Environmental Liabilities: Long-Term Fiscal Planning Hampered by 
Control Weaknesses and Uncertainties in the Federal Government's 
Estimates (31-MAR-06, GAO-06-427).				 
                                                                 
The nation's military installations and nuclear weapons 	 
production facilities have accumulated many types of waste and	 
contamination over the years. The federal government estimated	 
its environmental liability to clean up this waste at $249	 
billion in fiscal year 2004, representing the federal		 
government's third largest reported liability. It represents a	 
significant future outflow of funds at the same time as many	 
other competing demands for federal dollars, but is currently not
auditable. GAO was asked to address (1) the nature and extent of 
the government's environmental liabilities, (2) the extent to	 
which Energy's and Defense's processes and controls were designed
to estimate and report environmental liabilities in accordance	 
with federal accounting standards, and (3) the nature and types  
of uncertainties that are currently not estimable but could	 
affect the cost of cleanup.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-427 					        
    ACCNO:   A50560						        
  TITLE:     Environmental Liabilities: Long-Term Fiscal Planning     
Hampered by Control Weaknesses and Uncertainties in the Federal  
Government's Estimates						 
     DATE:   03/31/2006 
  SUBJECT:   Environmental cleanups				 
	     Hazardous wastes					 
	     Internal controls					 
	     Liability of environmental damages 		 
	     Military facilities				 
	     Nuclear facilities 				 
	     Nuclear waste disposal				 
	     Radioactive waste disposal 			 
	     Financial analysis 				 
	     Cost estimates					 

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GAO-06-427

     

     * Report to Congressional Requesters
          * March 2006
     * ENVIRONMENTAL LIABILITIES
          * Long-Term Fiscal Planning Hampered by Control Weaknesses and
            Uncertainties in the Federal Government's Estimates
     * Contents
          * Results in Brief
          * Background
          * The Federal Government's Environmental Liabilities Are
            Significant, Widespread, and Complex
               * The Federal Government's Cleanup Responsibilities Are Vast
                 and Span the Nation
               * Cleanup Efforts Pose Diverse Challenges
          * Energy's Processes and Controls Allowed It to Produce Estimates
            in Accordance with Federal Accounting Standards; Defense's Did
            Not
               * Auditors Found Energy's Processes and Controls Sufficient to
                 Produce Reliable Environmental Liability Estimates in
                 Accordance with Federal Accounting Standards
               * Minor Improvements at Energy Would Help Enhance Reliability
                 of Estimates
               * Outdated and Incomplete Financial Management Guidance
                 Impeded Defense's Ability to Reliably Estimate Environmental
                 Liabilities
               * Defense's Existing Policies and Procedures for Determining,
                 Reporting, and Documenting Environmental Liability Estimates
                 Were Not Consistently Followed
               * Defense's Internal Controls Are Inadequate to Help Ensure
                 That All Cleanup Sites Are Included in the Environmental
                 Liability Estimate
          * Major Uncertainties Will Affect Future Cleanup Costs and Funding
            Demands
               * Remediation Technologies for Some Sites Are Nonexistent or
                 Uncertain
               * Regulatory Requirements and Legal Challenges Remain
                 Unresolved
               * Ability to Effectively Meet Current Cost and Schedule
                 Targets is Uncertain
               * Energy's and Defense's Financial Disclosures Acknowledge
                 Uncertainties, but Improvements Are Warranted
          * Conclusions
          * Recommendations For Executive Action
          * Agency Comments and Our Evaluation
     * Scope and Methodology
     * Comments from the Department of Defense
     * GAO Contact and Staff Acknowledgments
     * Related GAO Reports

Report to Congressional Requesters

March 2006

ENVIRONMENTAL LIABILITIES

Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties
in the Federal Government's Estimates

Contents

Tables

Figures

March 31, 2006Letter

The Honorable Todd R. Platts Chairman Subcommittee on Government
Management,   Finance, and Accountability Committee on Government Reform
House of Representatives

The Honorable Darrell E. Issa Chairman Subcommittee on Energy and
Resources Committee on Government Reform House of Representatives

The nation's military installations and nuclear weapons production
facilities have accumulated many types of waste and contamination over the
years. This material, which includes radioactive byproducts from nuclear
weapons production, nonradioactive but hazardous chemicals such as
polychlorinated biphenyls (PCB), and unexploded ordnance such as bombs and
missiles at military ranges, poses a potential threat to the public's
health and well-being.1 Various federal laws, agreements with states, and
court decisions require the government to clean up these environmental
hazards. Federal accounting standards require agencies responsible for
cleaning up this waste and contamination to estimate the cleanup and
disposal cost and report it in their financial statements as environmental
liabilities.2 In the federal government's fiscal year 2004 consolidated
financial statements, these environmental liabilities were estimated at
$249 billion-the third largest reported liability facing the

federal government.3 This amount is currently unauditable and likely
misstated given the problems we discuss later in this report with the
Department of Defense's (Defense) controls over its estimation processes.
Paying for this liability will require a significant future outflow of
funds at the same time that the federal government will be facing many
other competing demands for its limited dollars, such as escalating health
care costs and growing Social Security obligations.

Given that the inability to estimate total environmental liabilities has
contributed to our disclaimer of opinion on the U.S. government's
consolidated financial statements, and that the ultimate cost of cleanup
and disposal activities will affect the long-term fiscal outlook of the
federal government, you asked us to review the government's financial
reporting of its environmental liabilities.4 We focused our work on the
two federal agencies primarily responsible for those efforts-the
Department of Energy (Energy), which oversees the nation's nuclear weapons
facilities, and Defense, which oversees the nation's military
installations and weapons systems. Together, these two agencies comprised
99 percent of the cleanup and disposal cost estimates reported in the
federal government's fiscal year 2004 consolidated financial statements.
In response to your request, our report addresses

o the nature and extent of the environmental cleanup and disposal cost
liabilities as reported in the federal government's financial statements,

o the extent to which Energy's and Defense's processes and controls are
adequately designed to estimate and report environmental liabilities in
accordance with related federal accounting standards, and

o the nature and types of uncertainties that are currently not estimable
but could affect the ultimate cost of Energy's and Defense's environmental
cleanup efforts.

In performing our work, we focused our review on Energy's and Defense's
Performance and Accountability Reports for fiscal year 2004, the most
recent completed fiscal year at the time we began our review, to determine
what the agencies recorded and reported in their financial statements with
respect to their environmental liabilities.5 We interviewed Energy and
Defense officials, visited various sites, and reviewed policies and other
documentation to obtain a better understanding of each agency's cleanup
responsibilities and the cleanup and disposal issues being addressed by
each agency, their internal controls and procedures for developing their
environmental liability estimates, and the uncertainties that could affect
the ultimate cost of cleanup and disposal. In reviewing both agencies'
internal controls, we did not review or test detailed contractor estimates
but instead focused on each agency's procedures for compiling and
developing its environmental liability amounts.

Because an independent public accounting firm audited Energy's fiscal year
2004 financial statements and found them to be fairly stated, we reviewed
those statements, traced and verified environmental liabilities amounts to
supporting schedules, and reviewed audit workpapers where available. We
otherwise relied on the work performed by the independent auditors and did
not perform additional audit procedures to verify the completeness or
accuracy of the amounts reported. Because Defense has acknowledged serious
data reliability problems related to its financial systems and
information, including those involved in the reporting of its
environmental liabilities, auditors did not attempt to perform audit
procedures and disclaimed an opinion on Defense's fiscal year 2004
financial statements. Therefore, it was not our objective to-and we did
not-audit the completeness or accuracy of Defense's reported environmental
liabilities amounts. Although we have previously reported on the potential
for Defense to incur costs in voluntary restoration initiatives in
conjunction with returning overseas Defense facilities to host nations,
these activities are not reported as environmental liabilities in its
financial statements, and we did not review their international operations

or processes.6 Since Defense's reported amounts are not reliable, we are
providing them in this report for informational purposes only.

We also reviewed Energy's and Defense's fiscal year 2005 Performance and
Accountability Reports primarily to determine whether any significant new
issues had arisen subsequent to the issuance of the fiscal year 2004
financial statements. We performed our work from October 2004 through
January 2006 in accordance with generally accepted government auditing
standards. Appendix I provides further details on our scope and
methodology.

Results in Brief

The environmental liability amount reported in the federal government's
consolidated financial statements reflects an estimate of the cost to
clean up and dispose of environmental contamination in every state in the
nation. Of the $249 billion reported for fiscal year 2004, Energy's
recorded liability was $182 billion, the largest of any agency, and was
related primarily to the cleanup of nuclear waste and contamination at
about 50 Energy locations around the country. Over 40 percent of Energy's
total liability relates to cleanup at three locations in Washington, South
Carolina, and Idaho where most of the nation's nuclear weapons production
activities occurred during World War II and the subsequent Cold War. The
estimated cleanup costs relate to the treatment and disposal of millions
of gallons of radioactive byproducts from making plutonium and other
nuclear materials, decontamination and demolition of facilities used for
decades in nuclear materials production, and the cleanup of contaminated
soil and groundwater at these locations. Energy's recorded environmental
liabilities also include estimates for the future cleanup of its current,
or "active," facilities; long-term stewardship and monitoring at sites
after they are cleaned up; and disposal of high-level waste, used
("spent") nuclear fuel, and excess special nuclear material. The
radioactivity of most of Energy's waste makes its cleanup effort
technically difficult, costly, and subject to significant legal
challenges.

