Environmental Cleanup: Cash Management Practices At Rocky Mountain
Arsenal (Letter Report, 08/16/96, GAO/NSIAD-96-145).

GAO provided information on cash management practices at Rocky Mountain
Arsenal.

GAO noted that: (1) the settlement agreement between the Army and Shell
Oil Company does not provide for timely or efficient collection of
environmental cleanup costs; (2) if the government does not collect the
receivables in a timely manner, it will lose the opportunity to invest
these funds in other projects; (3) poor cash management practices at the
Arsenal have cost government more than one million dollars since 1989;
(4) the Army bills Shell quarterly rather than monthly because in the
past the Arsenal did not have the capacity to process disbursements on a
monthly basis; (5) the Army and Shell take 90 days to exchange quarterly
payments and document cost claims; (6) the 30-day extension period has
cost the government an additional $500,000 in interest costs since 1989;
(7) changing from a 90-day payment cycle to a 60-day payment cycle could
be accomplished without any additional cost to the government; (8) the
government has lost more than $22,000 in interest for checks processed
after the payment due date; and (9) the Army should consider using an
electronic payment system, since it costs less, accelerates the
availability of funds to the receiving party, improves internal
controls, reduces remittance processing time, and lessens paper and
postage requirements.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-145
     TITLE:  Environmental Cleanup: Cash Management Practices At Rocky 
             Mountain Arsenal
      DATE:  08/16/96
   SUBJECT:  Electronic funds transfer
             Financial management
             Environmental monitoring
             Army procurement
             Cash management
             Cost sharing (finance)
             Billing procedures
             Late payments
             Federal agency accounting systems
             Government collections
IDENTIFIER:  EPA National Priorities List
             
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Cover
================================================================ COVER


Report to the Assistant Secretary of the Army for Financial
Management and Comptroller

August 1996

ENVIRONMENTAL CLEANUP - CASH
MANAGEMENT PRACTICES AT ROCKY
MOUNTAIN ARSENAL

GAO/NSIAD-96-145

Environmental Cleanup

(709117)


Abbreviations
=============================================================== ABBREV

  CERCLA - Comprehensive Environmental Response, Compensation, and
     Liability Act
  GAO - U.S.  General Accounting Office

Letter
=============================================================== LETTER


B-260433

August 16, 1996

The Honorable Helen T.  McCoy
Assistant Secretary of the Army for
Financial Management and Comptroller

Dear Ms.  Secretary: 

This report discusses cash management practices associated with
environmental cleanup costs at the Rocky Mountain Arsenal.  The Army
and Shell Oil Company share these costs under a formula set forth in
a 1989 settlement agreement and the associated financial manual.\1 We
noted weaknesses in Army cash management practices permitted by the
settlement agreement as we reviewed the cost and schedule of the
arsenal's cleanup at the request of the Chairman, Subcommittee on
National Security, International Affairs, and Criminal Justice, House
Committee on Government Reform and Oversight.\2 This report discusses
the frequency of billing, the time permitted for payment, and the
method of payment. 


--------------------
\1 The arsenal's financial manual, which outlines the financial
management practices to be used by Shell and the Army, was
incorporated into the settlement agreement. 

\2 Environmental Cleanup:  Progress in Resolving Long-Standing Issues
at the Rocky Mountain Arsenal (GAO/NSIAD-96-32, Mar.  29, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The settlement agreement between the Army and Shell Oil Company does
not provide for timely or efficient collection of what is expected to
exceed $500 million in cleanup costs from Shell.  When the government
does not collect receivables in a timely manner, it loses the
opportunity to invest these funds until needed for federal purposes. 
Since the 1989 settlement agreement with Shell, cash management
practices have cost the government more than a million dollars.  We
noted three weaknesses in the cash management practices followed at
the arsenal that contribute to this cost. 

