Environmental Liabilities: EPA Should Do More to Ensure That	 
Liable Parties Meet Their Cleanup Obligations (17-AUG-05,	 
GAO-05-658).							 
                                                                 
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.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-658 					        
    ACCNO:   A33339						        
  TITLE:     Environmental Liabilities: EPA Should Do More to Ensure  
That Liable Parties Meet Their Cleanup Obligations		 
     DATE:   08/17/2005 
  SUBJECT:   Bankruptcy 					 
	     Environmental law					 
	     Environmental monitoring				 
	     Hazardous substances				 
	     Liability (legal)					 
	     Regulatory agencies				 
	     Waste disposal					 
	     Waste management					 
	     Environmental cleanups				 
	     Government/business relations			 
	     Superfund Program					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-658

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

August 2005

ENVIRONMENTAL LIABILITIES

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

                                       a

GAO-05-658

[IMG]

August 2005

ENVIRONMENTAL LIABILITIES

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

  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.

United States Government Accountability Office

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

1 3 6

17

21

33 58 62 64

Appendixes

Appendix I: Appendix II:

Appendix III: Appendix IV: Objectives, Scope, and Methodology

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

Comments from the Environmental Protection Agency

GAO Comments

GAO Contact and Staff Acknowledgments

                                       66

                                       68

                                     69 77

                                       81

Related GAO Products

Tables   Table 1: Financial Assurance Mechanisms Generally Accepted by 
                                        EPA                                40 
             Table 2: Relative Financial Risk, Necessary Oversight and    
                     Enforcement Effort, and Costs of Financial Assurance 
                                     Mechanisms                            42 

Contents

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

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

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),1 which established the
Superfund program, require that parties statutorily responsible for
pollution bear the cost of cleaning up contaminated sites.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.3

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

2The 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.

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

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.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.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

4National 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).

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

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.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

6Courts 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.

participate in cleanup work at about 70 percent7 of the sites on the
Superfund National Priorities List (NPL), EPA's list of seriously
contaminated sites.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

7This 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.

8To 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.

remedies it considers most appropriate and performs the cleanups itself or
negotiates settlements with liable parties for them to finance and perform
cleanups.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.10 For fiscal year 2004, for example, EPA's Superfund
appropriation of $1.2 billion was from general revenue only.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.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.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,

9In 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.

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

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

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

13Of 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.

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.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.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.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.

14According 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.

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

16GAO-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.

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.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.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.

17While 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.

18The 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.

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 1997.19 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.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

19Using 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.

20Specifically, 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.

desirable.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.22 EPA regulations also require a
facility seeking a permit to provide financial assurances to cover any
corrective action responsibilities identified in the permit.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.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

2142 U.S.C. S: 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. S: 6924(t)(1).

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

2340 C.F.R. S: 264.101(b). See footnote 18.

24Financial 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).

agency issues under this program.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

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

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.26 Like many corporations, these "hybrids" can have any
number of investors (owners), and the investors may include partnerships,
corporations, individuals, and others.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.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

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

27Certain 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.

28The 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.

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. 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.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.31

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

30Environmental 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.

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

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.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.33 In many instances, applicable law on key questions is unsettled
and interpretations may vary among the circuits. For example,

32Bankruptcy 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.

33Bankruptcy 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.

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.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

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

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.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

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

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.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.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

36Fruit 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.

37Some 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.

allegedly pose an imminent threat to public health and safety.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.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.40 Consequently, it is too soon to know the extent to which this

38Specifically, 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.

39The 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.

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

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.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

41EPA 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.

calling attention to them.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.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.44

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

43Ibid.

44From 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.

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.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.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.

45For 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).

46524 U.S. 51 (1998).

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

Differing Statutory Goals and Program Complexities Present EPA with
Challenges

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.

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.47 As a result, cleanup costs may be shifted to the general
public, especially when the site has no other liable parties.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

47As 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, 86465 (4th Cir. 2001) (upholding state enforcement of RCRA
closure/post-closure financial assurance regulations against a party in
bankruptcy).