Defense's unaudited cleanup cost estimate, reported at $64 billion in
fiscal year 2004, accounted for the bulk of the government's remaining
reported environmental liability balance. Its cleanup responsibilities
include treatment and disposal of many types of hazardous wastes
associated with military operations; disposal of weapons systems including
nuclear ships and submarines; storage and disposal of highly toxic
chemical weapons such as nerve agents and sulfur mustard blister agents;
and environmental cleanup at military installations affected by base
realignment and closures. Defense has identified about 600 military
locations and over 1,700 formerly used defense locations requiring
remediation in all 50 states.

Energy's processes and internal controls over the financial reporting of
its environmental liabilities have enabled it to produce an estimate of
its environmental liabilities in accordance with federal accounting
standards for several years; however, Defense's have not. Key components
of Energy's environmental liability estimation process include the
issuance of internal control guidance to its field locations for the
development and annual update of environmental liability estimates,
independent reviews of selected projects, and establishment of a
requirement that project work scope changes and cost increases be approved
by a control board. Another key part of Energy's financial reporting
process is its "contingency estimate," which is used to take into account
the inherent uncertainties in estimating the cost of environmental cleanup
activities. Adding this component to the liability helped Energy achieve a
clean financial statement audit opinion in fiscal year 1999 and in
subsequent years.

In contrast, numerous weaknesses in the design of Defense's processes and
internal controls for estimating and reporting environmental liabilities
have precluded it from producing an auditable estimate of its
environmental liabilities. While some progress has been made over the
years, we found that (1) Defense's outdated and incomplete accounting
guidance for developing and reporting its environmental liabilities
estimates led to errors in financial reporting; (2) its policies and
procedures for determining, reporting, and documenting environmental
liability estimates were not consistently followed; and (3) none of the
military services had adequate controls in place to help ensure that all
identified contaminated sites were included in their reported
environmental liability estimates. These weaknesses not only impacted the
reliability of Defense's environmental liability estimate, but also that
of the federal government as a whole.

Even if Defense resolves all of its control deficiencies and reports cost
estimates that meet all federal accounting standards, nonquantifiable
uncertainties currently exist for both Energy and Defense that could
increase the eventual cost of the cleanup beyond the estimated amounts
recorded in the federal government's consolidated financial statements.
While not quantifiable, these, like the quantified environmental
liabilities, add to the fiscal exposures of the federal government and
will affect the long-term fiscal outlook. For example, various regulatory
requirements and legal challenges have caused multiple delays in the
licensing and design of the nation's planned high-level waste repository
at Yucca Mountain, Nevada, and many of the environmental liability cost
estimates are predicated upon Yucca Mountain opening and accepting this
waste by certain milestone dates. Further delays could cause construction,
interim storage, and other costs to increase, but Energy has not yet
committed to a new target date for opening the repository. These
uncertainties do not affect the auditability of the liability because
under current federal accounting standards a potential liability that
cannot be estimated but is considered at least reasonably possible to
occur is not required to be recorded, only disclosed. Both Energy and
Defense currently disclose these types of uncertainties in the notes to
their financial statements, although improvements in their disclosures are
warranted at both agencies.

Given these uncertainties and the extensive internal control weaknesses at
Defense, the ultimate cost and funding requirements of cleanup and
disposal of the federal government's environmental contamination cannot be
fully determined. Improving Defense's financial management processes and
controls are critical to ensuring that environmental liability estimates
are as reliable as possible under current circumstances. We are making
eight recommendations to Defense that, if properly implemented, will
improve internal controls at Defense to help ensure that its environmental
liabilities estimates are adequately supported and properly reported. We
are also making a recommendation to Energy to help improve disclosure in
the notes to the financial statements of uncertainties that could have a
significant impact on ultimate cleanup costs. We provided Energy and
Defense with a draft of applicable sections of this report for their
review and comment. We received verbal comments from Energy, and written
comments from Defense that are reprinted in appendix II. Each concurred
with the respective recommendations made to them and described the
corrective actions they were taking to address them.

Background

Federal agencies' responsibilities for environmental cleanup are set forth
in a number of different laws, regulations, and agreements. For example,
many of Energy's and Defense's cleanup activities are governed by the

Resource, Conservation, and Recovery Act of 1976, as amended,7 and the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended.8 Additionally, the Nuclear Waste Policy Act of 1982, as
amended,9 established a program for the development of a geologic
repository (a permanent deep disposal system) for disposing of high-level
radioactive waste and spent nuclear fuel; the Waste Isolation Pilot Plant
Land Withdrawal Act10 provided for the establishment of a repository for
transuranic wastes. Furthermore, 10 U.S.C. S:S: 2701-2709 established the
Defense Environmental Restoration Program to identify, investigate, and
clean up properties contaminated by Defense's activities. Table 1
describes the primary categories of waste and materials that the
government is faced with cleaning up.

Table 1: Primary Categories of Environmental Waste and Byproducts

                                        

          Type                              Description                       
Spent nuclear fuel Fuel elements and irradiated targets that have been     
                      removed from nuclear reactors. These spent fuels are    
                      highly radioactive and must be stored in special        
                      facilities that shield and cool the materials.          
High-level waste   Highly radioactive liquid left over when spent nuclear  
                      fuel is reprocessed to recover reusable uranium or      
                      plutonium. Most of Energy's high-level waste came from  
                      the production of plutonium. This designation is also   
                      applied to solids made when liquid high-level waste is  
                      treated. This waste typically contains highly           
                      radioactive, short-lived fission products as well as    
                      long-lived isotopes, hazardous chemicals, and toxic     
                      heavy metals. High-level waste must be isolated from    
                      the environment for thousands of years.                 
Transuranic waste  Waste contaminated with transuranic elements at a       
                      concentration higher than 100 nanocuries per gram. This 
                      includes soil and chemicals as well as contaminated     
                      tools, equipment, and clothing. Transuranic waste is    
                      generated during nuclear weapons production and other   
                      activities involving long-lived transuranic elements,   
                      such as plutonium. Some of these isotopes have          
                      half-lives of tens of thousands of years, thus          
                      requiring long-term isolation.                          
Low-level waste    Any radioactive waste that does not fall into one of    
                      the above categories regardless of content, activity    
                      level, or longevity. Most low-level waste contains      
                      small amounts of radioactivity in large volumes of      
                      material.                                               
Hazardous waste    Hazardous wastes are chemical wastes containing         
                      substances defined as hazardous by law. These are       
                      capable of causing illness, death, or some other harm   
                      to humans and other life forms when mismanaged or       
                      released into the environment.                          
Mixed waste        Waste that contains both radioactive and chemically     
                      hazardous materials. Some high-level, transuranic, and  
                      low-level wastes are also hazardous and thus are also   
                      considered mixed waste.                                 

Source: GAO.

In our report on major challenges facing the nation in the 21st century,
we pointed out that progress in cleaning up sites frequently does not meet
expected time frames and the costs dramatically exceed available funding
levels.11 Furthermore, the current approaches to cleaning up the various
sites are not consistent and, in some cases, not especially efficient or
effective. Such issues are some of the reasons we have designated aspects
of Energy's and Defense's operations as high-risk areas for the federal
government.12 We have also previously reported on shortcomings with the
federal budgeting process for environmental liabilities.13 Specifically,
we reported that because the federal budget is primarily calculated on a
cash basis, the full costs of a program that will have cleanup costs are
not recognized in the budget, nor are estimates of these future costs
provided elsewhere in budget documents. Consequently, the budget itself
does not provide policymakers the information to compare the full costs of
certain programs and thus, the long-term fiscal exposures. We have
previously suggested to the Congress that budget process mechanisms be
developed to prompt more deliberations about such fiscal exposures while
recognizing the uncertainty inherent in estimating some long-term costs.14

Meeting these cleanup responsibilities carries a financial cost, and
federal accounting standards require the costs associated with the federal
government's environmental cleanup responsibilities to be reported in the
respective agencies' financial statements as well as the federal
government's consolidated financial statements. The Federal Accounting
Standards Advisory Board's Statement of Federal Financial Accounting
Standards (SFFAS) No. 5, Accounting for Liabilities of the Federal
Government, requires the recognition of a liability when there has been a
past government-related event and there is both a probable and a
reasonably estimable future outflow or sacrifice of resources.15 If a
future outflow of resources is probable but the amount is not reasonably
estimable, then SFFAS No. 5 requires the disclosure of a liability in the
notes to the financial statements with a statement that the amount of the
liability cannot be estimated. If a future outflow of resources is not
considered probable but there is at least a reasonable possibility that a
loss or future expenditure may be incurred, SFFAS No. 5 requires
disclosure of the possible liability in the notes to the financial
statements. Table 2 explains in more detail the accounting criteria for
determining when to record a liability in the federal financial
statements, disclose it in the notes to the financial statements, or not
disclose it at all.16

Table 2: Accounting Requirements for Recording or Disclosing a Liability
in the Federal Financial Statements

                                        

                        Degree to which  
                          loss can be    
                            measured     
      Likelihood of     Loss amount can   Loss range can be   Loss amount or  
    future outflow or    be reasonably   reasonably measured range cannot be  
other sacrifice of       measured                            reasonably    
        resources                                                measured     
Probable: Future     Record a         Record a liability  Disclose nature  
confirming event(s)  liability        for best estimate   of liability and 
are more likely to   (reported on     or minimum amount   include a        
occur than not a     balance sheet    in loss range if    statement that   
                        and statement of there is no best    an estimate      
                        net cost)        estimate, and       cannot be made   
                                         disclose nature and 
                                         range of estimated  
                                         liability           
Reasonably           Disclose nature  Disclose nature of  Disclose nature  
possible:            of possible      possible liability  of possible      
Possibility of       liability and    and estimated loss  liability and    
future confirming    estimated loss   range               include a        
event(s) occurring   amount                               statement that   
is more than remote                                       an estimate      
and less than                                             cannot be made   
likely                                                    
Remote: Possibility  No disclosure    No disclosure       No disclosure    
of future event(s)                                        
occurring is slight                                       

Source: Statement of Federal Financial Accounting Standards, No. 5.

aFor liabilities related to litigation, probable is defined as a future
confirming event(s) that is likely to occur.

