Recession puts brownfield cleanup in peril

By Bruce Gruenewald
Director, Energy and Environment Sector

Environmental cleanup could become a big and expensive mess for the Obama administration as double-digit business default rates over the next few years lead to new abandoned hazardous waste sites.

Current regulations allow companies to avoid purchasing third-party financial instruments to guarantee hazardous waste cleanup if they can prove financial capability to pay for it themselves. But the criteria, referred to as a financial assurance test provides less financial security than traditional third-party financial instruments, such as an insurance policy.

The bleak economic forecast and a potential multi-year period of elevated corporate defaults will test the financial assurance regime that federal and state regulators have established to secure the nation’s hazardous waste cleanup programs.

An ongoing case review being conducted by the U.S. Environmental Protection Agency indicates that a majority of facilities rely on either the financial test or a corporate guarantee to establish financial assurance. And, the number of companies that fail the financial assurance
test could increase dramatically if the number of companies in default in 2009 and 2010 doubles or triples as has been forecast by NYU bankruptcy expert Edward Altman. And the number of defaults arising from the current recession (think auto dealerships) is likely to exceed the existing capacity of federal and state regulators to work with self-insured companies to reestablish financial assurance under third-party mechanisms.

When self-insured companies default and thus become incapable of fulfilling their hazardous waste cleanup obligations, the responsibility falls to the government. A program known as Superfund was set up for this purpose. However, Superfund’s tax authority expired in 1995. At the time, the taxes generated roughly $2.2 billion in annual revenue; approximately $700 million more than the current annual appropriation from general revenues for cleanup efforts.

The Obama administration has proposed a partial Superfund tax reinstatement in its FY 2010 budget. Full reinstatement of the Superfund taxes would replenish the trust fund and free up $1.5 billion within the Interior and Environment appropriations bill, providing the president and congressional appropriators with additional monies to fund other environmental priorities. It would also provide a cushion of up to $700 million per year to absorb new cleanups and return the program to its roots as the nation’s hazardous waste cleanup safety net and the trust fund as its financial assurance mechanism.

Without dedicated tax revenue, hazardous waste cleanup left undone by companies in default will pile up. And with each one, human health and the environment are put at more risk.

Bruce Gruenewald is the Director, Energy and Environment Sector for NSI. He runs the day-to-day operations of the sector and works with the vice president to help clients develop sustainable energy and environmental solutions for state and local governments. This article was based on a piece Bruce authored for Natural Resources and Environment titled Current Recession to Test Financial Assurance Program. He was the lead economist on the EPA's Superfund Reauthorization Task Force.