48At 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.

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 Circuit49-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.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.51

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

50Other 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).

51When 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.

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.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.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.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

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

53As 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.

54W.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.

from bankruptcy.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.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 In evaluating bankruptcy filings to determine
whether EPA should request

Bankruptcies Also Present EPA that the Justice Department pursue cases in
bankruptcy court, EPA faces

with Challenges	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:

o 	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

55W.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.

56According 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.

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.

o 	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.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.

o 	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

57EPA, 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).

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.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.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.

58According 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.

59Along 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.

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.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.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

60A lien is a claim against property for the payment of a debt or
obligation. 61Section 108(b)(1) of CERCLA.

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
metalplating 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.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.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.64 The law
requires EPA to give priority in developing these requirements to those

62RCRA'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 thirdparty liability insurance,
but these policies only cover third-party bodily injury and property
damage from hazardous releases, not the actual cleanup costs.

63In 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.

64The 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.

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.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

65The 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.

wastes."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.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.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.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

66In 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.

67Our 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.

68Most 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).

69EPA, 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.

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.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.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

70In 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.

71In 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.

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.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.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

72As 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.

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

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).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

74The 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.

has acknowledged that its enforcement of financial assurances has been
inadequate and has initiated some actions to address this problem.

EPA Allows Companies to EPA has generally given companies significant
flexibility to choose the type Choose among Financial of financial
assurance mechanism they will use to demonstrate their ability Assurance
Mechanisms That to meet their obligations under the RCRA corrective action
and Superfund Carry Varying Degrees of programs. While the
closure/post-closure program has regulations Financial Risk to the
governing financial assurances, the corrective action and Superfund
Government, Rather Than Taking programs do not. EPA generally accepts the
same financial assurance into Account Information on the mechanisms in the
Superfund and RCRA corrective action programs as are Extent of Default
Risk That outlined in the RCRA closure/post-closure regulations. Under the
Companies May Pose 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
                                  Description

Corporate financial test	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.

Corporate guarantee	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.

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

Letter of credit	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.

Surety bond	A company may obtain a bond from an approved surety companya
guaranteeing that its obligations will be met.

Trust fund	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.

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

Financial assurance mechanisms vary in

o 	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;

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

o  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

Relative financial risk to the Oversight and enforcement effort Mechanism
government needed Cost to the company Corporate financial test 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.

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.

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.

Corporate High High Low

guarantee	Same issues as with the corporate Same issues as with the
corporate See discussion concerning the corporate financial test.
financial test. financial test.

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

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

(Continued From Previous Page)

Relative financial risk to the Oversight and enforcement effort Mechanism
government needed Cost to the company

Surety Low to moderate Low to moderate Moderate to high

Bond	Surety companies are required to pay Periodic monitoring is required
to Companies pay annual premiums to the amounts specified in the bonds
verify that the bond remains in force surety companies and generally are
upon receipt of demand letters by the and that the surety company is still
required to provide substantial cash

a

regulator. approved. collateral.

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

Source: GAO analysis.

aIn 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.

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.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:

75See 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.

o 	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.

o 	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.

o 	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.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.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

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

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

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 Officials78
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.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.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.

78The 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.

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

80CERCLA and RCRA both specifically authorize self-insurance as a form of
financial assurance. 42 U.S.C. S: 9608(b)(1); 42 U.S.C. S: 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.

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.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.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

81See footnote 77.
8240 C.F.R. Part 258, Subpart G.

regulatory requirements, which may delay recovery on the policy.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. 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

83Under 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. S:
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.

84See footnote 79.

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.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.

85EPA 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.

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.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

86For 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.

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:

o 	EPA has added financial assurances to its national enforcement
priorities beginning in fiscal year 2006.87

o 	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.

o 	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.

o 	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.

o 	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.

87EPA 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).

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

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

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.

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.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.

88Although 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.

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.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.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

89Section 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.

90EPA'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.

reimbursement may otherwise be difficult or impossible, the agency can
miss opportunities to have status as a secured creditor in bankruptcy

91

cases.

