&EPA
United States
Environmental Protection
Agency
Office of the
Chief Financial Officer
(2710A)
EPA-190-R-00-OC3
March 2000
http://www.epa.gov
                     FY 1999 Audited
                     Financial Statements
                                      U.S. EPA Headquarters Library
                                           Mail code 3201
                                      1200 Pennsylvania Avenue NW
                                         Washington DC 20460
0-003
                           Internet Address (URL) . http://www.epa.gov
        Recycled/Recyclable.Printed with Vegetable Oil Based Inks on Recycled Paper (Minimum 30% Postconsumer)

-------

-------
                       TABLE OF CONTENTS




Message from the Administrator	         iii


Management's Discussion and Analysis	         1


Message from the Chief Financial Officer	        17


Chief Financial Officer's Analysis	        19


Principal Financial Statements	         25


OIG's Report on EPA's FY 1999 Financial Statements	        71


Acronyms	          89
                                             U.S. EPA Headquarters Library
                                                   Mail code 3201
                                             1200 Pennsylvania Avenue NW
                                               Washington DC 20460
                        EPA's FY 1999 Annual Financial Statements                    Page i

-------

-------
           MESSAGE  FROM THE ADMINISTRATOR
       I am pleased to present the U.S. Environmental Protection Agency's Annual Financial
Statements for Fiscal Year 1999.  These statements summarize EPA's financial activities and
highlight the successes achieved by EPA's programs during this time.

       Over the past seven years of unprecedented economic expansion, this Administration,
working with the Congress, and our state and tribal partners, has distinguished itself through
unprecedented environmental progress. On a range of issues in 1999 EPA continued to build on
its record of achievements.

       The 1996 amendments to the Safe Drinking Water Act, a fine example of what we can
       achieve when the Congress and the Agency work together, coupled with the President's
       Clean Water Action Plan, have contributed greatly to improving the quality of tap water
       and cleaning up the Nation's waters. More recently, under a new cooperative,
       intergovernmental process, we recently completed a comprehensive, nationwide
       assessment of watersheds to help achieve our Clean and Safe Water goal.

       We have placed special emphasis on protecting our Nation's greatest resource - our
       children - through actions like implementing the Food Quality Protection Act, that for the
       first time puts emphasis on protecting the health of infants and children from pesticide
       risks. For example, EPA announced the cancellation of certain uses and risk reduction
       strategies for the highly toxic organophosphate pesticides methyl parathion and azinphos
       methyl. Residues from these pesticides are often found on foods children commonly eat.
       This is the first time the Agency has set standards because of the specific effects a
       pesticide has on children's health.

•       Accelerated cleanups of our Nation's worst Superfund hazardous waste sites have helped
       ensure that neighborhoods are free from toxic waste sites. EPA and its partners met the
       FY 1999 goal of construction completion at 85 Superfund sites.  Under this
       administration, more than three times as many toxic waste site cleanups have been
       completed than were completed in the previous 12 years of the Superfund program.

       Under our Brownfields Assessment Demonstration Pilot Program, we continued to forge
       stronger partnerships with states, cities, and communities by providing funding and
       technical support to 307 communities to help them redevelop abandoned or underutilized
       industrial properties.
                          EPA's FY 1999 Annual Financial Statements                    Paae iii

-------
•      Our Nation's air quality continues to improve through cleaner cars and fuels.  The
       President announced a final rule that will give Americans substantially cleaner-burning
       vehicles and cleaner fuels.  For the first time ever, SUVs, vans and light trucks will be
       held to the same tough standard as cars.  By the end of the decade, every single vehicle
       rolling off the assembly line will be 77 to 98 percent cleaner than the vehicles we drive
       today. These reductions will be the equivalent of taking 164 million cars off the road,
       and will prevent thousands of premature deaths and respiratory illnesses. But this action
       will not  limit a consumer's choice in vehicles.

•      EPA's Office of Environmental Information was created to be an innovative center of
       excellence for the creation, management, and use of information as a strategic resource.
       Having quality environmental  information will enable EPA to make informed decisions,
       improve information management, reduce reporting burdens, improve public access, and
       measure success in support of the Agency's mission to protect the environment and
       human health.

       Working cooperatively with industry, the public, and local leaders we continued to find
       innovative, cost-effective, and common sense solutions to environmental and public
       health challenges. Our Project XL (excellence and Leadership) initiative enables
       companies, states, and localities to redesign current EPA rules if they can formulate
       alternative systems that are both cheaper and cleaner for the environment.

       When I began my service as Administrator, I stated that the Agency would fulfill its
mission while adhering to sound management principles designed to ensure prudent and effective
stewardship of the taxpayer funds entrusted to us.  These financial statements are one major
indicator of our commitment to fiscal  accountability. I look forward to continued management
improvements enabling EPA to link its resources with results, measure its successes, meet the
long-term goals and objectives established in its Strategic Plan, and address the critical
environmental challenges that will emerge during the new millennium.
                                                     M. Browner
                                               Administrator
Page iv                      EPA's FY 1999 Annual Financial Statements

-------
MANAGEMENT'S DISCUSSION
   AND ANALYSIS (MD&A)
    EPA's FY 1999 Annual Financial Statements
                                    Page

-------
                 U.S. ENVIRONMENTAL PROTECTION AGENCY
                                       (EPA)
                                    -   "OFFICEOF >,••'**
                                   TOE ADMMSTRATOR, A

[CEOF ' ' OFFI
STRATION AIR,,
SOURCES RAT
GEMENT (O/
UtM)


CEOF »"v ^ OFFICE OF'~"
\ND : ENFORCEMENT
1ATION ! AND COMPLIANCE
iR) ,ASSURANCE
(OECA)




""OFFICE OF *'•• OFFICE OP f s - OFF
THE CHIEF 
(OCFO) , (OGC) ,{C
CEO^^
ECTOR
JERAi--
>IG)"j?5-
   OFFICE OF
 INTERNATIONAL
   AcnvrnES •
     (OIA)
 OFFICE OF
  POLICY
   OFFICE OF
  PREVENTION,
-.PESTICIDES, AND
TOXIC SUBSTANCES
    (OPPTS)
   REGION!
  (Boston, MA)
  REGION II
{New York; NY)
 1  REGION III
 (Philadelphia, PA)
  OFFICE OF:
RESEARCH AND
DEVELOPMENT
   (ORD)*
   OFFICE OF
SOLID WASTE AND
  EMERGENCY
   RESPONSE
   .(OSWER)
AOFHCE-C
": WATER",':
  REGION IV
 (Aflanta;,GA)
   REGION V
  (Chicago, H.)
 REGION VT*
 (Dallas; TX) ;*
                  REGION VII
                (Kansas City, KS)
                REGION VH1
                (Denver, CO)
                  REGION DC
                (San Francisco, CA)
                 REGION X
                (Seattle, WA)
 Note:  This FY 1999 Organization Chart does not reflect the Office of Environmental
Information (OEI) which was established in FY 2000.
Page 2
                              EPA's FY 1999 Annual Financial Statements

-------
      MANAGEMENT'S DISCUSSION AND ANALYSIS

                                    Introduction

The Environmental Protection Agency (EPA) was established to lead the nation's efforts to protect
human health and safeguard the environment.  EPA continues to work in partnership with local,
state, tribal, federal and global communities to protect the air, water, land, and public health for all
generations. This section contains an overview of the initiatives taken to ensure that all citizens have
a clean environment and presents the key financial management highlights of the Agency. [For more
detailed information on environmental initiatives, see EPA's FY 1999 Annual Performance Report
(APR), to be issued in March 2000.]

                        EPA's Mission and Strategic Goals

The Agency's mission statement encompasses all of the legislative mandates of its programs and
serves as a guidepost for all activities. Our strategic planning framework comprises ten strategic
long-term goals that support the Agency's mission. We have articulated a set of objectives for each
strategic goal, as well as performance goals to identify the progress we aim to make each year
towards longer-term commitments.
                                       Mission
     "The mission of the U.S. Environmental Protection Agency is to protect human health and to
        safeguard the natural environment — air, water, and land — upon which life depends."
                                    Strategic Goals

 EPA has ten strategic goals to fulfill this mission. The Agency's Strategic Goals are:

        1. Clean Air
        2. Clean and Safe Water
        3. Safe Food
        4. Preventing Pollution and Reducing Risk in Communities, Homes, Workplaces, and
        Ecosystems
        5. Better Waste Management, Restoration of Contaminated Waste Sites, and Emergency
        Response
        6. Reduction of Global and Cross-Border Environmental Risks
        7. Expansion of Americans' Right to Know About Their Environment
        8. Sound Science, Improved Understanding of Environmental Risk, and Greater Innovation to
        Address Environmental Problems
        9. A Credible Deterrent to Pollution and Greater Compliance with the Law
   10. Effective Management.
                          EPA's FY 1999 Annual Financial Statements                      Page 3

                                                        U.S. EPA Headquarters Library
                                                               Mail code 3201
                                                        1200 Pennsylvania Avenue NW
                                                           Washington DC 20460

-------
                            Overview of FY1999 Results

EPA is proud of its FY 1999 contributions to establishing a cleaner, healthier environment. The
results presented in this report demonstrate continued progress and reveal a mix of tools and
approaches used to protect public health and promote environmental protection.  Throughout the
year, the Agency maintained close contact with its primary partners-states, tribes, and other federal'
agencies-whose involvement contributed significantly to the annual accomplishments discussed in
this report and progress toward the longer-term environmental results.

For FY 1999, EPA can report significant accomplishments that contributed to cleaner air and land
and safer food and water, meeting the majority of the 69 annual performance goals (APGs) to which
the Agency committed in its FY 1999 Annual Plan.  The Agency is also on track to achieve several
APGs with targets  that  fall beyond FY 1999. Final results are not yet available for a number of
APGs due to differences in reporting schedules.  Owing to a variety of factors, EPA did not achieve
some of the accomplishments it had planned for FY 1999. A table showing detailed results for
EPA's 69 APGs is included in the Appendix of the FY 1999 APR.

Selected Accomplishments

Innovative Approaches to Environmental Problems

EPA is taking a fresh look at environmental problems and their solutions. We are devising more
efficient and effective  regulatory  programs, expanding cooperative partnerships, and building
simpler and more flexible processes for rule-making and permitting. We have some exciting results
to report.

A 25-Percent Reduction in Acid Rain.  In the Northeast and Mid-Atlantic regions of the United
States, where ecosystems are most prone to acidification, acid deposition has declined by up to 25
percent through the efforts of the acid rain program, which implements a system of emissions trading
known as "cap and trade."  This successful, market-based program was established by the Clean Air
Act to control emissions of sulfur dioxide (SO2) from electric power plants that cause acid rain and
other environmental and public health problems. The "cap and trade" system is innovative in its use
of the market to achieve greater environmental results for a given cost than are possible through
traditional approaches.  The program places a mandatory ceiling, or cap, on emissions nationwide
from electric utilities, and allocates emissions to these pollution sources in the form of allowances.
At the end of the year, sources must hold one allowance for each ton of SO2 they emitted.  Extra
allowances may be banked (or carried over) for future use, or sold to other companies.  This
flexibility gives utilities  the opportunity to find cost efficiencies while ensuring that overall emission
reductions are achieved. Estimates by Edison Electric Institute in 1989 of estimated costs under
traditional approaches were $7.4 billion by 2010, versus EPA's initial estimate of $4.6 billion under
"cap and trade." Based on recent compliance cost information, a 1998 Resources  for the Future
report estimated costs of SO2 emissions reductions to be less than $1 billion by 2010.
Page 4                       EPA's FY 1999 Annual Financial Statements

-------
Early Progress in Food Safety. EPA is piloting a new approach to broaden public participation in
decision-making on older agricultural pesticides.  We are confronted with a large number of
pesticides that were registered, or licensed for use, before  tough standards for food safety were
enacted into law.  EPA is required by statute to evaluate these pesticides to set safe limits for their
residues on foods, also called "food tolerances." Our new approach to reassessment makes the
process more transparent to the agricultural community, whose members are most directly affected
by Agency findings. We are pleased to report that,  as of September 30, 1999, EPA exceeded the
statutory requirement of evaluating 33 percent  of  the 9,721 existing pesticide  food tolerances,
completing a net total of 3,430 reassessments (over 35%).

Regulations that Produce Better Environmental Results. One of EPA's boldest innovations, Project
XL ("excellence and Leadership") was created through the President's Reinventing Environmental
Regulation Initiative. In FY 1999, EPA approved five more regulatory pilot projects through Project
XL, bringing the number of pilot experiments in the  implementation stage to 15.  An additional 36
XL proposals were either under development or in negotiation, bringing the total number of projects
to 51, meeting the Agency's goal for FY 1999.   To  date, these pilots have revealed over  40
opportunities for improving environmental regulations, and eight innovations have already been
incorporated into EPA regulations, permitting, and stakeholder involvement approaches. Project XL
gives approved regulated sources the flexibility to  develop alternative strategies to replace or modify
specific regulatory requirements, contingent upon the production of greater environmental benefits.

Innovative Partnerships for Environmental Results

EPA could not have achieved the results described in this document during FY 1999 without forging
innovative partnerships with  many  different governments, groups, and agencies.  The Agency
operates with the  active  participation of state and local  agencies, tribes, community leaders,
businesses, and private citizens to develop the  most effective standards for public health and
environmental protection.

Targeting Clean Water Efforts, from  Coast to Coast.  EPA's  Strategic Plan includes a commitment
to expand our focus on watersheds  in pursuit of our goal for Clean and Safe Water.   FY  1999
brought to fruition  a cooperative, intergovernmental process to assess the condition of the nation's
watersheds. For the first time, all 50 states, the District of Columbia, five territories, and numerous
tribes  each completed a comprehensive,  nationwide assessment of  watersheds within  their
boundaries, with guidance from EPA, the U.S. Department of Agriculture, and other federal
agencies. The results incorporate water quality data, habitat conditions, endangered species listings,
and other environmental factors.  Taken together, this information helps all agencies identify the
aquatic resources in greatest need of restoration and/or protection under the Clean Water Action
Plan.

A  Cleaner Environment,  a Stronger Economy.  During FY 1999, EPA's government/industry
partnership programs contributed to the reduction of annual greenhouse gas emissions in total by 35
metric tons in carbon equivalent.  The Agency's climate change efforts are part of the President's

                           EPA's FY  1999 Annual Financial Statements                      Page 5

-------
five-year Climate Change Technology Initiative included in the 1999 Budget and are designed to
overcome barriers to investments in more efficient technologies by consumers, businesses, and
others.  EPA promotes energy-efficient technologies through programs such as the Energy Star
Labeling Program and the Voluntary Aluminum Industry Partnership. Our support for innovation
enables industries to limit greenhouse gas emissions and at the same time improve local air quality,
save money for consumers and businesses, and enhance overall economic productivity.

Making the Most of our Land.  In FY 1999, EPA demonstrated its commitment to Brownfields
redevelopment by meeting its goal to provide funding and technical support to 80 communities,
bringing the total communities served to 307.  The Brownfields  Assessment and Development
Program supports the assessment, cleanup, and redevelopment  of industrial and commercial
properties that have been abandoned or underutilized due to real or perceived environmental
contamination. Redevelopment efforts  are designed to empower states, communities, and other
stakeholders to work together on Brownfields projects. EPA and its partners also met the Agency's
goal to complete  construction at 85 Superfund sites in FY 1999. Major administrative reforms in
the Superfund program have enabled us in the past seven years to complete construction at over three
times the number of sites achieved during the first twelve years of the program.

Managing and Improving Environmental Information

EPA is working to assemble and manage more precise information about the environment to present
a more complete  picture to the public and to enhance Agency decision-making. During FY 1999,
EPA made notable advances in  the quality of data being produced  and the availability of
environmental  information to all  partners and stakeholders.  When all of us-state and tribal
governments,  non-governmental  and  private  organizations, communities,  and  individual
citizens-have access to valid, consistent,  and comprehensible data about environmental conditions,
we can work together more effectively to address environmental problems and reduce exposure to
harmful substances.

Establishing Common Data Standards.   The State/EPA Information Management Workgroup,
founded to promote compatible data standards and systems designs, has negotiated a common vision
and operating principles for managing  environmental information.    Although EPA and state
agencies are committed to sharing environmental data, the variety of data standards currently in use
makes it difficult to integrate information or create accurate composites of environmental conditions.
The  workgroup  has  established  multi-party action teams to identify  and promulgate  joint
environmental data standards. In FY 1999, the teams completed standards for facility identification
and standard date, and work is currently underway on standards for latitude/longitude, industrial
classification, chemical identity, and biological classification.

Putting Information  into the  Hands of the  Public.  The Agency recognizes that making
environmental and public health information available to local residents is one of the most effective
ways to reduce local pollution and prevent it from happening in the future. EPA, the Environmental
Defense Fund, and the Chemical Manufacturers Association achieved considerable success in FY

Page 6                      EPA's FY 1999 Annual Financial Statements

-------
 1999 during the first phase of the Chemical Right-to-Know Initiative.  The focus was on 2,800
 chemicals produced  and imported at volumes exceeding one million pounds per year which,
 therefore, present significant chance of public and environmental exposure. The Right-to-Know
 initiative aims to identify and make public basic screening-level information on these chemicals,
 including some that may present particular concerns for children's health. Over 200 companies
 committed voluntarily to provide screening level toxicity information on over 1,150 of the chemicals
 in question.

 New Information about Human Health and the Environment. Research and development programs
 at EPA seek out more  innovative, effective ways to gather and distribute information about
 environmental health risks.  The  endocrine disrupters research program is producing important
 results  by expanding our knowledge of how exposure to certain chemicals can affect human
 endocrine systems. In FY 1999, the Agency initiated a study to examine children for the effects of
 two endocrine-disrupting chemicals (EDCs). This study will help to characterize the key factors that
 influence human exposures to these chemicals and other persistent pesticides, toxics, and metals.
 It will also help produce a field exposure study protocol to support a follow-on larger-scale study
 to begin in FY 2000.  The data from these studies will teach us more about where, when, and how
 children  and other sensitive sub-populations are exposed  to these kinds  of  environmental
 contaminants.

 Transforming Information Management for the Next Century.  During FY 1999, EPA laid the
 groundwork for a new office dedicated to information and information access issues. Formally
 established in FY 2000, EPA's Office of Environmental Information (OEI) will play a significant
 role to advance the creation, management, and use of data as a strategic resource.  OEI will work
 closely with EPA's external partners to meet their data needs, develop appropriate policies regarding
 data protection and information security, create and oversee  information standards and records
 management policies, and enhance the security and reliability of EPA's information infrastructure.
 The office supports the  Agency's mission by integrating quality  environmental information to
 maximize its usefulness for decision-makers.

