7280
     J^""*S
         \   Office of Inspector General
^
             Report of Review
                                      OOOR94001
        Region 5's Use of Allocation Tools And
              Mixed Funding Under The
   Superfund Administrative Improvements Initiatives
                 E1SFG4-05-0175-4400092
                     July 29, 1994

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Inspector General Division
 Conducting the Audit:         Northern Audit Division
                              Chicago, Illinois
Region Covered:               Region 5
Program Offices Involved:       Waste Management Division,
                               Office of Superfund

                              Office of Regional Counsel

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 .-(to sr,,,
  r*  *„       UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                      OFFICE OF THE INSPECTOR GENERAL
      -                    NORTHERN DIVISION
                        77 WEST JACKSON BOULEVARD
                          CHICAGO, IL 60604-3590

                           July 29, 1994

MEMORANDUM

SUBJECT:   Report of Review No. E1SFG4-05-0175-4400092
           Region 5's Use of Allocation Tools  and
           Mixed Funding Under the  Superfund Administrative
           Improvements Initiatives

                                    /A
FROM:      Anthony C.  Carrollo
           Divisional  Inspecto^z^General for Audits
           Northern Division

TO:        Valdas V. Adamkus
           Regional Administrator
           Region 5

     A copy  of  the subject final report is attached.   This report
provides  the status of Region 5's work under the allocation tools
and mixed funding Superfund Administrative Improvements
initiatives.

     We appreciate the cooperation we received from your staff in
conducting this review.   The open lines of communication from the
Region throughout this effort have enabled us to recommend
actions that we believe can benefit the program.

     This report represents the opinion of the OIG.   Final
determinations  on matters in the report will be made  by EPA
managers  in  accordance with established EPA audit  resolution
procedures.   Accordingly,  the findings described in this report
do not necessarily represent the final EPA position.


ACTION REQUIRED

     In responding to our draft report,  your office agreed with
the recommendations;  however,  no milestone dates were included.
In accordance with EPA Order 2750,  you,  as the action official,
are required to provide  this office a written response to this
report within 90 days.   For corrective actions planned,  reference
to specific  milestone dates will assist this office in deciding
whether to close this report.   All action plans and milestone
dates must be tracked in the Management Audit Tracking System.
                            U.S. Environmental Protection Agency
                            Region 5, Library (PL- 12J)
                            77 West Jackson Boulevard, 12th floor
                            Chicago, IL 60604-3590             Pnmed on Recycled

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        We have no objections to the further release of this  report
   to  the public.   Should you have any questions regarding  this
   report,  please  contact Kimberly O'Lone, Audit Manager, at  (312)
   886-3186.
r -) - j •',• **N
u // *. <

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               Allocation Tools and Mixed Funding Initiatives
                      EXECUTIVE SUMMARY
PURPOSE
The Office of Inspector General  (OIG) has completed a  special
review of Region 5's use of allocation tools and mixed
funding under the Superfund Administrative Improvements
(SFAI) initiatives.  We performed this review to obtain
information about the Region's experience with these
initiatives.  This information could influence Congressional
Superfund reauthorization decisions.  Our objectives were to:

      •    gain an understanding of the work performed  using
          allocation tools and mixed funding,

      •    determine how performance of the initiatives was
          measured, and

      •    determine the status of the communication network
          between the following parties:   the Region,
          Headquarters program offices,  and the Superfund
          Revitalization Office  (SRO).
BACKGROUND

In July 1993, the Environmental Protection Agency  (EPA)
announced plans to improve the Superfund program within the
current statutory authority.  The plan, known as the
"Superfund Administrative Improvements," focused attention on
the four areas of most concern to the Administration,
Congress,  and the public.  Each of the four areas contained
individual "initiatives" that called for specific actions
designed to improve the program.  The two initiatives
addressed in this special review, allocation tools and mixed
funding, fall under the first area of concern,  enhancing
enforcement fairness and reducing transaction costs.

Allocation Tools Initiative

The Superfund law makes potentially responsible parties
(PRPs)  connected with pollution at hazardous waste sites
liable for their cleanup costs.  PRPs also incur transaction
costs,  including legal expenses while allocating
responsibility for cleanups, settling with the government, or
litigating liability for cleanups.  The Superfund law
provides the EPA with allocation tools to help reduce the
transaction coses.
                            Report No.  E1SFG4-05-0175-4400092

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	Allocation Tools and Mixed Funding Initiatives

Several allocation tools exist to promote settlement and
reduce the transaction costs associated with reaching a
settlement.  Two tools Region 5 used were Alternative Dispute
Resolution  (ADR) and Non-binding Allocation of Responsibility
 (NEAR).  Under ADR, a neutral third party coordinates with
the PRPs for negotiation, facilitates settlement
deliberations, and, in some cases, provides an opinion to the
PRPs.  The neutral party serves at the discretion of the
PRPs.  NBARs allocate 100 percent of response costs among
PRPs and are meant to promote settlement, thus reducing
transaction costs.

Mixed Funding Initiative

EPA encourages the use of mixed funding to promote
settlements and hazardous waste site cleanups.  EPA can use
mixed funding in situations where it is appropriate to
recover less than 100 percent of the site costs in a
settlement.  Mixed funding involves using both Superfund and
private resources to clean up a site.  EPA can then pursue
cost recovery cases against any non-settling PRPs to try to
recover the Government's share of the mixed funding cleanup
costs.
RESULTS-IN-BRIEF

Region 5 made progress under the allocation tools and mixed
funding SFAI initiatives.  For example, the Region had
initiated an NEAR under the allocation tools initiative.
Under the mixed funding initiative, Region 5 was negotiating
two settlements.  However, the Region was prevented from
making much progress on the allocation tools initiative,
because factors outside its control limited use of ADR.