Federal agencies are also obligated to establish and maintain effective
internal control. We issue the standards for internal control in the
federal government, which provide the overall framework for establishing
and maintaining internal control and for identifying and addressing major
performance and management challenges and areas at greatest risk of fraud,
waste, abuse, and mismanagement.17 According to the standards, internal
control is an integral component of an organization's management that
provides reasonable assurance that agency objectives-such as the
reliability of financial reporting and the effectiveness and efficiency of
operations-are being met. These standards define the minimum level of
quality acceptable for internal control in government and provide the
basis against which internal control is to be evaluated.

The Federal Government's Environmental Liabilities Are Significant,
Widespread, and Complex

For fiscal year 2004, the estimated cost for environmental cleanup
reported in the federal government's consolidated financial statements was
$249.2 billion-the third largest reported liability. The government's
responsibility for cleanup extends to locations in every state of the
nation, with Energy and Defense showing marked differences in the nature
of these locations and the types of cleanup needed.18 Energy's liability
is primarily for the cleanup of waste resulting from the nation's nuclear
weapons complex, and the number of these locations is considerably fewer
than the locations for which Defense is responsible. Although concentrated
at fewer locations, the radioactivity associated with much of Energy's
cleanup work make the efforts technically difficult and costly. Defense's
liability is for contamination from current and past military activities
at over 2,300 locations across the country, creating difficult management
challenges. While cleanup at many of these locations may not carry the
same technical challenges as those associated with Energy's nuclear
cleanup responsibilities, some Defense locations have chemical weapons or
hazardous waste that carry considerable challenges of their own.

The Federal Government's Cleanup Responsibilities Are Vast and Span the
Nation

The federal government's reported environmental liability is an estimated
amount, stated in current dollars. As illustrated in figure 1, Energy and
Defense together made up $246 billion (99 percent) of the federal
government's total reported environmental liability at the end of fiscal
year 2004. The remaining $3 billion (1 percent) of the reported 2004
liability represented the estimated environmental cleanup costs of 12
other federal agencies, with the three largest being the Department of
Transportation ($1.1 billion), National Aeronautics and Space
Administration ($987 million), and the Department of Veterans Affairs
($339 million).

Figure 1: The Federal Government's Reported Fiscal Year 2004 Environmental
Liabilities by Agency

The size of the overall estimate makes the environmental liability amount
the third largest reported liability that the federal government faces,
behind federal debt securities held by the public with their related
accrued interest and federal employee and veteran benefits payable.19 As
such, management of the environmental liability represents one of the
federal government's major challenges from both financial and
environmental perspectives.

The majority of Energy's environmental liability, reported at $182 billion
as of September 30, 2004, comes from nuclear weapons production during
World War II and the Cold War. During this period, the United States built
a massive industrial complex to research, produce, and test nuclear
weapons. At all locations where these activities took place, environmental
contamination of buildings, soil, surface water, and groundwater occurred.
This environmental legacy of nuclear weapons production also produced
large volumes of radioactive and chemical waste requiring treatment,
stabilization, and disposal. Collectively, the waste remaining from the
development and production of nuclear weapons is referred to as legacy
waste. Energy is also responsible for stabilizing and disposing of waste
from ongoing operations at active facilities, such as at its national
laboratories, which carry out scientific research for national and defense
purposes.20 Additionally, Energy is tasked with disposing of radioactive
special nuclear materials and depleted uranium surplus from our national
defense needs, including the nation's surplus plutonium and highly
enriched uranium used in nuclear weapons. Energy has about 50 locations
nationwide for which it is responsible for cleaning up, stabilizing, and
disposing of hazardous and radioactive wastes and materials resulting from
past and current operations.21 Figure 2 shows major Energy locations where
legacy and active facility wastes require cleanup either currently or in
the future. Although Energy's legacy and active facility waste cleanup and
disposal locations are dispersed throughout the United States, over 40
percent of Energy's total environmental liabilities estimate pertains to
cleanup and related long-term monitoring at just three locations: Hanford
near Richland, Washington; Savannah River near Aiken, South Carolina; and
Idaho National Laboratory near Idaho Falls, Idaho.

Figure 2: Energy's Cleanup Locations and Waste Repositories as of
September 30, 2004

Note: Map locations not drawn to scale.

In contrast to Energy, Defense reports a need to clean up over 2,300
locations around the country. This includes about 600 current and base
realignment and closure (BRAC) military locations and over 1,700 formerly

used defense locations in every state in the country.22 Defense is
required to clean up contamination resulting from past and current waste
disposal practices, leaks, spills, and other activities that have created
a public health or environmental risk. Defense is also responsible for
costs of (1) closure and monitoring associated with the transportation,
storage, and disposal of hazardous wastes, (2) disposal of weapons systems
such as nuclear ships and submarines and their associated spent nuclear
fuel, (3) storage and disposal of highly toxic chemical weapons, and (4)
environmental cleanup related to base realignments and closures. As figure
3 shows, every state has at least one such Defense cleanup location, and
14 states have more than 100.

Figure 3: Number of Defense's Reported Cleanup Locations by State

Note: Map does not reflect the locations of chemical weapons and nuclear
ships and submarines. The number of states reflected in the legend
includes the District of Columbia.

Cleanup Efforts Pose Diverse Challenges

As shown in figure 4, about $130 billion (72 percent) of Energy's reported
fiscal year 2004 environmental liability relates primarily to the cleanup
and long-term stewardship of legacy waste at sites where weapons research,
production, and testing took place. By comparison, Energy's 2004 liability
for the estimated cost of cleaning up its active facilities when current
operations cease was only $30 billion, 17 percent of the total. Energy's
plan is to dispose of its high-level waste and spent nuclear fuel in a
deep geologic repository that will also be used for the disposal of such
waste from other federal agencies and commercial nuclear generators.
Energy's allocated share of the disposal cost at the repository is $15
billion, 8 percent of its reported environmental liability.23 The
remaining $6 billion, 3 percent of the liability, primarily relates to the
disposal of special nuclear material in excess of national defense needs.

Figure 4: Energy's Reported Fiscal Year 2004 Environmental Liabilities by
Type

Energy's cleanup and disposal efforts involve difficult and costly
technical challenges. The physical characteristics and radioactivity of
its wastes affect the handling requirements, treatment, and disposal
methods, and thus the cost of cleanup. For example, Energy's cleanup
efforts involve large amounts of radioactive waste from nuclear weapons
production. While the level of radioactivity varies, some waste-such as
waste contaminated with plutonium-will stay radioactive for thousands of
years. As a result, some wastes must be remotely handled with special
robotic machines sealed in heavily shielded rooms because they are too
dangerous for workers to physically handle. This further adds to the cost
of cleanup.

Figure 5: Waste Drum Being Opened and Contents Processed through a
Remote-Handled Waste Facility

Furthermore, Energy is developing and testing technologies and methods of
treatment for certain types of waste because there are currently no proven
methods for cleaning them up. As discussed later in this report, some of
these treatment methods have proved unsuccessful, requiring Energy to
pursue new methods. This lack of treatment technology means that the cost
to treat these wastes will likely increase. Also, the hazardous and
long-lived nature of much of Energy's waste has resulted in contention
between interested parties as to the best way and extent to which cleanup
should occur. As discussed later in this report, this has at times
resulted in legal challenges, which can also increase the extent and cost
of cleanup.

The Defense portion of the federal government's environmental liabilities
also poses significant challenges. Defense's environmental liabilities,
shown in figure 6, consist primarily of (1) hazardous waste disposal and
cleanup on training ranges, including removal of unexploded ordnance, (2)
disposal of nuclear ships and submarines, and (3) disposal of chemical
weapons. The "other" category includes cleanup of hazardous wastes (such
as petroleum products and PCBs) at military bases and formerly used
defense sites.

Figure 6: Defense's Reported Fiscal Year 2004 Environmental Liabilities by
Type

Although the technical processes for dealing with Defense's cleanup may be
more clearly defined and understood at this point than the processes for
dealing with some of Energy's cleanup of high-level radioactive wastes,
many of Defense's cleanup efforts are nonetheless significant and
challenging. Not only are Defense's cleanup efforts spread across the
nation, but estimating the future costs of disposing of nuclear ships and
submarines is complicated by the uncertainty surrounding the final
disposal location of spent nuclear fuel, as discussed more fully later in
this report. Further, Defense has responsibility for safeguarding the
environment and human life from the extreme risks inherent in storing the
nation's stockpile of deadly chemical weapons-including highly toxic nerve
agents and sulfur mustard blister agents-while working to develop
alternative methods for their disposal.

Energy's Processes and Controls Allowed It to Produce Estimates in
Accordance with Federal Accounting Standards; Defense's Did Not

Energy's processes and internal controls for developing its overall
environmental liability estimate have evolved and improved over time to
the point where, for fiscal years 1999 through 2004, its auditors
determined that the financial statements that reported the estimated
environmental liabilities were presented fairly and in accordance with
federal accounting principles.24 Key components of Energy's environmental
liability estimation process include the issuance of internal control
guidance to its field locations for the development and annual update of
environmental liability estimates; independent reviews of selected
projects; and establishment of a requirement that project work scope
changes and cost increases be approved by a control board. Another key
part of Energy's financial reporting process is its "contingency
estimate," which is used to take into account the inherent uncertainties
in estimating the cost of environmental cleanup activities. Adding this
component to the liability estimate helped Energy achieve a clean
financial statement audit opinion in fiscal year 1999 and subsequent
years. While Energy's auditors identified some issues related to the
environmental liability reporting process that require corrective action,
none of these were significant enough to materially impact the
reasonableness of the overall liability estimate.

