as
military construction or procurement, for similar cleanup purposes. b
Although the Army, as executive agent, receives funding from the FUDS DERP
account, the sites in

FUDS may have been owned by any of the services. c Includes the Defense
Logistics Agency, Defense Threat Reduction Agency, and Deputy

Undersecretary of Defense (Installations & Environment).

Page 9 GAO- 03- 219 Budgeting for Environmental Liabilities

Figure 2: Flow of Cleanup Funds for DOE

a May also receive additional surveillance and monitoring funds from
program offices and power administrations.

Current Budget Information Does Not Include Environmental Liabilities
Before Acquisition

Current budget guidance and accounting standards both require agencies to
estimate cleanup and disposal costs. However, neither requires that these
costs be separately estimated for decisions when assets are being
considered for purchase* before the government is legally committed to
paying these costs. While information about private sector decision making
on these costs is limited, at least some organizations set aside funds to
address these future cleanup and disposal costs.

Page 10 GAO- 03- 219 Budgeting for Environmental Liabilities

Agencies have little or no budgetary incentive to develop estimates of
future cleanup costs. With respect to primary budget data, agencies do not
reflect associated cleanup costs in their budget requests for new
wasteproducing assets. Funding for such cleanup costs is not requested
until many years later when the waste produced is ready to be cleaned up
or disposed of. Budget guidance does require agencies to estimate cleanup

costs as part of total life- cycle costs when requesting funds for new
assets. However, agencies are not required to specifically break out the
cleanup portion of these costs. 10 DOD and DOE officials told us that
separating out the cleanup/ disposal component from total life- cycle
costs would be relatively difficult because their estimates of cleanup
costs are very preliminary. Often, a percentage of the purchase price
instead of a specific unit cost is used as the cost estimate. Moreover,
they noted that future,

unknown changes in regulatory requirements and technology make it
difficult to develop what they believe to be reasonable and credible cost
estimates at the time an asset is acquired. However, since estimates for
retiring assets are being made under today*s regulatory requirements and
technology, the same methodology might be used for preliminary estimates
with respect to new assets. This would permit comparisons between or
across different assets. Over time, as laws and technology change,
periodic cleanup cost reestimates could be made. Clear definitions for
hazardous substances also may need to be resolved to ensure that
reasonable estimates are developed. For example, the Federal Accounting
Standards

Advisory Board (FASAB) defines hazardous wastes in relatively broad terms
(see footnote 1) for accounting purposes. However, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA),
which requires the cleanup of waste sites, provides a substantially more
detailed definition.

10 DOD and DOE do provide cleanup cost information in various reports that
are available to policymakers. For example, DOD provides an annual report
to Congress on the progress and accomplishments of DERP. DOE periodically
reports on the status of the EM program*s life- cycle cost and schedule
estimates for completing cleanup. While the information in

these reports may inform future budget planning, it does not include
cleanup cost estimates for assets being proposed for purchase.

Page 11 GAO- 03- 219 Budgeting for Environmental Liabilities

While accounting standards promote an earlier recognition of environmental
liabilities than does the budget, they do not call for estimates of
environmental liabilities before an acquisition decision is made because
they recognize these cleanup costs only after a transaction has occurred
and an asset is put into service. 11 Given that these conditions are met,
agencies must estimate the environmental liabilities associated with all
existing assets. Despite this, not all agencies comply with accounting
standard requirements to estimate the environmental liabilities associated
with all of their assets. For example, DOD typically records the
liabilities associated with assets for which cleanup or disposal is
imminent. DOD*s inability to comply with requirements for environmental
liabilities was one of several reasons why independent auditors were not
able to render an opinion about DOD*s fiscal year 2001 financial
statements. Absent budgetary incentives to estimate future environmental
liabilities,

these cost estimates will not be developed as assets are considered for
purchase* the time when decision makers still have an opportunity to judge
whether the government should commit to these costs. 11 Accounting
standards require that a liability be recognized (i. e., estimated) when a
past

transaction or event has occurred, a future outflow or other sacrifice of
resources is probable, and the future outflow or sacrifice of resources is
measurable.