All of the projects the Region had initiated were progressing
successfully, according to Regional staff.  However, the
Region did not have measures of success for the mixed funding
initiative.  Without these measures, the Region will not be
able to evaluate the success of this initiative.  Because
work under both of the initiatives was still in progress, it
was premature for us to comment on either of the initiatives'
success.

Region 5 needed to include more comprehensive information in
its quarterly progress reports to the SRO.  For example,
Region 5 did not keep the SRO informed of the status of its
mixed funding cases in the fiscal 1994 first and second
quarter progress reports.  Several misunderstandings,  about


                              ii

                           Report No.  E1SFG4-05-0175-4400092

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	Allocation Tools and Mixed Funding  Initiatives

what information the Region needed to include  in the reports
and who was responsible for reporting it, resulted in  the
Region not providing complete information to the SRO.
PRINCIPAL FINDINGS

Factors Outside Recrion 5's Control Prevented Most Progress
Under The Allocation Tools Initiative

Region 5 proposed to use two types of non-binding allocation
tools, Alternative Dispute Resolution and Non-binding
Allocation of Responsibility, under the SFAI initiative.  The
Region made progress with the NEAR, but was unable to proceed
with ADR due to contracting delays outside its control.
Because no projects had been completed under the initiative,
we were not able to comment on its success.

Region 5 Was Proceeding With The Mixed Funding Initiative

Region 5 was proceeding with its projects under the mixed
funding initiative.  The initiative consisted of using mixed
funding to encourage settlements for Superfund site cleanups.
Because the work under the initiative was still in progress,
it was premature for us to comment on the initiative's
success.  Although Region 5 did not have written measures of
success for this initiative,  the staff members involved with
it agreed that the initiative was progressing successfully.

During our review, Region 5 was using mixed funding on two
projects.   Both projects were still in the negotiation
process.  Region 5 staff members on both projects stated
that,  without using mixed funding,  they did not think the
cases would reach voluntary settlements.

Region 5's Progress Reports Did Not Contain Comprehensive
Information

Region 5 did not include comprehensive information in its
fiscal 1994 quarterly progress reports to the SRO.   For
example, the Region did not provide updates on the
settlements under the mixed funding initiative in the first
quarter.  Several misunderstandings,  between the Region and
the SRO, and between two Region 5 offices,  caused the
reporting problems.  As a result, the SRO did not have
complete information about Region 5's progress under the SFAI
initiatives.
                             111
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	Allocation Tools and Mixed Funding Initiatives

RECOMMENDATIONS

We recommend that the Region 5 Administrator direct the
Office of Superfund and the Office of Regional Counsel to:

  1. Evaluate the success of the allocation tools and mixed
     funding initiatives once the projects are completed.

  2. Work with EPA Headquarters to develop measures of
     success for the mixed funding initiative.

  3. Coordinate on future quarterly progress reports to
     include complete and accurate information on the
     initiatives.

  4. Work with the Superfund Revitalization Office to be sure
     the Regional officials responsible for the quarterly
     progress reports have a clear understanding of what
     information they are expected to report.
REGION 5 ACTIONS AND COMMENTS

Region 5 provided a written response to our draft report on
July 15, 1994.  The Region agreed with the recommendations in
the report and stated that it would work together with
Headquarters to further strengthen the program.

In regard to the recommendations concerning the progress
reports, Region 5 stated it had already made the necessary
contacts to assure the fiscal 1994 third quarter report met
Headquarters' needs.  The Region provided us with a copy of
the third quarter progress report that addressed both the
allocation tools and mixed funding initiatives.

Also, in regard to the progress reports, Region 5 pointed out
that the principal users of the information contained in the
reports have been well satisfied with the reports.  The
Region stated in its response that Headquarters had
consistently been satisfied with the reports and had been
complimentary.  Region 5 also commented that some initiatives
crossed program lines and,  therefore, tended to duplicate
other reporting protocols.

We have included a summary of Region 5's comments in
appropriate sections throughout the report.  Appendix 1
contains a copy of Region 5's written response to our draft
report.
                              IV


                           Report No.  E1SFG4-05-0175-4400092

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	Allocation Tools and Mixed Funding Initiatives

PIG EVALUATION

Region 5's actions, when completed, will address the findings
in the report.  Region 5 needs to provide milestone dates for
completion of the corrective actions.
                              v
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   Allocation Tools and Mixed Funding Initiatives
[This  page  intentionally  left blank.]
                 VI





              Report No.  E1SFG4-05-0175-4400092

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	Allocation Tools and Mixed Funding Initiatives

                      TABLE OF CONTENTS



EXECUTIVE SUMMARY 	    i

CHAPTERS

  1  INTRODUCTION 	    1

       PURPOSE  	    I

       BACKGROUND 	    1

       SCOPE AND METHODOLOGY	    2

       PRIOR AUDIT COVERAGE 	    4

  2  FACTORS OUTSIDE REGION 5'S CONTROL PREVENTED MOST
     PROGRESS UNDER THE ALLOCATION TOOLS INITIATIVE ...    5

       BACKGROUND 	    5

       USE OF ADR IN REGION 5	    6

       USE OF NBARs IN REGION 5	    6

       MEASURES OF SUCCESS	    7

       CONCLUSION 	    7

       RECOMMENDATION 	    7

       REGION 5 COMMENTS AND ACTIONS  	    7

       DIG EVALUATION	    8

  3  REGION 5 WAS PROCEEDING WITH THE MIXED FUNDING
     INITIATIVE 	    9

       BACKGROUND 	    9

       MIXED FUNDING PILOT PROJECTS 	  10

       MEASURES OF SUCCESS	12

       CONCLUSION	12

       RECOMMENDATIONS  	  12


                             vii

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	Allocation Toola and Mixed Funding  Initiatives