 Year 2000 (Y2K) Activities

 In FY 1999, EPA positioned the Agency's information technology assets to successfully transition
 to the upcoming calendar year change.  All 50  EPA mission critical systems were assessed,
 renovated, and certified through an independent certification program.  In addition, the Agency's
major  computing platforms  (mainframe,  client/server,  supercomputer)  and wide  area
telecommunications networks were 100 percent compliant. EPA also completed assessment and
renovation of its  1,475 non-mission critical systems, as well as renovations to 28 data exchanges,
which are a combination of mission critical  and non-mission critical systems. Currently, the Agency
is monitoring the post Y2K transition testing process for mission critical and non-mission critical
systems.  This will enable EPA to determine whether or not the moratorium on modifications to
information technology assets is needed through March 15, 2000.
                          EPA's FY 1999 Annual Financial Statements          -             Pa«e 7

-------
EPA assessed all leased and owned buildings for Y2K compliance. The Agency received written
confirmation from the General Services Administration (GS A) on March 1,1999, that all EPA space
was successfully evaluated and compliant. To address any adverse impact of the century change on
EPA  facilities,  the  Agency prepared guidance for  all facility managers and  coordinated the
preparation of facility contingency plans specifically addressing building systems.  The Agency
completed testing facility contingency procedures and identified corrective actions.

To address worst case scenarios of the Y2K transition and ensure continuity of the core business
processes, the Agency developed procedures to respond to threats and risks of the calendar year
change.  Through  careful business  process analysis, the Agency's Business  Continuity  and
Contingency Planning (BCCP) methodology includes state and local interfaces, where appropriate.
The Agency's BCCP also includes cross-cutting programmatic threats that may affect the continuity
of business operations.

Within the Agency's BCCP methodology, EPA  formed business resumption teams (BRTs) for each
of the following nine core business processes:

       •      Protection of Air Quality
       •      Protection of Water Quality
       •      Safe Disposal of Waste Products
       •      Regulation of Pesticides and Toxic Substances
       •      Emergency Response to Environmental Emergencies
       •      Research and Development to Improve the Understanding of Environmental Risks
       •      A Credible Deterrent to Pollution and Greater Compliance with the Law
       •      Expansion of Americans'  Right-to-Rnow About Their Environment
             Financial/Administrative Management of Agency Operations

The overall goals of the BRTs are to: 1) identify threats/risks and business priorities for its own core
business process; 2) develop and embellish a set of contingency procedures; 3) review and rehearse
procedures;  and 4)  enhance and implement procedures.  EPA's BCCP Life  Cycle includes
milestones for corrective actions for identified  contingencies and  procedures through a series of
workshops, rehearsals, and follow-up meetings.

The following table represents the historical and estimated future costs for Agency Y2K activities:
Fiscal Year
Cost (in Millions)
1996
$0.8
1997
$5.3
1998
$11.5
1999
S22.3
2000
Sl.O
Total
$40.9
Building on Lessons Learned

As a learning year, FY 1999 provided EPA many opportunities to identify and  develop the
capabilities essential for results-based management. The Agency knows that future successes will
Page 8
                          EPA's FY 1999 Annual Financial Statements

-------
 depend in large measure on its ability to set quantifiable, attainable goals and targets; to forecast
 external factors that may have an impact on program planning; to measure performance and results
 more precisely; and to analyze more accurately the relationships among costs, activities, and results.

 For a variety of reasons that affected the Agency's ability to accomplish what it had planned, EPA
 achieved less than full performance for several of its 69 FY 1999 APGs discussed in the Agency's
 FY 1999 APR. The Agency does not expect the shortfall in meeting these annual performance
 targets, however, to compromise its progress toward the long-range goals to which they contribute.
 For example, the Agency met the statutory and cumulative goal of reassessing existing tolerances
 for pesticide food uses, but missed its annual target due to efforts to strengthen involvement of the
 agricultural community in the reassessment process. In another case, the Agency added only four
 states (out of the eight that were planned) to the One Stop Reporting program in FY 1999. However,
 EPA did develop a technology transfer activity to support states' efforts to increase their level of
 information integration.  While they may not have resulted in the performance planned for F Y 1999,
 these and other such efforts build a strong foundation for longer-term progress towards the Agency's
 goals.

 In some cases, external factors affected the Agency's ability to achieve planned APGs. For example,
 due to  difficulties reaching agreements with developing nations, EPA delivered 16 international
 training modules instead of the 30 originally planned. Similarly, the Agency's decision to relinquish
 interest in the Wilson Building so that the District of Columbia Government could return to its
 historic home delayed the consolidation of EPA Headquarters offices at the Federal Triangle.

 Looking Ahead

 In addition to the missed APGs, other program issues will need careful attention by the Agency and
 our partners if we are to maintain progress towards the achievement of long-term performance
 results.  The Agency is  working to address these challenges  as we continue to strive  for
 environmental outcomes.

Air Court Case: Implications for Future of EPA 's Regulations. In May 1999, in a split decision (2
to 1), a panel of judges on the U.S. Court of Appeals fortheD.C. Circuit held that the Clean Air Act,
as applied in setting the  new public health air quality standards for ozone and particulate matter,
represents an unconstitutional delegation of legislative authority. The Court's decision calls into
question these important new health air standards for ozone and particulate matter, which would
protect the health of 125  million Americans, including 35 million children.  Ozone and particulate
matter are harmful pollutants that together contribute to acute health effects ranging from premature
death to asthma and other respiratory problems. The Court's decision stands in the  way of EPA's
public health protection efforts and carries with it long-term implications not only  for these new air
quality standards, but also for many other federal regulations containing broad grants of authority
to executive branch agencies. In January 2000, the Administrator filed a cetiorari petition seeking
Supreme Court review of key aspects of the Court's opinion.
                           EPA's FY 1999 Annual Financial Statements                      pa°e 9

-------
Nonpoint Source Pollution. Nonpoint source (NPS) pollution is the nation's largest contributor to
water quality problems.  There are literally millions of diffuse sources of polluted runoff from
agricultural lands, residential areas, city streets, and forests, and from pollutants settling out of the
air. A key challenge for the future is to foster a national commitment to preventing nonpoint source
pollution, assuring adequate investments by federal, state, tribal and local governments to fund
projects to  address these problems.

Performance Information: Need for Improved Data Quality and Availability.  EPA gathers much
of its data on the environment from sources outside the Agency, whose reporting cycles and data
standards vary widely.  For this reason, EPA has concerns about  data quality, availability,  and
measurability.  In a few instances, data relevant to FY 1999 performance are either lacking or of poor
quality.  We  need accurate baseline data  to measure performance  effectively.   EPA goal
teams-bringing together representatives from all Agency offices whose work contributes to progress
on our strategic goals-are working to determine what data are needed to set the baselines so that we
can assess results over the long term. We are also working to develop performance measures that
focus more on the outcomes of our work than  on our programmatic outputs.

Need for Improved and More Accessible Information.  EPA, in cooperation with the states and tribes,
must advance efforts to reinvent  environmental information by adopting formal data standards,
providing universal access to electronic reporting, and re-engineering the Agency's national data
systems. EPA must use efforts such as joint EPA/state/tribal information activities, Environmental
Monitoring for Public Access and Community Tracking (EMPACT), Environmental Justice grants,
and  drinking water Consumer Confidence Reports (CCRs) to help provide communities and
individuals with the information and tools they need, to address environmental problems. EPA is
striving to provide information in simpler, clearer terms and make it more accessible to states and
local governments, the regulated community, and the public.

                                    Future Trends

A number of current trends, which are likely to continue into the future, will have implications for
the success of EPA's programs.   The increasing likelihood of climate-change-driven weather
extremes, such as more frequent  hot, dry summers, may make it increasingly difficult to  reach
attainment  with air quality standards, despite  the full implementation of emission control plans.
Similarly, droughts and floods, such  as those  that occurred in 1999, can significantly impact the
success of the Agency's water and waste programs. As evidenced by the nation's recent experience,
flood waters can disrupt hazardous waste sites and spread animal and other wastes.  Drought
conditions can preclude reliance on dilution to  improve water quality. The Agency and its partners
have established some pollution control strategies predicated upon  fairly typical temperature and
precipitation regimes; however, these control  strategies may be less likely to  succeed, as we  are
exposed to  increasing climate and weather extremes.

Population growth,  and the attendant development of suburban and urban areas, pose further
implications for environmental protection programs.   Sprawl places increased demands  on

Page 10                      EPA's FY 1999 Annual Financial Statements

-------
transportation, and can result in more people relying heavily on private vehicles. The need to drive
more, coupled with the trend towards larger vehicles such as sports utility vehicles, can contribute
to increased emissions of conventional pollutants and greenhouse gases such as carbon dioxide. In
addition to air quality concerns, population growth places increased pressure on the nation's
infrastructure for providing clean and safe water.  This concern is especially apparent as the U.S.
population grows in southern and southwestern states with fewer water resources and often less
highly-developed water and wastewater treatment infrastructures.

The current trend of general economic growth and increased consumer demands will also bear upon
the success of EPA's programs across all media. If domestic manufacturing and production rise to
meet the demands of wealthier, more prosperous consumers, waste streams and air and greenhouse
gas emissions are likely to increase.
                           Financial Analysis Highlights
Financial Trends
Appropriation Levelsfor FY1996-1999. For Fiscal Year 1999, Congress appropriated a total of $7.9
billion to the Agency. A comparison of total Agency appropriations for Fiscal Years 1996 through
1999 is provided in the following chart:
      Appropriations by Fiscal Year
                             Supwfunci
                             TAG
                             All Othar
          1996  1997  1998  1999
                                       The chart is categorized by Superfund, State and Tribal
                                       Assistance  Grants (STAG), and  All Other.   The
                                       Superfund appropriation category is net of transfers to
                                       the  Science and Technology (S&T)  and Office of
                                       Inspector General (OIG) appropriations. The All Other
                                       category includes appropriations for OIG, Oil, Leaking
                                       Underground Storage Tank (LUST),  Buildings and
                                       Facility,  Environmental Program  and Management
                                       (EPM), and S&T.
                                                         FY 1999 EPA Expenditures
                                                                        46.8% ^ Contrac
FY 1999 Expenses.  In Fiscal Year 1999, EPA expended
S7.7 billion using current and  prior year appropriation
authority. Of this amount, as depicted, 74.9 percent was
expended for contracts, inter-agency agreements, and grants.

Superfund Financial Trends. The U.S. Congress passed the
Comprehensive Environmental Response, Compensation,
and Liability Act of 1980 (CERCLA) (P.L. 96-510), which
formally established  the  Superfund  program  and the
Hazardous Substance Response Trust Fund, now known as
the Hazardous Substance Superfund (Trust Fund). Although CERCLA has not been reauthorized
                                                         Contracts & lAGs
                                                            27.7%
                          EPA's FY 1999 Annual Financial Statements
                                                                                 Pa
-------
since 1995, the Superfund program continues to operate each year by way of annual Congressional
appropriations.

The Trust Fund, which is administered by the Bureau of Public Debt, U.S. Department of the
Treasury (Treasury), is the primary financing source for the Superfund program.  For FY 1999,
Treasury reports that the Trust Fund received $889.5 million in receipts from the revenue sources
shown in the following chart:
   Superfund Trust Fund Revenue Sources
               FY1999
     General Fund Transfi
        36.5%
                       Cost Recoveri e
                         36.0%
                     Fines & Penalties
                        0.4%
                             The Superfund program's authority  to  tax  expired  on
                             December 31, 1995.  Consequently,  tax revenues  have
                             diminished and the remaining revenue sources for the Trust
                             Fund are:  cost recoveries; interest, fines, and penalties;
                             interest from Trust Fund investments; and general revenues.
                             Due to diminishing revenues, EPA has  increased its efforts
                             to conserve existing Trust Fund balances and replenish the
                             Trust Fund with all eligible revenues.  Specifically,  EPA
                             has done the following to accomplish these goals:
       Reemphasized its "enforcement first" philosophy to compel Potentially Responsible Parties
       (PRPs) to clean up their sites. By having PRPs perform clean-ups, EPA can reduce related
       response and legal enforcement costs which result in cost savings to both the taxpayer and
       the Trust Fund.
                                                     Cumulative Superfund Trust Fund Cost
                                                                Recoveries
                                                            FY 1994 thru FY 1999
                                                        2500	
                                                           1994  1995  1996 1997  1998  1999
Accelerated efforts to pursue cost recovery (see
chart).   During FY  1999,  EPA recovered
$319.7 million —  the largest  cost recovery
amount for a one year period to date.

Placed increased emphasis on debt collection
activities to pursue unpaid debts owed EPA.

Diversified  the  Trust  Fund's  investment
portfolio,  with direction from Treasury,  to
return a higher rate of interest to the Fund.
       Office of the Chief Financial Officer's (OCFO's) Accomplishments

Financial Performance Measures.  OCFO tracks nine Core Financial Management Performance
Measures for monitoring the key functions in EPA's 14 finance offices.  The measures cover the
timeliness of processing of payments (commercial, grant, travel, payroll), recording of contract
obligations and accounts receivable, and reconciling cash as well as the use of electronic payments
for travel and payroll. The Agency improved its performance compared to FY 1998 and exceeded
the performance goals for all the measures during FY  1999.
Paae !2
                           EPA's FY 1999 Annual Financial Statements

-------
 Benchmarking. EPA, as a CFO Council member agency, participated in a Benchmarking project
 sponsored by The Hackett Group, an organization that conducts benchmarking studies for the private
 sector. EPA's business processes were compared to other government agencies and to private sector
 companies in areas such as transaction processing, control and risk management, decision support
 and finance function management.  EPA compared very favorably against both government and
 private sector averages in the number of finance FTEs per billion dollars of appropriations (equated
 to revenues for private sector comparison) and the FTE staff time allocated to processing financial
 transactions (lowest among both government and private sector).

 One area of concern that the study revealed was the overall cost of EPA's financial systems. OCFO
 is evaluating replacement systems and other measures to bring these costs in line with government
 and private sector averages.

 Integration of Planning, Budgeting, and Accounting. EPA prepared its FY 1999 Annual Plan and
 Budget  by linking resources to the Goals and Objectives in the  Agency's Strategic Plan in
 accordance with the requirements of the Government Performance and Results Act (GPRA) and
 other related management reform initiatives. The General Accounting Office (GAO) commended
 EPA for being the  first Agency to succeed  at  full integration of  budget  requests and annual
 performance plans. During the year, substantial enhancements were made to the Agency's Budget
 Automation System (BAS) to allow the resource community greater flexibility in formulating their
 budgets. The GPRA structure is used to account  for the costs of our programs and meets the
 requirements of the Statement of Federal Financial Accounting Standards No. 4, Managerial Cost
 Accounting Concepts and Standards for the Federal Government, that requires Agencies to account
 for the "full  costs" of their outputs.

 Working Capital Fund.  In 1999, the  Working Capital Fund (Fund) completed  its third year of
 providing administrative support services to Agency offices on a fee-for-service basis and ended its
 protected status as a mandatory source for services  provided to internal Agency customers. The
 Fund is expected to demonstrate additional savings through increased efficiencies driven by market
 forces.

 In 1999, the Fund operated two successful business activities, providing customers postage services
 and an array of telecommunications and data processing services.  As expected,  the Fund has
 promoted  effective resource utilization Agency-wide by more clearly identifying to  Agency
 managers, who must now account for the cost of administrative services in their budget planning,
both the resources their organizations consume and the cost of those resources. EPA has experienced
a 20 percent reduction in its postage costs, a savings of approximately $1 million annually, simply
through  reduced  internal  demand.   Similarly,  EPA  experienced significant savings in its
telecommunications and data processing operations.   For FY  1996, the year before the Fund
commenced  operations, these activities consumed approximately $114 million of the Agency's
appropriated budget.  Actual costs for these operations dropped to approximately SI02 million in
FY 1997 (first year of Fund's operations). Costs were SI 14.1 million and $127.8 million in Fiscal
Years  1998 and 1999,  respectively. Fund administrators are currently examining a business case

                          EPA's FY 1999 Annual Financial Statements                     Page 13

-------
analysis for including certain payroll services within the Fund,  and additional expansions are
contemplated within the next several years.

FY1999 Biennial Review of EPA User Fee Systems. The Chief Financial Officers Act of 1990 (CFO
Act), Section 902(a)(8),  directs EPA's Chief Financial Officer to: "review on a biennial basis, the
fees, royalties, rents and other charges imposed for services and things of value it provides, and make
recommendations on revising those charges to reflect costs incurred by it in providing those services
and things of value."

The Agency's FY 1999 review was conducted in accordance with the CFO Act and provisions set
forth in Office of Management and Budget Circular A-25, "User Charges." During this review
process, the Agency assessed its existing fee systems, made necessary revisions and  identified
potential new fee systems.   EPA has six existing fee systems:  Motor  Vehicle and Engine
Compliance Fee, National Radon Proficiency  Program Fee, Maintenance Fee, Tolerance  Fee,
Premanufacture Notice Fee, and Lead Accreditation and Certification Fee. The Agency is also
proposing several new fees:  Outside  User Fee, Tolerance Fee, Registration "Fee for Service,"
Registration Review, and Registration Fee.

The preliminary results of the review reveal that the Agency  is taking reasonable and appropriate
actions to ensure that fees reflect costs where it would not adversely affect the service provided and
where EPA has the statutory authority to do so.  A formal report is being prepared and is expected
to be completed by March 2000.
Re-engineered and Streamlined Payment Processes. In 1999, the Agency successfully re-engineered
and/or streamlined several payment processes to ease the burden on external and internal customers,
reduce the reliance on paper documents, and
help the Agency take advantage of rebates
and  discounts for prompt payment.  The
benefits from these efficiencies flow back to
EPA's program offices and are  used to
further the Agency's mission.
For small purchase payments, the Agency
worked closely  with  its new credit card
issuer to streamline invoicing and recording
of accounting  data.   The  Agency also
developed  new intranet-based  reporting
tools  to  facilitate cost  allocation  and
expanded the  use of automated  tools to
reduce duplicate data entry. The bank card
effort alone allowed EPA to earn about S365
thousand in rebates in  1999.
             Bankcard Program
   Six Year Comparison of Total Number of Purchases
In Thousands
90.0	
                                79.7
                                         | 1994
                                          1995
                                         | 1996
                                         ] 1997
                                         i 1998
                                          1999
Page 14
                           EPA's FY 1999 Annual Financial Statements

-------
For travel and transportation payments, EPA implemented a new credit card to offer over 16,000
Agency employees a way to better manage their accounts and to provide the Agency with rebates
and new administrative tools.