Page 12 GAO- 03- 219 Budgeting for Environmental Liabilities

Data about how non- federal organizations consider environmental
liabilities when planning to purchase assets or start new projects were
largely unavailable. However, there are cases where companies set aside
funds for future cleanup costs. For example, the Nuclear Regulatory
Commission (NRC) requires private utilities to accumulate the funds

necessary to decommission their nuclear power plants and most established
sinking funds so that the decommissioning funds are accumulated over the
operational life of a nuclear power plant as part of the cost charged to
customers for the electricity they use. With the deregulation of electric
utilities and the resultant industry restructuring, we

recently reported that in most of the requests to transfer licenses to own
or operate nuclear power plants approved by NRC, the financial
arrangements have either maintained or enhanced the assurance that
adequate funds will be available to decommission those plants. 12 For
example, projected decommissioning funds were generally prepaid by the
selling utility. Also,

an Environmental Protection Agency contracted study recommended that a
Canadian hydroelectric company establish a liability fund to accumulate
funds to finance asset removal, decommissioning, irradiated fuel disposal,
and low- to- intermediate radioactive waste disposal. 13 Alternative

Approaches to Consider Environmental Liabilities

Alternative approaches to promote more complete consideration of the full
costs of environmental cleanup and disposal associated with the
acquisition of new assets fall along a continuum from provision of
supplemental information to accrual of those costs in budget authority up

front, as assets are acquired. We explored three approaches along this
continuum ranging from the relatively simple one of providing more
information but making little other change to current budgeting, to a more
complicated one involving significant changes to what is included in
primary budget data. The approaches along this continuum represent the
degree of certainty that the costs will be considered in decision making.
Figure 3 summarizes the three approaches along the continuum.

12 U. S. General Accounting Office, Nuclear Regulation: NRC*s Assurances
of Decommissioning Funding During Utility Restructuring Could Be Improved,
GAO- 02- 48 (Washington, D. C.: Dec. 3, 2001).

13 ICF Incorporated, *Full Cost Accounting* for Decision Making at Ontario
Hydro: A Case Study (Mar. 22, 1996).

Page 13 GAO- 03- 219 Budgeting for Environmental Liabilities

Figure 3: Continuum of Alternative Approaches to Improve Budgeting for
Environmental Liabilities

The first approach would be to report long- term environmental liability
costs associated with new assets as supplemental information along with
the budget authority and outlay amounts requested in the budget. For
example, the program and financing schedules within the President*s budget
appendix could be expanded to report these associated costs by budget
account or program. This would enable those being asked to make a decision
to see the full cost information along with currently requested funds.
Although the estimates provided in the supplemental information would not
be precisely correct, they would clearly be closer to correct than the
current implication of no cost. If a running tally of total environmental
liabilities is desired, periodic reestimates would be needed.

A second approach would move beyond providing supplemental information to
establishing budget process mechanisms to require explicit disclosure and
prompt consideration of the full costs of the environmental liability
associated with a proposed asset acquisition. Thus, Congress could revise
its rules to permit a point of order against legislation that does not
disclose estimates for environmental liabilities associated with the
acquisition of new assets to be funded in the bill. This would have the
effect of requiring cleanup cost estimates to be made, either by the
executive branch or CBO, so that the estimates could be considered.

Page 14 GAO- 03- 219 Budgeting for Environmental Liabilities

At the other end of the continuum is the more comprehensive approach of
accruing amounts for environmental liabilities associated with new assets
in any requested budget authority for new assets. 14 This approach
represents the largest departure from current budgeting practices. Along
these lines, OMB is developing a legislative proposal to require programs
that generate hazardous waste to *pay the accruing cost to clean up
contaminated assets at the end of their useful life. These payments would

go to funds responsible for the cleanup.* 15 Implementation of an approach
that would include budget authority for environmental liabilities would
require development of new budgeting mechanisms. The provision to
accumulate budget authority over an asset*s life would require a means of
*fencing off* the budget authority to ensure that it is actually used for
cleanup. Also, since no such amounts were set aside for existing assets,
it would be necessary to continue financing the cleanup of existing assets
while implementing the new approach for new assets. One way to do this is
to use a pair of accounts* a liquidating account and a cleanup fund
account* in each department involved in budgeting for the cleanup costs.
The liquidating account would obtain discretionary budget authority for
the past share of cleanup costs of assets already in operation and for the
cleanup costs of retired assets. It would pay the past share of cleanup
costs for operating assets to the cleanup fund