Defense has made some improvements to its controls in recent years, such
as issuing management guidance for reporting environmental cleanup costs
that are not funded under the Defense Environmental Restoration Program.
However, there remain significant weaknesses in Defense's processes and
internal controls that have hindered it from producing auditable estimates
of its environmental liabilities. Specifically, Defense's outdated and
incomplete accounting guidance for developing and reporting its
environmental liabilities estimates led to errors in financial reporting;
its policies and procedures for determining, reporting, and documenting
environmental liability estimates were not consistently followed; and none
of the military services had adequate controls in place to help ensure
that all identified contaminated sites were included in their
environmental liability cost estimates. These weaknesses not only impacted
the reliability of Defense's environmental liability estimate, but also
that of the federal government as a whole.

Auditors Found Energy's Processes and Controls Sufficient to Produce
Reliable Environmental Liability Estimates in Accordance with Federal
Accounting Standards

Over the years, the design of Energy's processes and internal controls for
developing its overall environmental liability estimate has evolved and
improved, which enabled its auditors to determine that Energy's financial
statements that reported these estimates were presented fairly and in
accordance with federal accounting principles from fiscal years 1999
through 2004. Beginning in fiscal year 1999, Energy issued written
internal control guidance to its field offices outlining requirements they
are to follow in the development and annual update of environmental
liability estimates, such as assigning responsibilities, maintaining
supporting documentation, and reviewing and approving the estimates.
Energy's estimating process for its legacy waste cleanup, which
represented 62 percent of its fiscal year 2004 environmental liability
estimate, normally starts with life cycle cost estimates that are usually
prepared by Energy's contractors based on the extent of cleanup, timing of
the work, and funding levels. External independent reviews are to be
conducted each year on selected projects, and headquarters management is
to perform baseline validation reviews of projects before they are put
under Energy's configuration control process. The configuration control
process requires that proposed changes to a particular project, such as a
change in cost estimate or a change in work scope, be approved by Energy's
configuration control board.25 Energy's second largest environmental
liability component-the future clean up of its active
facilities-represented 17 percent of its 2004 environmental liability
total. Unlike the legacy waste component that is managed entirely by
Energy's Office of Environmental Management, active facilities may be
managed by any of several different programs, such as Energy's Office of
Science or the National Nuclear

Security Administration (NNSA).26 Energy's Office of the Chief Financial
Officer developed an approach in 1996 that uses a cost-estimating model to
develop its active facilities baseline estimate. With the model, various
parameters, such as facility type and size, are used to estimate the total
cost of cleanup, including facility deactivation and decommissioning. Some
locations, such as the Idaho National Laboratory, have developed their own
site-specific active facilities liability estimates, and thus, are not
included in the baseline model. Idaho lab officials indicated they develop
their estimate based on more specific information about their facilities
than the baseline model requires, which enables them to prepare a more
detailed active facilities estimate.

Accounting standards recognize that no one accounting estimate can be
considered accurate with certainty.27 One of the auditors' criticisms of
Energy's fiscal year 1998 environmental liability estimate was that it did
not sufficiently reflect significant uncertainties associated with the
technical cleanup scope of the program. Thus, in fiscal year 1999 Energy
began adding an amount-which Energy refers to as a contingency estimate-to
its environmental liabilities baseline amount to help recognize the risks
associated with its projects, such as the reliance on new technology and
complex construction projects. In fiscal year 2004, Energy added $33.2
billion to its baselines estimates for this contingency estimate, 18.3
percent of its total environmental liabilities, which the auditors
reviewed as part of Energy's annual financial statement audit.28

Although the contingency amount is significant, it is not intended to
estimate all uncertainties. Federal accounting standards require recording
a liability only when a future outflow of resources is considered both
probable and measurable. The estimated liability may be a specific amount
or range of amounts. If the estimate is a range, the standards require
only the minimum amount in the range to be recognized unless some amount
within the range is a better estimate. Energy developed its contingency
methodology to derive its best estimate within the range. For each
project, the cognizant project manager assigns a risk score of one to five
to each of three project characteristics: project definition, which refers
to how well the project is defined in terms of its cost, schedule, and
scope; innovation, which refers to the maturity of technology upon which
the project is reliant; and complexity, which refers to the difficulty and
number of processing and treatment steps required. These risk scores are
then input to a statistical model that predicts the range of total
life-cycle cleanup costs and the mean within the range. The difference
between the mean and the current project baseline total is the amount that
is recorded as the contingency estimate.

This additional contingency amount is necessary because Energy's cleanup
cost estimates can and have experienced significant increases. For
example, Energy is currently constructing a waste treatment plant
consisting of three treatment facilities, an analytical laboratory, and
several support structures to attempt to treat over 53 million gallons of
radioactive and hazardous waste at its Hanford location, but this complex
project has experienced several cost increases. It was originally approved
for $4.3 billion in 2000, but later increased to $5.8 billion in 2003.
Subsequent problems-including required changes to the design's seismic
criteria after the seismic assumptions were found inadequate-resulted in
the contractor revising the cost estimate in 2005 to $8.0-$8.3 billion,
which Energy has not yet approved. The Army Corps of Engineers (Corps)
reviewed the contractor's revised cost estimate under an agreement with
Energy, and found that the actual cost could be an additional $1.3 billion
higher than the revised estimate. Although Energy has not yet approved a
revised estimate, both the contractor's revised estimate and Corps' review
of it indicated that the final cost will likely be significantly higher
than the current $5.8 billion estimate. At Energy's request, the
contractor subsequently submitted a more detailed cost estimate in early
fiscal year 2006, which the Corps is now reviewing. Because of the
uncertainty of the project estimate, Energy added both a project-specific
contingency estimate and included this project in the statistical model
calculation of its overall contingency estimate in fiscal year 2005. These
construction cost increases are the types of things for which Energy
established its contingency amount. Using this overall approach to develop
its environmental liability estimate, Energy has been able to produce an
auditable estimate from fiscal years 1999 through 2004.

Figure 7: Aerial View of the Waste Treatment Plant under Construction at
Hanford

Minor Improvements at Energy Would Help Enhance Reliability of Estimates

In its audit report on Energy's fiscal year 2004 financial statements,
Energy's independent auditors did not identify any material weaknesses or
reportable conditions related to environmental liabilities, but did
identify two matters related to environmental liabilities that warranted
communicating to management for corrective action.29 While not material to
the overall estimate, continued attention to improvement helps ensure the
future auditability of the estimate. The following are the issues the
auditors identified in fiscal year 2004.

o As previously discussed, Energy uses a cost-estimating model to estimate
its environmental liability for the future remediation of active
facilities. Field location personnel are responsible for inputting and
verifying certain facility data such as type of facility (e.g., office
space, laboratory), size, and a general characterization of the type of
contamination in the facility. The model then uses the data to estimate
the active facilities' portion of the environmental liability estimate. In
fiscal year 2004, the auditors tested a statistical sample of facilities
and structures from each of five locations to test the reliability and
accuracy of selected facility data, and found immaterial errors at two of
the five locations. The auditors made recommendations to correct the
specific errors and to improve internal controls for verifying the
accuracy of the data.

o The auditors' review of selected key projects identified two instances
where the field location did not have adequate supporting documentation on
file for its cost estimates. For both projects, the field location was
ultimately able to produce detailed information that satisfied the
auditors as to the reasonableness of the cost estimates. However, the
auditors made recommendations to establish procedures to ensure that all
project cost estimates were adequately supported by written documentation
and reviewed.

In fiscal year 2005, the auditors also noted immaterial errors in the
active facilities' data and supporting documentation tested, although the
specific locations at which these errors were identified may have changed.
The auditors made specific recommendations in each instance, and indicated
that management generally agreed with the findings and was responsive to
the recommendations.

In addition, we learned of an instance during our review where the
estimated cleanup cost of a particular project was erroneously excluded
from a prior-year environmental liability estimate. Specifically, in
fiscal year 2003, Energy's Office of Environmental Management recorded a
liability for the estimated cost of operating the Savannah River Site's H
Canyon Processing Facility through fiscal year 2007, and assumed that NNSA
would take over responsibility for the facility and record the liability
for fiscal years 2008 through 2010. However, NNSA never agreed to take
over responsibility for this facility and thus did not record those costs,
which were estimated at $632 million. The Office of Environmental
Management subsequently included the full amount in its fiscal year 2004
estimates. Subsequent to the costs being excluded, Energy issued a policy
requiring such transfers to be formally documented, agreed to by the
affected parties, and approved by the Secretary of Energy through the
Chief Financial Officer. If properly implemented, this should help ensure
that estimates associated with such transfers are not excluded in future
estimates.

While these errors and omissions were not material to the overall
liability estimate, continued attention and improvements to Energy's
internal controls would help provide additional assurance that its overall
environmental liability estimates are reliable and are reported in
accordance with federal accounting standards.

Outdated and Incomplete Financial Management Guidance Impeded Defense's
Ability to Reliably Estimate Environmental Liabilities

At the time of our review, the accounting guidance provided by Defense's
Financial Management Regulations (FMR) had not been updated to reflect
current federal accounting standards for determining and reporting
environmental liabilities. This outdated and incomplete guidance
contributed to financial reporting errors in fiscal years 2004 and 2005 as
follows.

o Changes in federal accounting standards, which eliminated the asset
category of National Defense Property, Plant, and Equipment, and changed
the required accounting for the associated environmental liabilities were
issued in May 2003.30 Defense's FMR had not been timely updated to reflect
the effect of these changes for recognition of cleanup costs related to
nuclear ships and submarines. Consequently, the Navy was recording the
cleanup cost estimates in full at the time the ships and submarines were
placed into service rather than incrementally over the useful life of the
vessels, as the new standards required. This could result in an
overstatement of the estimated environmental liability for the affected
vessels.

o FMR accounting guidance did not completely identify all the budgetary
cost elements that should be considered when determining the unpaid costs
required to be included in reported environmental liability estimates.31
In certain circumstances, such as for estimates of remediation costs on
BRAC bases, some Defense component officials told us that they were
excluding certain cleanup costs once appropriations had been received to
pay those costs, even though actual payments had not yet been made. As a
result, certain costs (e.g., unsigned contracts) intended to be paid for
with prior-year budgetary authority were not included in BRAC cleanup cost
estimates, even though this is required to comply with federal accounting
standards.