       REGION 5 COMMENTS AND ACTIONS   	   13




       OIG EVALUATION	13




  4  REGION 5'S PROGRESS REPORTS WERE NOT COMPREHENSIVE  .   15




       BACKGROUND	15




       PROGRESS REPORTS WERE NOT COMPREHENSIVE   	   15




       MISUNDERSTANDINGS CAUSED REPORTING PROBLEMS  ...   16




       OTHER MATTERS	17




       CONCLUSION	17




       RECOMMENDATIONS  	   18




       REGION 5 COMMENTS AND ACTIONS   	   18




       OIG EVALUATION	19




APPENDICES




  APPENDIX 1   REGION 5 RESPONSE TO DRAFT REPORT   ....   21




  APPENDIX 2   ABBREVIATIONS  	   23




  APPENDIX 3   DISTRIBUTION 	   24
                            VI11





                           Report No.  E1SFG4-05-0175-4400092

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               Allocation Tools and Mixed  Funding  Initiatives

                          CHAPTER 1

                         INTRODUCTION
PURPOSE
The Office of Inspector General  (OIG) has completed a  special
review of Region 5's use of allocation tools and mixed
funding under the Superfund Administrative  Improvements
 (SFAI) initiatives.  We performed this review to obtain
information about the Region's experience with these
initiatives.  This information could influence Congressional
Superfund reauthorization decisions.  Our objectives were to:

     •    gain an understanding of the work performed  using
          allocation tools and mixed funding,

     •    determine how performance of the  initiatives was
          measured, and

     •    determine the status of the communication network
          between the following parties:  the Region,
          Headquarters program offices, and the Superfund
          Revitalization Office  (SRO).

The special review was part of an OIG-wide effort to review
all of the SFAI initiatives.  It was coordinated through the
OIG Headquarters Audit Division.
BACKGROUND

The Environmental Protection Agency's  (EPA) Superfund program
has generated considerable criticism both from internal and
external reviews.  This criticism stems from the pace and
cost of cleanup, the degree to which sites are cleaned, the
fairness of the program, the role of the States in the
process, and the role of the community, particularly minority
communities.

In July 1993, the EPA Deputy Administrator testified before
the House Ways and Means Committee regarding the pace and
cost of Superfund cleanups.  During this testimony, the
Deputy Administrator announced EPA's plan to improve the
Superfund program within the current statutory authority.
The plan, known as the "Superfund Administrative
Improvements," focused attention on the four areas of most
concern to the Administration,  Congress, and the public.
Each of the four areas contained individual "initiatives"
which called for specific actions designed to improve the


                            Report No. E1SFG4-05-0175-4400092

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	Allocation Tools and Mixed Funding Initiatives

program.  The two initiatives addressed in this special
review, allocation tools and mixed funding, fall under the
first area of concern, enhancing enforcement fairness and
reducing transaction costs.  Beginning in fiscal 1994, EPA
planned to fully implement the initiatives.

Allocation Tools Initiative

The Superfund law makes potentially responsible parties
(PRPs) connected with pollution at hazardous waste sites
liable for their cleanup costs.  PRPs also incur transaction
costs, including legal expenses while allocating
responsibility for cleanups, settling with the government, or
litigating liability for cleanups.  The Superfund law
provides the EPA with allocation tools to help reduce the
transaction costs.

Several allocation tools exist to promote settlement, and
reduce the transaction costs associated with reaching a
settlement.  Two tools Region 5 used were Alternative Dispute
Resolution (ADR)  and Non-binding Allocation of Responsibility
(NEAR).  Under ADR,  a neutral third party coordinates with
the PRPs for negotiation, facilitates settlement
deliberations, and,  in some cases, provides an opinion to the
PRPs.  The neutral party serves at the discretion of the
PRPs.  NBARs allocate 100 percent of response costs among
PRPs and are meant to promote settlement,  thus reducing
transaction costs.

Mixed Funding Initiative

EPA encourages the use of mixed funding to promote
settlements and hazardous waste site cleanups.   EPA can use
mixed funding in situations where it is appropriate to
recover less than 100 percent of the site costs in a
settlement.  Mixed funding involves using both Superfund and
private resources to clean up a site.   EPA can then pursue
cost recovery cases against any non-settling PRPs to try to
recover the Government's share of the mixed funding cleanup
costs.
SCOPE AND METHODOLOGY

Our first objective was to gain an understanding of the work
performed using allocation tools and mixed funding under the
SFAI initiatives.  To accomplish this objective, we reviewed
guidance documents for both initiatives.  We also obtained
and reviewed Region 5's plan for implementing the


                              2

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	Allocation  Tools  and Mixed  Funding Initiatives

initiatives.  We  interviewed officials  from the  Office  of
Regional  Counsel  (ORC)  and Office of  Superfund  (OSF)  who were
handling  the projects  under the  initiatives.  In addition,  we
obtained  information about Region 5's prior experiences using
allocation tools  and mixed funding for  background purposes.