and would conduct or contract for the cleanup of assets no longer in use
at the inception of this new approach. Given technological and other
changes, regular reestimates of cleanup costs would be necessary. 14
Rather than accruing budget authority over time, the full amount for
cleanup could be

enacted at the time an asset is acquired. However, this would immediately
insert the total highly uncertain cleanup cost estimate into the budget.

15 Office of Management and Budget, Analytical Perspectives, Budget of the
United States Government, Fiscal Year 2003 (Washington, D. C.: Feb. 4,
2002), 12.

Page 15 GAO- 03- 219 Budgeting for Environmental Liabilities

The cleanup fund account would obtain budget authority from two sources:
(1) from the liquidating account for the past share of the cleanup cost
for assets that are in operation when the new approach is established and
(2) for new assets, from programs that operate assets that generate

cleanup needs. The cleanup fund account would receive annual accruing cost
payments from programs based on the estimated (and reestimated) cost of
cleanup for all operating assets* those purchased after the new approach
is implemented and those already in service. These payments would be a
required part of the discretionary appropriations for running any program
that generates cleanup costs. When needed, the cleanup fund accounts could
also request additional budget authority for the assets in

operation at its inception. These appropriations could be made to the
liquidating account and paid to the cleanup fund account when the assets
are ready for cleanup. Once in the cleanup fund account, the budget
authority from the programs and liquidating accounts could be permanent,
indefinite authority available for cleanup, subject only to the usual
apportionment process. 16 Figure 4 below illustrates one possible flow of
funds through accounts.

16 Any successor reform to the Balanced Budget and Emergency Deficit
Control Act of 1985 would need to recognize this change.

Page 16 GAO- 03- 219 Budgeting for Environmental Liabilities

Figure 4: Possible Flow of Funds through Accounts

Page 17 GAO- 03- 219 Budgeting for Environmental Liabilities

Each Approach Has Potential Benefits and Challenges

Each of the three approaches described offer both potential benefits and
challenges to consider. All three would be likely to improve the quality
of cleanup estimates. Although agencies are required to develop these

estimates for financial statement purposes, they are not developed until
after the asset is purchased. Also, not all agencies have completely
complied with financial accounting standards. For example, in December

2001, we reported that DOD was not estimating and reporting liabilities
associated with a significant portion of property, plant, and equipment
that was no longer being used in its operations. 17 Moreover, DOD*s
financial statements did not provide cleanup cost information on all of
its closed or inactive operations known to result in hazardous wastes. In
addition, in 1997 and 1998 we issued a series of reports on DOD
environmental liabilities that were not being reported, even though they
could be reasonably estimated. 18

Each of the three approaches would result in decision makers having
information about costs and benefits of a proposed acquisition while there
is still the opportunity to make a choice* before the government actually
incurs an environmental liability. Since the cleanup costs for any asset
will become a future claim on federal resources regardless of whether
these

costs were considered at the outset, good budgeting principles call for
upfront consideration of these costs. Given that agencies are not
currently experienced in separately estimating cleanup/ disposal costs
before assets are purchased, reasonable and credible estimates may take
time to develop. This, however, is not an insurmountable issue. We have
reported on numerous occasions that environmental liabilities can be
estimated and have pointed out how estimation methodologies can be
improved. For example, in December 2001 we recommended that, among other
things, DOD correct real property records, develop and implement standard
methodologies for estimating related cleanup costs, and systematically

17 See U. S. General Accounting Office, Environmental Liabilities: Cleanup
Costs From Certain DOD Operations Are Not Being Reported, GAO- 02- 117
(Washington, D. C.: Dec. 14, 2001).