For contractor payments, the Agency moved aggressively to use electronic imaging of contracts to
make information more accessible while reducing the use of paper. EPA introduced a new release
of the Electronic Approval System (EASY) and expanded the use of the system to 94 project
officers, up from 20 in 1998. EASY provides project officers a streamlined on-line invoice approval
process. This re-engineering enabled EPA to pay 99.9 percent of invoices on time and earn over
$344 thousand in discounts in 1999.

Payment Related Initiatives Under Way. Three initiatives are underway to re-engineer and automate
payment processes. First, by the end of September 2000, all EPA grant payment offices will have
implemented Treasury's Automated Standard Application for Payments (ASAP) which standardizes
federal payment request  procedures for grant recipients.  Second, a dedicated team thoroughly
analyzed alternatives for replacing the aging EPA Integrated Payroll and Personnel System (EP AYS)
and recommended a product that will interface easily with other agency software, automate a number
of tasks, and provide high quality information to employees. Third, in 1999, the Agency obtained
a new intranet-based release of Travel Manager Plus (TM+) software that allows travel documents
to be prepared, processed, and approved on-line.  TM+ will interface with the Agency's Integrated
Financial Management System (IFMS) to allow the automatic obligation and disbursement of funds
from fully approved documents.
                          EPA's FY 1999 Annual Financial Statements                     Page 15

-------

-------
   MESSAGE FROM THE  CHIEF FINANCIAL OFFICER
      I am pleased to present the FY 1999 financial statements of the Environmental Protection
Agency (EPA). Identifying strengths and weaknesses is a key component in the continuous
improvement of financial management at EPA.  This document reflects the progress the Agency
has made and signals our commitment to addressing the challenges we still face.

      EPA's financial statements have a slightly different look this year with the inclusion of
Management's Discussion and Analysis (MD&A) in place of the Overview found in the FY 1998
Audited Financial Statements. The MD&A highlights EPA's financial and programmatic
accomplishments in FY 1999, as well as current and future challenges.

      In FY 1999, EPA furthered its commitment to strong program performance and financial
management through activities such as the following:

•     Laid the ground work for a new Office of Environmental Information that will help
      Agency programs use information as a strategic resource.

•     Successfully converted the Agency's financial management systems to comply
      with Year 2000 (Y2K) requirements.

•     Integrated planning, budgeting, and accounting by linking resources with the ten strategic
      goals and related objectives in the Agency's Strategic Plan.

•     Achieved the majority of the 69 annual performance goals included in the Agency's FY
      1999 Annual Plan, and remained on track to achieve several goals with targets falling
      beyond the FY 1999 time frame.

•     Improved performance relative to FY 1998, and exceeded FY  1999 performance targets,
      for timely payment processing (commercial, grant, travel, and payroll), recording of
      contract obligations and accounts receivable, and using electronic payments for travel and
      payroll.

•     Implemented a new bank card program for travel and small purchases, increasing EPA's
      use of electronic mechanisms for financial transactions.

      These actions are just a few of the many activities that comprise the Agency's overall
strategy for strengthening financial management and  programmatic functions at EPA.  We will
continue to identify other ways to improve financial management functions and ensure that
dollars spent will be used as efficiently as possible to carry out our mission.
                         EPA's FY 1999 Annual Financial Statements                     Page 17

                                                        U.S. EPA Headquarters Library
                                                               Mai! code 3201
                                                        1200 Pennsylvania Avenue NW
                                                           Washington DC 20460

-------
      The preparation of the financial statements has been a collaborative effort among OCFO,
the OIG, and the Agency's program offices.  I want to acknowledge the hard work and
commitment of all the employees throughout the Agency who contributed to this effort.
                                                                      5
                                                lichael W. S. Ryan
                                              Acting Chief Financial Officer
Page 18
                           EPA's FY 1999 Annual Financial Statements

-------
EPA's FY 1999 Annual Financial Statements
                                                              Paae 19

-------

-------
            Chief Financial  Officer's Analysis of the
              FY  1999 Audited Financial  Statements
       The Chief Financial Officers Act of 1990 (CFO Act), as amended by the Government
Management Reform Act of 1994 (GMRA), requires EPA to prepare agency-wide financial
statements. The Agency has categorized its appropriations for presentation in the FY 1999
financial statements as follows:

•      Hazardous Substance Superfund Trust Fund (Superfund), and

•      All Other Appropriations (All Others).


                   Summary of Auditor's Report and Opinions

       The Agency prepared the following FY 1999 Financial Statements: Statement of Financial
Position (Balance Sheet), Statement of Changes in Net Position, Statement of Net Cost, Statement
of Budgetary Resources, Statement of Financing, and Statement of Custodial Activity. The Office
of Inspector General (OIG) did not identify any material inconsistencies between the information
presented in EPA's Management's Discussion and Analysis (MD&A) and in the principal financial
statements. However, the OIG did identify exceptions in rendering its opinion that the Agency's
financial statements are fairly presented.

       In its February 10, 2000, draft audit report, the OIG raised for the first time an opinion level
question regarding support for an amount identified in a footnote to the Statement of Changes in Net
Position that related to the Superfund equity line titled "Other." OCFO provided the OIG with an
explanation and backup documentation for this amount on February 24,2000. OIG in its final report
has indicated that the support was not provided in time for them to apply audit procedures.

       In addition, on February 28, 2000, the OIG raised another issue affecting the Statement of
Financing. The OIG stated that the Agency was  unable to provide support for the composition of
the "Other" line item in the Statement of Financing for All Other Appropriations Funds. In fact, the
line item consisted mostly of prior period and other adjustments that could have been audited. The
OIG did not request an explanation nor supporting documentation for this amount.

Report on Internal Controls

       In evaluating the Agency's internal controls the OIG stated that the Agency made some
improvements in its financial statement preparation process but they also stated that the financial
statements provided to them were incomplete and contained significant errors.  The OIG proposed
the financial statement preparation process as a material weakness.
                         EPA's FY 1999 Annual Financial Statements                    Page 21

-------
       We disagree with the categorization of the OCFO financial statement preparation process as
a material weakness.  The Agency took aggressive action to meet the milestone dates for the FY
1999 statements and to ensure quality data. We cooperated fully on a time line jointly developed
by the CFO and the OIG. While we agreed to some of the presentation enhancements proposed by
the OIG, in some instances, the issues raised  by  the auditors were not errors in the underlying
accounting data in the system. In other instances the auditors' findings of error related to differences
in professional judgement on  the application of  accounting standards  and presentation on the
financial statements.  While we agree that the financial statement process can be significantly
improved, we do not believe the process constitutes a material weakness that places the agency at
risk in preparing reliable financial statements.

Compliance with Laws and Regulations

Compliance with the Federal Financial Management Improvement Act (FFMIA)

       The OIG identified the  following as instances of substantial noncompliance with FFMIA
requirements:

•       The OIG stated that our revised security plans for EPA's core financial systems continued
       to be substantially noncompliant with federal financial management system requirements.
       The OIG stated that they believed the security plans did not adequately address the system's
       operational security controls and still lack significant detail to document critical operational
       controls.

•       The OIG  stated that EPA's methodology for  accumulating and reporting costs by the
       Agency's  ten strategic goals could not be relied upon to fairly state the Agency's cost to
       achieve each goal.  Therefore, they believed EPA managers did not have adequate cost
       accounting data to manage their programs.

•       The OIG stated that the Agency was able to report "trading partner" information on only a
       portion of its intragovernmental transactions.

       Regarding the security plan, OCFO is developing a Remediation Plan to address the security
issues raised and will incorporate them in FY 2000 security plan actions.

       On cost accounting, we agree that improvements can be made.  However, we believe the
Agency' s current policy and practices substantially comply with federal Managerial Cost Accounting
Standards (SFFAS 4).  Further, the OIG's primary issue relates to year-end audited financial
statement presentation.   This concern does not  necessarily reflect  upon the reliability of the
Agency's underlying accounting data. OCFO provides Agency managers a variety of management
reports and ad-hoc reporting tools which enables officials to manage their programs on an on-going
basis.  OCFO will continue to work with the OIG, however, to improve EPA's cost accounting
capabilities.

Page 22                     EPA's FY 1999 Annual Financial Statements

-------
       OCFO also acknowledges that the Agency's FY 1999 Financial Statement reporting did not
 fully meet the most recent OMB and Treasury requirements for "trading partner" information. Those
 requirements were not issued until late FY 1999 and FY 2000. We have taken steps since then to
 ensure that Agency intergovernmental transaction data will be correctly identified for the FY 2000
 statements and that we will meet the overall reporting requirements for FY 2000.

 Other Noncompliance Issues

       The OIG did not identify any instances of noncompliance with laws and regulations that
 would result in material misstatements to the audited financial statements. However, the OIG did
 report two  issues  under the category of compliance with laws and regulations that, while not
 material, they still considered to  be significant. OCFO has worked with the Agency's Office of
 General Counsel in resolving both issues.

       The first concerned finding reported in past years about the Agency's practices for recording
 disbursements against grants funded with more than one appropriation. The Agency has since issued
 a revised policy "Accounting for Resources under the Government Performance and Results Act
 (GPRA)," which changes the way that grant disbursements, as well as other Agency transactions,
 are charged.

       The second issue concerned Agency compliance with Office of Management and Budget
 (OMB)  Circular A-25,  "User Charges."  OCFO recently  completed a Biennial Review of the
 Agency's user fee systems.  The review was  performed in accordance with the CFO Act and
 provisions set forth in OMB Circular A-25. We expect to issue the final report on the 1999 Biennial
 Review of the Agency's user fee  systems by March 15, 2000.
                       Impediments to Correcting Problems

       Gathering information on grant accruals has been a major challenge for the Agency in the
preparation of its financial statements.  For the preparation of the FY 2000 statements, we plan to
work with the OIG in streamlining this process.

              Progress in Correcting Previously Identified Problems

       The financial statement preparation process was identified as a material weakness last year.
As we noted above, under our "Report on Internal Controls," we addressed the problems identified
in the development of the FY 1998 financial  statements in the preparation of EPA's FY 1999
financial statements and are committed to further improvements in FY 2000.
                          EPA's FY 1999 Annual Financial Statements                     Page 23

-------
       In last year's audit report, the OIG recommended two improvements in the accounts
receivable area. In response, we clarified our policies and provided training and guidance to resolve
these issues.
Page 24                       EPA's FY 1999 Annual Financial Statements

-------
     PRINCIPAL
     FINANCIAL
    STATEMENTS
EPA's FY 1999 Annual Financial Statements
                                 Paee 25

-------

-------
                                 CONTENTS
Financial Statements

      Consolidating Balance Sheet
      Consolidating Statement of Net Cost
      Consolidating Statement of Changes in Net Position
      Combined Statement of Budgetary Resources
      Combined Statement of Financing
      Statement of Custodial Activity

Notes to Financial Statements

      Note 1.  Summary of Significant Accounting Policies
      Note 2.  Fund Balances with Treasury
      NoteS.  Cash
      Note 4.  Investments
      Note 5.  Accounts Receivable
      Note 6.  Loans Receivable, Net - Non-Federal
      Note 7.  Inventory and Related Property
      Note 8.  General Plant Property and Equipment - Net
      Note 9.  Debt
      Note 10. Other Liabilities
      Note 11. Leases
      Note 12. Pensions and Other Actuarial Benefits
      Note 13. Unexpended Appropriations
      Note 14. Amounts Held by Treasury
      Note 15. Commitments and Contingencies
      Note 16. Grant Accrual
      Note 17. Environmental Cleanup Costs
      Note 18. Superfund State Credits
      Note 19. Superfund Preauthorized Mixed Funding Agreements
      Note 20. Income and Expenses from Other Appropriations
      Note 21. Custodial Non-Exchange Revenues
      Note 22. Statement of Budgetary Resources
      Note 23. Adjustments
      Note 24. Unobligated Balances Available
      Note 25. Obligated Balance, Net - End of Period
      Note 26. Difference in Outlays between Statement of Budgetary Resources and SF-133
      Note 27. Statement of Financing
      Note 28. Other Financing Sources

                         EPA's FY 1999 Annual Financial Statements                     Page 27

-------
Supplemental Information Requested by OMB

    Required Supplemental Information

        Deferred Maintenance (Unaudited)
        Intra-govemmental Assets (Unaudited)
        Intra-govemmental Liabilities (Unaudited)
        Supplemental Statement of Budgetary Resources (Unaudited)
        Working Capital Fund Supplemental Balance Sheet (Unaudited)
        Working Capital Fund Supplemental Statement of Net Cost (Unaudited)
        Working Capital Fund Supplemental Statement of Changes in Net Position (Unaudited)

    Required Supplemental Stewardship Information

        Annual Stewardship Information (Unaudited)
paoe 28                     EPA's FY 1999 Annual Financial Statements

-------




Environmental Protection Agency
Consolidating Balance Sheet
As of September 30, 1999
(Dollars in Thousands)




Superfund All Combined Intra-agency
Trust Fund Others Totals Eliminations
ASSETS
Intragovem mental:
Fund Balance with Treasury (Note 2)
Investments (Note 4)
Accounts Receivable, Net (Note 5)
Other
Total Intragovemmental
Accounts Receivable, Net (Note 5)


S 20,069 $ 10,794,978 $
4,417,886 1,398,005
48,982 55,194
3,037 7,801
4,489,974 12,255,978
643,255 88,565
Loans Receivables, Net - Non Federal (Note 6) 	 1 0 1 ,3 1 2
Cash (Note 3)
	 55
Inventory and Related Property, Net (Note 7) 237
Marketable Securities Equity (Note 4)
General Property, Plant and Equipment,
Other
Total Assets
LIABILITIES
Intragovemmental :
Accounts Payable
Debt (Note 9)
5,146
Net (Note 8) 13,407 385,968
835 2,668
S 5,152,617 S 12,834,783 S


S 89,594 $ 2,737 S
37,922
Environmental and Disposal Costs (Note 17) 14,321
Other (Note 10)
Total Intragovemmental
Accounts Payable
Pensions and Other Actuarial Liabilities
Other (Note 10)
Total Liabilities
Commitments and Contingencies (Note
NET POSITION
Unexpended Appropriations (Note 13)
Cumulative Results of Operations
Total Net Position
Total Liabilities and Net Position
96,746 174,372
186,340 229,352
47,945 75,241
(Note 12) 5,826 23,987
611,256 752.651
851,367 1,081,231
15)

2.656.831 10,076,964
1.644.419 1,676.588
4.301.250 11.753.552
S 55,152,617 S 12,834.783 S


10,815,047 S
5,815,891
104,176 (2,513)
10,838 (2,638)
16,745,952 (5,151)
731.820
101,312
55
237
5,146
399,375
3,503
17,987,400 S (5,151)


92,331 S
37,922
14,321
271,118 (5,151)
415,692 (5,151)
123,186
29,813
1,363,907
1,932,598 (5,151)


12,733,795
3,321,007
16.054,802
17.987.400 S (5,151)




Consolidated
Totals


S 10,815,047
5,815,891
101,663
8,200
16,740,801
731,820
101,312
55
237
5,146
399,375
3,503
S 17,982,249

S 92,331
37,922
14,321
265,967
410,541
123,186
29,813
1,363,907
1,927.447


12,733.795
3,321,007
16.054,802
S 17.982.249
The accompanying notes are an integral part of these statements.
EPA's FY 1999 Annual Financial Statements
                                                              Page 29

-------
                                 Environmental Protection Agency
                               Consolidating Statement of Net Cost
                             For the Year Ended September 30,1999
                                       (Dollars in Thousands)
COSTS:
  Intragovem mental
  With the Public
  Expenses from Other Appropriations (Note 20)

  Total Costs
                                               Superfund      All      Combined   Intra-agency  Consolidated
                                              Trust Fund    Others      Totals    Eliminations     Totals
S  454,791 $   607,490  S 1,062,281    S  (344,375)
  1,254,104    5,764,882    7,018,986          	
    35,664     (35,664)         	          	
 717,906
7,018,986
  1,744,559    6,336,708    8,081,267      (344,375)     7,736,892
  Less:
  Earned Revenues

  Total Revenue
   707,674     212,904     920,578      (19,375)      901,203
   707,674     212,904     920,578      (19,375)
 901,203
NET COST OF OPERATIONS
51,036,885$  6,123,804  $7,160,689    5(325,000)   56,835,689
                     The accompanying notes are an integral part of these statements.
Pase 30
                                EPA's FY 1999 Annual Financial Statements

-------
                                  Environmental Protection Agency
                       Consolidating Statement of Changes in Net Position
                              For the Year Ended September 30,1999
                                        (Dollars in Thousands)
Net Cost of Operations

Financing Sources (Other Than Exchange Revenues):

   Appropriations Used

   Taxes (and Other Non-Exchange Revenues)

   Trust Fund Appropriations Received (Note 14)

   Imputed Financing

   Income from Other Appropriations (Note 20)
   Transfers-In/Out

   Other Financing Sources (Note 28)

Net Results of Operations


Prior Period Adjustments

Net Changes in Cumulative Results of Operations


Increase (Decrease) in Unexpended Appropriations


Change in Net Position


Net Position - Beginning of Period


Net Position - End of Period
Superfund
Trust Fund
S 1,036,885
1,549,960
25,169
325,000
31,437
35,664
	
(1,524,112)
(593,767)
(20,122)
(613,889)
(149,129)
(763,018)
5,064,268
S 4,301,250
All
Others
$ 6,123,804
6,150,746
225,275
_
165,232
(35,664)
206
(75,179)
306,812
12,481
319,293
249,165
568,458
11,185,094
S 11,753,552
Combined Intra-agency
Totals Eliminations
S 7,160,689 $ (325,000)
7,700,706
250,444 	
325,000 (325,000)
196,669

206 	
(1,599,291)
(286,955) 	
(7,641) 	
(294,596) 	
100,036 	
(194,560) 	
16,249,362
S 16,054,802 S
Consolidated
Totals
S 6,835,689
7,700,706
250,444
_
196,669

206
(1,599,291)
(286,955)
(7,641)
(294,596)
100,036
(194,560)
16,249,362
S 16,054,802
                     The accompanying notes are an integral part of these statements.
                                EPA's FY 1999 Annual Financial Statements
                                                                                                  Page 31

-------
                               Environmental Protection Agency
                         Combined Statement of Budgetary Resources
                           For the Year Ended September 30,1999
                                    (Dollars in Thousands)
                                                        Superfund
                                                       Trust Fund
                         AH
                     Others
                  Combined
                     Totals
Budgetary Resources:

Budget Authority
Unobligated Balances - Beginning of Period
Spending Authority from Offsetting Collections
Adjustments (Note 23)
Total Budgetary Resources
$ 1,410,708
701,468
139,421
(59,368)
$ 6,447,893
1,717,941
276,342
(81,848)
S 7,858,601
2,419,409
415,763
(141,216)
$ 2,192,229
$ 8,360,328
$ 10,552,557
Status of Budgetary Resources:

Obligations Incurred
Unobligated Balances - Available (Note 24)
Unobligated Balances - Not Available

Total, Status of Budgetary Resources

Outlays:

Obligations Incurred
Less:  Spending Authority from Offsetting Collections
     and Adjustments

Obligated Balance, Net - Beginning of Period

Less: Obligated Balance, Net - End of Period (Note 25)

Total Outlays
S 1,709,357
    482,872


S 2,192,229
S 1,709,357

    326,851

  2,550,841

  2.433,861
$ 1,499,486
$ 6,685,653
  1,567,142
    107,533

$ 8,360,328
S 6,685,653

   427,091

  8,750,289
  9,153,233
S 5,855,618
S  8,395,010
   2,050,014
     107,533

S 10,552,557
   8,395,010

    753,942

  11,301,130
  11,587,094
   7,355,104
                    The accompanying notes are an integral part of these statements.
Pa°e 32
                              EPA's FY 1999 Annual Financial Statements

-------
Environmental Protection Agency
Combined Statement of Financing
For the Year Ended September 30, 1999
(Dollars in Thousands)
Superfund All
Trust Fund Others
Obligations and Nonbudgetary Resources
Obligations Incurred
Less: Spending Authority for Offsetting
Collections and Adjustments
Recoveries
Financing Imputed for Cost Subsidies
Income from Other Appropriations (Note 20)
Transfers- In/Out
Exchange Revenue Not in the Budget
Nonexchange Revenue Not in the Budget
Other
Total Obligations as Adjusted and
Nonbudgetary Resources
Resources that Do Not Fund Net Cost of Operations
Change in Amount of Goods, Services, and
And Benefits Ordered but Not Yet Received or
Provided
Change in Unfilled Customers Orders
Costs Capitalized on the Balance Sheet
Financing Sources that Fund Costs of Prior Periods
Trust Fund Outlays Not Affecting Net Cost
Total Resources that Do Not Fund Net
Costs of Operations
Costs that Do Not Require Resources
Depreciation and Amortization
Bad Debt Expense from Non-Credit
Reform Receivables
Loss on Disposition of Assets
Total Costs That Do Not Require Resources
Financing Sources Yet to be Provided (Note 27)
Net Costs of Operations
The accompanying notes are an intes

$ 1,709,357
(139,421)
(205,200)
31,437
35,664

(612,898)
(4,150)
241
815.030



• 156,635
49,033
(9,510)

74

196,232

2,595
18,316
477
21,388
4,235
S 1,036,885
;ral part of these

$ 6,685,653
(276,342)

165,232
(35,664)
206
(73,735)

40,351
6.505.701



(280,131)
19,440
(162,028)
9,628


(413,091)

13,481
894
884
15,259
15,935
$ 6,123,804
statements.
Combined
Totals

S 8,395,010
(415,763)
(205,200)
196,669

206
(686,633)
(4,150)
40,592
7.320.731



(123,496)
68,473
(171,538)
9,628
74

(216,859)

16,076
19,210
1,361
36,647
20,170
S 7,160,689

EPA's FY 1999 Annual Financial Statements
                                                                 Page 33

-------
                            Environmental Protection Agency
                              Statement of Custodial Activity
                         For the Year Ended September 30,1999
                                  (Dollars in Thousands)
                                                                       All Others
         Revenue Activity:

         Sources of Collections:

          Fines and Penalties                                             S 126,996

          Total Cash Collections                                            126,996

          Accrual Adjustment                                                 4,679

          Total Custodial Revenue                                           131,675

        • Disposition of Collections:


         Transferred to Others (by Recipient)                                   116,151

         Increase (Decrease) in Amounts To Be Transferred                       15,524

         Total Disposition of Revenue                                         131,675

         Net Custodial Revenue Activity                                    $     —
               The accompanying notes are an integral part of these statements.
Page 34                     EPA's FY 1999 Annual Financial Statements

-------
                            Environmental Protection Agency
                               Notes to Financial Statements
                                  (Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies

A.  Basis of Presentation

These consolidating financial statements have been prepared to report the financial position and results of
operations of the Environmental Protection Agency (Agency) for the  Hazardous Substance Superfund
(Superfund) Trust Fund and All Other Funds, as required by the Chief Financial Officers Act of 1990 and
the Government Management Reform Act of 1994. The reports have been prepared from the books and
records of the Agency in accordance with "Form and Content for Agency Financial Statements," specified
by the Office of Management and Budget (OMB) in Bulletin 97-01, and the Agency's accounting policies
which are summarized in this note.  These statements are therefore different from the financial reports also
prepared by  the Agency pursuant to OMB directives that are used to monitor and control the Agency's use
of budgetary resources.

B.  Reporting Entities

The Environmental  Protection Agency was  created in  1970  by executive reorganization  from various
components of other Federal agencies in order to  better marshal and coordinate Federal pollution control
efforts. The Agency is generally  organized around the media and substances it regulates — air, water, land,
hazardous waste,  pesticides and toxic substances.  For FY 1999 the reporting entities are grouped  as
Hazardous Substance Superfund  and All Other Funds.

                                Hazardous Substance Superfund

In 1980, the Hazardous Substance  Superfund, commonly referred to as the Superfund Trust Fund, was
established by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(CERCLA) to provide resources needed to  respond to and clean up hazardous substance emergencies and
abandoned, uncontrolled hazardous waste sites.  The Superfund Trust Fund financing is shared by Federal
and state governments as well as industry. The Agency allocates funds from its appropriation to other
Federal agencies to carry out the Act. Risks to public health and the environment at uncontrolled hazardous
waste sites qualifying for the Agency's National Priorities List  (NPL) are reduced and addressed through a
process involving site assessment and analysis, and the design and implementation of cleanup  remedies.
Throughout this process, cleanup activities may be supported by shorter term removal actions to reduce
immediate risks. Removal actions may include removing contaminated material from the site, providing an
alternative water supply to people  living nearby, and installing security measures. NPL cleanups and
removals are conducted  and financed by the Agency, private parties, or other Federal agencies. Through
1999, construction of cleanup remedies were completed at a total of 670 NPL sites (includes Federal and
non-Federal  sites). Superfund includes the Treasury collections and investment activity. The Superfund
Trust Fund is accounted for under Treasury symbol number 8145.
                            EPA's FY 1999 Annual Financial Statements                       Page 35

-------
                                       All Other Funds

All Other Funds include Trust Fund appropriations, General Fund appropriations, Revolving Funds, Special
Funds, the Agency Budgetary Clearing accounts, Deposit Funds, General Fund Receipt accounts, the
Environmental Services Special Fund Receipt Account, the Miscellaneous Contributed Funds Trust Fund,
and General Fund appropriations transferred from other Federal agencies as authorized by the Economy Act
of 1932.  Trust Fund appropriations are to the Leaking Underground Storage Tank (LUST) Trust Fund and
the Oil Spill Response Trust Fund. General Fund appropriations are to State and Tribal Assistance Grants
(STAG),  Science and Technology (S&T), Environmental Programs and Management (EPM), Office of
Inspector General (IG), Buildings and Facilities (B&F), and Payment to the Hazardous Substance Superfund.
General Fund appropriations that no longer receive current appropriations but have unexpended authority
are the Asbestos Loan Program,  Program and Research Operations  (PRO), and Energy, Research and
Development.  Revolving Funds include the FIFRA Revolving Fund and Tolerance Revolving Fund which
receive no direct appropriations;  however,  they do  collect fees from public industry  as a source of
reimbursement for the services provided.   In addition to FIFRA and Tolerance, a Working Capital Fund
(WCF) was established and designated as a franchise fund to provide computer operations support and
postage service for the Agency. A Special Fund was established to collect the Exxon Valdez settlement as
a result of the Exxon Valdez oil spill. All Other Funds are as follows:

The LUST Trust Fund was authorized by the Superfund Amendments and Reauthorization Act of 1986
(SARA) as amended by the Omnibus Budget Reconciliation Act of 1990. The LUST appropriation provides
funding to respond to releases from leaking underground petroleum tanks. The Agency oversees cleanup
and enforcement programs which are implemented by the states.  Funds are allocated to the states through
cooperative agreements to clean up those sites posing the .greatest threat to human health and environment.
Funds are used for grants to non-state entities including Indian tribes under section 8001  of the Resource
Conservation and Recovery Act. The program is financed by a 0.1 cent a gallon tax on motor fuels which
will expire in 2005, and is accounted for under Treasury  symbol number 8153.

The Oil Spill Response Trust Fund was authorized by the Oil Pollution Act (OPA) of 1990. The Oil Spill
Response Trust Fund was established in FY 1993 and monies were appropriated to the Oil Spill Response
Trust Fund. The Agency is responsible for directing, monitoring  and providing technical assistance for
major inland oil spill response activities.  This involves setting oil prevention and response standards,
initiating enforcement actions for compliance  with OPA and Spill Prevention Control arid Countermeasure
requirements, and directing response actions when appropriate. The  Agency carries out research to improve
response actions to oil spills including research on the use of remediation techniques such as dispersants and
bioremediation. Funding of oil spill cleanup actions is provided through the Department of Transportation
under the Oil Spill Liability Trust Fund and reimbursable funding from other Federal agencies.  The Oil
Spill Response Trust Fund is accounted for under Treasury symbol number 8221.

The State and Tribal Assistance Grants (STAG) appropriation provides funds for environmental programs
and infrastructure assistance including capitalization  grants for State  revolving funds and performance
partnership grants.  Environmental programs and infrastructure supported are  Clean and Safe  Water;
Capitalization grants for the Drinking Water State Revolving Funds; Clean Air; Direct grants for Water and
Wastewater Infrastructure needs, Partnership grants to meet Health Standards, Protect Watersheds, Decrease
Wetland Loss, and Address Agricultural and Urban Runoff and Storm  Water; Better Waste Management;
Preventing Pollution  and Reducing Risk in  Communities, Homes,  Workplaces and Ecosystems; and
paoe 36                       EPA's FY 1999 Annual Financial Statements

-------
 Reduction of Global and Cross Border Environmental Risks.   STAG is accounted for under Treasury
 symbol 0103.

 The Science and Technology (S&T) appropriation finances salaries; travel; science;  technology; research
 and development activities including laboratory and center supplies; certain operating expenses; grants;
 contracts; intergovernmental agreements; and purchases of scientific equipment. These activities provide
 the scientific basis  for the Agency's regulatory actions.  In FY 1999, Superfund research costs were
 appropriated in Superfund and transferred to S&T to allow for proper accounting of the costs.  Scientific and
 technological activities for environmental issues include Clean Air; Clean and Safe Water; Americans Right
 to Know About Their Environment; Better Waste Management; Preventing Pollution and Reducing Risk in
 Communities, Homes, Workplaces, and Ecosystems;  and Safe Food.  The Science and Technology
 appropriation is accounted for under Treasury symbol 0107.

 The Environmental Programs and Management (EPM) includes funds for salaries, travel, contracts, grants,
 and cooperative agreements for pollution abatement, control, and compliance activities and administrative
 activities of the operating programs. Areas supported from this appropriation include Clean Air; Clean and
 Safe Water; Preventing Pollution and Reducing Risk in Communities, Homes, Workplaces, and Ecosystems;
 Better Waste Management, Restoration of Contaminated Waste Sites, and Emergency Response; Reduction
 of Global and Cross Border Environmental Risks; Americans' Right to Know About Their Environment;
 Sound Science, Improved Understanding of Environmental Risk,  and Greater Innovation  to Address
 Environmental Problems; a Credible Deterrent to Pollution and Greater Compliance with  the Law; and
 Effective Management. The Environmental Programs and Management appropriation is accounted for under
 Treasury symbol 0108.

 The Office of Inspector General appropriation provides funds for audit and investigative functions to identify
 and recommend corrective actions on management and administrative deficiencies that create the conditions
 for existing  or potential  instances of fraud, waste and mismanagement. Additional funds  for audit and
 investigative activities associated with the Superfund Trust Fund and the Leaking Underground Storage Tank
 Trust Fund are appropriated under those Trust Fund accounts and are transferred to the Office of Inspector
 General account. The audit function provides contract audit, internal and performance audit, and financial
 and grant audit services.  The Office of Inspector General appropriation is accounted for under Treasury
 symbol 0112 and includes expenses incurred and reimbursed from the appropriated trust funds being
 accounted for under Treasury symbols 8145 and 8153.

 The Buildings and Facilities appropriation provides for the construction, repair, improvement, extension,
 alteration, and purchase  of fixed  equipment or facilities that are owned  or used by the Environmental
 Protection Agency. The Buildings  and Facilities appropriation is accounted for under Treasury symbol 0110.

The Payment to the Hazardous Substance Superfund appropriation authorizes  appropriations from the
General Fund of the Treasury to  finance activities conducted through Hazardous Substance  Superfund.
Payment to the Hazardous Substance Superfund is accounted for under Treasury symbol 0250.

The Asbestos Loan Program was  authorized by the Asbestos School Hazard Abatement Act  of 1986 to
finance control of asbestos building materials in schools. Funds have not been appropriated for this Program
since FY 1993. For FY  1993 and FY1992, the program was funded by a  subsidy appropriated from the
General Fund for the actual cost of  financing the loans, and by borrowing from Treasury for the unsubsidized
portion of the loan. The Program fund disbursed the subsidy to the Financing fund as loans were made, and

                             EPA's FY 1999 Annual Financial Statements                       Page 37

-------
disbursed administrative expenses to the providers. The Financing fund received the subsidy payment,
borrowed from Treasury and disbursed  loans and collects the asbestos loans. The Asbestos Loan Program
is accounted for under Treasury symbol 0118 for the subsidy and administrative support, under Treasury
symbol 4322 for loan disbursements, loans receivable and loan collections on post FY 1991 loans, and under
Treasury symbol 2917 for pre FY 1992 loans receivable and loan collections.

The Program  and Research  Operations appropriation provides salaries and travel associated with
administering  the operating programs  within the Environmental Protection Agency.  It incorporated
personnel, compensation and benefit costs and travel, exclusive of the Hazardous Substance Response Trust
Fund, the Leaking Underground Storage Tank Trust Fund, the Office of Inspector General and the Oil Spill
Response Trust Fund. In fiscal year 1996, Congress restructured the Agency's accounts. The Program and
Research Operations appropriation was eliminated. Activity remaining from prior fiscal year appropriations
is accounted for under Treasury symbols 0200 and 0201.

The FIFRA Revolving Fund was authorized by the Federal Insecticide, Fungicide and Rodenticide Act
Amendments of 1998, as amended by the Food Quality Protection Act of 1996. Fees are paid by industry
to offset costs of accelerated reregistration, expedited processing of pesticides, and establishing tolerances
for pesticide chemicals in or on food and animal feed. The FIFRA Revolving Fund is accounted for under
Treasury symbol number 4310.

The Tolerance Revolving Fund was authorized in 1963 for the deposit of tolerance fees. Fees are paid by
industry for Federal  services of pesticide chemicals in or on food and animal feed.  Effective January 2,
1997, fees collected are now being collected and deposited in the Reregistration and Expedited Processing
Revolving Fund (4310).  The fees collected prior to this date are accounted for under Treasury symbol
number 4311.

The Working Capital Fund (WCF) includes two activities: computer support services and  postage. WCF
derives revenue from these activities based upon fee for services. WCF's customers currently consist solely
of Agency program offices. Accordingly, revenue generated by WCF and expenses recorded by the program
offices for use of such services, along with the related advances/liabilities, are eliminated on consolidation.
The WCF is accounted for under Treasury symbol 4565.

The Exxon Valdez Settlement Fund has  funds available to carry out authorized environmental restoration
activities. Funding is derived from the collection of reimbursements under the Exxon Valdez settlement as
a result of the oil spill. The Exxon Valdez Settlement fund is accounted for under Treasury symbol number
5297.

Appropriations transferred to the Agency from other Federal agencies include funds from the Appalachian
Regional Commission and the Department of Commerce which provide economic assistance to state and
local developmental activities,  the Agency for International Development which provides assistance on
environmental matters at international levels, and from the General Services Administration which provides
funds for rental of buildings, and operations, repairs, and maintenance of rental space.  The transfers
appropriations are accounted for under Treasury symbols 0200, 1010, 1021, 2050. and 4542.

Clearing Accounts include the  Budgetary suspense account, Deposit in  Transit  differences.  Unavailable
Check Cancellations and Overpayments, and Undistributed and Letter  of Credit differences. Clearing
accounts are accounted for under Treasury symbols 3875. 3878, 3879, and 3880.

Page 38                       EPA's FY 1999 Annual Financial Statements

-------
Deposit funds include Fees for Ocean Dumping, Nonconformance Penalties, Suspense and payroll deposits
for Savings Bonds, and State and City Income Taxes Withheld.  Deposit funds are accounted for under
Treasury symbols 6050, 6264, 6265, 6275, and 6875.

General Fund Receipt Accounts include Hazardous Waste Permits; Miscellaneous Fines, Penalties and
Forfeitures; General Fund Interest; Interest from Credit Reform Financing Accounts; Fees and Other Charges
for Administrative and Professional Services; and Miscellaneous  Recoveries and Refunds. General Fund
Receipt accounts are accounted for under Treasury symbols 0895,  1099,1435,1499,2410, 3200, and 3220.

The Environmental Services Receipt account was established for the deposit of fee receipts associated with
environmental programs, including radon  measurement proficiency ratings and training, motor vehicle
engine certifications, and water pollution permits. Receipts in this special fund will be appropriated to the
S&T appropriation and to the EPM appropriation to meet the expenses of the programs that generate the
receipts.  Environmental Services are unavailable receipts accounted for under Treasury symbol 5295.

The Miscellaneous Contributed Funds Trust Fund includes gifts  for pollution control programs that are
usually designated for a specific use by the donor and deposits from pesticide registrants to cover the costs
of petition hearings when such hearings result in unfavorable decisions to the petitioner. Miscellaneous
Contributed Funds Trust Fund is accounted for under Treasury symbol 8741.

The accompanying financial statements include the accounts of all funds described in this note. The expense
allocation methodology is  a financial  statement  estimate that presents  EPA's programs at  full cost.
Superfund may charge some costs directly to the fund and charge the remainder of the costs to the All Other
Funds  in  the  Agency-wide appropriations.  These  amounts are  presented as Expenses from  Other
Appropriations on the Statement of Net Cost and as Income from Other Appropriations on the Statement of
Changes in Net Position and the Statement of Financing.

