oversight

Long-Term Commitments: Improving the Budgetary Focus on Environmental Liabilities

Published by the Government Accountability Office on 2003-01-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

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



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




GAO-03-219
               a
                                                 January 2003


                                                 LONG-TERM COMMITMENTS

                                                 Improving the Budgetary Focus on
Highlights of GAO-03-219, a report to the
Chairman of the Committee on the
                                                 Environmental Liabilities
Budget, House of Representatives




 Although environmental liabilities              The federal government is legally required to clean up hazardous wastes that
 resulting from federal programs                 result from its operations. Agencies are currently required to report these
 and activities represent the third              environmental liabilities in their financial statements, but these estimates are
 largest category of the federal                 not recognized until after a waste-producing asset is placed into service.
 government’s liabilities, the current           Although agencies are supposed to consider cleanup and disposal costs
 cash- and obligation-based budget
 does not provide information on
                                                 associated with these assets as part of the acquisition process, they typically
 estimated cleanup costs before                  do not request the related budget authority until many years after the
 waste-producing assets are                      government has committed to the operation creating the waste, when
 purchased. As a result,                         cleanup is imminent.
 policymakers do not have the
 opportunity to weigh the full costs             Alternative approaches to promote up-front consideration of the full costs of
 of a proposal with their judgment               environmental cleanup and disposal for assets being proposed for purchase
 of its benefits. The Chairman of                fall along a continuum ranging from supplemental information to enactment
 the House Committee on the                      of additional budget authority. (See figure below.) While each approach has
 Budget asked GAO to examine and                 potential benefits and challenges, agencies’ lack of experience in estimating
 report on various ways budgeting                future cleanup/disposal costs up front suggest starting at the more modest
 might be improved for
 environmental cleanup costs,
                                                 end of the continuum—providing supplemental information to decision
 including some of the benefits,                 makers. Eventually, however, accruing budget authority for the tail-end
 limitations, and challenges                     cleanup/disposal cost along with the front-end purchase cost estimates
 associated with each.                           would do the most to ensure that these costs are considered before the
                                                 government incurs the liability.

                                                 Continuum of Alternative Approaches to Improve Budgeting for
                                                 Environmental Liabilities
 GAO recommends that the Director
 of the Office of Management and
 Budget (OMB) require
 supplemental reporting in the
 budget to disclose future
 environmental cleanup/disposal
 costs for new acquisitions. Agency
 and OMB officials should consult
 with legislative branch officials to
 ensure that useful information is
 provided to congressional decision
 makers.




 www.gao.gov/cgi-bin/getrpt?GAO-03-219

 To view the full report, including the scope
 and methodology, click on the link above.
 For more information, contact Susan Irving on
 (202) 512-9142 or irvings@gao.gov.
Contents



Letter                                                                                            1
                           Results in Brief                                                       2
                           Background                                                             4
                           Objectives, Scope, and Methodology                                     5
                           Environmental Liabilities Largely Associated with Defense and
                             Energy                                                               7
                           Current Budget Information Does Not Include Environmental
                             Liabilities Before Acquisition                                       9
                           Alternative Approaches to Consider Environmental Liabilities          12
                           Each Approach Has Potential Benefits and Challenges                   17
                           Conclusions                                                           20
                           Recommendations for Executive Action                                  21
                           Agency Comments                                                       21


Appendixes
             Appendix I:   Breakout of Environmental Liabilities                                 23


Tables                     Table 1: Breakdown of DOE and DOD Federal Environmental
                                    Liabilities, Fiscal Year 2001                                         23
                           Table 2: Environmental Liabilities, by Agency, Fiscal Year 2001                24


Figures                    Figure 1: Flow of Cleanup/Restoration and Disposal Funds for
                                     DOD                                                                   8
                           Figure 2: Flow of Cleanup Funds for DOE                                         9
                           Figure 3: Continuum of Alternative Approaches to Improve
                                     Budgeting for Environmental Liabilities                              13
                           Figure 4: Possible Flow of Funds through Accounts                              16




                           Page i                          GAO-03-219 Budgeting for Environmental Liabilities
Contents




Abbreviations

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


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Page ii                                GAO-03-219 Budgeting for Environmental Liabilities
A
United States General Accounting Office
Washington, D.C. 20548



                                    January 24, 2003                                                                                 Leter




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

                                    Dear Mr. Chairman:

                                    The federal government undertakes a wide range of programs and
                                    activities—such as federal employee pensions, retiree health, and federal
                                    credit—that may create commitments for future spending. Environmental
                                    liabilities,1 which result from some federal programs and activities, are one
                                    example of these future commitments and represent the third largest
                                    category of the federal government’s liabilities reported in the 2001
                                    Financial Report of the U.S. Government.2 Federal, state, or local laws
                                    and regulations require cleanup that may be done many years after the
                                    activity creating the environmental liability is undertaken. However,
                                    because the federal budget is primarily calculated on a cash basis,
                                    information on the estimated cleanup costs is not included in the budget
                                    when budgeting decisions are being made about such activities.