18 See U. S. General Accounting Office, Financial Management: DOD*s
Liability for Missile Disposal Can Be Estimated, GAO/ AIMD- 98- 50R
(Washington, D. C.: Jan. 7, 1998); Financial Management: DOD*s Liability
for the Disposal of Conventional Ammunition Can Be

Estimated, GAO/ AIMD- 98- 32 (Washington, D. C.: Dec. 19, 1997); and
Financial Management: DOD*s Liability for Aircraft Disposal Can Be
Estimated, GAO/ AIMD- 98- 9 (Washington, D. C.: Nov. 20, 1997).

Page 18 GAO- 03- 219 Budgeting for Environmental Liabilities

accumulate and maintain the site inventory and cost information needed to
report this liability.

Of the three approaches described, the supplemental information and the
budget process mechanism approaches would be easiest to implement and
could be done separately or together. Neither requires the enactment of
budget authority and so would not increase reported budget totals.
Supplemental reporting requirements would be the easiest to implement
since OMB could require it under OMB*s current authority. However, unless
agencies see that the new supplemental information is used in decision
making, they may have less incentive to develop meaningful estimates. The
budget process mechanism approach would increase the

perceived importance of these estimates by permitting a point of order
that could block legislation lacking appropriate cost information. For
example, unfunded mandates legislation permits a point of order to be
raised against proposed legislation containing significant
intergovernmental mandates if a CBO estimate of the cost of the mandate
has not been published in the committee report or the Congressional
Record. 19 Unlike supplemental reporting alone, the budget mechanism
approach has the potential to promote improved estimates because it could
present members an opportunity to challenge legislation without
appropriate cost information. Implementing a budget process approach with
a point of order would require an amendment either to the Congressional
Budget Act of 1974 or a change to committee rules.

The third approach, accruing budget authority over the life of the asset,
represents the largest departure from current budgeting practices. By
requiring that agencies obtain budget authority before acquiring new
assets, this approach would ensure consideration of environmental cleanup
costs before an asset is acquired. Such an approach would require
legislation. If Congress and the Administration agree to take such action,
it would ensure that each program*s costs are fully reflected in program
budgets. Requiring that agencies accrue budget authority for cleanup costs
would likely increase the attention paid to improving the quality of
estimates. All in all, given the current quality of agency estimates and
significant implementation issues, such an approach may best be viewed as
something to be considered in the future. 19 Unfunded Mandate Reform Act
of 1995, Pub. L. No. 104- 4, S:423.

Page 19 GAO- 03- 219 Budgeting for Environmental Liabilities

Beyond the issue of developing reasonable and credible estimates early on,
this third approach also would present administrative and structural
challenges such as developing mechanisms to ensure that (1) budget
authority provided for cleanup is adequately fenced off for cleanup, (2)
agencies adequately track and manage that budget authority, and 3)
reestimates provide positive incentives to reflect the best approximation

of the government*s total environmental liabilities. When demand for
current funding is great, fencing off budget authority for future use can
be a challenge. One way to address this would be to have payments into the
cleanup fund come from discretionary appropriations, but once in the fund,
the budget authority would become permanent, subject only to the usual
apportionment process. 20 Providing higher levels of budget authority now
for expenses that may not be paid until well into the future may be
difficult. It is important to note that this approach would not in fact
change the costs

of future cleanups* in effect these have already been determined by the
decision to acquire the asset. Rather, this would only shift the timing of
their recognition.

Ensuring that agencies adequately track and manage the earmarked budget
authority would be a second challenge to successful implementation of this
approach. For example, there is more than one way to manage the budget
authority needed to clean up assets already in operation at the inception
of the new approach. One way would be to transfer budget authority from a
liquidating account to a cleanup fund for such assets when they are ready
to be cleaned up. Alternatively, the full amount of budget authority for
the past share of the cleanup cost could be enacted in one lump sum for
the cleanup fund. This would simplify implementation since it would apply
the new accrual concept fully to all assets in operation. Since this could
be a considered a concept change, any discretionary caps on budget
authority (if renewed) would be adjusted upward to accommodate the
additional budget authority* but it would still increase reported budget
authority totals. 21 Some believe that covering all of the costs
immediately would be a 20 Discretionary budget authority is provided in
appropriations acts. Permanent budget

authority is available as the result of previously enacted legislation and
does not require new legislation for the current year. Apportionment is
the action by which OMB distributes amounts available for obligation, by
specific time periods (usually quarters), activities, projects, objects,
or a combination thereof. The amounts apportioned limit the amount of
obligations that may be incurred.