The Superfund Trust Fund is allocated general support services costs (such as rent, communications, utilities,
mail operations, etc.) that were initially charged to the Agency's S&T and EPM appropriations. During the
year, these costs are allocated from the S&T and EPM appropriations to the Superfund Trust Fund based on
a ratio of direct labor hours, using budgeted  or actual full-time equivalent personnel  charged to these
appropriations, to the total of all direct labor hours. Agency general support services cost charges  to the
Superfund Trust Fund may not exceed the ceilings established in the Superfund Trust Fund appropriation.
The related general support services costs charged to the Superfund Trust Funds was $48.3 million for FY
1999.

C.  Budgets and Budgetary Accounting

                                           Superfund

Congress adopts an annual appropriation amount to be available until expended for the Superfund Trust
Fund. A transfer account for the Superfund Trust Fund has been established for purposes of carrying out the
program activities.  As the Agency disburses obligated amounts from the transfer account, the Agency draws
down monies from the Superfund Trust Fund at Treasury to cover  the amounts being disbursed.
                             EPA's FY 1999 Annual Financial Statements                       Page 39

-------
                                        All Other Funds

Congress adopts an annual appropriation amount for the LUST Trust Fund and for the Oil Spill Response
Trust Fund to remain available until expended.  A transfer account for the LUST Trust Fund has been
established for purposes of carrying out the program activities. As the Agency disburses obligated amounts
from the transfer account, the Agency draws down monies from the LUST Trust Fund at Treasury to cover
the amounts being disbursed. The Agency draws down all the appropriated monies from the Treasury's Oil
Spill Liability trust fund to the Oil Spill Response Trust Fund when Congress adopts the appropriation
amount. Congress adopts an annual appropriation for STAG, Buildings and Facilities, and for Payments to
the Hazardous Substance Superfund to be available until expended; adopts annual appropriation for S&T,
EPM and for the  Office of the Inspector  General to  be available for two fiscal years.   When the
appropriations for the General Funds are enacted, Treasury issues a warrant to the respective appropriations.
As the Agency disburses obligated amounts, the balance of funds available to the appropriation is reduced
at Treasury.

The Asbestos Loan Program is a commercial activity financed by a combination from two sources:  one for
the long term cost of the loan and another for the remaining non-subsidized portion of the loan. Congress
annually adopts a  one year appropriation,  available for obligation  in the fiscal year  for which it is
appropriated, to cover the estimated long term cost of the Asbestos loans.  The long term costs are defined
as the net present value of the estimated cash flows associated with the loans. The portion of each loan
disbursement that does not represent long term cost is financed under a permanent indefinite  borrowing
authority established with the Treasury. The annual appropriation bill limits the amount of obligations that
can be made for direct loans. A permanent indefinite appropriation is available to finance the costs of
subsidy re-estimates that occur after the year in which the loan is disbursed. No appropriation was adopted
by Congress for FY 1999; therefore, there was no new financing available to the Asbestos Loan Program for
FY 1999.

Funding of the FIFRA and the Tolerance Revolving Funds  is provided by fees collected from industry to
offset costs incurred by the Agency in carrying out these programs.  Each year the Agency submits an
apportionment request to OMB based on the anticipated collections of industry fees.

Funding of the WCF is provided by fees collected from other Agency appropriations collected to offset costs
incurred for providing the Agency administrative support for computer support and postage.

Funds transferred from other Federal agencies is funded by a non expenditure transfer of funds from the
other Federal agencies.  As the Agency disburses the obligated amounts, the balance of funding available
to the transfer appropriation is reduced at Treasury.

Clearing accounts, Deposit accounts, and Receipt accounts receive no budget. The amounts are recorded
to the Clearing and Deposit accounts pending further disposition. Amounts recorded to the Receipt accounts
capture amounts receivable to or collected for the General Fund of the U.S. Treasury.
paoe 40                       EPA's FY 1999 Annual Financial Statements

-------
D.  Basis of Accounting

                                 Superfund and All Other Funds

Transactions are recorded on an accrual accounting basis and on a budgetary basis (where budgets are
issued). Under the accrual method, revenues are recognized when earned and expenses are recognized when
a liability is incurred, without regard to receipt or payment of cash.  Budgetary accounting facilitates
compliance with legal constraints and controls over the use of Federal funds.  All interfund balances and
transactions have been eliminated.

E.  Revenues and Other Financing Sources

                                          Superfund

The Superfund receives most funding needed to support the program through appropriations that may be
used  within statutory limits, for operating and capital expenditures (primarily equipment).  Additional
financing for the Superfund Trust Fund is obtained through reimbursements from other Federal agencies,
from States for State Cost Share, and from potentially responsible parties (PRPs) for future costs. Revenues
collected through cost recovery are deposited with the Trust fund at Treasury.

                                        All Other Funds

The majority of All Other Funds appropriations receive funding needed to  support programs through
appropriations, which may be used, within statutory limits, for operating and capital expenditures.  Under
Credit Reform provisions, the Asbestos Loan Program received funding to support the subsidy cost of loans
through appropriations which may be used with statutory limits. The Asbestos Direct Loan Financing fund,
an off-budget fund, receives additional funding to support the loan disbursements through collections from
the Program fund for the subsidized portion of the loan and through borrowing from Treasury for the non-
subsidized portion. The last year Congress provided appropriations for this fund was 1993, accordingly no
new funding has been available for this program.  The FIFRA and the Tolerance Revolving Funds receive
funding, which is now deposited with the FIFRA Revolving Fund, through  fees  collected for services
provided. The FIFRA Revolving Fund also receives interest on invested funds.  The WCF receives revenue
through fees collected for services provided to Agency program offices. Such revenue is eliminated with
related Agency program expenses on Consolidation. The Exxon Valdez Settlement Fund received funding
through reimbursements.

Appropriations are recognized as Other Financing Sources when earned, i.e., when goods and services have
been rendered without regard to payment of cash. Other revenues are recognized when  earned, i.e., when
services have been rendered.

F. Funds with the Treasury

                                Superfund and All Other Funds

The Agency does not maintain cash in commercial bank accounts. Cash receipts and disbursements are
handled by Treasury. The funds maintained with Treasury are Appropriated Funds, Revolving Funds and
                             EPA's FY 1999 Annual Financial Statements                       Page 41
                                                                    U.S. EPA Headquarters Library
                                                                           Mail code 3201
                                                                    1200 Pennsylvania Avenue NW
                                                                       Washington  DC  20460

-------
 Trust Funds. These funds have balances available to pay current liabilities and finance authorized purchase
 commitments.

 G. Investments in U.S. Government Securities

                                        All Other Funds

 Investments in U.S. Government securities are maintained by Treasury and are reported at amortized cost
 net of unamortized discounts. Discounts are amortized over the term of the  investments and reported as
 interest income. The FIFRA Revolving Fund, which is included in All Other Funds, holds the investments
 to maturity, unless they are needed to finance operations of the fund.  No provision is made for unrealized
 gains or losses on these securities because, in the majority of cases, they are held to maturity.

 H. Marketable Equity Securities

                                           Superfufid

 During FY 1993 and FY  1996, the  Agency received marketable equity securities, valued at a total $5.1
 million, which are still held, from a company in settlement of Superfund cost recovery actions. The Agency
 records marketable securities at cost as of the date of receipt.  Marketable securities are held by Treasury,
 and reported at their cost value in the financial statements until sold.

 I.  Accounts Receivable and Interest Receivable

                                           Superfund

 The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) as amended by
 the Superfund Amendments and Reauthorization  Act (SARA) provides for the recovery of costs  from
 potentially responsible parties (PRPs).  However, cost recovery expenditures  are expensed when incurred
 since there is no assurance that these funds will be recovered.

 It is the Agency's policy to record accounts receivable from PRPs for Superfund site response costs when
 a consent decree, judgment, administrative order, or settlement is entered.  These agreements are generally
 negotiated after site response costs have been incurred. It is the Agency's position that until a consent decree
 or other form of settlement is obtained, the amount recoverable should not be recorded.

 The Agency also records accounts receivable from states for a percentage of Superfund site remedial action
 costs incurred by the Agency within those states. As agreed to under Superfund State Contracts (SSCs), cost
 sharing arrangements under SSCs may vary according to whether a site was privately  or publicly operated
 at  the time of hazardous  substance disposal and  whether the Agency response action was removal or
remedial. SSC agreements are usually for 10% or 50% of site remedial action costs. States may pay the full
 amount of their share in advance, or incrementally throughout the remedial action process. Allowances for
uncollectible state cost share receivables have not been recorded, because the Agency has not had collection
problems with these agreements.
Page 42                       EPA's FY 1999 Annual Financial Statements

-------
                                        All Other Funds

 The majority of receivables for All Other Funds represent interest receivable for Asbestos and FIFRA and
 both accounts receivable and interest receivable to the General Fund of the Treasury.

 J. Loans Receivable

                                        All Other Funds

 Loans are accounted for as receivables after funds have been disbursed.  The amount of Asbestos Loan
 Program loans  obligated but not disbursed are disclosed in Note 6.  Loans receivable resulting from
 obligations on or before September 30, 1991 are reduced by the allowance for uncollectible loans.  Loans
 receivable resulting from loans obligated on or after October  1, 1991 are reduced by an allowance equal to
 the present value of the subsidy costs associated with these loans. The subsidy cost is calculated based on
 the interest rate differential between the loans and Treasury borrowing, the estimated delinquencies and
 defaults net of recoveries offset by fees collected and other estimated cash flows associated with these loans.

 K. Appropriated Amounts  Held by Treasury

                                Superfund and All Other Funds

 For the Superfund and LUST  Trust Funds, and for amounts appropriated to the Office of Inspector General
 from the Superfund and LUST Trust Funds, cash available to the Agency that is not needed immediately for
 current disbursements remains in the respective Trust Funds managed by Treasury. At the end of FY 1999
 approximately $2.9 billion remained in the Treasury managed Superfund Trust Fund and approximately
 S82.6 million remained in the LUST Trust Fund to meet the Agency's disbursement needs.

 L. Advances and Prepayments

                                Superfund and All Other Funds

 Advances and prepayments represent funds advanced or prepaid to other entities both internal and external
 to the Agency for which a budgetary expenditure has not yet occurred.

 M. Property, Plant, and Equipment

                                Superfund and All Other Funds

 The Fixed Assets Subsystem (FAS) implemented in FY 1997 maintains EPA-held personal and real property
records. The FAS automatically generates depreciation  entries monthly based upon the acquisition date.
Purchases of EPA-held and contractor-held personal equipment are capitalized if the equipment is valued
at $25 thousand or more and has an estimated useful life of at least two years. Prior to implementing FAS,
depreciation was taken on a modified straight-line basis over a period of six years depreciating 10% the first
and sixth year, and 20% in years two through five. All  EPA-held personal equipment purchased before the
implementation of FAS was assumed to have an estimated useful life of five years.  New acquisitions of
EPA-held personal equipment are depreciated using the straight-line method over the specific assets' useful
lives, ranging from two to 15 years.

                            EPA's FY 1999 Annual  Financial  Statements                      Paae 43

-------
Real property consists of land, buildings, and capital and leasehold improvements. Real property, other than
land, is capitalized  when the value is $75 thousand or more.  Land is capitalized regardless of cost.
Buildings are valued at an estimated original cost basis, and land is valued at fair market value. Depreciation
for real property is calculated using the straight-line method over the specific assets' useful lives, ranging
from 10 to 102 years. Leasehold improvements are amortized over the lesser of their useful lives or the
unexpired lease terms.  In addition to property and improvements not meeting the capitalization criteria,
expenditures for minor alterations, and repairs and maintenance are expensed as incurred.

N. Liabilities

                                 Superfund and All Other Funds

Liabilities represent the amount of monies or other resources that are likely to be paid by the Agency as the
result of a transaction or event that has already occurred.  However, no liability can be paid by the Agency
without an appropriation or other collection  of revenue for services provided. Liabilities for which an
appropriation has not been enacted are classified as unfunded liabilities and there is no certainty that the
appropriations will be enacted. Liabilities of the Agency, arising from other than contracts, can be abrogated
by the Government acting in its sovereign capacity.

O. Borrowing Payable to the Treasury

                                        All Other Funds

Borrowing payable to Treasury results from loans from Treasury to fund the Asbestos direct loans described
in part B and C of this note. Periodic principal payments are made  to Treasury based on the collections of
loans receivable.

P. Interest Payable  to Treasury

                                        All Other Funds

The Asbestos Loan Program makes periodic interest payments to Treasury based on its debt to Treasury.
At the end of FY 1999, there was no outstanding interest payable to Treasury since payment was made
through September 30.

Q. Accrued Unfunded Annual Leave

                                 Superfund and All Other Funds

Annual, sick and other leave is expensed as taken during the fiscal year. Sick and other leave earned but not
taken is not accrued  as a liability. Annual leave earned but not taken as of the end of the fiscal year is
accrued as an unfunded liability. Accrued unfunded annual leave is included in the Statement of Financial
Position as a component of "Other Liabilities-Governmental". As of September 30, 1999, the unfunded
annual leave liability for the Superfund Trust Fund was SI8.4 million and for All Other Funds was S86.4
million.
    44                       EPA's FY 1999 Annual Financial Statements

-------
R.  Retirement Plan

                                Superfund and All Other Funds

The majority of the Agency's employees participate in the Civil Service Retirement System (CSRS), to
which the Agency contributes 8.51% and employees contribute 7.25% of base pay.

On January 1, 1987, the Federal Employees Retirement System (FERS) went into effect pursuant to Public
Law 99-335. Most employees hired after December 31,1983, are automatically covered by FERS and Social
Security. Employees hired prior to January 1, 1984 were allowed to either join FERS and Social Security
or remain in CSRS. A primary feature of FERS is that it offers a savings plan to the Agency employees
which automatically contributes 1 percent of pay and matches any employee contribution up to an additional
4 percent of pay.  For  most  employees hired after December 31, 1983, the Agency also contributes the
employer's matching share for Social Security.

With the issuance of "Accounting for Liabilities of the Federal Government" (SFFAS-5) , which was
effective for the FY 1997 financial statements, accounting and reporting standards were established for
liabilities relating to the Federal employee benefit  programs (Retirement, Health Benefits  and  Life
Insurance).  SFFAS-5 requires that employing agencies recognize the cost of pensions and other retirement
benefits during their employees' active years of service.  SFFAS-5 requires that the Office of Personnel
Management, as administrator of the Civil Service Retirement and Federal Employees Retirement Systems,
the Federal Employees Health Benefits Program, and the Federal Employees Group Life Insurance Program,
provide EPA with the 'Cost Factors' to compute EPA's liability for each program.

Note 2.  Fund Balances with Treasury

Fund Balances with Treasury as of September 30. 1999, consists of the following (in thousands):

                                  Entity Assets    Non-Entity Assets        Total

       Trust Funds:

         Superfund                $      20,069            S     	      $      20,069
         Lust                               30                  	                30
         Oil Spill                        (9,320)                  	            (9,320)

       Revolving Funds:

         FIFRA                          7,319                  	             7.319
         Tolerance                           22                  	                22
         Working Capital Fund            37,066                  	            37,066

       Appropriated Funds           10,694.125                  	         10.694,125
Other Fund Types
Total
63.480
S 10,812.791

2,256
S 2,256
65,736
S 10,815,047

                            EPA's FY 1999 Annual Financial Statements                       Pase 45

-------
Entity fund balances includes balances which are available to pay current liabilities and to finance authorized
purchase commitments. Also, entity assets, Other Fund Types consist of the Environmental Services Receipt
account.  The Environmental Services Receipt account is a special fund receipt account. Upon Congress
appropriating the funds, EPA will use the receipts in the Science and Technology appropriation and the
Environmental Programs and Management appropriation.

The non-entity Other Fund Type consist of deposits.  The deposit accounts are awaiting documentation for
the determination of proper accounting disposition.

NoteS. Cash

In All Others, as of September 30, 1999, Cash consisted of imprest funds totaling $55 thousand.

Note 4. Investments

As of September 30, 1999, investments consisted of the following:

                                 	Amounts for Balance Sheet Reporting	
                                  Cost
               Unamortized
                (Premium)    Investments,
                 Discount          Net      Market Value
       Superfund

       Intragovernmental
       Securities:

          Non-Marketable
        Other Securities:

          Marketable

       All Others

       Intragovernmental
       Securities:

          Non-Marketable
$  4.593.183   $    175.297   $  4.417.886  S  4.417.886
       5.146   $_
5.146  S     11.525
S   1.461.697   S     63.692   S  1.398.005  $   1.398.005
CERCLA, as amended by SARA, authorizes EPA to recover monies to clean up Superfund sites from
responsible parties (RP). Some RP's file for bankruptcy under Title 11 of the U.S. Code. In bankruptcy
settlements, EPA is an unsecured creditor and is entitled to receive a percentage of the assets remaining after
secured creditors have been satisfied. Some RPs satisfy their debts by issuing marketable securities in the
reorganized company. The Agency does not intend to exercise ownership rights related to these securities,
and instead will convert these securities to cash as soon as practicable.

The other securities represent assets received during a bankruptcy proceeding.
Page 46
                            EPA's FY 1999 Annual Financial Statements

-------
Note 5.  Accounts Receivable
The Accounts Receivable for September 30, 1999, consist of the following:
                                                                      1999
         Intragovernmental Assets:

         Accounts & Interest Receivable
              Total

         Governmental Assets:

         Unbilled Accounts Receivable
         Accounts & Interest Receivable
         Less: Allowance for Doubtful Accounts
              Total
                                                            Superfund
$     48,982
S     48,982


$     75,721
    927,758
   (360,224)
$   643,255
                    AH Others
$    55,194
$    55,194
    149,250
   (60.685)
     88,565
Accounts receivable due from other Federal agencies are considered fully collectible.

The Allowance for Doubtful Accounts is determined on a specific identification basis as a result of a case-
by-case review of receivables at the regional level, and a reserve on a percentage basis for those not
specifically identified.

Note 6.  Loans Receivable, Net - Non-Federal

Asbestos Loan Program loans disbursed from obligations made prior to FY 1992 are net of an allowance for
estimated uncollectible loans, if an allowance was considered necessary. Loans disbursed from obligations
made after FY 1991 are governed by the Federal Credit Reform Act. The Act mandates that the present
value of the subsidy costs (i.e., interest rate differentials, interest subsidies, anticipated delinquencies, and
defaults) associated with direct loans be recognized as an expense in the year the loan is made.  The net
present value of loans is the amount of the gross loan receivable less the present value of the subsidy.