                                    1
                                     Federal accounting standards define environmental liabilities as the cleanup costs of
                                    removing, containing, and/or disposing of (1) hazardous waste from property or (2) material
                                    and/or property that consists of hazardous waste at permanent or temporary closure or
                                    shutdown of associated property, plant, and equipment. Hazardous waste is a solid, liquid,
                                    or gaseous waste or combination of these wastes that, because of its quantity,
                                    concentration, or physical, chemical, or infectious characteristics, may cause or
                                    significantly contribute to an increase in mortality or an increase in serious irreversible or
                                    incapacitating reversible illness or pose a substantial present or potential hazard to human
                                    health or the environment when improperly treated, stored, transported, disposed of, or
                                    otherwise managed. As used in this report, it may include such things as nuclear or toxic
                                    waste or unexploded ordnance, among other things. Cleanup may include, but is not limited
                                    to, decontamination, decommissioning, site restoration, site monitoring, closure, and
                                    postclosure costs. Federal accounting standards define a liability as a probable future
                                    outflow of resources due to a past governmental transaction or event.
                                    2
                                     The two largest liabilities are federal debt securities held by the public and federal
                                    employee and veteran benefits payable.




                                    Page 1                                   GAO-03-219 Budgeting for Environmental Liabilities
                   You asked us to examine and report on various ways budgeting might be
                   improved for environmental cleanup costs, including some of the benefits,
                   limitations, and challenges associated with each. Accordingly, we reviewed
                   current budgeting practices at the departments of Energy and Defense,
                   since they account for about 98 percent of the government’s reported
                   environmental liabilities. In addition, we discussed alternative approaches
                   with staff within these departments, as well as staff in the Office of
                   Management and Budget (OMB) and the Congressional Budget Office
                   (CBO). The focus of this report is forward-looking. That is, it explores
                   alternative ways to ensure that the cleanup costs of hazardous waste are
                   considered by decision makers before the government has committed to
                   the operation creating the waste.3



Results in Brief   The federal government is legally required to clean up hazardous wastes
                   that result from its operations. Although these cleanup costs represent the
                   third largest category of federal liabilities, they are not usually addressed
                   until many years after the government has committed to the operation
                   creating the waste. Under current budget guidance, agencies include in
                   their budget request for a given year only the funds they expect to obligate
                   for cleanup during that budget year. As a result, at the time decisions are
                   being made, the full costs of a program that will have cleanup costs are not
                   recognized in the budget, nor are estimates of these future costs provided
                   elsewhere in budget documents. The budget does not provide
                   policymakers the information to compare the full costs of certain programs
                   with their judgment of benefits.

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

                   About 98 percent of the $307 billion in environmental liabilities that was
                   reported in fiscal year 2001 financial statements was associated with the

                   3
                    We recently issued a report that provides a broad overview of various program activities,
                   such as environmental liabilities, that may expose the government to future spending. See
                   U.S. General Accounting Office, Fiscal Exposures: Improving the Budgetary Focus on
                   Long-Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).
                   4
                    These retired assets include such things as excess facilities at the Savannah River Site in
                   South Carolina and the Presidio military base in California.




                   Page 2                                   GAO-03-219 Budgeting for Environmental Liabilities
departments of Energy and Defense. Estimates of disposal and cleanup
costs for new assets are not, however, routinely estimated before making
the commitment to purchase the asset. Given the large number of years
that frequently occur between acquisition and cleanup, estimates for new
assets are likely to change during that period for a variety of reasons,
including changes over time in technology and regulatory standards. This,
however, is also true to some degree when agencies estimate cleanup costs
at the end of asset lives when they begin to request funding for the cleanup.
While cleanup cost estimates made before committing to purchase an asset
would need to be periodically reassessed, they would provide more
information than is currently provided.

Alternative approaches exist to promote more complete consideration of
the full costs of environmental cleanup and disposal associated with the
acquisition of new assets. They fall along a continuum representing the
degree of certainty that the costs will be considered in decision making. At
one end of the continuum, the government could increase awareness of full
costs by reporting the long-term environmental liability costs associated
with new assets as supplemental information along side budget authority
and outlay figures in the budget. While this puts it closer to the budget
numbers than would a separate report, there is no assurance that this
information will be considered in budget decision making. However, it will
help ensure that information is generated and made more transparent.
Alternatively, budget process mechanisms could be established to require
explicit disclosure and prompt consideration of the full costs of
environmental liabilities associated with a proposed asset acquisition. For
example, Congress could revise its rules to permit a point of order against
legislation that does not disclose estimates for environmental liabilities
associated with the acquisition of new assets to be funded in the bill. Such
a process mechanism might increase attention paid to these costs even
though they would not actually require funding until far into the future.
Finally, it is generally assumed that costs included in primary budget data
receive the most attention.5 At this end of the continuum, budget authority
needed for environmental cleanup for new assets could be accrued in the
budget. OMB is currently working on a proposal along these lines. It is
important to note that this approach would not change the costs of future
cleanup—these have already been created by the decision to acquire the



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



Page 3                                   GAO-03-219 Budgeting for Environmental Liabilities
             asset. Rather, it would only shift the timing of when the costs are
             recognized.