First, the Army bills Shell quarterly, rather than monthly, as is
usual business practice.  This extended billing cycle alone has cost
the government about half a million dollars.  The settlement
agreement calls for quarterly billing.  However, Army officials said
that it does so only because their accounting systems were not able
to process disbursements on a monthly basis at the time the agreement
was signed in early 1989.  Since late 1989 or early 1990, the Army
has had the capability to bill Shell on a monthly basis. 

Second, the payment cycle allows 90 days--rather than the 60 days
called for in the settlement agreement--to document cost claims,
prepare a quarterly statement, and pay the amount due.  The 30-day
extension has cost the government over half a million dollars since
1989. 

Finally, the Army and Shell exchange payments through the mail rather
than electronically, which further delays access to the funds.  Nine
of the 10 checks we reviewed were deposited after the due date,
including 1 for about $12 million.  The government loses the use of
the money in the interim between the payment's due date and
deposit--an interval of as long as 10 days.  The associated cost from
the delayed deposits in these nine cases--which represent about a
third of the total number of checks--exceeded $22,000 in lost
interest.  Although payment by mail is specified by the settlement
agreement, the Army and Shell have the capability to set up
electronic transactions. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Army manufactured chemical weapons and conventional munitions at
the Rocky Mountain Arsenal, near Denver, Colorado, from the 1940s
into the 1960s.  The Army destroyed weapons there into the early
1980s.  Shell Oil Company leased a portion of the arsenal from 1952
to 1987 to produce herbicides and pesticides.  In July 1987, the
Environmental Protection Agency placed the Rocky Mountain Arsenal on
its list of the nation's most heavily contaminated sites--the
National Priorities List.  Under the settlement agreement and the
Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) of 1980 as amended,\3 the Army and Shell Oil Company are
both responsible for the extensive soil and groundwater contamination
at the Rocky Mountain Arsenal. 

According to the terms of the settlement agreement, Shell's portion
of the shared cleanup costs is expected to be about $500 million, and
the government's share about $1.6 billion, toward the estimated $2.1
billion cleanup.\4 In essence, the Army and Shell each incurs costs
for cleanup activities as they proceed; then quarterly, the two
entities reconcile which costs belong to which entity and bill one
another accordingly.  In most of the quarters since 1989, Shell has
owed the Army. 

Numerous laws and related federal regulations dictate prompt
recording, collection, and deposit of receivables.\5 The objective of
these laws and regulations is to improve funds availability and the
efficiency and effectiveness with which funds are transferred. 
Commonly accepted business principles also require efficient cash
management practices--based on the same "time value of money"
concept. 


--------------------
\3 CERCLA created the framework for cleaning up the nation's most
dangerous hazardous waste sites.  CERCLA imposes liability for
cleanup on a variety of potentially responsible parties, including
facility owners, operators, and others who generated hazardous
substances. 

\4 The $500 million only includes Shell's portion of shared costs. 
Shell is also responsible for paying to remove contamination caused
solely by Shell. 

\5 31 U.S.C.  ch.  33; 31 Code of Federal Regulations Part 206;
Department of Defense Financial Management Regulation, vol.  10, ch. 
18; and the GAO Policy and Procedures Manual for Guidance of Federal
Agencies, title 4, ch.  9. 


   QUARTERLY RATHER THAN MONTHLY
   BILLING
------------------------------------------------------------ Letter :3

Despite commonly accepted management practices that call for timely
billing to maximize cost recovery, the Army and Shell exchange bills
on a quarterly basis as specified in the settlement agreement.  The
consequent loss from the delayed recovery has in some cases been
considerable; Shell owes the Army, on average, about $4 million per
quarter, but has owed as much as $12 million for one quarter. 