Defense Office of Comptroller financial management personnel told us that
the FMR had not been updated in a timely manner because of personnel
turnover and inadequate staffing. Subsequent to our inquiries, but prior
to the release of this report, the FMR was updated to address the issues
we identified, and to reflect current federal accounting standards
requirements for measuring and recognizing estimated cleanup costs related
to environmental liabilities. According to Defense component officials,
cleanup cost estimates will be reported in accordance with the new FMR
guidance no later than September 30, 2006.

Defense's Existing Policies and Procedures for Determining, Reporting, and
Documenting Environmental Liability Estimates Were Not Consistently
Followed

In addition to the guidance problems, certain policies and procedures
included in Defense's FMR related to environmental liabilities are not
being consistently followed by some military service components. Further,
there continues to be a lack of adequate documentation supporting
estimates of environmental liabilities, which precluded Defense's
management from properly carrying out their oversight responsibilities
related to the estimation process. This lack of documentation also
precludes Defense's financial auditors from making a determination of the
reasonableness of the liability amount recorded in the financial
statements. These compliance lapses were caused in part by a lack of
financial management review and oversight of the environmental liability
estimation process at both the Department of Defense and the military
services level. We identified several instances where the failure to
follow established policies and procedures resulted in errors in the
liability estimates, as follows.

o The Navy has not been estimating and reporting all costs for disposing
of spent nuclear fuel produced by its nuclear ships and submarines. The
Navy's financial reporting and program management personnel believed that
the Navy's responsibility for estimating costs for spent nuclear fuel
disposal stopped with the fuel's removal from the ship or submarine, since
at that point the fuel became the property of Energy. The Navy's
management assumed, but had not verified, that Energy was recording this
liability. However, further discussions with the Navy's and Energy's
financial management confirmed that the liability for disposing of nuclear
fuel generated by Navy ships and submarines was not being estimated and
reported by either department. Prior to the issuance of this report, Navy
financial management assumed responsibility for reporting a liability for
disposing of spent nuclear fuel, which Defense has estimated may be as
much as $4 billion, in its financial statements beginning in fiscal year
2006.

o The Navy's financial management was unaware that the Navy had been
discontinuing the reporting of cost estimates for disposing of nuclear
ships and submarines when appropriated funds were obligated, which is
prior to the actual disposal costs being paid, and is contrary to federal
accounting requirements. Naval Sea Systems, which has responsibility for
estimating and reporting these disposal liabilities, ceased doing so once
individual ships or submarines were scheduled for inactivation, a contract
for disposal was executed with the Puget Sound Naval Shipyard, and funds
were obligated for the cost of disposal. Because it is not unusual for the
actual inactivation of a ship or submarine to be extended to meet
operational demands and for the disposal activities to take over a year to
accomplish, costs may not be paid for months or years after the liability
estimate was omitted from the reporting process. As a result, the Navy has
understated reported environmental liabilities by the unpaid costs of
ships and submarines still in the process of inactivation and disposal.

o The Air Force has not been including in its environmental liability
estimates all of the unpaid costs that are required by both Defense's FMR
and federal accounting standards.32 Personnel at two Air Force major
commands told us that estimates for completing Defense Environmental
Restoration Program (DERP) efforts reflected only those costs that had not
yet been funded. Costs that had been incurred in prior years and for which
funding had been received but payments had not been made were not included
in the DERP estimates. These omissions were also contrary to Air Force
guidance that required estimates to include "all anticipated costs
required to effect the restoration of the site."33 Because Air Force
financial management did not have a monitoring process in place to ensure
that guidance was understood and being followed, the Air Force has been
understating its cost estimates by the amount of incurred but unpaid
prior-year costs.

o The military services are not preparing or retaining documentation that
supports the consistency and adequacy of their reported environmental
cleanup and disposal cost estimates. In its annual Performance and
Accountability Reports for fiscal years 2003 through 2005, Defense has
acknowledged-and independent financial auditors have reported-that
inadequate supporting documentation for environmental liabilities is an
ongoing material weakness in the department's system of internal control.
In addition, in recent audit reports specifically targeting environmental
liability controls, various military audit agencies reported a general
lack of adequate documentation to support cost estimates in the military
services.34 One auditor told us that environmental personnel completing or
updating environmental liability estimates erroneously believed that an
electronic file created by a cost estimating model was sufficient
supporting documentation, even though the model did not explain or contain
source documentation for variables used in the cost calculation, such as
remaining capacity, usage rates, contractors estimates, or engineering
studies. According to military service representatives, environmental
engineers see no need to retain supporting documentation for cost
estimates since management does not request or review it. Neither
financial or program management nor auditors will be able to assess the
reliability of environmental cost estimates until estimators develop and
retain sufficient documentation to support their calculations.

Defense's Internal Controls Are Inadequate to Help Ensure That All Cleanup
Sites Are Included in the Environmental Liability Estimate

Even if the guidance and monitoring issues previously discussed are
remedied, none of the military services have a structured process in place
and working at the installation level to provide reasonable assurance that
all known contaminated sites and hazardous operations are included in the
reported environmental liability cost estimates. One example of such a
control would be a comparison of the cleanup sites and hazardous waste
operations actually being reported by specific programs on each base to a
comprehensive inventory of all sites and hazardous waste operations
located on each base that was prepared without regard to reporting program
or Defense component use. Defense's FMR requires a reconciliation of
environmental and property records, and indicates the purpose of the
resulting inventory is to ensure that all disposal liabilities are
recognized.35 The FMR stops short of specifically requiring a comparison
of the reconciled site inventory to sites included in environmental
liability reporting, and no Army, Navy, or Air Force program or financial
management personnel we spoke with were aware of any activity at the base
level making such a comparison. As a result, contaminated sites and
operations that are not included in a reporting program are at risk of not
being identified and reported as required, and the related cost estimates
could be understated. For example, we spoke with Defense component
personnel who expressed conflicting views about responsibility for
reporting cleanup costs associated with underground storage tanks
physically located on a military base that contain fuel owned and managed
by another Defense component. Thus, the associated liability is at risk of
not being reported by any Defense component. Without a comparison of site
lists as described, such an oversight would likely go undetected.

Major Uncertainties Will Affect Future Cleanup Costs and Funding Demands

Beyond the issues previously discussed that make Defense's and the federal
government's environmental liability estimates unauditable, the ultimate
cost of the cleanup will be affected by major uncertainties, the impact of
which cannot be currently estimated. These uncertainties, which primarily
involve the lack of feasible or proven remediation technologies,
regulatory impediments and legal challenges to cleanup and disposal, and
uncertainties as to the agencies' abilities to meet their current cost and
schedule targets, do not impact the auditability of the liability because
under current federal accounting standards a potential liability that
cannot be estimated but is considered at least reasonably possible to
occur is not required to be recorded on the face of the financial
statements, only disclosed in the notes. Both Energy and Defense currently
disclose various uncertainties in the notes to their financial statements,
although improvements to their disclosures are warranted at both agencies.
It is important to understand the nature and extent of these uncertainties
in assessing future funding demands for environmental cleanup because they
have the potential to materially affect the ultimate cost and timing of
cleanup activities.

Remediation Technologies for Some Sites Are Nonexistent or Uncertain

The nature and extent of contamination the federal government must clean
up is complex and vast, and suitable technologies to address all of the
waste do not currently exist. As stated in Energy's fiscal year 2004
Performance and Accountability Report, estimated cleanup costs at sites
for which there is no current feasible remediation approach would be
higher if some remediation were assumed for these areas, but because
Energy has not identified effective remediation technologies for these
sites, no basis for estimating costs is available. Energy has identified
18 significant uncertainties, at various and multiple locations, where no
currently feasible remediation technology exists or the effectiveness of
technologies currently being explored remains to be seen. An example of a
location for which Energy reported that cleanup costs were excluded is the
nuclear explosion test area at the Nevada Test Site. The Nevada Test Site,
an area larger than Rhode Island, was the site of over 900 atmospheric and
underground nuclear test explosions that occurred over four decades ending
in 1992. These nuclear detonations left residual radioactivity, but most
of the radioactivity is in highly inaccessible underground locations.
According to Energy, effective, feasible remediation technologies have not
yet been developed to address this widespread contamination, and Energy's
fiscal year 2004 environmental liability estimate primarily for the Nevada
Test Site only included an estimate of approximately $3.3 billion for
monitoring of groundwater contamination plumes, disposal of active
facilities, and long-term stewardship.