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



Background   Historically, federal outlays and receipts generally have been reported on a
             cash basis. That is, receipts are recorded when received and outlays are
             recorded when paid without regard to the period in which the taxes and
             fees were assessed or the costs resulting in the outlay were incurred. This
             has an advantage in that the deficit (or surplus) closely approximates the
             cash borrowing needs (or cash in excess of immediate needs) of the
             government.6 However, over the years analysts and researchers have
             raised concerns that the current cash- and obligation-based budget does
             not adequately reflect the cost of some programs—such as federal credit or
             insurance—in which the government makes a commitment now to incur a
             cost, but some or most of the cash flows come much later. This means that
             for some programs the current cash- and obligation-based budget does not
             recognize the full costs up front when decisions are made or provide
             policymakers the information to compare the full costs of a proposal with
             their judgment of its benefits. Programs such as federal employee
             pensions, retiree health care, and environmental liabilities are examples
             where the cash basis of accounting does not represent the government’s
             full commitments.




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




             Page 4                                GAO-03-219 Budgeting for Environmental Liabilities
                         Environmental liabilities are the result of federal operations that create
                         hazardous waste that federal, state, or local laws and/or regulations require
                         the federal government to clean up. Because these cleanup costs are not
                         usually paid until many years after the government has committed to the
                         operation creating the waste, policymakers have not been provided
                         complete cost information when making decisions about undertaking the
                         waste-creating operation. Although all agencies are not yet in compliance,
                         current federal accounting standards require agencies to estimate and
                         report in their financial statements their liability for cleanup costs when
                         they are deemed probable and measurable. Traditionally, budget guidance
                         has required agencies to estimate the funds expected to be obligated for
                         cleanup activities during the budget year in which the funds are needed.7
                         However, in recent years OMB also has issued guidance for agencies to
                         estimate life-cycle costs when purchasing capital assets. Among the items
                         to be included in the total amount of these life-cycle costs are
                         decommissioning and disposal costs. The life-cycle cost estimates are
                         reported to OMB in budget Exhibit 300 and do not separately break out
                         cleanup and disposal costs. The exhibits are for OMB’s informational
                         purposes only; they are not included in the President’s budget request or
                         agency’s budget justification provided to Congress. Department of Energy
                         (DOE) and Department of Defense (DOD) officials told us that the cleanup
                         portion of these total costs has traditionally not been separated out or
                         identified at the time of purchase. This is because estimates developed at
                         that time were very preliminary, often based only on a percentage of total
                         costs rather than specific unit costs.



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

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


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




                         Page 5                                  GAO-03-219 Budgeting for Environmental Liabilities
sheets. Because this analysis showed that about 98 percent of the
government’s reported environmental liabilities were associated with DOD
and DOE, we focused our review on the practices of these two
departments. We reviewed published reports, related guidance, and budget
and financial statement documentation from each agency. We also
interviewed DOD, DOE, and OMB staff to discuss current budget practices.

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

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




Page 6                           GAO-03-219 Budgeting for Environmental Liabilities
Environmental         Nearly all of the $307 billion in environmental liabilities reported for fiscal
                      year 2001 was associated with DOD and DOE. About 78 percent of these
Liabilities Largely   liabilities were associated with DOE and represent the environmental
Associated with       legacy resulting from the production of nuclear weapons. The 21 percent
                      associated with DOD is primarily for environmental restoration of military
Defense and Energy    installations and disposal of nuclear materials.8 The remaining
                      environmental liabilities associated with other federal agencies include
                      such things as replacement of underground storage tanks, asbestos
                      removal, and lead abatement. Some of this remaining 1 percent will be paid
                      out of Treasury’s judgment fund.9