Our  second objective was to determine how  performance of the
initiatives was measured.  To accomplish this objective, we
obtained  available documents explaining the standards for
measuring success or failure of  the initiatives.   We
interviewed Region 5 staff members from ORC and  OSF to  obtain
their views on the success of the initiatives.   Because the
projects  under the initiatives were not completed, we were
not  able  to fully accomplish this objective.

Our  third objective was to evaluate the communication between
parties involved  in the projects under  the  initiatives.  To
accomplish this objective, we reviewed  the  guidance and
background documents for guidelines on  communication  between
the  parties.  We  interviewed Region 5 staff members to
determine how the communication network functioned.   We also
reviewed  Region 5's quarterly progress  reports to  the SRO and
interviewed the staff members responsible  for completing the
reports.  Because no problems were noted regarding
communication with Headquarters program offices, we took no
further action on that part of the objective.  Because  we did
note some issues with reports to SRO,  we asked the OIG
Headquarters Audit Division to interview officials from the
SRO.  They provided us with the information obtained.

We reviewed the fiscal 1993 annual reports  on management
controls  from Region 5, the Waste Management Division (OSF is
part of this division), and ORC.  These reports did not
identify  any weaknesses in the management controls over
allocation tools or mixed  funding.  Likewise, we did  not
identify any significant management control weaknesses  during
our  review.

We conducted this review from March 8 to June 3, 1994.  We
distributed position papers to "Region 5 on  May 19, 1994.  We
discussed the position papers with Regional officials on June
2, 1994.  Their comments were incorporated  into the draft
report.

On June 10,  1994,  we issued our draft report.  Region 5
provided us with written comments on July 15, 1994.  We held
an exit conference with Region 5 officials  on July 20,  1994.
After reviewing the response and conducting the exit
conference,  we made appropriate changes and finalized the


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	Allocation Tools and Mixed Funding Initiatives

report.  The Regional Administrator's written response is
included as Appendix 1.

This review, like all special reviews, was a short term study
of EPA activities.  It was not designed to be a statistical
research study or a detailed audit.  Rather, it was an
information gathering study that sought to determine the
status of Region 5's progress under the SFAI initiatives.
Thus, it was more limited in scope than an audit, and as
such, did not necessarily encompass all generally accepted
governmental auditing standards.  Alternatively, this review
was conducted in accordance with the provisions of OIG Manual
Chapter 150, Special Reports.
PRIOR AUDIT COVERAGE

There were no prior audits of Region 5's SFAI allocation
tools or mixed funding initiatives that applied to our
objectives.
                              4

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 	Allocation Tools and Mixed Funding Initiatives

                          CHAPTER 2

  FACTORS OUTSIDE REGION 5'S CONTROL PREVENTED MOST PROGRESS
            UNDER THE ALLOCATION TOOLS INITIATIVE
Region 5 proposed to use two types of non-binding allocation
tools, Alternative Dispute Resolution and Non-binding
Allocation of Responsibility, under the SFAI initiative.  The
Region made progress with the NBAR, but was unable to proceed
with ADR due to contracting delays outside its control.
Because no projects had been completed under the initiative,
we were not able to comment on its success.
BACKGROUND

According to Region 5's SFAI plan, the Region would use one
of the allocation tools, ADR, on a more routine basis to
facilitate allocating responsibility at sites.  Under ADR, a
neutral third party coordinates with the PRPs for
negotiation, facilitates settlement deliberations, and, in
some cases, provides an opinion to the PRPs.  The neutral
party serves at the discretion of the PRPs.

The ADR process consists of four methods that aid in
resolving disputes.  The Region has used only the mediation
method on its cases so far.  Region 5 officials said that
they have not yet encountered cases where other ADR methods
would be appropriate.  The four ADR methods are:

     •    Mediation:  A neutral party facilitates
          negotiations to assist the PRPs in reaching a
          settlement.  Mediation is a voluntary, non-binding
          process.

     •    Arbitration:  A neutral party makes a binding or
          non-binding decision about factual, legal,  or
          remedial issues that the PRPs specify.

     •    Mini-trials:  PRPs present their case, or an agreed
          upon portion of it, to principals who have the
          authority to settle the dispute.

     •    Fact-finding:   A neutral party investigates
          disputed factual or technical issues that the PRPs
          select.
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  	Allocation Tools and Mixed Funding Initiatives

  Another non-binding allocation tool used to promote
  settlement is the NEAR.  NBARs allocate 100 percent of
  response costs among PRPs and are meant to promote
  settlement, thus reducing transaction costs.  In general,
  EPA's policy is that PRPs should work out among themselves
  questions of how much each will pay toward the cleanup costs
  at a site.  EPA considers preparing an NEAR to promote
  settlement when it may help to unite an unorganized group of
  PRPs.  In addition, EPA will consider an NEAR whenever a
  significant percentage of PRPs at a site request one.
  USE OF ADR IN REGION 5

  Even before the SFAI allocation tools initiative,  Region 5
  was a leader with ADR.  In a June 1990 memorandum, the Deputy
  Administrator praised Region 5 for its success with its ADR
  pilot program using ADR in enforcement actions.  A January
  1994 General Accounting Office report showed that Region 5
  used ADR at more sites than any other Region.1  In fiscal
  1993, the Region settled three ADR cases:  Muskego, HOD
  Landfill, and Spiegelberg.