21 An increase in budget authority totals alone would not affect the
deficit/ surplus measure because that calculation is based on the
difference between total federal revenues and spending in a given year.

Page 20 GAO- 03- 219 Budgeting for Environmental Liabilities

cleaner, more consistent application of full costing since it would
eliminate a lengthy and possibly confusing transition period. However,
such a decision to provide budget authority for retired assets could shift
the control over the timing of the cleanup from Congress to the
Administration. Finally, a way to budget for inevitable reestimates of
cleanup costs would

have to be designed. If agencies must obtain additional budget authority
for these reestimates, they will have less incentive to make artificially
low initial estimates but may be reluctant to provide upward reestimates.
On the other hand, one could envision agencies forwarding a low estimate

*today* with the idea that they could worry about *tomorrow* later.
Alternatively, reestimates could be handled as they are with credit
programs, that is, agencies could automatically receive permanent,
indefinite budget authority for upward reestimates of cleanup costs. This
would hold agencies harmless for additional costs that result from
technological or regulatory changes. It would also, however, provide an
incentive to make artificially low initial estimates.

Conclusions Because the federal budget does not recognize the full costs
of a program that will have cleanup costs when decisions to commit to the
program are

being made, policymakers do not have sufficient information to compare the
full costs of a particular program with their judgment of its benefits.
Cleanup costs are in fact a liability associated with the ownership of
many assets. Decision makers need to consider these costs before
committing to acquire the waste- producing asset.

Agencies generally do not yet have experience in estimating future
cleanup/ disposal costs up front, before the decision to purchase the
wasteproducing asset is made. Accordingly, all of the alternative
approaches we discuss for providing this information represent a challenge
for both

agencies and OMB to develop an estimation methodology. Increasing the
visibility of cost estimates may increase the effort spent on them and
ultimately improve both the quality of the estimates and enhance decision
making. As a first step, we believe that OMB and agencies should provide
supplemental information. This can be expected to improve the focus and
attention and permit improvements in estimating models. As this proceeds,
further consideration should be given to budget process and budget

accounting changes. Ultimately, accruing budget authority for the tail-
end cleanup/ disposal costs along with the front- end purchase costs of
assets would best ensure that the cleanup/ disposal costs are considered
before

Page 21 GAO- 03- 219 Budgeting for Environmental Liabilities

the government incurs the liability, but raises significant implementation
challenges.

Recommendations for Executive Action

We recommend that the Director of OMB require supplemental reporting in
the budget to disclose future environmental cleanup/ disposal costs for
new acquisitions. To this end, agency and OMB officials should consult
with legislative branch officials to ensure that useful information on
estimated environmental cleanup/ disposal costs is provided to
congressional decision makers when requesting appropriations to acquire
waste- producing assets.

Agency Comments The Secretary of Defense had no comments on our draft
report. We did not receive comments from the Secretary of Energy in time
to be considered and included in this report. In consultation with OMB
staff, GAO was

commended for its useful analysis and noted that the ideas discussed merit
consideration. OMB staff also provided technical clarifications, which we
incorporated as appropriate.

As agreed with your office, unless you release this report earlier, we
will not distribute it until 30 days from the date of this letter. At that
time we will send copies to the Ranking Minority Member of the House
Committee on the Budget and the chairmen and ranking minority members of
the Senate Committee on the Budget; the subcommittees on Defense and on
Energy and Water Development, Senate Committee on Appropriations; and the
subcommittees on Defense and on Energy and Water Development, House
Committee on Appropriations. We are also sending copies to the

Director, Office of Management and Budget. In addition, we are sending
copies to the Secretary of Defense and of Energy. Copies will also be made
available to others upon request. In addition, the report is available at
no charge on GAO*s Web site at http:// www. gao. gov.