An analysis of loans receivable  and the nature and amounts of the subsidy and administrative expenses
associated entirely with Asbestos Loan Program loans as of September 30, 1999, is provided in the following
sections.
                             EPA's FY 1999 Annual Financial Statements
                                                                                         Page 47

-------
                                              	1999
                                                   Loans                  Value of
                                              Receivable,                Assets Related
                                                   Gross   Allowance*  to Direct Loans
     Direct Loans Obligated Prior to FY 1992      $   67,441   $       	      $      67,441
     Direct Loans Obligated After FY1991            51,960       (18,089)            33,871
         Total                                $  119,401   $   (18,089)     $     101,312

    *  Allowance  for Pre-Credit Reform loans (Prior to FY 1992 ) is  the Allowance  for Estimated
       Uncollectible Loan  and the Allowance for Post Credit Reform loans (After FY 1991) is the
       Allowance for Subsidy Cost (present value).

Subsidy Expenses for Post Credit Reform Loans:

                                          Interest      Expected     Fee
                                      Differential       Defaults    Offsets         Total

      Current Year's Direct Loan         S    109    $              S           S    109

      Direct Loan Subsidy Expense                                              $  2,507
Note 7. Inventory and Related Property

The Inventory and Related Property at September 30, 1999, consisted of the following:

                                                                     1999
                                                            Superfund      All Others
         Operating Materials and Supplies Held for
           Use in Normal Operations                           $     _        $237
             Total                                           $              $   237


Note 8. General Plant Property and Equipment

Superfund property, plant and equipment, consists of personal property items held by contractors and the
Agency. EPA also has property funded by various other Agency appropriations. The property funded by
these appropriations are presented in the aggregate under "All Others" and consists of real, EPA-Held and
Contractor-Held personal, and capitalized-leased property.

Purchases of EPA-Held and Contractor-Held personal property are capitalized if the equipment is valued at
$25 thousand or more and has an estimated useful life of at least two years. The Agency depreciates EPA-
Held personal property using a straight-line method over the asset's useful life ranging from two to 15 years.

Page 48                       EPA's FY 1999 Annual Financial Statements

-------
 Contractor-Held personal property is depreciated over five years using a modified straight-line method. Real
 property, other than land, is capitalized when the value is $75 thousand or more and is depreciated using the
 straight-line method over the specific asset's useful life  ranging from  10  to  102 years.  Leasehold
 improvements are amortized over the lesser of their useful lives or the unexpired lease term.

 As of September 30, 1999. Plant, Property and Equipment consisted of the following:
  EPA-Held
  Equipment

  Contractor-
  Held
  Equipment

  Land and
  Buildings

  Capital Leases

      Total


Note 9. Debt
                                Superfund
                                    AH Others
                  Acquisition  Accumulated  Net Book  Acquisition   Accumulated   Net Book
                       Value  Depreciation     Value       Value   Depreciation      Value


                    $  22,983     $  (15.734)   $   7,249    $  129.555    $   (85,676)   $   43,879
                                   (2,113)
             6,158
             86,504
(75,090)
11,414
                    $  31,254
(17,847)   $ 13,407    $
370,102
40,992
627,153
(70,643)
(9,776)
S (241,185)
299,459
31,216
$ 385,968
The Debt consisted of the following as of September 30, 1999:
            All Others

            Other Debt:
            Debt to Treasury

            Classification of Debt:
             Intra-governmental Debt
               Total
        Beginning        Net          Ending
         Balance      Borrowing      Balance
37.922      $_
                                       S  37.922


                                       S  37.922
                                       $  37,922
Note 10,  Other Liabilities

The Other Liabilities Covered by Budgetary Resources and Not Covered by Budgetary Resources for
September 30, 1999, are as follows:
                             EPA's FY 1999 Annual Financial Statements
                                                                                        Page 49

-------
Other Liabilities Covered by Budgetary Resources:
Non-Current
Intra-governmental - Superfund
Accrued Liabilities $ 	
FECA Accrued Liability 73 1
Other 1,256
Total Intra-governmental $ 1,987
Intra-governmental - All Other
Accrued Liabilities $ 	
FECA Accrued Liability 1 ,048
WCF Advances
Other 64
Total Intra-governmental $ 1,112
Superfund
Cash Out - Non Federal $ 90
Accrued Liabilities
Accrued Funded Payroll and Benefits 	
Other 3
Total $ 93
All Other
Accrued Funded Payroll & Benefits S
Accrued Liabilities 	 	
Other Liabilities 335
Total S 335

Current

$ 91,389 $
485
2,885
$ 94,759 S

S 55,214 $
4,496
2,637
(104)
$ 62,243 $

$ 457,706 $
97,477
15,243
21,647
S 592,073 $

$ 65,974 S
553,443
8,291
S 627,708 S

Total

91,389
1,216
4,141
96,746

55,214
5,544
2,637
(40)
63,355

457,796
97,477
15,243
21,650
592,166

65,974
553,443
8,626
628,043

Pa«e 50
                              EPA's FY 1999 Annual Financial Statements

-------
       Other Liabilities Not Covered by Budgetary Resources:
                                                Non-Current      Current          Total
       Intra-governmental - All Other
         Custodial Liability                      S	—-    S  111,017    S   111.017
       Total Intra-governmental

       Superfund
         Accrued Unfunded Annual Leave
         Contingent Liabilities - Unfunded
           Total

       All Others
         Accrued Unfunded Annual Leave
         Capital Lease Liability
            Total
                  111,017    $   111,017
               $   18,415    $    18,415
                      675            675
               $   19,090    $    19,090
               S   86,430    $
     38,178
Note 11.  Leases
The Capital Leases as of September 30, 1999, consist of the following:
Capital Leases:

           Summary of Assets Under Capital Lease:
           Land, Buildings and Personal Property
           Accumulated Amortization
86,430
38,178
$    38,178    S   86,430    $   124,608
                           All Others
                           S  40.992
                           S   9.776
EPA has three capital leases for land and buildings housing scientific laboratories and/or computer facilities.
All of these leases include a base rental charge and escalator clauses based upon either rising operating costs
and/or  real estate taxes.  The base operating costs are adjusted annually according to escalators in the
Consumer Price Indices published by the Bureau of Labor Statistics (U.S. Department of Labor).  These
leases terminate in fiscal years 2010, 2013 and 2025.  The charges are expended out of the Environmental
Programs and Management appropriation. EPA has one capital lease for a xerox copier that expires in FY
2002.  The total future minimum lease payments of the capital leases are listed below.
                            EPA's FY 1999 Annual Financial Statements
                                        Page 51

-------
                   Future Payments Due:                         All Others

                   Fiscal Year

                   2000                                       $      6,314
                   2001                                              6,314
                   2002                                              6,303
                   2003                                              6,295
                   2004                                              6,295
                   After 5 Years                                     102,489
                   Total Future Minimum Lease Payments             134,010
                   Less: Imputed Interest                            (95.832)
                   Net Capital Lease Liability                  S     38,178

                   Liabilities not Covered by
                   Budgetary Resources                        $     38,178
Operating Leases:

The General Services Administration (GSA) provides leased real property (land and buildings) as office
space for EPA employees. GSA charges a Standard Level Users Charge that approximates the commercial
rental rates for similar properties.

EPA has five direct operating leases for land and buildings housing scientific laboratories and/or computer
facilities. Most of these leases include a base rental charge and escalator clauses based upon either rising
operating costs and/or real  estate  taxes.  The base operating costs are adjusted annually according to
escalators in the Consumer Price Indices published by the Bureau of Labor Statistics (U.S. Department of
Labor). Three leases terminate in fiscal year 2000.  In fiscal 1997 and 1998, EPA entered into two leases,
which terminate in  fiscal 2017 and  2003 respectively. The charges are expended  out of the EPM
appropriation. The total minimum  future costs of the operating leases are listed below.
Fiscal Year
2000
2001
2002
2003
2004
Beyond 2004
Total Future Minimum
Lease Payments
Superfund All Others
$ — - $ 6,109
36
34
34
24
310
$ — $ 6,547

Total Land
& Buildings
$ 6,109
36
34
34
24
310
$ 6,547

Page 52                       EPA's FY 1999 Annual Financial Statements

-------
Note 12.  Pensions and Other Actuarial Benefits

FECA provides income and medical cost protection to covered Federal civilian employees injured on the job;
employees who have incurred a work-related occupational disease; and beneficiaries of employees whose
death is attributable to a job-related injury or occupational disease. Annually, EPA is allocated the portion
of the long term FECA actuarial liability attributable to the entity. The liability is calculated to estimate the
expected liability for death, disability, medical and miscellaneous costs for approved compensation cases.
The liability amounts and the calculation methodologies are provided by DOL.

The FECA Actuarial Liability at September 30, 1999, consisted of the following:

                                                 Superfund      All Other

                    FECA Actuarial Liability     $  5,826     $    23,987

The FY 1999 present value of these estimates was calculated using a discount rate of 5.5 percent in years
1 and 2, 5.55 percent in year 3 and 5.6 percent in year 4 and thereafter.  The estimated future costs are
recorded as an  unfunded liability.

Note 13.  Unexpended Appropriations

As of September 30, 1999, the Unexpended Appropriations consisted of the following:

        Unexpended Appropriations:           Superfund     All Others           Total

         Unobligated
           Available                      $     473,194    S  1,277,839    $    1,751,033
           Unavailable                              	          88,054          88,054
        Undelivered Orders                    2.183,637       8,711.071       10.894,708
           Total                         S    2,656,831    S 10,076,964    $  12,733,795

Note 14. Amounts Held by Treasury

Amounts Held  by Treasury for Future Appropriations consists of amounts  held in trusteeship by the U.S.
Department of Treasury in the "Hazardous Substance Superfund Trust Fund" (Superfund) and the "Leaking
Underground Storage Tank Trust Fund" (LUST).

                                     Superfund (Audited)

Superfund is supported primarily by an environmental tax on corporations, cost recoveries of funds spent
to clean up hazardous waste sites, and fines and penalties. Prior to December 31, 1995, the fund was also
supported by other taxes on crude and petroleum and on the sale or use of certain chemicals. The authority
to assess those taxes and the environmental tax on corporations also expired  on December 31,1995, and has
not been renewed by Congress.  It is not known if or when such taxes will be reassessed in the future.


                            EPA's FY 1999 Annual Financial Statements                      Page 53
                                                                      U.S. EPA Headquarters Library
                                                                              Mail code 3201
                                                                      1200 Pennsylvania Avenue NW
                                                                         Washington DC 20460

-------
The following reflects the Superfund Trust Fund as maintained by the U.S. Department of Treasury as of
September 30, 1999.  The amounts contained in these statements have been provided by the Treasury and
are unaudited. Outlays represent appropriations received by EPA's Superfund Trust Fund, such funds are
eliminated on consolidation with the Superfund Trust Fund maintained by Treasury.
                                                      EPA
Treasury
Combined
Undistributed Balances
Available for Investment
Unavailable for Investment
Total Undisbursed Balance
Investments, Net of Discounts
Total Assets
Liabilities & Equity
Debt
Equity
Total Liability and Equity
Receipts
Crude and Petroleum
Certain Chemicals
Corporate Environmental
Cost Recoveries
Fines & Penalties
Total Revenue
Appropriations Received
Interest Income
Total Receipts
Outlays
Transfers to EPA
Total Outlays
Net Income


S -— S 1,262 $
— —
1,262
2.894,095 1,523,791
$ 2.894.095 S 1.525.053 S

S — - $ — - $
2,894,095 1,525,053
$ 2.894.095 S 1.525.053 $

$ — $ (2,060) $
12,830
10,249
319,746
3,648
344,413
325,000
220,086
889,499

(1,545,851) 1,545,851
(1,545,851) 1,545,851
$ 1.545,851 $ (656.352) $
LUST (Audited)
LUST is supported primarily by a sales tax on motor fuels to clean up LUST waste sites.
represents LUST Trust Fund as maintained

1,262
	
1,262
4,417,886
4.419.148

—
4,419,148
4,419.148

(2,060)
12,830
10,249
319,746
3,648
344,413
325,000
220,086
889,499

	
	
889.499

The following
by the U.S. Department of Treasury. The amounts contained in
Page 54
                            EPA's FY 1999 Annual Financial Statements

-------
these statements have been provided by Treasury and are unaudited.  Outlays represent appropriations
received by EPA's LUST Trust Fund, such funds are eliminated on consolidation with the LUST Trust Fund
maintained by Treasury.
                                                     EPA
    Undisbursed Balances
     Available for Investment
     Unavailable for Investment
    Total Undisbursed Balance
    Investments, Net of Discounts
         Total Assets
    Liabilities & Equity
     Debt
     Equity
         Total Liability and Equity

    Receipts
     Highway TF Tax
     Airport TF Tax
     Inland TF Tax
     Gross Revenue
     Less: Reimbursement to G/F
    Net Revenue
    Interest Income
         Net Receipts
    Outlays
     Transfers to EPA
          Total Outlays
    Net Income
Note 15.  Commitments and Contingencies
      82,594
      82,594
    (60,783)
$    60.783
     Treasury

           10

           10
    1,312,103
    1,312,113
$     82,594     S  1,312,113
                     199,333
                      18,270
                       1,024
                     218,627
                      (3,091)
                     215,536
                      57.789
                     273,325
      60,783
S    212.542
                                    Combined
                                $         10

                                          10
   	     	    _      1.394,697
$    82.594     S  1.312.113    $  1.394.707
                                   1,394,707
                                   1,394,707
                     199,333
                      18,270
                       1,024
                     218,627
                      (3,091)
                     215,536
                      57,789
                     273,325
$   (60,783)     S     60,783    S_
                                    273.325
EPA is a party in various administrative proceedings, legal actions, and claims brought by or against it.
These include:
                            EPA's FY 1999 Annual Financial Statements
                                         Page 55
                       U.S. EPA Headquarters Library
                              Mail code 3201
                       1200 Pennsylvania Avenue NW
                          Washington DC 20460

-------
-  Various personnel actions, suits, or claims brought against the Agency by employees and others.

-  Various contract and assistance program claims brought against the Agency by vendors, grantees and
   others.

-  The legal recovery of Superfund costs incurred for pollution cleanup of specific sites, to include the
   collection of fines and penalties from responsible parties.

-  Claims against recipients for improperly spent assistance funds which may be settled by a reduction of
   future EPA funding to the grantee or the provision of additional grantee matching funds.

                                          Superfund

Under CERCLA i 106 (a), EPA issues administrative orders that require parties to clean up contaminated
sites.   CERCLA f!06(b)  allows a party that has complied  with  such  an order to petition  EPA for
reimbursement from the Fund of its reasonable costs of responding to the order, plus interest. To be eligible
for reimbursement, the party must demonstrate either that it was not a liable party under CERCLA i 107 (a)
for the response  action  ordered, or that the Agency's selection of the response action was arbitrary and
capricious or otherwise not in accordance with law.

There are currently  nine CERCLA  / 106(b) administrative claims and four pending lawsuits.  If the
claimants  are successful, the  total  losses on the administrative  and judicial claims could  amount  to
approximately $32.4 million and $13.7 million, respectively. The Environmental Appeals Board has not yet
issued final  decisions on the administrative claims; therefore a definite estimate of the amount of the
contingent loss cannot be made. The claimants' chance of success in eight of these outstanding  claims is
characterized as reasonably possible. The outcome of the remaining claim is considered probable and the
expected liability is $50 thousand. The claimants'chance of success in three  of the four pending lawsuits is
also reasonably possible. The outcome of the remaining lawsuit is considered remote.

There are a number of outstanding CERCLA f 106(a) cleanup orders where the recipients of the orders have
not yet completed the ordered response actions. Each such recipient could potentially file a claim with EPA
for reimbursements under CERCLA f 106(b) of its costs of responding to the order once it has completed
the ordered actions.

EPA is responsible to indemnify response action contractors (CERCLA / 119) for legal costs that will
eventually exceed or have exceeded the deductible specified in the current indemnification agreements. Such
payments by the United States would be recoverable government response costs.  EPA has only one claim
which is considered remote.

EPA contractors  have submitted response action contractor claims. No claims  were material.

                                          All Other

There were  no material litigation,  asserted or unasserted claims or assessments involving  all other
appropriated funds of the Agency.
    56                       EPA's FY 1999 Annual Financial Statements

-------
                                        Judgement Fund

 In cases which are paid by the U.S. Treasury Judgement Fund, the Agency must recognize the full cost of
 a claim regardless of who is actually paying the claim. The Agency is involved in various other actions that
 in the aggregate do not exceed $3.4 million.

 In addition, EPA is party to certain pending litigation upon which EPA believes it has a reasonable legal
 position. No estimate has been provided for a loss.

 In the opinion of EPA's management and General Counsel, the ultimate resolution of any legal actions still
 pending will not materially affect EPA's operations or financial position.

 Note 16.  Grant A ccrual

 Grant accruals represent Grantee expenses that were not reported to EPA for reimbursement as of September
 30, 1999.

 EPA selected a statistical sample of grant recipients from our grantee universe to use as our basis to calculate
 our accrual. EPA sent confirmation letters to the sample grantees, asking them to provide the amount of
 unbilled grant expense at September 30, 1999.  We then aggregated up the unbilled grant expense rates.
 Finally, we used these two weighted-average rates to compute the overall unbilled grant expense accruals.

                                                                 1999
                       Superfund Trust Fund                 S    13,981
                       All Others                            S   430.299

Note 17.  Environmental Cleanup Costs

EPA has three sites that require clean up stemming from its activities.  Two of these sites will be paid from
the Treasury Judgement Fund amounting to $105 thousand. EPA estimates that clean up on the other site
will be approximately $ 1 thousand. EPA also holds title to a site in Edison, New Jersey, which was formerly
an Army Depot.  While EPA did not cause the contamination, the Agency could potentially be liable for a
portion of the clean up costs.  However, it  is expected that the Department of Defense and the General
Services Administration will bear all or most of the cost of remediation.

Accrued Clean-up Cost

EPA has sixteen sites that will require future clean up associated with permanent closure. The estimated cost
will be approximately $14.3 million. Since the clean up costs associated with permanent closure are not
primarily recovered though user fees, EPA has elected to recognize the estimated total cleanup cost as a
liability upon implementation and record changes in estimate in subsequent years. The FY 1999 estimate
decreased  by approximately $.2 million for unfunded clean-up costs over FY 1998. There was an increase
of $20 thousand for funded clean-up costs for FY 1999.  EPA could also be potentially liable for cleanup
costs at a GSA-leased sites: however, the amounts are not known.
                             EPA's FY 1999 Annual Financial Statements                       Page 57

-------
 Of the nearly $ 14.3 million in estimated clean up costs, approximately $11.3 million represents the estimated
 expense to close the current RTF research facility.  These costs will be incurred within the next three years.
 The remaining amount represents the future decontamination and decommissioning costs of EPA's research
 facilities.