                      DOD and DOE manage environmental cleanup quite differently: DOD’s
                      decentralized activities are managed within the individual services, at the
                      program level, while DOE’s activities are centralized within its
                      Environmental Management (EM) program. For example, DOD considers
                      environmental liabilities in two categories: (1) disposal and
                      (2) environmental restoration/cleanup. Army’s chemical weapons and
                      Navy’s nuclear-powered carriers, ships, and submarines dominate DOD’s
                      disposal liabilities. Funding for disposal is provided to the Army, Navy, and
                      Air Force Operation and Maintenance (O&M) accounts.
                      Restoration/cleanup activities are largely addressed through the Defense
                      Environmental Restoration Program (DERP), which is funded through five
                      environmental restoration accounts for Army, Navy, Air Force, Formerly
                      Used Defense Sites (FUDS), and Defense-wide. The funds in these
                      accounts are then transferred to the service levels’ O&M budgets. In
                      contrast, within DOE, facilities that have reached the end of their useful
                      lives and require cleanup typically are transferred to EM, along with some
                      additional funds for surveillance and maintenance. EM also receives
                      budget authority directly through an appropriation. Thus, budgeting and
                      funding for cleanup is almost entirely handled by EM, not individual
                      program offices. EM’s program emphasis is on site closure and project
                      completion. Its activities include environmental restoration, waste
                      management, and nuclear material and facility stabilization. Figures 1 and
                      2 illustrate the flow of cleanup funds for these two departments.



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




                      Page 7                                  GAO-03-219 Budgeting for Environmental Liabilities
Figure 1: Flow of Cleanup/Restoration and Disposal Funds for DOD




                                         a
                                          In some instances, funds may be transferred to other accounts, such as military construction or
                                         procurement, for similar cleanup purposes.
                                         b
                                          Although the Army, as executive agent, receives funding from the FUDS DERP account, the sites in
                                         FUDS may have been owned by any of the services.
                                         c
                                         Includes the Defense Logistics Agency, Defense Threat Reduction Agency, and Deputy
                                         Undersecretary of Defense (Installations & Environment).




                                         Page 8                                      GAO-03-219 Budgeting for Environmental Liabilities
                        Figure 2: Flow of Cleanup Funds for DOE




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




Current Budget          Current budget guidance and accounting standards both require agencies
                        to estimate cleanup and disposal costs. However, neither requires that
Information Does Not    these costs be separately estimated for decisions when assets are being
Include Environmental   considered for purchase—before the government is legally committed to
                        paying these costs. While information about private sector decision
Liabilities Before      making on these costs is limited, at least some organizations set aside
Acquisition             funds to address these future cleanup and disposal costs.




                        Page 9                                     GAO-03-219 Budgeting for Environmental Liabilities
Agencies have little or no budgetary incentive to develop estimates of
future cleanup costs. With respect to primary budget data, agencies do not
reflect associated cleanup costs in their budget requests for new waste-
producing assets. Funding for such cleanup costs is not requested until
many years later when the waste produced is ready to be cleaned up or
disposed of. Budget guidance does require agencies to estimate cleanup
costs as part of total life-cycle costs when requesting funds for new assets.
However, agencies are not required to specifically break out the cleanup
portion of these costs.10 DOD and DOE officials told us that separating out
the cleanup/disposal component from total life-cycle costs would be
relatively difficult because their estimates of cleanup costs are very
preliminary. Often, a percentage of the purchase price instead of a specific
unit cost is used as the cost estimate. Moreover, they noted that future,
unknown changes in regulatory requirements and technology make it
difficult to develop what they believe to be reasonable and credible cost
estimates at the time an asset is acquired. However, since estimates for
retiring assets are being made under today’s regulatory requirements and
technology, the same methodology might be used for preliminary estimates
with respect to new assets. This would permit comparisons between or
across different assets. Over time, as laws and technology change, periodic
cleanup cost reestimates could be made. Clear definitions for hazardous
substances also may need to be resolved to ensure that reasonable
estimates are developed. For example, the Federal Accounting Standards
Advisory Board (FASAB) defines hazardous wastes in relatively broad
terms (see footnote 1) for accounting purposes. However, the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 (CERCLA), which requires the cleanup of waste sites, provides a
substantially more detailed definition.




10
  DOD and DOE do provide cleanup cost information in various reports that are available to
policymakers. For example, DOD provides an annual report to Congress on the progress
and accomplishments of DERP. DOE periodically reports on the status of the EM program’s
life-cycle cost and schedule estimates for completing cleanup. While the information in
these reports may inform future budget planning, it does not include cleanup cost estimates
for assets being proposed for purchase.




Page 10                                GAO-03-219 Budgeting for Environmental Liabilities
While accounting standards promote an earlier recognition of
environmental liabilities than does the budget, they do not call for
estimates of environmental liabilities before an acquisition decision is
made because they recognize these cleanup costs only after a transaction
has occurred and an asset is put into service.11 Given that these conditions
are met, agencies must estimate the environmental liabilities associated
with all existing assets. Despite this, not all agencies comply with
accounting standard requirements to estimate the environmental liabilities
associated with all of their assets. For example, DOD typically records the
liabilities associated with assets for which cleanup or disposal is imminent.
DOD’s inability to comply with requirements for environmental liabilities
was one of several reasons why independent auditors were not able to
render an opinion about DOD’s fiscal year 2001 financial statements.
Absent budgetary incentives to estimate future environmental liabilities,
these cost estimates will not be developed as assets are considered for
purchase—the time when decision makers still have an opportunity to
judge whether the government should commit to these costs.