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
Superfundrelated 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.

91We 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.

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-toceiling 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 	To close gaps in financial assurance coverage that
expose the government to significant financial risk for costly
environmental cleanups, the EPA

Executive Action	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:

o 	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.

o 	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.

o 	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.

o 	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.

o 	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 	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

Our Evaluation	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 http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-3841 or [email protected]. 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.

John B. Stephenson Director, Natural Resources and Environment

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

Appendix I
Objectives, Scope, and Methodology

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.

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.

Appendix III

Comments from the Environmental Protection Agency

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

Appendix III
Comments from the Environmental
Protection Agency

Appendix III
Comments from the Environmental
Protection Agency

                                 See comment 1.

Appendix III
Comments from the Environmental
Protection Agency

See comment 2. Now on p. 50.

See comment 3.

See comment 4.

Appendix III
Comments from the Environmental
Protection Agency

                                 See comment 5.

                                 See comment 6.

                                 See comment 7.

Appendix III
Comments from the Environmental
Protection Agency

See comment 8. Now on p. 42.

Appendix III
Comments from the Environmental
Protection Agency

See comment 9.

See comment 10. Now on pp. 18 and 30.

See comment 11.

Appendix III
Comments from the Environmental
Protection Agency

                                  Appendix III
                        Comments from the Environmental
                               Protection Agency

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

GAO Comments 1.

2.

3.

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.

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.

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

Appendix III
Comments from the Environmental
Protection Agency

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 postclosure 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

Appendix III
Comments from the Environmental
Protection Agency

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

Appendix III
Comments from the Environmental
Protection Agency

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.

Appendix IV

                     GAO Contact and Staff Acknowledgments

GAO Contact John B. Stephenson, (202) 512-3841

Staff 	In addition to the individual named above, Christine Fishkin,
Assistant Director; Nancy Crothers; Richard Johnson; Les Mahagan; and
Susan

Acknowledgments 	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.

Related GAO Products

Superfund Program: Breakdown of Appropriations Data. GAO-04-787R.
Washington, D.C.: May 14, 2004.

Superfund Program: Updated Appropriation and Expenditure Data.

GAO-04-475R. Washington, D.C.: February 18, 2004.

Superfund Program: Current Status and Future Fiscal Challenges. GAO03-850.
Washington, D.C.: July 31, 2003.

Hazardous Materials: EPA's Cleanup of Asbestos in Libby, Montana, and
Related Actions to Address Asbestos-Contaminated Materials. GAO-03469.
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. 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. 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. GAO/RCED-97-238R. Washington, D.C.: September
24, 1997.

Superfund: Number of Potentially Responsible Parties at Superfund Sites Is
Difficult to Determine. GAO/RCED-96-75. Washington, D.C.: March 27, 1996.

Superfund: EPA Has Opportunities to Increase Recoveries of Costs.
GAO/RCED-94-196. Washington, D.C.: September 28, 1994.

Hazardous Waste: An Update on the Cost and Availability of Pollution
Insurance. GAO/PEMD-94-16. Washington, D.C.: April 5, 1994.

Superfund: More Settlement Authority and EPA Controls Could Increase Cost
Recovery. GAO/RCED-91-144. Washington, D.C.: July 18, 1991.

Related GAO Products

Hazardous Waste: Funding of Postclosure Liabilities Remains Uncertain.
GAO/RCED-90-64. Washington, D.C.: June 1, 1990.

Superfund: A More Vigorous and Better Managed Enforcement Program Is
Needed. GAO/RCED-90-22. Washington, D.C.: December 14, 1989.

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

GAO's Mission

Obtaining Copies of GAO Reports and Testimony

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone 	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Contact:

Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Gloria Jarmon, Managing Director, [email protected] (202)
512-4400Congressional U.S. Government Accountability Office, 441 G Street
NW, Room 7125 Relations Washington, D.C. 20548

Public Affairs 	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

                           PRINTED ON RECYCLED PAPER
*** End of document. ***