  Under the allocation tools initiative, Region 5 was prevented
  from making progress with ADR due to contract delays at
  Headquarters.  The EPA contract to hire neutral third parties
  for the ADR process lapsed in November 1993 .   A new contract
  was not signed until March 1994.   Because of  the delay,
  Region 5 was unable to hire the neutral third parties to
  begin the ADR process.  After the new ADR contract was signed
  at the end of March 1994,  Region 5 proposed the Waste, Inc.
  site for ADR.  The Region may propose other sites as well.
  It expects to use the non-binding mediation process in all of
  its ADR projects under the initiative.
  USE OF NBARs IN REGION 5

  Region 5 executed an NBAR at the Arrowhead Refinery site in
  Minnesota under the allocation tools initiative.   The purpose
  of the NBAR was to encourage the PRPs to reach a settlement.
  In this case, the PRPs appeared to be reluctant in developing
  an allocation method on their own.  After Region 5 began
  computing the allocation percentages in the NBAR,  the PRPs
  began working on their own allocations.  As a result, the
     1Further EPA Management Action  Is Needed  To Reduce  Legal
Expenses,  Report No. GAO\RCED-94-90, January 1994.

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               Allocation Tools and Mixed Funding  Initiatives

Region suspended work on the NEAR without having to use
additional resources to complete it.

According to the Region 5 case attorney for Arrowhead, the
project was successful.  The Region's goal in using the NEAR
was to help the PRPs reach an agreement on a method of
allocating responsibility, whether it was EPA's method under
the NEAR or the PRPs' method.  Since the PRPs decided to
develop their own allocation method, the Region considered
the project successful.
MEASURES OF SUCCESS

Region 5 had measures of success for the allocation tools
initiative.  Unfortunately, because none of the cases had
been completed, we were unable to use these measures to
evaluate the initiative's success.  For the NBARs, the Region
had its own informal measure of success:  bringing the PRPs
together to reach an agreement on allocating costs.
According to the Region 5 case attorney for Arrowhead, the
NEAR met this informal measure.
CONCLUSION

Region 5 made some progress under the allocation tools
initiative.  For example, the Region executed an NEAR at a
site and considered it successful.  However, it did not begin
work with any of its ADR cases due to contracting delays.
Since the Region had not completed any projects under the
initiative, we were unable to evaluate its success.
RECOMMENDATION

We recommend that the Region 5 Administrator direct the
Office of Superfund and the Office of Regional Counsel to
evaluate the success of the allocation tools initiative once
the projects are completed.
REGION 5 COMMENTS AND ACTIONS

The Regional Administrator agreed with the recommendation.
However, he did not provide a milestone date for completing
the corrective action.
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	Allocation Tools and Mixed Funding Initiatives

PIG EVALUATION

The Region's actions,  when completed,  will address the
recommendations in this chapter.   Region 5 needs to provide a
milestone date for completing the corrective action.
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  	Allocation Tools and Mixed Funding  Initiatives

                          CHAPTER 3

  REGION 5 WAS PROCEEDING WITH THE MIXED FUNDING INITIATIVE
Region 5 was proceeding with its projects under the mixed
funding initiative.  The initiative consisted of using mixed
funding to encourage settlements for Superfund site cleanups.
Because the work under the initiative was still in progress,
it was premature for us to comment on the initiative's
success.  Although Region 5 did not have written measures of
success for this initiative,  the staff members involved with
it agreed that the initiative was progressing successfully.

During our review,  Region 5 was using mixed funding on two
projects.  Both projects were still in the negotiation
process.  Region 5 staff members on both projects stated
that, without using mixed funding,  they did not think the
cases would reach voluntary settlements.
BACKGROUND

EPA encourages the use of mixed funding to promote
settlements and hazardous waste site cleanups.  EPA can use
mixed funding in situations where it is appropriate to
recover less than 100 percent of the site costs in a
settlement.  Mixed funding involves using both Superfund and
private resources to clean up a site.  For example, EPA can
use mixed funding to reach an agreement when only some of the
PRPs are willing to settle.  This practice allows the
settling PRPs to begin cleaning up the site rather than
waiting while EPA tries to reach an agreement with non-
settling PRPs.  EPA can then pursue cost recovery cases
against any non-settling PRPs to try to recover the
Government's share of the mixed funding cleanup costs.

EPA has identified three types of mixed funding:

  •  Mixed Work:  The PRPs and EPA perform different aspects
     of the cleanup, each paying the costs of their own work.
     The Region can approve this method without going through
     Headquarters.

  •  Preauthorization:   The PRPs conduct the work and EPA
     agrees to reimburse them for a portion of the costs.
     EPA Headquarters must approve preauthorization cases.
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  	Allocation TooIB and Mixed Funding Initiatives

    •  Cashouts:   The PRPs fund a portion of the work which EPA
       performs.   EPA Headquarters' approval is not required.

  Prior to the new EPA-wide Superfund initiatives, Region 5 had
  entered into mixed funding agreements on four sites:   (1)
  Marion (Bragg)  Dump,  Indiana (1991),  (2) Carter Industrial,
  Inc., Michigan (1993),  (3)  Kummer Sanitary Landfill,
  Minnesota (1994), and (4) Onalaska Municipal Landfill,
  Wisconsin.2

  In 1993,  under the SFAI,  the Headquarters Office of Waste
  Programs Enforcement (OWPE)  planned to evaluate the mixed
  funding policy.  It conducted an extensive screening process
  to select the most appropriate cases for mixed funding.  The
  EPA regional offices initially proposed 23 sites for the
  mixed funding initiative.  OWPE screened the proposed sites
  against five criteria:

       •    Date by which negotiations would be completed,

       •    EPA's share of the costs,

       •    The benefits  of the settlement to the government,

       •    Type of mixed funding settlement (preauthorization,
            mixed work,  cashout),  and

       •    The type of concern that the pilot would address
            (municipal share,  divisibility of harm,  innovative
            technology).