11
  Accounting standards require that a liability be recognized (i.e., estimated) when a past
transaction or event has occurred, a future outflow or other sacrifice of resources is
probable, and the future outflow or sacrifice of resources is measurable.




Page 11                                  GAO-03-219 Budgeting for Environmental Liabilities
                Data about how non-federal organizations consider environmental
                liabilities when planning to purchase assets or start new projects were
                largely unavailable. However, there are cases where companies set aside
                funds for future cleanup costs. For example, the Nuclear Regulatory
                Commission (NRC) requires private utilities to accumulate the funds
                necessary to decommission their nuclear power plants and most
                established sinking funds so that the decommissioning funds are
                accumulated over the operational life of a nuclear power plant as part of
                the cost charged to customers for the electricity they use. With the
                deregulation of electric utilities and the resultant industry restructuring, we
                recently reported that in most of the requests to transfer licenses to own or
                operate nuclear power plants approved by NRC, the financial arrangements
                have either maintained or enhanced the assurance that adequate funds will
                be available to decommission those plants.12 For example, projected
                decommissioning funds were generally prepaid by the selling utility. Also,
                an Environmental Protection Agency contracted study recommended that
                a Canadian hydroelectric company establish a liability fund to accumulate
                funds to finance asset removal, decommissioning, irradiated fuel disposal,
                and low-to-intermediate radioactive waste disposal.13



Alternative     Alternative approaches to promote more complete consideration of the full
                costs of environmental cleanup and disposal associated with the
Approaches to   acquisition of new assets fall along a continuum from provision of
Consider        supplemental information to accrual of those costs in budget authority up
                front, as assets are acquired. We explored three approaches along this
Environmental   continuum ranging from the relatively simple one of providing more
Liabilities     information but making little other change to current budgeting, to a more
                complicated one involving significant changes to what is included in
                primary budget data. The approaches along this continuum represent the
                degree of certainty that the costs will be considered in decision making.
                Figure 3 summarizes the three approaches along the continuum.




                12
                 U. S. General Accounting Office, Nuclear Regulation: NRC’s Assurances of
                Decommissioning Funding During Utility Restructuring Could Be Improved, GAO-02-48
                (Washington, D.C.: Dec. 3, 2001).
                13
                 ICF Incorporated, “Full Cost Accounting” for Decision Making at Ontario Hydro: A Case
                Study (Mar. 22, 1996).




                Page 12                              GAO-03-219 Budgeting for Environmental Liabilities
Figure 3: Continuum of Alternative Approaches to Improve Budgeting for
Environmental Liabilities




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

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




Page 13                           GAO-03-219 Budgeting for Environmental Liabilities
At the other end of the continuum is the more comprehensive approach of
accruing amounts for environmental liabilities associated with new assets
in any requested budget authority for new assets.14 This approach
represents the largest departure from current budgeting practices. Along
these lines, OMB is developing a legislative proposal to require programs
that generate hazardous waste to “pay the accruing cost to clean up
contaminated assets at the end of their useful life. These payments would
go to funds responsible for the cleanup.”15

Implementation of an approach that would include budget authority for
environmental liabilities would require development of new budgeting
mechanisms. The provision to accumulate budget authority over an asset’s
life would require a means of “fencing off” the budget authority to ensure
that it is actually used for cleanup. Also, since no such amounts were set
aside for existing assets, it would be necessary to continue financing the
cleanup of existing assets while implementing the new approach for new
assets. One way to do this is to use a pair of accounts—a liquidating
account and a cleanup fund account—in each department involved in
budgeting for the cleanup costs. The liquidating account would obtain
discretionary budget authority for the past share of cleanup costs of assets
already in operation and for the cleanup costs of retired assets. It would
pay the past share of cleanup costs for operating assets to the cleanup fund
and would conduct or contract for the cleanup of assets no longer in use at
the inception of this new approach. Given technological and other
changes, regular reestimates of cleanup costs would be necessary.




14
 Rather than accruing budget authority over time, the full amount for cleanup could be
enacted at the time an asset is acquired. However, this would immediately insert the total
highly uncertain cleanup cost estimate into the budget.
15
 Office of Management and Budget, Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2003 (Washington, D.C.: Feb. 4, 2002), 12.




Page 14                                 GAO-03-219 Budgeting for Environmental Liabilities
The cleanup fund account would obtain budget authority from two
sources: (1) from the liquidating account for the past share of the cleanup
cost for assets that are in operation when the new approach is established
and (2) for new assets, from programs that operate assets that generate
cleanup needs. The cleanup fund account would receive annual accruing
cost payments from programs based on the estimated (and reestimated)
cost of cleanup for all operating assets—those purchased after the new
approach is implemented and those already in service. These payments
would be a required part of the discretionary appropriations for running
any program that generates cleanup costs. When needed, the cleanup fund
accounts could also request additional budget authority for the assets in
operation at its inception. These appropriations could be made to the
liquidating account and paid to the cleanup fund account when the assets
are ready for cleanup. Once in the cleanup fund account, the budget
authority from the programs and liquidating accounts could be permanent,
indefinite authority available for cleanup, subject only to the usual
apportionment process.16 Figure 4 below illustrates one possible flow of
funds through accounts.