According to Shell officials, the quarterly cycle represents a
compromise negotiated by the parties in 1988/1989.  Shell had
proposed monthly billing--consistent with its commercial practice,
the Army had proposed annual billing, and through negotiation the two
parties settled on quarterly billing.  According to Army officials,
the arsenal's financial manual specifies a quarterly billing cycle
because the arsenal did not have the capacity to process disbursement
documents on a monthly basis until after the agreement was executed. 
The financial manual could have been amended to take advantage of
this new capacity, but it was not.  Currently, the Army is processing
bills monthly and retaining them for quarterly submission to Shell. 

We estimate that the government has incurred about $500,000 in
additional interest costs since 1989 because the Army billed Shell on
a quarterly rather than a monthly basis.\6 According to Army
officials, a change to monthly billing could be accomplished without
any additional costs to the government.  According to Shell
officials, monthly billing is preferable, and the only cost to Shell
would be lost interest on the extended use of those funds. 


--------------------
\6 We calculated the government's lost income opportunity by assuming
an average interest rate of 5 percent over the period 1989 to 1996. 


   PAYMENT CYCLE ALLOWS 30 EXTRA
   DAYS
------------------------------------------------------------ Letter :4

The Army and Shell are taking 30 days longer than the 60 days allowed
by the settlement agreement to exchange quarterly payments.  Under
the agreement, payments are due 60 days\7 after the end of each
quarter in order to give both parties time to document and exchange
cost claims, prepare quarterly statements, and remit payments.  In
practice, however, payments are not made until 90 days after the
quarter closes. 

The extra 30 days occurs because the 3-month periods used for billing
purposes and accounting purposes do not match.  According to the
financial manual, the quarters are to begin on January 1, April 1,
July 1, and October 1.  The cost information supporting the quarterly
statements, however, comes from an accounting period that is 1 month
behind; that is, the quarters for which costs are captured begin on
December 1, March 1, June 1, and September 1.  Thus, the payment due
dates shown on each quarterly billing statement are 90 days after the
end of the quarter for which costs have been presented. 

We estimate the extra 30 days in each billing period cost the
government approximately $500,000 in additional interest costs since
1989.\8

According to Army officials, the 30 extra days are allowed at the
front end of the payment cycle to facilitate data collection
requirements.  In effect, they allow 30 days to elapse before
starting the clock on the 60-day process outlined in the financial
manual.  Shell officials said that billing has always been delayed an
additional 30 days to accommodate Shell's accounting system.  Shell
needed the additional time to close its books and present a cost
claim to the Army for incurred cleanup costs. 

When asked if they could comply with the 60 days called for in the
financial manual, rather than the 90 days currently allowed, Shell
officials expressed concern about whether this would allow sufficient
time to process the quarterly statement.  They agreed, however, that
if the quarterly billing cycle were replaced by a monthly cycle, the
processing and payment functions could probably be accomplished
within the
60 days.  According to an Army official, time can be trimmed from the
data collection, claims, and billing functions.  However, he believes
that the Army and Shell would want to revisit the time frames
allotted to each function by the financial manual.  For example, the
parties may want to allow more time for preparation and less for
billing. 

According to an Army official, a change from a 90-day payment process
to a 60-day payment process could be accomplished without any
additional cost to the government.  According to Shell officials, the
only cost to Shell would be lost interest on the extended use of
those funds. 


--------------------
\7 The financial manual allows 20 business days to prepare the
quarterly billing statement and another 30 calendar days for payment;
according to Army officials, this works out to be about 60 calendar
days. 

\8 We used the same method discussed in footnote 6 to calculate the
government's lost income opportunity. 


   PAYMENT BY MAIL DELAYS
   COLLECTION
------------------------------------------------------------ Letter :5

Under the terms of the 1989 settlement agreement, the party that owes
more at the end of the quarter is to send the remittance to the other
party by mail.  Mail remittance has remained the sole payment
transfer mechanism for both parties throughout the agreement. 
However, remitting these payments electronically, rather than by
mail, would expedite deposits of Shell's payments to the U.S. 
Treasury.  This is significant because in 25 of the 29 quarters that
payments were transferred, Shell has owed money to the Army. 