  Based on these criteria,  OWPE determined that seven sites
  would be candidates for the mixed funding demonstration
  pilots.   Two of these sites were in Region 5:  (1)  Arrowhead
  Refinery,  Minnesota,  and (2)  Kysor/Northernaire,  Michigan.
  MIXED FUNDING PILOT PROJECTS

  Region 5 has made progress on both of the mixed funding pilot
  projects.  At the time of our review, both sites were in the
  initial stages of the mixed funding process.  Although it
  would be premature for us to evaluate the final outcome of
  these cases, at both sites, the Regional staff agreed that
  mixed funding was speeding up the settlement process.
     2Onalaska Municipal  Landfill was  in  the  final  stages  in July
1994.

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  Arrowhead  Refinery

  The Arrowhead Refinery  site  was  set on  ten acres  of land in
  St. Louis  County, Minnesota.   The Arrowhead Refinery Company
  had conducted waste oil  refining activities and sold recycled
  oils.  The primary contamination at the site was  a sludge
  lagoon.  The soil, surface water, and groundwater were  also
  contaminated.  The Arrowhead site was placed on the National
  Priorities List  (NPL) in August  1983.   Region 5 signed  the
  Record of  Decision  (ROD) in  September 1986.

  The PRPs for this site  requested mixed  funding as part  of
  their settlement, because  the  site  had  a large percentage of
  orphan shares.3  The PRPs proposed a mixed work method of
  mixed funding.  They agreed  to clean up the worst part  of the
  contamination  (a black  sludge  lagoon),  if  EPA would clean up
  the contaminated soil.   The  ORC  attorney and the  Remedial
  Project Manager  (RPM) both stated that  they did not think a
  voluntary  settlement would be  possible  without using mixed
  funding.   EPA and the PRPs agreed on what  work each party
  would do (scope of work).  As  of July 20,  1994, the PRPs  and
  EPA had reached an agreement in  principle.   EPA planned  to
  have the consent decree, which includes the  covenant  not-to-
  sue, and the scope of work documents in circulation for
  signature  in early August  1994.
  Kysor/Northernaire

  The Kysor/Northernaire site consisted of two separate
  companies, both located in an approximate one-square-mile
  industrial park in Wexford County, Michigan.  The Kysor
  Industrial Corporation was a large manufacturer of truck
  parts.  Kysor was proposed for the NPL in September 1985.
  Northernaire Plating, a former electroplating facility, was
  included on the NPL, separately from Kysor, in July 1982.
  Because the groundwater contamination from both sites was
  commingled, Region 5 combined the two sites for cleanup.  The
  ROD for the Kysor/Northernaire site was signed in September
  1989 and,  as of July 1994, a settlement still had not been
  reached for the final remedial action.

  The PRPs requested mixed funding,  using the preauthorization
  method, as part of their settlement with Region 5.  They
  asked for mixed funding because a now bankrupt PRP generated
     3When  unknown  or  nonviable  PRPs  caused parts  of  the
contamination,  EPA refers to these parts as orphan shares.

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some of the waste at the site.  According to Region 5 staff,
the waste that the bankrupt PRP generated (contaminated
groundwater) was easy to separate from other waste at the
site.  Region 5 could pay for the groundwater cleanup with
Superfund money, while the PRPs paid for the rest of the
cleanup.  The PRPs submitted their mixed funding application
to Region 5 at the end of March 1994.  As of July 20, 1994,
the PRPs were revising the mixed funding package, based on
Headquarters' comments.  Region 5 plans to complete the mixed
funding negotiations by November 1994.   Again, both the RPM
and the ORC attorney agreed that, without mixed funding, it
would be difficult to reach a settlement with the PRPs.
MEASURES OF SUCCESS

Measures of success did not exist for the mixed funding
initiative.  However, Region 5 staff agreed on an obvious
measure of success for the settlements using mixed funding.
If the cases reached settlement before they went to trial,
then using mixed funding was worthwhile.  Because the mixed
funding settlements were not completed,  we did not evaluate
the success of the mixed funding initiative.
CONCLUSION

Region 5 had made progress under the mixed funding
initiative.  We found that work was underway on all of the
Region's pilot projects.  However, none of the projects were
far enough along to allow us to evaluate them.  As a result,
we were unable to express an opinion on the success of the
mixed funding initiative.  Region 5 also will not be able to
evaluate the success of the initiative until it develops
measures of success.
RECOMMENDATIONS

We recommend that the Region 5 Administrator direct the
Office of Superfund and the Office of Regional Counsel to:

  1.  Work with EPA Headquarters to develop measures of
     success for the mixed funding initiative.

  2.  Evaluate the success of the initiative, based on these
     criteria once the projects are completed.
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REGION 5 COMMENTS AND ACTIONS

The Regional Administrator agreed with the recommendations
made in the draft report.  However, he did not provide
milestone dates for completing the corrective actions.
PIG EVALUATION

The Region's actions, when completed, will address the
recommendations in this chapter.  Region 5 needs to provide
milestone dates for completing the corrective actions.
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                            CHAPTER  4

        REGION S'S PROGRESS REPORTS WERE NOT COMPREHENSIVE
  Region  5 did not  include comprehensive information  in  its
  fiscal  1994 quarterly progress reports to the SRO.   For
  example, the Region did not provide updates on the
  settlements under the mixed funding initiative in the  first
  quarter.  Several misunderstandings, between the Region  and
  the SRO, and between two Region 5 offices, caused the
  reporting problems.  As a result, the SRO did not have
  complete information about Region 5's progress under the SFAI
  initiatives.
  BACKGROUND

  The EPA planned to fully implement successful streamlining
  measures, including piloting allocation tool and mixed
  funding projects, beginning in fiscal 1994.  Also in 1994,
  Congress is expected to consider reauthorization of the
  Comprehensive Environmental Response, Compensation and
  Liability Act.  Information about EPA's experience with these
  streamlined measures could greatly influence Congressional
  reauthorization decisions.  The SRO is tasked with reporting
  to Congress on EPA's progress under the initiatives.