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




Page 15                              GAO-03-219 Budgeting for Environmental Liabilities
Figure 4: Possible Flow of Funds through Accounts




Page 16                           GAO-03-219 Budgeting for Environmental Liabilities
Each Approach Has        Each of the three approaches described offer both potential benefits and
                         challenges to consider. All three would be likely to improve the quality of
Potential Benefits and   cleanup estimates. Although agencies are required to develop these
Challenges               estimates for financial statement purposes, they are not developed until
                         after the asset is purchased. Also, not all agencies have completely
                         complied with financial accounting standards. For example, in December
                         2001, we reported that DOD was not estimating and reporting liabilities
                         associated with a significant portion of property, plant, and equipment that
                         was no longer being used in its operations.17 Moreover, DOD’s financial
                         statements did not provide cleanup cost information on all of its closed or
                         inactive operations known to result in hazardous wastes. In addition, in
                         1997 and 1998 we issued a series of reports on DOD environmental
                         liabilities that were not being reported, even though they could be
                         reasonably estimated.18

                         Each of the three approaches would result in decision makers having
                         information about costs and benefits of a proposed acquisition while there
                         is still the opportunity to make a choice—before the government actually
                         incurs an environmental liability. Since the cleanup costs for any asset will
                         become a future claim on federal resources regardless of whether these
                         costs were considered at the outset, good budgeting principles call for up-
                         front consideration of these costs. Given that agencies are not currently
                         experienced in separately estimating cleanup/disposal costs before assets
                         are purchased, reasonable and credible estimates may take time to
                         develop. This, however, is not an insurmountable issue. We have reported
                         on numerous occasions that environmental liabilities can be estimated and
                         have pointed out how estimation methodologies can be improved. For
                         example, in December 2001 we recommended that, among other things,
                         DOD correct real property records, develop and implement standard
                         methodologies for estimating related cleanup costs, and systematically



                         17
                          See U.S. General Accounting Office, Environmental Liabilities: Cleanup Costs From
                         Certain DOD Operations Are Not Being Reported, GAO-02-117 (Washington, D.C.: Dec. 14,
                         2001).
                         18
                          See U.S. General Accounting Office, Financial Management: DOD’s Liability for Missile
                         Disposal Can Be Estimated, GAO/AIMD-98-50R (Washington, D.C.: Jan. 7, 1998); Financial
                         Management: DOD’s Liability for the Disposal of Conventional Ammunition Can Be
                         Estimated, GAO/AIMD-98-32 (Washington, D.C.: Dec. 19, 1997); and Financial
                         Management: DOD’s Liability for Aircraft Disposal Can Be Estimated, GAO/AIMD-98-9
                         (Washington, D.C.: Nov. 20, 1997).




                         Page 17                              GAO-03-219 Budgeting for Environmental Liabilities
accumulate and maintain the site inventory and cost information needed to
report this liability.

Of the three approaches described, the supplemental information and the
budget process mechanism approaches would be easiest to implement and
could be done separately or together. Neither requires the enactment of
budget authority and so would not increase reported budget totals.
Supplemental reporting requirements would be the easiest to implement
since OMB could require it under OMB’s current authority. However,
unless agencies see that the new supplemental information is used in
decision making, they may have less incentive to develop meaningful
estimates. The budget process mechanism approach would increase the
perceived importance of these estimates by permitting a point of order that
could block legislation lacking appropriate cost information. For example,
unfunded mandates legislation permits a point of order to be raised against
proposed legislation containing significant intergovernmental mandates if a
CBO estimate of the cost of the mandate has not been published in the
committee report or the Congressional Record.19 Unlike supplemental
reporting alone, the budget mechanism approach has the potential to
promote improved estimates because it could present members an
opportunity to challenge legislation without appropriate cost information.
Implementing a budget process approach with a point of order would
require an amendment either to the Congressional Budget Act of 1974 or a
change to committee rules.

The third approach, accruing budget authority over the life of the asset,
represents the largest departure from current budgeting practices. By
requiring that agencies obtain budget authority before acquiring new
assets, this approach would ensure consideration of environmental
cleanup costs before an asset is acquired. Such an approach would require
legislation. If Congress and the Administration agree to take such action, it
would ensure that each program’s costs are fully reflected in program
budgets. Requiring that agencies accrue budget authority for cleanup costs
would likely increase the attention paid to improving the quality of
estimates. All in all, given the current quality of agency estimates and
significant implementation issues, such an approach may best be viewed as
something to be considered in the future.