Figure 8: Craters Left As A Result Of Underground Nuclear Testing At The
Nevada Test Site

In other cases, potential remediation technologies have been identified,
but their effectiveness has yet to be successfully demonstrated. For
example, during operations at Energy's Hanford location from 1943 through
1989, Energy generated large volumes of hazardous and radioactive waste.
Some of this waste was deposited directly into the ground, while some of
the most hazardous and radioactive material was stored in underground
tanks that have leaked contaminants into the soil. Over time, concern has
developed about the impact of Hanford's waste moving through the ground
and toward the Columbia River. As we have previously reported, Energy has
used three main approaches to treat the groundwater near the river, but

has experienced problems with all three.36 For example, one approach has
been to use a chemical barrier near the Columbia River to block chromium
from entering the river near major fish breeding areas.37 The barrier
consists of a series of wells where Energy injected a chemical into the
groundwater that reacts with chromium to change it to a less hazardous and
less mobile form. However, in 2004 Energy reported that the barrier was
not fully effective, and that the hazardous form of chromium was detected
in groundwater readings beyond the barrier. Energy is currently evaluating
alternative approaches to contain the chromium or fix the barrier. Until
an effective remediation technology can be identified, tested, and
implemented, the ultimate cost of cleaning up this groundwater
contamination remains unknown.

Regulatory Requirements and Legal Challenges Remain Unresolved

Various regulatory requirements and legal challenges also affect the
ultimate cost, extent, and timing of cleanup at several sites. The primary
uncertainty facing the federal government's cleanup efforts relates to the
opening of the national geologic repository for high-level waste and spent
nuclear fuel. The disposal of Energy's and Defense's high-level waste and
spent nuclear fuel is contingent upon the opening of this repository
planned for Yucca Mountain. However, multiple challenges related to the
regulatory and legal requirements it must meet have caused several delays
in its licensing and design. Additionally, the degree of cleanup required
by regulations can vary from site to site and depend on how the land is
expected to be used after it has been cleaned up. These decisions must
usually be agreed upon by various federal and state agencies, with input
from interested parties, such as community representatives. Even after an
agreement has been signed, various parties may raise legal challenges to
the agreement, the outcome of which could affect both the cost and timing
of cleanup plans. Thus, it can take years to determine the final cleanup
requirements for some sites. Until these issues are resolved, the ultimate
cost of cleanup and disposal of the federal government's environmental
contamination cannot be fully determined. The following are examples of
current regulatory and legal uncertainties Energy and Defense are facing,
the resolution of which could significantly impact the final cost of
cleanup.

o Over the years, regulatory requirements and legal challenges have caused
multiple delays in the licensing and design of the Yucca Mountain geologic
repository, which is intended to be the nation's first high-level waste
and spent nuclear fuel disposal site. For example, Energy reported that it
did not meet its goal of submitting a license application for the
repository to the Nuclear Regulatory Commission by the end of calendar
year 2004, in part due to a July 2004 decision by the U.S. Court of
Appeals to invalidate the Environmental Protection Agency's (EPA)
radiation standard, which set a 10,000 year time frame in which the amount
of radiation that can be released from the repository would be limited.38
The court held that EPA violated section 801 of the Energy Policy Act of
1992, which required the agency to issue standards for Yucca Mountain
based upon and consistent with findings by the National Academy of
Sciences. In August 2005, EPA issued a proposed standard that extended
protection to 1 million years to be consistent with the Academy's
recommendations. Because the repository must be designed to comply with
the EPA standard, approval of a revised standard is critical.
Consequently, Energy acknowledged that it will not meet its goal of
commencing disposal operations by 2010 but has not committed to a new
target date for opening the repository. Energy acknowledged that delays in
opening the repository could cause project costs to increase, including
the cost of constructing the repository as well as interim storage and
other costs, for the Energy and Defense locations that are expected to
ship waste to Yucca Mountain. For example, officials at Energy's Savannah
River location estimated that if there was a 5-year delay in the opening
of the repository, the additional costs incurred for their spent nuclear
fuel disposal could range anywhere from about $50 million to $200 million,
depending on how Energy decides to deal with the fuel during such a delay.

Figure 9: View of an Exploratory Tunnel at Yucca Mountain

o The 2005 Defense Base Closure and Realignment Commission recommended 22
major base closures and 33 major base realignments. Although cleanup costs
for Defense property in prior BRAC rounds are included in Defense's
environmental liabilities, some of the cleanup costs that will result from
the 2005 BRAC round have not yet been estimated, such as the estimated
cleanup cost of currently operational ranges with ordnance or other
explosive material. In addition, the decision to realign or close a base
may result in a change to its planned use and thus require a change in
cleanup estimate based on those plans. For example, the cleanup
requirements and therefore the cleanup costs are less if the property is
expected to be used for industrial purposes than if it is to be used for
residential purposes. But before planned use can be decided, Defense must
determine who the next owner will be. If, as in previous BRAC rounds, most
property is transferred to nonfederal ownership for economic development
and other purposes, communities receiving the property transfer will
likely want contamination removal. Defense may prefer containment to save
costs, thus, the adopted cleanup plan and final associated costs will
often be the result of negotiation and agreement among all of the involved
parties including Defense, EPA, and various community representatives.
Until all of these significant new decisions are made for each site, the
cost to remediate excess property as a result of the 2005 BRAC round
remains uncertain.

o At the Idaho National Laboratory there is a great deal of controversy
over how much buried transuranic waste Energy will have to excavate and
remove from the lab's Subsurface Disposal Area, an 88-acre area where
radioactive transuranic waste has been buried in shallow pits and trenches
since 1952. In April 2002, the State of Idaho sued Energy over its
interpretation of a 1995 settlement agreement concerning the amount of
transuranic waste that must be removed from the Idaho National Laboratory.
Specifically, Energy asserted that the agreement requires only certain
stored waste to be removed, but the state asserted that the agreement also
applied to all buried transuranic waste. In March 2003, the District Court
of Idaho ruled in favor of the state and concluded that Energy was
responsible for removing all transuranic waste buried or stored at the
laboratory. Energy appealed, and in December 2004, the court of appeals
reversed the decision and sent the case back to the district court for
further consideration. Energy is currently removing selected portions of
the buried waste totaling 4 acres where it has identified the highest
concentrations of radioactivity and has recorded a corresponding
environmental liability for this portion of the waste. However, officials
indicated that the cost to excavate all 88 acres would be extremely costly
and cannot be estimated. Should the state ultimately prevail, the
resulting additional costs could be substantial.

Figure 10: An Excavator Removes Buried Transuranic Waste at Energy's Idaho
Cleanup Location

Ability to Effectively Meet Current Cost and Schedule Targets is Uncertain

Both Energy's and Defense's environmental liabilities estimates are based
upon current plans and targets for accomplishing their cleanup
responsibilities. However, our previous reports have identified project
management weaknesses at both agencies that could hinder them from meeting
these goals.39 At Energy, we have previously reported that many of its
major projects, including environmental cleanup projects, have experienced
substantial cost overruns and delays. For example, our 2002 assessment of
Energy's contract reform initiatives found that 5 of the 16 major projects
we examined had more than doubled in cost-for billions of dollars in total
cost overruns-and experienced more than 5 years in

delays.40 In late 2002, Energy began implementing an accelerated cleanup
plan to address the uncontrolled cost and schedule overruns that had
occurred over many years. In describing this plan, Energy reported that it
would reduce the total cost of the cleanup program by an estimated $50
billion and would complete its cleanup activities by 2035-35 years earlier
than called for in previous plans. While Energy has made some progress
since it implemented its plan, both we and the Energy Inspector General
have identified cleanup projects and activities that are behind schedule
and thus may cost more than currently planned.41 Although Energy
reevaluates and adjusts its environmental liability estimates each year,
its history of cost and schedule overruns raises additional uncertainties
as to what the ultimate cost of cleanup will be.

In addition to the processes and internal control weaknesses discussed
earlier that have prevented Defense from developing an auditable estimate
of its environmental liabilities, we have also previously reported on
program management weaknesses at Defense that add to the uncertainty about
its current estimates. For example, we previously reported that Defense
had made limited progress in its program to identify, assess, and clean up
sites that may be contaminated with military munitions, and that its plan
to address potentially contaminated sites relied on preliminary cost
estimates that can change significantly because they were developed using
incomplete information.42 In another report, we found that the U.S. Army
Corps of Engineers did not have a sound basis for determining that about
38 percent of former defense sites-sites now owned by states, local
governments, and individuals and used for parks, farms, schools, and

homes-did not need further study or cleanup action.43 As a result, the
Corps' assessment may not be accurate, and the Corps cannot be reasonably
certain that it has identified all hazards that may require further study
or cleanup. These issues raise questions as to whether Defense and Energy
can effectively perform the necessary cleanup work within current cost and
schedule targets and thus raise additional uncertainties as to the
ultimate cost of cleanup.

Energy's and Defense's Financial Disclosures Acknowledge Uncertainties,
but Improvements Are Warranted

As mentioned earlier in this report, federal accounting standards require
recording a liability only if the future outflow of resources is
considered both probable and measurable. If one of the two conditions is
not met but the future outflow of resources is considered at least
reasonably possible, then it does not need to be recorded as a liability
in the financial statements but should be disclosed in the notes to the
financial statements. Both Energy and Defense disclose in the notes to
their financial statements various uncertainties that are not included in
their liability estimates because the events are not considered probable
or the amount of the liability cannot be reasonably estimated. Some
examples of Energy's disclosures in its notes to the fiscal year 2004
financial statements include the following.

o "The Department has identified approximately 10,400 potential release
sites from which contaminants could migrate into the environment. Although
virtually all of these sites have been at least partially characterized,
final remedial action and/or regulatory decisions have not been made for
many sites. Site-specific assumptions regarding the amount and type of
contamination and the remediation technologies that will be utilized were
used in estimating the environmental liability related to these sites."

o "Cost estimates for management of the Department's high-level waste are
predicated upon assumptions as to the timing and rate of acceptance of the
waste by the first geologic repository. Delays in opening the repository
could cause EM project costs to increase."

o "Estimated cleanup costs at sites for which there is no current feasible
remediation approach are excluded from the baseline estimates, although
applicable stewardship and monitoring costs for these sites are included.
The cost estimate would be higher if some remediation were assumed for
these areas. However, because the Department has not identified effective
remedial technologies for these sites, no basis for estimating costs is
available. An example of a site for which cleanup costs are excluded is
the nuclear explosion test area at the Nevada Test Site."