  To monitor progress nationwide, each quarter, the SRO
  requests that the Regions report their SFAI activities.  In
  Region 5, the OSF is responsible for consolidating
  information from several staff members into one Regional
  report, which is sent to the SRO.4
  PROGRESS REPORTS WERE NOT COMPREHENSIVE

  Region 5's first and second quarter progress reports of
  fiscal 1994 did not show the status of all proposed work
  under the mixed funding and allocation tools initiatives.
  For example,  the reports did not:
     "Region 5's  progress  reports  cover  all  17  SFAI  initiatives.
Our review included only 2 of the 17 initiatives:  allocation
tools and mixed funding.  Therefore, our evaluation of the
progress reports was limited to these initiatives.

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       •    contain information about the delays the Region 5
            allocation tools initiative had experienced.  As
            explained in Chapter 2,  contract delays at
            Headquarters prevented Region 5 from proceeding
            with ADR cases.

       •    include information about the NEAR case that the
            Region executed under the allocation tools
            initiative.

       •    provide the status of all of the settlements the
            Region was negotiating under the mixed funding
            initiative.

  As a result of these reporting issues,  the SRO may riot be
  aware of the complete status of Region 5's work under the
  initiatives.
  MISUNDERSTANDINGS CAUSED REPORTING PROBLEMS

  Three misunderstandings combined to cause problems with the
  quarterly progress reports.   First,  Region 5 misunderstood
  the SRO's instructions about information needed in the
  report.   Second,  there was a lack of coordination between two
  Region 5 offices,  because each office's responsibilities for
  the quarterly report were not clear.  Third, Region 5 did not
  realize it was unable to change the pilot projects under the
  mixed funding initiative, since EPA Headquarters had
  specifically selected the projects.5

  In the first instance,  Region 5 officials thought that they
  did not need to include information about the allocation
  tools initiative in the quarterly report.  The SRO's request
  for the quarterly report stated that the Regions did not need
  to submit information about  another SFAI initiative for de
  minimis settlements, because the SRO had an alternate way of
  collecting that information.  The Regional officials
  misinterpreted this to include work being done under the
  allocation tools initiative  as well.

  In the second instance,  a misunderstanding between the OSF
  and the ORC contributed to the reporting problems.  OSF was
  responsible for compiling the quarterly report.   ORC did not
  realize it needed to provide OSF with updates on the
     5See  Chapter 3 for a description of how the pilot projects
for the mixed funding initiative were  selected.

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	Allocation Tools and Mixed Funding  Initiatives

allocation tools and mixed funding cases that it was working
on.  When OSF did not receive updates, it assumed  no progress
had been made and did not provide an update in the quarterly
report.

In the third instance, Region 5's misunderstanding of the
sites officially selected for the mixed funding initiative
caused problems in progress reporting.  EPA Headquarters had
selected sites that met specific criteria in an attempt to
evaluate the mixed funding policy in several different
circumstances.  However, Regional officials were not aware
that EPA Headquarters had specifically selected certain
sites.  Instead, they thought they should include  all
successfully settled mixed funding sites as part of the
initiative.  Therefore,  Region 5 included an update in the
second quarterly report about a successfully settled site,
Kummer Sanitary Landfill,  that was not officially  included
under the initiative.  The Region also did not include an
update in the same quarterly report on the Kysor/Northernaire
site, one officially under the initiative that had not yet
reached settlement.
OTHER MATTERS

Region 5 officials agreed that there were misunderstandings
concerning these initiatives.  They stated that EPA
Headquarters' instructions about the initiatives were not
clearly communicated to them.  For example, the Region did
not know that EPA Headquarters had selected the mixed funding
sites and that the Region should only include those sites
under the initiative.  Also, according to Regional officials,
EPA Headquarters had not given them any negative feedback on
the quarterly progress reports.  Instead, the officials said
Headquarters had complimented them on the reports.  Other OIG
reports,  such as the Special Review of Superfund
Revitalization Office (SRO)  Administration of Enforcement
Pilot Projects6,  have also discussed  communication problems.
We have referred this issue to our Headquarters Audit
Division.
CONCLUSION

Several misunderstandings combined to cause Region 5's
quarterly progress reports about the SFAI initiatives to not
   6Report Number  4400037,  dated March  9,  1994.