19
 Unfunded Mandate Reform Act of 1995, Pub. L. No. 104-4, §423.



Page 18                           GAO-03-219 Budgeting for Environmental Liabilities
Beyond the issue of developing reasonable and credible estimates early on,
this third approach also would present administrative and structural
challenges such as developing mechanisms to ensure that (1) budget
authority provided for cleanup is adequately fenced off for cleanup,
(2) agencies adequately track and manage that budget authority, and
3) reestimates provide positive incentives to reflect the best approximation
of the government’s total environmental liabilities. When demand for
current funding is great, fencing off budget authority for future use can be a
challenge. One way to address this would be to have payments into the
cleanup fund come from discretionary appropriations, but once in the fund,
the budget authority would become permanent, subject only to the usual
apportionment process.20 Providing higher levels of budget authority now
for expenses that may not be paid until well into the future may be difficult.
It is important to note that this approach would not in fact change the costs
of future cleanups—in effect these have already been determined by the
decision to acquire the asset. Rather, this would only shift the timing of
their recognition.

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


20
  Discretionary budget authority is provided in appropriations acts. Permanent budget
authority is available as the result of previously enacted legislation and does not require new
legislation for the current year. Apportionment is the action by which OMB distributes
amounts available for obligation, by specific time periods (usually quarters), activities,
projects, objects, or a combination thereof. The amounts apportioned limit the amount of
obligations that may be incurred.
21
 An increase in budget authority totals alone would not affect the deficit/surplus measure
because that calculation is based on the difference between total federal revenues and
spending in a given year.




Page 19                                  GAO-03-219 Budgeting for Environmental Liabilities
              cleaner, more consistent application of full costing since it would eliminate
              a lengthy and possibly confusing transition period. However, such a
              decision to provide budget authority for retired assets could shift the
              control over the timing of the cleanup from Congress to the Administration.

              Finally, a way to budget for inevitable reestimates of cleanup costs would
              have to be designed. If agencies must obtain additional budget authority
              for these reestimates, they will have less incentive to make artificially low
              initial estimates but may be reluctant to provide upward reestimates. On
              the other hand, one could envision agencies forwarding a low estimate
              “today” with the idea that they could worry about “tomorrow” later.
              Alternatively, reestimates could be handled as they are with credit
              programs, that is, agencies could automatically receive permanent,
              indefinite budget authority for upward reestimates of cleanup costs. This
              would hold agencies harmless for additional costs that result from
              technological or regulatory changes. It would also, however, provide an
              incentive to make artificially low initial estimates.



Conclusions   Because the federal budget does not recognize the full costs of a program
              that will have cleanup costs when decisions to commit to the program are
              being made, policymakers do not have sufficient information to compare
              the full costs of a particular program with their judgment of its benefits.
              Cleanup costs are in fact a liability associated with the ownership of many
              assets. Decision makers need to consider these costs before committing to
              acquire the waste-producing asset.

              Agencies generally do not yet have experience in estimating future
              cleanup/disposal costs up front, before the decision to purchase the waste-
              producing asset is made. Accordingly, all of the alternative approaches we
              discuss for providing this information represent a challenge for both
              agencies and OMB to develop an estimation methodology. Increasing the
              visibility of cost estimates may increase the effort spent on them and
              ultimately improve both the quality of the estimates and enhance decision
              making. As a first step, we believe that OMB and agencies should provide
              supplemental information. This can be expected to improve the focus and
              attention and permit improvements in estimating models. As this proceeds,
              further consideration should be given to budget process and budget
              accounting changes. Ultimately, accruing budget authority for the tail-end
              cleanup/disposal costs along with the front-end purchase costs of assets
              would best ensure that the cleanup/disposal costs are considered before




              Page 20                           GAO-03-219 Budgeting for Environmental Liabilities
                      the government incurs the liability, but raises significant implementation
                      challenges.



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




Agency Comments       The Secretary of Defense had no comments on our draft report. We did not
                      receive comments from the Secretary of Energy in time to be considered
                      and included in this report. In consultation with OMB staff, GAO was
                      commended for its useful analysis and noted that the ideas discussed merit
                      consideration. OMB staff also provided technical clarifications, which we
                      incorporated as appropriate.


                      As agreed with your office, unless you release this report earlier, we will
                      not distribute it until 30 days from the date of this letter. At that time we
                      will send copies to the Ranking Minority Member of the House Committee
                      on the Budget and the chairmen and ranking minority members of the
                      Senate Committee on the Budget; the subcommittees on Defense and on
                      Energy and Water Development, Senate Committee on Appropriations; and
                      the subcommittees on Defense and on Energy and Water Development,
                      House Committee on Appropriations. We are also sending copies to the
                      Director, Office of Management and Budget. In addition, we are sending
                      copies to the Secretary of Defense and of Energy. Copies will also be made
                      available to others upon request. In addition, the report is available at no
                      charge on GAO’s Web site at http://www.gao.gov.