 Note 18.  Superfund State Credits

 Authorizing statutory language for Superfund and related Federal regulations require States  to enter into
 Superfund State Contracts (SSCs) when EPA assumes the lead for a remedial action in their State. The SSC
 defines the State's role in the remedial action and obtains the State's assurance that they will share in the cost
 of the remedial action. Under Superfund's authorizing statutory language, States will provide EPA with a
 ten percent cost share for remedial action costs incurred at privately owned or operated sites, and at least fifty
 percent of all response activities (i.e., removal, remedial planning, remedial  action, and enforcement) at
 publicly operated sites.  In some cases, States may use EPA approved credits  to reduce all or  part of their
 cost share requirement that would otherwise be paid by the States.  Credit is limited to State  site-specific
 expenses EPA has determined to be reasonable, documented, direct out-of-pocket expenditures of non-
 Federal funds for remedial action. Once EPA has reviewed and approved a State's claim for credit, the State
 must first apply the credit at the site where it was earned. The State may apply  any excess/remaining credit
 to another site when approved by EPA.  As of September 30, 1999, total outstanding State credits has been
 estimated  at $7.3 million.

Note 19.  Superfund Preauthorized Mixed Funding Agreements

 Under Superfund Preauthorized Mixed Funding Agreements, settling Potentially Responsible Parties (PRPs)
 agree to perform response actions at their sites with the understanding that EPA will reimburse the PRPs a
 percentage of their total response action costs. EPA's authority to enter into mixed funding agreements is
 provided under Section  lll(a)(2) of the Comprehensive Environmental Response,  Compensation, and
 Liability Act (CERCLA) of 1980.  Under Section 122(b)(l) of CERCLA, as  amended by the Superfund
 Amendments and Reauthorization Act (SARA) of 1986, a PRP may assert a claim against the Superfund
Trust Fund for a portion of the costs they incurred while conducting a preauthorized response action as
 agreed to  under a mixed  funding  agreement.  As of September 30, 1999, EPA had 13  outstanding
preauthorized mixed funding agreements with obligations totaling $50 million.  A liability is not recognized
 for these amounts until the PRP's work has been performed and has been approved by EPA for payment.
 EPA will not disburse any funds under these agreements, however, until the PRP's application, claim, and
 claims adjustment processes have been reviewed and approved by EPA.

Note 20.  Income and Expenses from other Appropriations

 The Statement of Net Cost reports program costs that include the full costs of the program  outputs and
 consist of the direct costs and all other costs that can be directly traced, assigned on a cause and  effect basis,
or reasonably allocated to program outputs.

During Fiscal Year 1999, EPA had three appropriations which funded a variety of programmatic and non-
programmatic activities across the Agency, subject to statutory' requirements. The Environmental Programs
and Management (EPM) appropriation was created to fund personnel compensation and benefits, travel.
procurement, and contract  activities. Two prior year appropriations, Program and Research Operations
paoe 58                       EPA's FY 1999 Annual Financial Statements

-------
 (PRO) and Abatement Control and Compliance (AC&C) generated expenses. PRO funded travel, personnel
 compensation and benefits.  AC&C funded procurement and contract activities.

 All of the expenses from EPM, PRO and AC&C were distributed among EPA's two Reporting Entities:
 Superfund and All Others.  This distribution is calculated using a combination of specific identification of
 expenses to Reporting Entities, and a weighted average that distributes expenses proportionately to total
 programmatic expenses.

 As illustrated below, this estimate does not impact the net effect of the Statement of Net Costs.

                                                         1999

                              Income From           Expenses From
                          Other Appropriations   Other Appropriations    Net Effect

           Superfund              $      35,664          $      (35,664)     $  	
           All Others                   (35,664)                  35,664      	
               Total               S                      $                  $
Note 21.  Custodial Non-Exchange Revenues

EPA uses the accrual basis of accounting for the collection of fines, penalties and miscellaneous receipts.
Collectability by EPA of the fines and penalties is based on the responsible parties' willingness and ability
to pay.

                                                                       1999
                Fines, Penalties & Misc Revenue (EPA)                $  128,176
                Accounts Receivable for Fines, Penalties
                & Miscellaneous Receipts                                1999
                 Accounts Receivable                                $   66,750
                 Less: Allowance for Doubtful Accounts                   36,265
                     Total                   .                       $   30,485
Note 22. Statement of Budgetary Resources

A reconciliation of budgetary resources, obligations incurred, and outlays, as presented in the audited
Statement of Budgetary Resources, to amounts included in the Budget of the United States Government for
the year ended September 30, 1999. is as follows:
                            EPA's FY 1999 Annual Financial Statements                       Page 59

-------
                                                Budgetary     Obligations
                                                Resources      Incurred
                                 Outlays
    Superfund

    Statement of Budgetary Resources
       Allocated to Other Agencies
       Adjustments to Unliquidated Obligations,
       Unfilled Customer Orders and Other

    Budget of the United States Government
$  2,192,229  $   1,709,357   $   1,499,486
      97,741         80,789         77,029

    (31,240)       (26,489)
$  2,258,730   $   1,763,657   $   1,576,515
    All Other

    Statement of Budgetary Resources

       Adjustments to Unliquidated Obligations,
       Unfilled Customer Orders and Other
S  8,360,328   $   6,685,653


      77,806           9,411
5,855,618


  (1,260)
    Budget of the United States Government      $  8,438,134   S   6,695,064   S  5,854,358
Note 23. Adjustments

During FY 1999, there is a reduction in the Superfund Trust Fund authority available of $262.9 million
between the beginning available and ending available authority. This amount represents amounts that were
overstated in the beginning FY 1999 authority available resulting from anticipated reimbursable funding that
was not decreased prior to  the close of FY 1998. This amount is reflected as part of the $59.3 million
Adjustments on the Statement of Budgetary Resources. The remaining amount of the Adjustments is for
Recoveries of prior year obligations of $205.2 million and the Canceled Authority of $1.6 million.

Note 24. Unobligated Balances Available

The Superfund Trust Fund has an unobligated balance of $483 million in unexpired authority. All Others
has an unobligated balance of $ 1,675 million which includes $ 1,567 million in unexpired authority and $ 108
million in expired authority.  The unexpired authority is available to be  apportioned by the Office of
Management and Budget for new obligations at the beginning of FY 2000. Unobligated balances of expired
authority is not available for new obligations.  However, the expired authority is available for upward
adjustments of obligations incurred as of the end of the fiscal year.

Note 25. Obligated Balance, Net - End of Period

Undelivered Orders at the end of the period are $2.4 million for the Superfund Trust Fund and $9.2 million
for All Others.
Page 60
                            EPA's FY 1999 Annual Financial Statements

-------
Note 26. Difference in Outlays Between Statement of Budgetary Resources and SF-133

Outlays between the Statement of Budgetary Resources and the SF-133 differ by an unidentified $1 million
for All Others.

Note 27. Statement of Financing

Increases in Unfunded Liabilities  relate to unfunded annual leave, environmental liabilities, contingent
liabilities and the Federal Employees Compensation Act (FECA) special benefit fund. For Superfund and
All Others, the amounts totaled $4.2 million and $15.9 million, respectively and is reflected in Financing
Sources Yet to Be Provided.

Note 28. Other Financing Sources

Consists primarily of Appropriations to  EPA from the Superfund and LUST Trust Funds held at Treasury
(Treasury Trust Funds).  Such appropriations are reported as non expenditure transfers on the financial
statements of the respective Treasury Trust Funds. Upon consolidation with Trust funds held by EPA, the
Treasury Trust Fund Appropriation non expenditure transfers are reported as Other Financing Sources to
offset Appropriations Used and Trust Fund revenues.

                                                                1999
             Trust Funds                                Superfund        LUST

             Treasury Trust Fund Transfers            $   (1,545,851)  $   (60,783)
             Custodial Liability Reclassification                22,718          	
             Other                                           (979)      (14,396)
                 Total                              S   (1,524,112)  $   (75,179)
                            EPA's FY 1999 Annual Financial Statements                       Pase 61

-------
                             Environmental Protection Agency
                            Required Supplemental Information
                                  As of September 30,1999
                                   (Dollars in Thousands)
                                        (Unaudited)
Deferred Maintenance
The EPA classifies property, plant, and equipment as follows: 1) EPA-Held Equipment, 2) Contractor-Held
Equipment, 3) Land and Buildings, and, 4) Capital Leases.  The condition assessment survey method of
measuring deferred maintenance is utilized. The Agency adopts requirements or standards for acceptable
operating condition in conformance with industry practices.

One deferred maintenance project was identified in the Land and Buildings category, with an estimated total
cost of $325,000. This project included repairing and resurfacing weathered and cracked parking lots and
driveways.  No deferred maintenance was reported for the other three categories.

Infra-governmental Assets

Intra-governmental assets represent transactions between all federal departments and agencies.

                                         Accounts Receivable
              Agency                  Superfund       All Others

              Dept. of the Army         S      34     '  S      	
              Dept. of Interior                	             143
              Dept. of Energy                	              24
              Dept. of the Air Force           	               5
              Unassigned                 48,948          55,022
              Total                    S  48,982       $   55,194
Intra-governmental Liabilities

Intra-govemmental liabilities represent transactions between all federal departments and agencies.


                            Accounts Payable          Other Liabilities           Debt

     Agency

     Dept. of Agriculture

     Library of Congress            	        	           	

     US Postal Service               11        	           	


Pa°e 62                      EPA's FY 1999 Annual Financial Statements
Superfund All Other
$ 	 $ (3)

Superfund AH Other
S 	 $ (759)
66
All Other
S __


-------
Intra-governmental Liabilities - continued

                          Accounts Payable
             Other Liabilities
Government Printing
Office

Dept. of the Army

Government
Accounting Office

OPM

Executive Office of the
President

Dept. of the Treasury

Dept. of Commerce

Dept. of Justice

Dept. of the Interior

Secretary of Defense

Dept. of Air Force

Dept. of Labor

Tennessee Valley
Authority

Small Business
Administration

Dept. of Health and
Human Services

NASA

Housing and Urban
Development

Dept. of Energy

National Labor Relations
Board

Dept. of Transportation

Agency for International
Development

Government Services
Administration

National Science
Foundation
                         Superfund    All Other
          Superfund
                  34
(12)
                498
                425
               1,216
All Other


       82

       26


      (1)

       98


       46

      (8)

    (994)

    (203)

  (5,043)


        5

    4,649


        1


    (185)


    6,073

       67


      100

   (1,282)


      (2)

   (1,049)


      431


  (10,248)


      38
                 Debt
All Other
   37,922
                          EPA's FY 1999 Annual Financial Statements
                                                                                           Page 63

-------
      Intra-governmental Liabilities - continued
                             Accounts Payable           Other Liabilities           Debt
     Agency                Superfund   All Other      Superfund      All Other     All Other
     Dept. of State                  —-        —-            —-           (11)
     Unassigned                 89,582       2,749         94,573        182,475
         Total               $   89,594  S    2,737    $    96,746  $    174,372     $  37,922
Page 64                       EPA's FY 1999 Annual Financial Statements

-------
                                     Environmental Protection Agency
                                    Required Supplemental Information
                            Supplemental Statement of Budgetary Resources
                                           As of September 30,1999
                                            (Dollars in Thousands)
                                                                     Unaudited
                                             Environmental                                  Miscellaneous  Consolidated
                                              Programs &    Science*              LUST         All           All
                                    STAG     Management  Technology   FIFRA   Trust Fund     Others       Others

Budgetary Resources:
Budget Authority
Unobligated Balances - Beginning of
   the Period

Spending Authority from Offsetting
    Collections

Adjustments

Total Budgetary Resources
5 3,408,050    S   1,853,150   S 660,672   $     —   S   72,500    S   453,521    S  6,447,893

  1,159,696        202,100     143,627     15,342       2,733       194,443      1,717,941
      6,595

    120,791
 48,159

(11,035)
50,802     18,400

 (908)        35
  '-  1       152,385

(434)      (190,297)
276,342

(81,848)
S 4.695.132    S  2,092,374   S 854,193   S 33,777   S   74,800   S   610,052   S  8,360,328
Status of Budgetary Resources:


Obligations Incurred

Unobligated Balances - Available

Unobligated Balances-Not Available
S 3,430,652   S   1,858,653   S 692,256   S 22,225   S   71,230   S   610,637   S  6,685,653

  1.264,480        146,973     139,411     11,552       3,570         1,156      1,567,142
                   86,748      22,526
                                              (1.741)
                                              107,533
Total Status of Budgetary Resources     54,695,132   S  2,092,374   5854,193   S 33.777  S   74,800   S   610,052   S  8,360,328
Outlays:

Obligations Incurred

Less: Spending Authority from
  Offsetting Collections and Adjustments     127,386

Obligated Balance. Net - Beginning
  of Period
Less: Obligated Balance, Net - End

  of the Period

Total Outlays
S 3,430,652   S  1,858,653   S  692,256   S 22,225  S  71,230   S   610,637   S  6,685,653


                   64,263      55,514    18,435        1,898       159,595       427,091


  7,012.337        873,197     481,875      (627)     74,552       308,955      8,750,289
  7,570.173         794,380     511,824      (926)
                                             198,476      9.153,233
S 2,745,430   S  1,873,207  S  606,793   S   4.089  S  64,578   S  561,521    S  5,855,
                                                                                                                 ,618
                                    EPA's FY 1999 Annual Financial Statements
                                                                                                            Page 65

-------
                            Environmental Protection Agency
                           Required Supplemental Information
                                 Working Capital Fund
                              Supplemental Balance Sheet
                                As of September 30,1999
                                 (Dollars in Thousands)
            ASSETS
              Intragovernmental
                Fund Balance With Treasury
                Advances and Prepayments
              Total Intragovernmental

              Advances and Prepayments
              Operating Materials and Supplies, Net
              General Property Plant and Equipment
              Other

            Total Assets

            LIABILITIES
              Intragovernmental
                Accounts Payable
                Other
              Total Intragovernmental

               Accounts Payable
               Other
             Total Liabilities

            NET POSITION
              Cumulative Results of Operations
              Total Net Position

            Total Liabilities and Net Position
Unaudited

$   37,066
      443
    37,509

         5
        13
    17,184
    15,559

$   70,270
$    1,500
    23.293
    24,793

    13,165
 	1.171
    39,129
    31.141
    31.141
    70.270
Page 66
                           EPA's FY 1999 Annual Financial Statements

-------
               Environmental Protection Agency
             Required Supplemental Information
                   Working Capital Fund
             Supplemental Statement of Net Cost
            For the Year Ended September 30,1999
                   (Dollars in Thousands)
                                                  Unaudited

COSTS:

Intrago vernmental                                   $   15,177

With the Public                                        112,629
Total                                                127,806
Less: Earned Revenues                                   119,972
Net Cost of Operations                              $    7,834
             EPA's FY 1999 Annual Financial Statements                    Page 67

-------
                           Environmental Protection Agency
                          Required Supplemental Information
                                 Working Capital Fund
                   Supplemental Statement of Changes in Net Position
                         For the Year Ended September 30,1999
                                 (Dollars in Thousands)
                                                                 Unaudited


            Net Cost of Operations                                  S    7,834

            Financing Sources (Other Than Exchange Revenues)

              Imputed Financing                                       5,937

              Transfers-In                                             4.160

              Transfers-Out                                          (4,160)

              Other                                                  (952)
            Net Results of Operations                                   (2,849)


            Prior Period Adjustments                                   (5,535)
            Net Changes in Cumulative Results of Operations                2,686


            Net Position-Beginning of Period                            28,455
             Net Position-End of Period                            $   31,141
Page 68                      EPA's FY 1999 Annual Financial Statements

-------
                               Environmental Protection Agency
                        Required Supplemental Stewardship Information
                            For the Year Ended September 30,1999
                                     (Dollars in Thousands)
INVESTMENT IN THE NATION'S RESEARCH
AND DEVELOPMENT:

Public and private sector institutions have long been
significant contributors to our nation's environment
and human health research agenda. EPA's Office of
Research and Development, however, is  unique
among  scientific institutions  in this  country in
combining research, analysis, and the integration of
scientific information across the full spectrum of
health and ecological issues and across both risk
assessment and risk management. Science enables
us to identify the most important sources of risk to
human health and the environment, and by so doing,
informs our priority-setting, ensures credibility for
our  policies, and  guides our deployment  of
resources.   It  gives  us  the  understanding and
technologies  we need to detect, abate, and avoid
environmental problems.   Science  provides  the
crucial  underpinning  for  EPA  decisions and
challenges us to apply the best available science and
technical analysis to our environmental problems
and to practice more integrated, more efficient, and
more   effective   approaches  to   reducing
environmental risks.

Among the Agency's highest research priorities is a
program to expand the understanding of near- and
long-term effects of the environment on children.
Another priority  is the Particulate  Matter (PM)
research  program,  which  focuses  on  review,
implementation, and eventual  attainment  of the
National Ambient Air Quality Standards (NAAQS).
ForFY 1999,  the full cost of the Agency's Research
and Development activities totaled S603 million. A
breakout of  the expenses  is  below (Dollars  in
thousands):

FY 99  Programmatic Expenses:   S543.777
       Allocated Expenses:       S  58,728
 FY98  Programmatic Expenses:    $507,828
        Allocated Expenses:        $ 53,322

 INVESTMENT  IN   THE   NATION'S
 INFRASTRUCTURE:

 The Agency makes significant investments in the
 Nations's  drinking  water  and   clean  water
 infrastructure. The investments are the result of
 three programs: The Construction Grant Program
 which   is being  phased  out,  and  two  State
 Revolving Fund (SRF) programs.

 Construction  Grants Program: During the 1970s
 and 1980s, the Construction Grants Program was a
 source of Federal funds, providing more than $60
 billion of direct grants  for the construction of
 public  wastewater treatment projects.  These
 projects,  which  constituted  a  significant
 contribution to the nation's water  infrastructure,
 included  sewage  treatment  plants,  pumping
 stations, and collection  and intercept sewers,
 rehabilitation of sewer systems, and the control of
 combined sewer  overflows.  The construction
 grants led to the improvement of water quality in
 thousands of municipalities nationwide.

 Congress set 1990 as the last year that funds would
 be appropriated for Construction Grants.  Projects
 funded  in  1990 and  prior will  continue  until
 completion.  Beyond 1990, EPA shifted the focus
 of municipal  financial assistance from grants to
 loans that are  provided by State Revolving Funds.