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	Allocation Tools and Mixed Funding Initiatives

reflect the actual progress the Region had made.  Region 5
needs to resolve these misunderstandings to ensure that
future quarterly progress reports contain all information on
the allocation tools and mixed funding initiatives.  The SRO
would then have comprehensive information on Region 5's
progress under both initiatives.
RECOMMENDATIONS

We recommend that the Region 5 Administrator direct the
Office of Superfund and the Office of Regional Counsel to:

  1. Coordinate on future quarterly progress reports to
     include comprehensive information on the initiatives.

  2. Work with the Superfund Revitalization Office to be sure
     the Regional officials responsible for the quarterly
     progress reports have a clear understanding of what
     information they are expected to report.
REGION 5 COMMENTS AND ACTIONS

In the response to the draft report,  the Regional
Administrator agreed with our recommendations.  Region 5
staff members provided us with a copy of the fiscal 1994
third quarter progress report.  It included complete
information on the allocation tools and mixed funding
initiatives.  This showed that ORC and OSF coordinated to
develop a comprehensive report, as recommended in the draft
report.

The Regional Administrator stated in the response that the
Region would work together with Headquarters to further
strengthen the program.  In fact,  he stated that the Region
had already made the necessary contacts to assure the third
quarter report precisely met Headquarters' needs.

In regard to the progress reports, Region 5 pointed out that
the principal users of the information contained in the
reports have been well satisfied with the reports.  The
Region stated in its response that Headquarters had
consistently been satisfied with the reports and had been
complimentary.  Region 5 also commented that some initiatives
crossed program lines and, therefore, tended to duplicate
other reporting protocols.
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               Allocation Tools and Mixed Funding Initiatives

PIG EVALUATION

The Region's actions have addressed the recommendations in
this chapter.
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                                                              APPENDIX 1
                                                              Page  1 of 2
              wrrto runs ENVMONMENTAL »BOTECTK>N AGENCY
                             REGION 5
                      77 WEST JACKSON BOULEVARD
                        CHICAGO. H $0604-3590

                            ML  15 1W
                                                       R-19J
 MEMORANDUM

 SUBJECT:   Draft Report  E1SFC4-05-0175
           Region 5't  Use of Allocation Tools and Mixed
           Funding Under the Superfund Administrative
           Improvement*  Initiatives

 FROM:      Valdai V. Adaakus
           Regional Administrator

 TO:        Anthony C.  Carrollo, Divisional Inspector General
             for Audits, Northern Division

 ThanX  you  for  the opportunity to couent on the draft report on
 Region 5's Use of Allocation Tools and Mixed Funding Under the
 Superfund  Administrative Improvements Initiatives. He agree with
 the  recommendation* in  the report and will work together with
 Headquarters to further strengthen our program. He appreciate
 that the report acknowledges that the Region ha* made progress in
 the  use of allocation tools, as evidenced by Region 5's
 performance in obtaining more settlements through the use of
 Alternative Dispute Resolution (ADR) and de minimia than any
 other  region.   In regard to the reporting requirements, the
 Region has already made the necessary contact* to assure the
 third  quarter  report precisely meets Headquarter*'  needs.   He
 will provide this report to your office at the July 20, 1994 exit
 conference.

 As a footnote,  we must raise a concern relative to the Findings
 on the Administrative Improvement Plan reporting requirements.
 This Plan  consolidates many different program elements which
 cross  program  lines both regionally and nationally,  and
 therefore,  has  a  tendency to duplicate other reporting protocols.
 Reporting  requirements have evolved since the Plan  was devised
 and  the Region  has always complied  with those changes.
 Headquarters has consistently been  satisfied with the  reports and
 has  been complimentary.   Certain reporting,  such as on de »inimis
 settlements, has not always been in the report because it was
duplicative of  other detailed reports provided by ORC.   However,
 it is  now  included in a  summary  fashion.   In conclusion, the
principal users of the information  contained in the  report are
well satisfied with the  reports  and we  believe  this  should be
noted  in your final report.
                             Report  No.   E1SFG4-05-0175-4400092

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            Allocation Tool*  and Mix»d Funding Initi*tiv>«

                                                   APPENDIX 1
                                                   Page  2  of 2
If you hav* any qu««tion», picas* contact Hov
6-7522.
                         vald«« v.
                         Report  No.  E1SFG4-05-0175-4400092

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               Allocation Tools and Mixed Funding Initiatives

                                                  APPENDIX  2
                                                  Page  1 of 1

                        ABBREVIATIONS
ADR       Alternative Dispute Resolution

EPA       Environmental Protection Agency

NEAR      Non-Binding Allocation of Responsibility

NPL       National Priorities List

OIG       Office of Inspector General

ORC       Office of Regional Counsel

OSF       Office of Superfund

OWPE      Office of Waste Programs Enforcement

PRP       Potentially Responsible Party

ROD       Record of Decision

RPM       Remedial Project Manager

SFAI      Superfund Administrative Improvements

SRO       Superfund Revitalization Office
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	Allocation Tools and Mixed Funding Initiatives

                                                  APPENDIX  3
                                                  Page  1 of 1

                         DISTRIBUTION

Inspector General  (2410)

Assistant Administrator for Solid Waste and Emergency
Response  (5101)

Director, Superfund Revitalization Office (5104)

Associate Administrator for Regional Operations and
State/Local Relations  (1501)

Associate Administrator for Congressional and Legislative
Affairs  (1301)

Associate Administrator for Communication, Education, and
Public Affairs (1701)

Agency Followup Official (3101)
  Attention:   Assistant Administrator for the Office of
               Administration and Resources Management

Agency Followup Coordinator (3304)
  Attention:   Director, Resource Management Division

Headquarters Library (3404)

Regional Administrator, Region 5  (R-19J)

Region 5 Audit Followup Coordinator  (MFA-10J)
  Attention:   Chief, Financial Accounting Section

Region 5 Public Affairs  (P-19J)

Region 5 Intergovernmental Relations Officer  (R-19J)

Region 5 Library (PL-12J)
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