                      Page 21                          GAO-03-219 Budgeting for Environmental Liabilities
This report was prepared under the direction of Christine Bonham,
Assistant Director, Strategic Issues, who may be reached at (202) 512-9576.
Other major contributors were Carol Henn and Brady Goldsmith. Please
contact me at (202) 512-9142 if you or your staff have any questions
concerning the report.

Sincerely yours,




Susan J. Irving
Director
Federal Budget Analyses
Strategic Issues




Page 22                          GAO-03-219 Budgeting for Environmental Liabilities
Appendix I

Breakout of Environmental Liabilities                                                                          AA
                                                                                                                ppp
                                                                                                                  ep
                                                                                                                   ned
                                                                                                                     n
                                                                                                                     x
                                                                                                                     id
                                                                                                                      e
                                                                                                                      x
                                                                                                                      Iis




               About a dozen federal agencies report environmental liabilities in their
               financial statements. This appendix provides additional detail on the
               environmental liabilities reported by the Department of Energy (DOE) and
               the Department of Defense (DOD) and about those reported by the other
               federal agencies. These data were extracted from agencies’ fiscal year 2001
               consolidated balance sheets and represent existing assets—not proposed
               acquisitions. Because DOD and the National Aeronautics and Space
               Administration auditors disclaimed an opinion on their financial
               statements, it is not certain that these amounts fairly present their
               liabilities.



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

               (Dollars in billions)
               Agency                                                                                  Liability
               DOE
                        Closed nuclear weapons complexes                                                   $184
                        Active and surplus facilities—other programs                                         31
                        High-level waste and spent nuclear fuel disposition                                  15
                        Other                                                                                  8
                        Subtotal — DOE                                                                     $238
               DOD
                        Training range cleanup                                                                 2
                        Other cleanup sites                                                                  14
                        Formerly Used Defense Sites                                                          18
                        Base Realignment and Closure                                                           5
                        Aircraft carriers/submarines disposal                                                11
                        Chemical weapons and other disposal                                                  14
                        Subtotal — DODa                                                                    $ 63
               Totala                                                                                      $302
               Source: DOE and DOD.

               Note: Information was taken from DOE’s and DOD’s fiscal year 2001 consolidated balance sheets and
               accompanying notes.
               a
                   Numbers do not add to total due to rounding.




               Page 23                                       GAO-03-219 Budgeting for Environmental Liabilities
                                            Appendix I
                                            Breakout of Environmental Liabilities




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

(Dollars in millions)
Agency                            Liability Audit opinion Nature of liability
Department of Energy             $238,349 Unqualified          Legacy resulting from the production of nuclear weapons.
Department of Defense              63,294 Disclaimed           Contamination resulting from decades of training and preparing for
                                                               national defense.
Department of                       2,178 Unqualified          Cleanup associated with normal Federal Aviation Administration, Coast
Transportation                                                 Guard, and Maritime Administration operations (e.g., storage tanks,
                                                               fuels, solvents, and chemicals) or the result of an accident.
National Aeronautics and            1,346 Disclaimed           Groundwater, surface water/sediment, and ecological remediation and
Space Administration                                           monitoring.
Tennessee Valley Authority            804 Unqualified          Decommissioning of nuclear-powered generating plants.
Department of the Interior            268 Unqualified          Remediation of hazardous conditions and contamination caused by the
                                                               Department of the Interior and which exist on lands held by the
                                                               department.
Department of Veterans                260 Unqualified          Asbestos removal, lead abatement, replacement of underground oil and
Affairs                                                        gasoline tanks, decommissioning of waste incinerators, and
                                                               decontamination of equipment prior to disposal.
General Services                      144 Unqualified          Removal and containment of environmental hazards in federal buildings.
Administration
Department of Commerce                 79 Unqualified          Nuclear reactor, Pribiloff Island, and other cleanup.
Environmental Protection               15 Unqualified          Cleanup of closed EPA sites plus the decontamination and
Agency (EPA)                                                   decommissioning of EPA research facilities.
Department of Health and               13 Unqualified          Removing, containing, and/or disposing of (1) hazardous waste from
Human Services                                                 property or (2) material and/or property that consists of hazardous waste
                                                               at a permanent or temporary closure or shutdown of associated
                                                               property, plant, and equipment.
Department of Justice                   5 Unqualified          Underground fuel storage tank remediation, maintenance, and repair.

Total                            $306,755
                                            Source: GAO.
                                            Note: Data were taken from these agencies’ consolidated balance sheets and accompanying notes.
                                            Only agencies that reported environmental liabilities in their fiscal year 2001 financial statements are
                                            shown.




(450077)                                    Page 24                                      GAO-03-219 Budgeting for Environmental Liabilities
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