As noted previously, the State of Idaho is currently in litigation with
Energy over the amount of transuranic waste that must be removed from the
Idaho National Laboratory, and in March 2003 the Idaho District Court
ruled in the state's favor. Energy did not disclose this potential
liability in the notes to its fiscal year 2004 financial statements. We
questioned Energy's decision not to disclose this case in its fiscal year
2004 financial statements given that it had an adverse court ruling at the
time that would seem to indicate that there was at least a reasonably
possible likelihood that Energy would ultimately be required to remediate
additional acreage. Energy officials stated that, at the time, the case
was under appeal and they thought the likelihood that they would be
required to remediate all transuranic waste within the 88 acres was
remote. However, Energy did not document this conclusion, the reasons
behind its conclusion, and whether its legal counsel concurred with that
conclusion in its fiscal year 2004 legal representation letter.44

Subsequent to the issuance of its fiscal year 2004 financial statements on
November 15, 2004, the court of appeals reversed the decision and sent the
case back to the district court for further consideration, which is still
ongoing. Nonetheless, Energy disclosed this matter in the notes to its
fiscal year 2005 financial statements. According to Energy officials,
activities at the site to evaluate the waste in the area have indicated
that the amount of waste that would have to be removed should Idaho
prevail would be greater than what Energy originally estimated, and thus
it documented in its fiscal year 2005 legal representation letter that
there was a reasonably possible likelihood of an unfavorable outcome.
Energy's fiscal year 2005 financial statement disclosure noted that the
State of Idaho was challenging Energy's interpretation of the 1995
settlement agreement concerning the shipment of transuranic waste from the
Idaho National Laboratory. It further disclosed that, should the state
prevail, the resulting costs could be substantial but Energy had not
recorded a provision for such costs in its financial statements.

Because of these and other uncertainties discussed in Energy's Performance
and Accountability Report, Energy's auditors have included an emphasis
paragraph with the audit opinion since fiscal year 1999, emphasizing that
the cost estimates supporting Energy's environmental liabilities are based
upon assumptions regarding future actions and decisions, many of which are
beyond Energy's control.45 In essence, this highlights the fact that,
should circumstances change in the future, the effects of such changes
could be material.

Defense disclosed one uncertainty in the notes to its financial
statements. Defense acknowledged that, because the extent of buried
chemical munitions and agents is not known, the Army was unable to provide
a reasonable estimate of its liability to clean up buried chemical
munitions and agents.

However, Defense failed to disclose the liability implications of its 2005
BRAC round. In its September 8, 2005, report to the President, the 2005
Defense Base Closure and Realignment Commission reported that Defense will
likely incur additional environmental cleanup and restoration costs
resulting from these base realignment and closure activities. Since the
additional costs could be significant, the lack of a discussion of the
2005 BRAC round in the notes precludes financial statement users from
having a full understanding of Defense's environmental liability
exposures.

Conclusions

The federal government is responsible for cleaning up environmental
contamination that is both complex and widespread. The estimated cost of
cleaning up this waste is substantial and will be competing for limited
federal resources over many years. Therefore, proper reporting of the
government's environmental liabilities is important to help determine
priorities for cleanup and disposal activities and to appropriately
consider future budgetary resources needed to carry out these activities.
However, weaknesses in Defense's processes and internal controls are
largely responsible for the federal government's inability to reasonably
estimate or adequately support the amounts reported for its environmental
liabilities. Also, significant uncertainties at both Energy and Defense
surrounding how waste will be cleaned up and when it will be disposed of
make it inherently impossible to fully determine the ultimate cost of
cleanup; therefore, it is essential that disclosures of such uncertainties
help keep policymakers informed of potential future resource needs.
Without adequate policies, processes, and internal controls for
identifying, estimating, recording, and disclosing its environmental
liabilities, the federal government does not have sufficient information
on the potential cost of addressing these liabilities for long-term fiscal
planning.

Recommendations For Executive Action

To address Defense-related deficiencies, we are making the following eight
recommendations. To improve internal controls over the development and
reporting of environmental liabilities and to prevent recurrence of the
types of problems we identified in our report, we recommend that the
Secretary of Defense direct the Under Secretary of Defense (Comptroller)
and the Secretaries of the Army, Navy, and Air Force, as appropriate, to

o develop, document, and implement a program for financial management
review, approval, assessment, and monitoring of the estimation and
reporting processes for environmental liabilities,

o improve compliance with federal accounting standards and FMR guidance
and remedy the specific deficiencies we identified by

o designing a process and controls at the department level to identify new
federal accounting standards and to update the FMR for changes and
additions in a timely manner,

o reassessing its process for ensuring that all required financial
statement disclosures are made, and disclosing in the notes to the
financial statements for the department and for the Army, Navy, and Air
Force, as appropriate, all significant uncertainties in accordance with
current federal accounting standards, including the effects of the 2005
BRAC round on reported environmental liabilities,

o estimating, updating, and reporting the accrued environmental liability
for the cost of disposing of the Navy's spent nuclear fuel,

o implementing revised FMR guidance for recognizing cleanup costs for the
Navy's nuclear ships and submarines over the estimated lives of those
assets,

o including all appropriate budget elements for reporting financial
liabilities for (1) the Navy's nuclear ships and submarines, (2) the Air
Force's cleanup and restoration costs, and (3) all costs intended to be
paid for with prior-year budgetary authority (e.g., unsigned contracts) by
the Army, Navy, and Air Force,

o reconciling the Army's, Navy's, and Air Force's installation-level
environmental records to installation-level property records as required
and then using the corrected site inventories to determine that all sites
with cleanup or corrective action costs and all hazardous waste operations
with cleanup or closure costs are included in financial reports of
environmental liabilities and all are reported by the appropriate Defense
component, and

o producing and maintaining adequate supporting documentation for Army,
Navy, and Air Force environmental liabilities at all levels in accordance
with internal control standards in the federal government.

To address the deficiency identified with Energy's legal representation
letters, we recommend that the Secretary of Energy reassess Energy's
process for ensuring that all litigation is appropriately documented in
its legal representation letters, including its evaluation of the
likelihood of an unfavorable outcome, the basis for its conclusion, and
whether its legal counsel concurred with that conclusion.

Agency Comments and Our Evaluation

We provided a draft of this report to Defense for review and comment. In
written comments, Defense's Principal Deputy Under Secretary of Defense
(Comptroller) stated that Defense concurred with all eight recommendations
in the report and was taking actions to correct the noted deficiencies.
For example, Defense stated that the military departments have been
instructed to include steps and milestones in their Financial

Improvement Plan46 to comply with several of the recommendations. Defense
also established a workgroup to improve the financial reporting of
environmental liabilities, and it plans to assist the military departments
in meeting the key milestones. Defense also noted that it was updating the
financial statement reporting guidance in the FMR to improve its
disclosures and would change some of its environmental liability
accounting procedures to comply with applicable federal accounting
standards and FMR guidance. Once properly implemented, these steps should
significantly improve Defense's environmental liability reporting.

We received verbal comments from Energy officials on a draft of this
report. Energy officials concurred with our recommendation, and stated
that they will implement procedures to help ensure that all cases are
appropriately documented in their legal representation letters.
Specifically, Energy officials said that the headquarters program offices
will now send the field offices' summary evaluations and backup
documentation on each case to the office of the Chief Financial Officer in
addition to the office of General Counsel. Once the office of General
Counsel prepares the final legal representation letter, staff in the
office of the Chief Financial Officer are to compare the cases listed in
the letter with the case summaries received from the field offices to help
ensure that all cases were appropriately included in the letter. If
properly implemented, these actions appear responsive to the
recommendation.

We are sending copies of this report to other interested congressional
committees; the Secretary of Energy; the Secretary of Defense; the Under
Secretary of Defense (Comptroller); and the Secretaries of the Army, the
Air Force, and the Navy. Copies will be made available to others upon
request. In addition, this report is available at no charge on the GAO Web
site at http://www.gao.gov .

Please contact me at (202) 512-9508 or [email protected] if you or your
staffs have any questions about this report. Contact points for our
Offices

of Congressional Relations and Public Affairs may be found on the last
page of this report. Other GAO contacts and key contributors to this
report are listed in appendix III.

Linda M. Calbom Director Financial Management and Assurance

Scope and Methodology Appendix I

To determine the nature and extent of the federal government's reported
environmental liabilities, we reviewed the Performance and Accountability
Reports of all federal agencies that reported environmental liabilities
for fiscal year 2004, the most recent completed fiscal year at the time we
began our review. Because Energy's fiscal year 2004 financial statements
were audited by an independent public accounting firm and determined to be
reliable, we reviewed those statements, traced and verified environmental
liabilities amounts to supporting schedules, and reviewed audit
workpapers, where available. We otherwise used the work performed by the
independent auditors and did not perform additional audit procedures to
verify the completeness or accuracy of the amounts reported. Because
Defense has acknowledged serious data reliability problems related to its
financial systems and information, auditors did not attempt to perform
audit procedures and disclaimed an opinion on Defense's fiscal year 2004
financial statements. Therefore, it was not our objective to-and we did
not-audit the completeness and accuracy of Defense-reported environmental
liabilities amounts. Although we have previously reported on the potential
for Defense to incur costs related to voluntary restoration initiatives in
conjunction with returning overseas Defense facilities to host nations,
these activities are not reported as environmental liabilities in its
financial statements, and we did not review its international operations
or processes.1 Since Defense-reported amounts are not reliable, we are
providing them in this report for informational purposes only. We also
reviewed Energy's and Defense's fiscal year 2005 Performance and
Accountability Reports primarily to determine whether any significant new
issues had arisen subsequent to the issuance of the fiscal year 2004
statements.