Page 22 GAO- 03- 219 Budgeting for Environmental Liabilities

This report was prepared under the direction of Christine Bonham,
Assistant Director, Strategic Issues, who may be reached at (202) 512-
9576. Other major contributors were Carol Henn and Brady Goldsmith. Please
contact me at (202) 512- 9142 if you or your staff have any questions
concerning the report.

Sincerely yours, Susan J. Irving Director Federal Budget Analyses
Strategic Issues

Page 23 GAO- 03- 219 Budgeting for Environmental Liabilities

Appendix I

Appendi xes Breakout of Environmental Liabilities Appendi x I

About a dozen federal agencies report environmental liabilities in their
financial statements. This appendix provides additional detail on the
environmental liabilities reported by the Department of Energy (DOE) and
the Department of Defense (DOD) and about those reported by the other
federal agencies. These data were extracted from agencies* fiscal year
2001 consolidated balance sheets and represent existing assets* not
proposed

acquisitions. Because DOD and the National Aeronautics and Space
Administration auditors disclaimed an opinion on their financial
statements, it is not certain that these amounts fairly present their
liabilities.

Table 1: Breakdown of DOE and DOD Federal Environmental Liabilities,
Fiscal Year 2001

Source: DOE and DOD. Note: Information was taken from DOE*s and DOD*s
fiscal year 2001 consolidated balance sheets and accompanying notes. a
Numbers do not add to total due to rounding. (Dollars in billions)

Agency Liability

DOE Closed nuclear weapons complexes $184 Active and surplus facilities*
other programs 31 High- level waste and spent nuclear fuel disposition 15
Other 8

Subtotal * DOE $238 DOD

Training range cleanup 2 Other cleanup sites 14 Formerly Used Defense
Sites 18 Base Realignment and Closure 5 Aircraft carriers/ submarines
disposal 11 Chemical weapons and other disposal 14

Subtotal * DOD a $ 63

Tot al a $302

Appendix I Breakout of Environmental Liabilities

Page 24 GAO- 03- 219 Budgeting for Environmental Liabilities

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

Source: GAO. Note: Data were taken from these agencies* consolidated
balance sheets and accompanying notes. Only agencies that reported
environmental liabilities in their fiscal year 2001 financial statements
are shown. (Dollars in millions)

Agency Liability Audit opinion Nature of liability

Department of Energy $238, 349 Unqualified Legacy resulting from the
production of nuclear weapons. Department of Defense 63, 294 Disclaimed
Contamination resulting from decades of training and preparing for

national defense. Department of Transportation 2, 178 Unqualified Cleanup
associated with normal Federal Aviation Administration, Coast

Guard, and Maritime Administration operations (e. g., storage tanks,
fuels, solvents, and chemicals) or the result of an accident. National
Aeronautics and Space Administration 1, 346 Disclaimed Groundwater,
surface water/ sediment, and ecological remediation and monitoring.

Tennessee Valley Authority 804 Unqualified Decommissioning of nuclear-
powered generating plants. Department of the Interior 268 Unqualified
Remediation of hazardous conditions and contamination caused by the

Department of the Interior and which exist on lands held by the
department. Department of Veterans Affairs 260 Unqualified Asbestos
removal, lead abatement, replacement of underground oil and

gasoline tanks, decommissioning of waste incinerators, and decontamination
of equipment prior to disposal.

General Services Administration 144 Unqualified Removal and containment of
environmental hazards in federal buildings. Department of Commerce 79
Unqualified Nuclear reactor, Pribiloff Island, and other cleanup.
Environmental Protection Agency (EPA) 15 Unqualified Cleanup of closed EPA
sites plus the decontamination and

decommissioning of EPA research facilities. Department of Health and Human
Services 13 Unqualified Removing, containing, and/ or disposing of (1)
hazardous waste from

property or (2) material and/ or property that consists of hazardous waste
at a permanent or temporary closure or shutdown of associated property,
plant, and equipment. Department of Justice 5 Unqualified Underground fuel
storage tank remediation, maintenance, and repair.

Total $306, 755

(450077)

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Service Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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