Shell mails its payments from Houston, Texas, to the Army Finance and
Accounting Center in Indianapolis, Indiana.  According to Army
officials, the Army has received all of Shell's payments on or before
the due date.  However, in the interval between the payment's due
date and its processing (i.e., deposit) date, the government is
losing the use of the funds.  Nine of the 10 checks we examined were
deposited after the due date.  For these nine checks, the interim
between the due date and the processing date ranged from 1 to 10
days. 

We could calculate only a portion of the lost interest arising from
the interval between the payment due date and the processing date
because we were unable to obtain the processing date for 15 of the 25
payments from Shell to the Army.  Further, we identified the deposit
date for only
10 of the more recent payments--those made between March 1992 and
December 1995.  These 10 payments ranged from about $1 million to $12
million.  The aggregate cost to the government for the nine checks
processed after the due date was more than $22,000.\9

Both Army and Shell officials agreed that electronic payment makes
good financial management sense.  Among the advantages cited were
that electronic funds transfers cost less to use, accelerate the
availability of funds to the receiving party, improve internal
controls through greater security and reliability, reduce remittance
processing time, and lessen paper and postage requirements. 

In fact, Shell Oil Company is already making electronic payments to
another federal entity.  According to an official of the Department
of the Interior's Minerals Management Service, Shell makes some
royalty payments by electronic funds transfer.  The Minerals
Management Service requires that all payers whose aggregate royalty
payment obligation totals $10,000 or more must make payment by
electronic funds transfer. 

To accomplish electronic funds transfers for the Rocky Mountain
Arsenal, the Army must approve a "deviation" from standard cash
management practices and then work with the Department of the
Treasury to set up an account.  According to Defense and Treasury
officials, the cost and time frame for establishing the electronic
process would be minimal. 


--------------------
\9 We used the same method discussed in footnote 6 to calculate the
government's lost income opportunity. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Assistant Secretary of the Army (Financial
Management & Comptroller) instruct the program manager at Rocky
Mountain Arsenal to work with Shell to amend the financial manual
accompanying the settlement agreement to achieve the following: 

  -- bill monthly rather than quarterly,

  -- eliminate the extra 30 days currently allowed for the payment
     cycle, and

  -- establish networks to exchange payments by way of electronic
     funds transfer, rather than by mail. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We obtained official oral comments on a draft of this report from the
Department of Defense's designated spokesperson in the office of the
Deputy Under Secretary of Defense for Environmental Security stating
that the Department concurs with the information in the report and
intends to implement its three recommendations. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We reviewed applicable laws, regulations, and documents such as the
settlement agreement, the financial manual governing transactions
between the Army and Shell, quarterly statements and supporting
documentation, and records of Shell's payments.  We interviewed
officials from the U.S.  Army located at the arsenal and at the Army
Environmental Center in Aberdeen, Maryland; the Defense Finance and
Accounting Service in Washington, D.C., and its centers in Columbus,
Ohio, and Indianapolis, Indiana; the U.S.  Treasury Department in
Washington, D.C.; and Shell Oil Company, both at the arsenal and at
the corporate headquarters in Houston, Texas. 

We did our work between June 1995 and June 1996 in accordance with
generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We would appreciate your advising us, within 30 days, of the actions
you are taking in response to our recommendations.  We are sending
copies of this report to the Chairman, Subcommittee on National
Security, International Affairs, and Criminal Justice, House
Committee on Government Reform and Oversight, and to the Secretary of
Defense. 

Please contact me at (303) 572-7317 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
I. 

Sincerely yours,

Thomas J.  Brew
Regional Manager, Denver


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
--------------------------------------------------------- Appendix I:1

Uldis Adamsons


   DENVER FIELD OFFICE
--------------------------------------------------------- Appendix I:2

Patricia Foley Hinnen
Tony Leonard
Wendy Matthews
Pam Tumler

*** End of document. ***