At Energy and Defense, we interviewed agency officials and performed site
visits to obtain a better understanding of the types of environmental
contamination being addressed. We met with officials at Energy
headquarters and visited its three largest cleanup locations (the Hanford
nuclear reservation in Washington State, the Savannah River location in
South Carolina, and the Idaho National Laboratory in Idaho). For Defense,
we met with program management, financial management, and financial
reporting officials for the relevant environmental programs for each
military service. For additional background information, we also visited
Defense's Puget Sound Naval Shipyard in Washington State, which dismantles
and disposes of nuclear ships and submarines that are being removed from
service.

To determine the extent to which Energy's and Defense's processes and
internal controls are adequately designed to assure estimating and
reporting environmental liabilities in accordance with federal accounting
standards, we interviewed Energy's financial auditors and reviewed
selected workpapers prepared for its annual financial statement audit;
interviewed Energy and Defense program and financial management officials
at agency headquarters and at the field locations we visited; and reviewed
agency documentation supporting their processes. We did not review or test
detailed contractor estimates but focused on each agency's procedures for
compiling and developing its environmental liability amounts. We compared
Energy's and Defense's processes and internal controls to GAO's Standards
for Internal Control in the Federal Government2 and reviewed applicable
federal accounting standards and guidance for the recognition and
reporting of environmental liabilities.

To determine the nature and types of uncertainties that might affect the
ultimate cost of Energy's and Defense's environmental cleanup efforts, we
interviewed Energy and Defense program and financial management officials
and reviewed supporting documentation. During interviews with agency,
contractor, and state agency officials, we inquired about sites that have
not been fully estimated or reported as well as other uncertainties that
could affect the total cost to the federal government of cleaning up the
contamination. We also reviewed Energy's and Defense's recent Performance
and Accountability Reports for further information on disclosed
uncertainties that are not estimated in their environmental liabilities
balances, and reviewed our relevant prior reports. Our work was conducted
from October 2004 through January 2006 and was performed in accordance
with generally accepted government auditing standards.

Comments from the Department of Defense Appendix II

GAO Contact and Staff Acknowledgments Appendix III

Linda M. Calbom, (202) 512-9508 or [email protected]

In addition to the contact named above, Molly Boyle, Assistant Director;
Doreen Eng, Assistant Director; Stephen Lipscomb, Assistant Director;
William Bates; Jessica Gray; Mary Ann Hardy; Charles Hodge; Nancy
Kintner-Meyer; Rick Kusman; Delores Lee; Jenny Li; Tom Perry; Bennet
Severson; and Stan Stenerson made key contributions to this report.

Related GAO Reports

Nuclear Waste: Better Performance Reporting Needed to Assess DOE's Ability
to Achieve the Goals of the Accelerated Cleanup Program. GAO-05-764. 
Washington, D.C.: July 29, 2005.

Securing U.S. Nuclear Materials: DOE Needs to Take Action to Safely
Consolidate Plutonium. GAO-05-665. Washington, D.C.: July 20, 2005.

Opportunities Exist to Improve Future Comprehensive Master Plans for
Changing U.S. Defense Infrastructure Overseas. GAO-05-680R Washington, D.
C.: June 27, 2005.

Department of Energy: Further Actions Are Needed to Strengthen Contract
Management for Major Projects. GAO-05-123. Washington, D.C.: March 18,
2005.

Nuclear Waste: Absence of Key Management Reforms on Hanford's Cleanup
Project Adds to Challenges of Achieving Cost and Schedule
Goals. GAO-04-611.  Washington, D.C.: June 9, 2004.

DOD Operational Ranges: More Reliable Cleanup Cost Estimates and a
Proactive Approach to Identifying Contamination Are Needed. GAO-04-601. 
Washington, D.C.: May 28, 2004.

Yucca Mountain: Persistent Quality Assurance Problems Could Delay
Repository Licensing and Operation. GAO-04-460. Washington, D.C.: April
30, 2004.

Nuclear Waste Cleanup: DOE Has Made Some Progress in Cleaning Up the
Paducah Site, but Challenges Remain. GAO-04-457.  Washington, D.C.: April
1, 2004.

Military Munitions: DOD Needs to Develop a Comprehensive Approach for
Cleaning Up Contaminated Sites. GAO-04-147. Washington, D.C.: December 19,
2003.

Nuclear Waste: Challenges to Achieving Potential Savings in DOE's
High-Level Waste Cleanup Program. GAO-03-593.  Washington, D.C.: June 17,
2003.

Environmental Contamination: DOD Has Taken Steps to Improve Cleanup
Coordination at Former Defense Sites but Clearer Guidance Is Needed to
Ensure Consistency. GAO-03-146.  Washington, D.C.: March 28, 2003.

Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and
Uncertainties. GAO-03-213. Washington, D.C.: January 24, 2003.

Long-Term Commitments: Improving the Budgetary Focus on Environmental
Liabilities. GAO-03-219.  Washington, D.C.: January 24, 2003.

Environmental Contamination: Corps Needs to Reassess Its Determinations
That Many Former Defense Sites Do Not Need Cleanup. GAO-02-658.
Washington, D.C.: August 23, 2002.

Environmental Contamination: Many Uncertainties Affect the Progress of the
Spring Valley Cleanup. GAO-02-556.  Washington, D.C.: June 6, 2002.

Waste Cleanup: Status and Implications of DOE's Compliance
Agreements. GAO-02-567.  Washington, D.C.: May 30, 2002.

Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca
Mountain Repository Project. GAO-02-191. Washington, D.C.: December 21,
2001.

Environmental Liabilities: Cleanup Costs From Certain DOD Operations Are
Not Being Reported. GAO-02-117.  Washington, D.C.: December 14, 2001.

Environmental Contamination: Cleanup Actions at Formerly Used Defense
Sites. GAO-01-557. Washington, D.C.: July 31, 2001.

Nuclear Cleanup: DOE Should Reevaluate Waste Disposal Options Before
Building New Facilities. GAO-01-441.  Washington, D.C.: May 25, 2001.

Nuclear Waste: Agreement Among Agencies Responsible for the West Valley
Site Is Critically Needed. GAO-01-314. Washington, D.C.: May 11, 2001.

Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are
Likely Understated. GAO-01-479.  Washington, D.C.: April 11, 2001.

Nuclear Waste: DOE's Advanced Mixed Waste Treatment Project--Uncertainties
May Affect Performance, Schedule, and Price.  RCED-00-106.  Washington,
D.C.: April 28, 2000.

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transparent illustrator graphic

www.gao.gov/cgi-bin/getrpt? GAO-06-427 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Linda Calbom at (202) 512-9508 or
[email protected].

Highlights of GAO-06-427 , a report to congressional requesters

March 2006

ENVIRONMENTAL LIABILITIES

Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties
in the Federal Government's Estimates

The nation's military installations and nuclear weapons production
facilities have accumulated many types of waste and contamination over the
years. The federal government estimated its environmental liability to
clean up this waste at $249 billion in fiscal year 2004, representing the
federal government's third largest reported liability. It represents a
significant future outflow of funds at the same time as many other
competing demands for federal dollars, but is currently not auditable. GAO
was asked to address (1) the nature and extent of the government's
environmental liabilities, (2) the extent to which Energy's and Defense's
processes and controls were designed to estimate and report environmental
liabilities in accordance with federal accounting standards, and (3) the
nature and types of uncertainties that are currently not estimable but
could affect the cost of cleanup.

What GAO Recommends

GAO is making eight recommendations to help Defense improve its internal
controls over its environmental liabilities by improving its financial
management guidance and processes. We are also making a recommendation to
help Energy improve its process for ensuring all litigation for potential
disclosure is documented. Both Defense and Energy concurred with the
recommendations, and described corrective actions being taken to address
them.

The federal government's environmental liability reflects the estimated
cost to clean up and dispose of environmental contamination in every state
in the nation. The Departments of Energy and Defense report about 99
percent of this liability. Energy's reported liability of $182 billion
relates primarily to the cleanup and disposal of nuclear waste,
contamination, and by-products that resulted from decades of nuclear
weapons production. Defense's reported liability of $64 billion is
primarily for the cleanup of hazardous wastes at training ranges, military
bases, and former defense sites; disposal of nuclear ships and submarines;
and disposal of chemical weapons.

While the design of Energy's internal controls have enabled its auditors
to determine that Energy's financial statements were presented fairly and
in accordance with federal accounting principles, significant weaknesses
in Defense's controls have hindered it from producing auditable
environmental liability estimates. Specifically, Defense's outdated and
incomplete accounting guidance for developing and reporting its
environmental liability estimates led to errors in financial reporting;
its policies and procedures for determining, reporting, and documenting
environmental liability estimates were not consistently followed; and none
of the military services had adequate controls in place to help ensure
that all identified contaminated sites were included in their
environmental liability cost estimates. These weaknesses not only affected
the reliability of Defense's environmental liability estimate, but also
that of the federal government as a whole.

Even if Defense resolved its internal control weaknesses, uncertainties
exist for both Energy and Defense-the effect of which cannot currently be
estimated-that could increase the government's environmental liabilities
beyond the currently recorded amounts. These uncertainties involve the
lack of feasible or proven remediation technologies, regulatory
impediments and legal challenges, and uncertainties with the agencies'
abilities to meet their current cost and schedule targets. It is important
to understand the nature and extent of these uncertainties because they
have the potential to materially impact the ultimate cost and timing of
cleanup activities.

Craters Left as a Result of Underground Nuclear Testing at the Nevada Test
Site
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