 State  Revolving  Funds:    The Environmental
 Protection Agency provides capital, in the form of
capitalization grants,  to  state  revolving  funds
which state governments use to make  loans to
 individuals, businesses, and governmental entities
 for the construction  of wastewater and  drinking
water treatment infrastructure. When the loans are
                             EPA's FY 1999 Annual Financial Statements
                                                                                        Page 69

-------
repaid to the state revolving fund, the collections are
used to  finance new loans for new construction
projects. The capital is reused by the states and is
not returned to the Federal Government.

The Agency is  also appropriated funds to finance
the  construction of infrastructure  outside  the
Revolving  Funds.  These are reported below as
Other Infrastructure Grants.

The Agency's expenses related to investments in the
Nation's Water Infrastructure are outlined below:

FY99
Construction Grants:              $  414,528
Clean Water SRF:                $  925,744
Safe Drinking Water SRF:         $  387,429
Other Infrastructure Grants:        $  245,606
Allocated Expenses:               $  213,117

FY98
Construction Grants:              $  444,817
Clean Water SRF:                 $ 1,109,017
Safe Drinking Water SRF:         $  94,936
Other Infrastructure Grants:        $  138,363
Allocated Expenses:               S  187,649

STEWARDSHIP LAND

The Agency acquires title to certain land and land
rights under the  authorities provided in Section 104
(J) CERCLA related to remedial clean-up sites. The
land rights  are in the form of easements to allow
access to clean-up  sites  or to restrict usage of
remediated sites.  In some instances, the Agency
takes title to the land during remediation and returns
it to  private ownership  upon  the completion of
clean-up.

As of 9/30/99, the Agency possesses the following
                                     22
                                      2
                                      0
                                     18
                                      2
                                      0
land and land rights:
  Superfund Sites with Easements

  Beginning Balance
  Additions
  Withdrawals
  Ending Balance


  Superfund Sites with Land
  Beginning Balance
  Additions
  Withdrawals
  Ending Balance

HUMAN CAPITAL
Agencies are required to report expenses incurred
to train the public with the intent of increasing or
maintaining  the nation's economic productive
capacity. Training, public awareness, and research
fellowships are components  of many  of  the
Agency's programs, and are effective in achieving
the Agency's mission of protecting public health
and the environment, but the focus is on enhancing
the  nation's  environmental,   not  economic,
capacity.

FY99
Training and Awareness Grants     $46,630
Fellowships                      SI 0,23 9
Allocated Expenses               $ 6,142

FY98
Training and Awareness Grants     S39,131
Fellowships                      $11,084
Allocated Expenses               $ 5,273
Page 70
                             EPA's FY 1999 Annual Financial Statements

-------
FINANCIAL STATEMENTS
         Audit Report 00100231
  EPA's FY 1999 Annual Financial Statements
                                          Page 71

-------
Note:  This summary is part of Audit Report Number 00100231 issued by the EPA Office of
Inspector General on February 29, 2000. Therefore, it contains references to other sections of the
report (e.g., attachments) which are not included. For a complete copy of the report, please contact:

                           Environmental Protection Agency
                            Office of the Inspector General
                               Financial Audit Division
                                    Mail Code 2422
                                  401 M Street, S.W.
                                   Washington, D.C.

                               Telephone: 202-260-1397
                               FAX:     202-260-1398
                                   Audit Report 00100231
Paoe 72                     EPA's FY 1999 Annual Financial Statements

-------
        INSPECTOR GENERAL'S REPORT ON EPA'S
            FISCAL 1999 FINANCIAL STATEMENTS
The Administrator
U.S. Environmental Protection Agency:

In accordance with the requirements of the Government Management Reform Act (GMRA), we
performed an audit of EPA's fiscal 1999 financial statements. Following are our opinions on the
Agency's financial statements, and the results of our evaluation of internal controls and tests of
compliance.

The financial statements include expenses of grantees, contractors and other Federal agencies.
Our audit work pertaining to these expenses included testing only within EPA. Audits of grants,
contracts and interagency agreements performed at a later date may disclose questioned costs of
an undeterminable amount at this time.

The Office of Inspector General (OIG) is not independent with respect to amounts pertaining to
its operations that are presented in the financial statements. The amounts included for the OIG
are not material to EPA's financial statements. The OIG is organizationally independent with
respect to all other aspects of the Agency's activities.
OPINIONS ON EPA'S FISCAL 1999 FINANCIAL STATEMENTS

Superfund Trust Fund Financial Statements

The Agency was unable to provide support in a timely manner for the composition of Other
Financing Sources for the Superfund Trust Fund, so we were unable to apply audit procedures to
satisfy ourselves as to the fair presentation of this line item. In addition, Note 28 to the financial
statements discloses these differences as Custodial Liability Reclassifications and Other which in
our opinion does not adequately address the source or composition of these amounts. Except for
the effects, if any, of adjustments that may have been necessary to correct the amounts reported
as Other Financing Sources in the Statement of Changes in Net Position and the related effects
on Equity and Net Costs of Operations, the financial statements for the Superfund Trust Fund
fairly present the assets, liabilities, and net position; net costs; changes in net position; budgetary
resources; and reconciliation of net costs to budgetary obligations for the fund as of and for the
year ended September 30, 1999, in accordance with generally accepted accounting principles, as
described in Note 1 to the financial statements.
                                   Audit Report 00100231

                         EPA's FY 1999 Annual Financial Statements                    Page 73

-------
All Other Appropriated Funds Financial Statements

The Agency was unable to provide support for the composition of "Other" in the Statement of
Financing for All Other Appropriated Funds, and we were unable to apply audit procedures to
satisfy ourselves as to the fair presentation of this line item.  Except for the effects, if any, of
adjustments that may have been necessary to correct the amounts reported as "Other" in the
Statement of Financing, the financial statements for All Other Appropriated Funds fairly present
the assets, liabilities, and net position; net costs; changes in net position; budgetary resources;
reconciliation of net costs to budgetary obligations; and custodial activity for All Other
Appropriated Funds as of and for the year ended September 30, 1999, in accordance with
generally accepted accounting principles, as described in Note 1 to the financial statements.

Agency-wide Financial Statements

The Agency was unable to provide support in a timely manner for the composition of Other
Financing Sources for the Agency as a whole. In addition, Note 28 to the financial statements
discloses these differences as Custodial Liability Reclassifications and Other which in our
opinion does not adequately address  the source or composition of these amounts. In addition, the
Agency was unable to provide support for the composition of "Other" in the Statement of
Financing for the Agency as a whole. We were unable to apply audit procedures to satisfy
ourselves as to the fair presentation of these line items.  Except for the effects, if any, of
adjustments that may have been necessary to correct the amounts reported as Other Financing
Sources in the Statement of Changes in Net Position and the related effects on Equity and Net
Costs of Operations, and the amounts reported as "Other" in the Statement of Financing the
Agency-wide financial statements fairly present the assets, liabilities, and net position;  net costs;
changes in net position; budgetary resources; and reconciliation of net costs to budgetary
obligations for the Agency as of and  for the year ended September 30, 1999, in accordance with
generally accepted accounting principles, as described in Note 1 to the financial statements.

Other Significant Matters

Although we were able to render opinions on EPA's financial statements, weaknesses existed in
the Agency's process for preparing the fiscal 1999 financial statements that resulted in  the
Agency being unable to provide us with complete, accurate and reliable statements, footnotes
and supplemental information by the agreed upon dates.  Significant audit effort was needed to
assist the Agency in improving the presentation of the financial statements and to resolve
preparation issues in order for the Agency to obtain the best possible opinions by March 1, 2000.

In addition, GRPA requires EPA to develop plans on intended accomplishments, measure how
well it is doing, make appropriate decisions based on the information gathered, and communicate
information about performance to Congress and the public. To do this, EPA developed a
strategic plan with ten goals and during fiscal 1999 began tracking the cost to achieve each of its

                                    Audit Report 00100231

Page 74                      EPA's FY 1999 Annual Financial Statements

-------
goals.  We found that the Agency's methodology for accumulating costs by goal could not be
relied upon to fairly state costs by goal. The Agency had originally planned to present its
Statement of Net Cost by goal. After we expressed concern about the Agency's ability to fairly
present its costs by goal, Agency management decided to present EPA's costs for the Superfund
Trust Fund  and All Other Appropriated Funds rather than present the information by goal.
Weaknesses in this area also affect the quality of cost accounting data Agency managers have
available for decision making.
REVIEW OF EPA'S REQUIRED SUPPLEMENTAL STEWARDSHIP
INFORMATION, REQUIRED SUPPLEMENTAL INFORMATION, AND
MANAGEMENT DISCUSSION AND ANALYSIS

EPA's Required Supplemental Stewardship Information, Required Supplemental Information,
and Management Discussion and Analysis are presented for purposes of additional analysis. We
inquired of EPA's management as to their methods of preparing this information and reviewed
this information for consistency with the principal financial statements. However, our audit was
not designed to express, and we are not expressing an opinion on it.

We did not identify any material inconsistencies between the information presented in EPA's
principal financial statements and the information presented in EPA's: (1) Required
Supplemental  Stewardship Information, (2) Required Supplemental Information, and (3)
Management Discussion and Analysis. We did find that EPA was unable, in most cases, to
provide Required Supplemental Information about its trading partners. The January 7, 2000,
technical amendments to OMB Bulletin 97-01 require agencies to report, as Required
Supplemental  Information, their intra-govemmental assets and liabilities by federal trading
partner (see Attachment 3 for additional details on this issue).

EPA's Management Discussion and Analysis presents performance information about various
EPA programs.  Our audits of EPA's programmatic areas have identified weaknesses in the
environmental data information systems used to generate data used for managing the Agency's
environmental programs.  The Agency has several initiatives underway to address data quality
and ensure that environmental data systems contain timely and accurate data. Although these
initiatives move the Agency in the right direction, EPA has not developed an overall strategy to
address the completeness of its environmental data. As a result, EPA's ability to evaluate the
outcomes of its programs in terms of environmental changes will continue to be limited by gaps
and inconsistencies in the quality of its data.

EPA's Management Discussion and Analysis states that the Agency is in compliance with
Statement of Federal Financial Accounting Standards No. 4, "Managerial Cost Accounting
Concepts and  Standards for the  Federal Government."  We do not believe the Agency is  in

                                  Audit Report 00100231

                          EPA's FY 1999 Annual Financial Statements                    Page 75

-------
compliance with this standard because EPA was not able to: (1) determine the full costs of its
activities, (2) accumulate and report cost of activities on a regular basis for management
information purposes, and (3) use appropriate costing methodologies to accumulate and assign
costs to outputs (see Attachment 3 for additional details on this issue).

EPA's Management Discussion and Analysis also states that, during fiscal 1999, the Agency
conducted a review of its user fees in accordance with the requirements of the CFO Act and
provisions of OMB Circular A-25, "User Charges." Our audit work showed, however, that the
Acting CFO still needs to follow through and either institute, revise, or update its user fees or
obtain exceptions from OMB for the user fees identified during the 1997 review, as updated by
the 1999 review (see Attachment 3  for additional details on this issue).
EVALUATION OF INTERNAL CONTROLS

We evaluated the Agency's internal controls over financial reporting:  (1) to determine the audit
procedures necessary to express an opinion on the financial statements, and (2) to determine
whether the internal controls provide reasonable assurance that:

  •    transactions are properly recorded, processed, and summarized to permit the preparation
       of reliable principal financial statements in accordance with generally accepted
       accounting standards;

  •    financial transactions are executed in compliance with applicable laws and regulations;
       and

  •    assets are safeguarded against loss  from unauthorized acquisition, use or disposition.

Recognizing on-going work by the General Accounting Office (GAO) on computer security
controls, we supplemented our review of these controls by relying on the GAO review.  We did
not test all internal controls relevant to operating objectives as broadly defined by the Federal
Managers' Financial Integrity Act, such as those controls relevant to ensuring efficient
operations. Our objective in evaluating controls was not to express an opinion on controls.
Consequently, we are not expressing an opinion on EPA's internal controls. Our evaluation
would not necessarily disclose all matters in the internal control structure that might be
reportable conditions or material weaknesses.  Because of inherent limitations in any system of
internal controls, losses, noncompliance, or misstaternents could occur and not be detected.
Also, projecting our evaluation of internal controls to future periods is subject to the risk that
controls may become inadequate because of changes in conditions, or the degree of compliance
with such controls may deteriorate.
                                    Audit Report 00100231

Page 76                      EPA's FY 1999 Annual Financial Statements

-------
 Material Weaknesses

 OMB Bulletin 98-08, "Audit Requirements for Federal Financial Statements," defines a material
 weakness as a situation where internal controls do not reduce to a relatively low level, the risk
 that errors, fraud or noncompliance in amounts material to the audited financial statements,
 Required Supplemental Stewardship Information, or reported performance measures may occur
 and not be detected in a timely manner by employees in the normal course of performing their
 assigned functions. In evaluating the Agency's internal control structure, we identified the
 following material weaknesses.

 Although the Agency made some improvements in its financial statement preparation processes,
 the financial statements provided to us for the purpose of expressing an opinion were incomplete
 and contained significant errors. The financial statements that we used as a basis for rendering
 our opinions were not received until late February 2000.  Further, significant audit effort was
 needed to assist the Agency in improving the presentation of the financial statements and to
 resolve preparation issues in order for the Agency to obtain the best possible opinions by March
 1, 2000. The Agency needs to make further improvements in its financial statement preparation
 process.  These improvements should be designed to improve the accuracy and reliability of
 financial information used to prepare financial statements after the end of the year, as well as the
 data that is  available on an ongoing basis throughout the year to manage EPA's environmental
 programs. Attachment 1 describes weaknesses in the Agency's financial statement preparation
 process in more detail.

 The Office  of Inspector General previously reported concerns that security plans for EPA's core
 financial systems were not compliant with Federal financial management system requirements.
 Our work continues to show significant deficiencies for fiscal 1999.  As a result, we continue to
 report the issue as a noncompliance with the Federal Financial Management Improvement Act
 (FFMIA). (See Attachment 3 for details.) Additional developments for fiscal  1999 support the
 listing of computer security controls as a material weakness.

 EPA's Acting CFO (in his Management Representation letter to us) listed potential
 vulnerabilities in the Agency's mainframe computer and network servers as an exception to
 Agency FFMIA compliance.  In addition, the Acting CFO cited the lack of sufficient detail in
 security plans, and security training programs  that were under development but not yet
 completed and implemented,  as further exceptions to complying with system requirements.

 In addition, a current, more comprehensive, on-going review by the GAO indicates that computer
 security weaknesses "pose a serious threat to the integrity of EPA's information systems; and if
 unconnected could allow unauthorized users to take control of EPA's network operations." The
problems are of such magnitude that the security program was rendered ineffective.  There have
been numerous computer incidents identified,  but the system to document and manage the
incidents is inadequate.  The operating computer and network controls were vulnerable to

                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                     Page 77

-------
tampering and disruption of services. EPA is vulnerable to serious disruptions, disclosure of data
and destruction of data.  A Congressional Committee, citing the seriousness of the vulnerability,
plans a March 2000 hearing on the issue.

Relying on the work of GAO and our efforts, and noting the concern of the Acting CFO, we
consider the lack of adequate computer security controls a material weakness.

Reportable Conditions

We also identified the following reportable conditions.  OMB Bulletin 98-08 defines a reportable
condition as an internal control weakness that could adversely affect EPA's ability to ensure:
(1) transactions are executed in accordance with applicable laws; (2) assets are safeguarded
against unauthorized acquisition, use, or disposition; (3) transactions are properly recorded,
processed, and summarized to permit the preparation of reliable financial statements and
Required Supplemental Stewardship Information in accordance with generally accepted
accounting principles; and (4) transactions are properly recorded, processed and summarized to
permit the preparation of reliable performance information.

• The Agency did not timely identify and deobligate unnecessary funds during its annual review
of inactive obligations. Therefore, the Agency had to conduct a "special review" of its open
obligations to ensure an accurate reporting of its open obligations in the Agency's financial
statements. The special review identified $14.6  million of open obligations which should have
been deobligated by September 30, 1999 in addition to the $10 million which should have been
deobligated based on the fiscal 1998  special review. In addition, our fiscal 1999 audit work
identified another $6.3 million which should have been deobligated by September 30, 1999.

• During fiscal 1999, the Agency continued its efforts to improve controls in the accounts
receivable area. However, we continued to find: (1) accounts receivable that  were not recorded
and billed timely,  (2) accounts receivable balances in the Agency's Integrated Financial
Management System (IFMS) were not reconciled to subsidiary records, (3) outstanding
receivables were not timely  followed up on and written off, and (4) collection transactions were
not properly recorded. Consequently, some accounts receivable may not be correctly valued and
timely collected.  These problems were primarily caused by Offices of Regional Counsel and
program offices not timely forwarding documentation needed to manage accounts receivable to
the financial management offices.

• Some Agency project officers were not fulfilling one of their program oversight duties, that of
timely reviewing and approving interagency agreement invoices. In addition, some project
officers were not obtaining and reviewing supporting cost documentation for  amounts billed by
other agencies.  The Agency needs to continue making improvements in this area, so that it can
be assured that payments are only made for costs billed that are valid and allowable under the
terms of its interagency agreements.

                                    Audit Report 00100231

Page 78                      EPA's FY 1999 Annual Financial Statements

-------
 • For a number of years, we have reported that EPA needs to make improvements in accounting
 for its property.  The Agency has been addressing weaknesses in its accounting for property;
 however, our fiscal 1999 audit work disclosed the need for further corrective actions.  We again
 found property that was not recorded or not recorded timely or accurately.  In addition, we found
 weaknesses in the reconciliation of property information in the Agency's accounting system with
 information contained in the property subsystem. When property is not accurately accounted for
 it impacts the quality of data available to manage EPA's resources and increases the risk of theft,
 loss  or misuse of the property.

 • We continue  to be unable to assess the adequacy of the automated internal control structure as
 it relates to automated input, processing and output controls for the accounting transactions
 contained in the  Agency's IFMS. We recognize the Agency has initiated a work group to replace
 the Agency payroll system, and the Agency's budget request indicated a desire to replace IFMS
 in the near future.  An active data dictionary would simplify conversion of data in implementing
 future financial systems.

 Attachment 2 describes each of these reportable conditions in  more detail. We will also be
 reporting other less significant matters involving the internal control structure and its  operation in
 a separate management letter.

 Comparison of  EPA'S FMFIA Report with Our Evaluation of Internal Controls

 As required by OMB Bulletin 98-08,  we compared EPA's Federal Managers' Financial Integrity
 Act (FMFIA or the Integrity Act) Report with our evaluation of the Agency's internal control
 systems. For reporting under FMFIA, material weaknesses are defined differently than they are
 defined for financial statement audit purposes.  OMB Circular A-123, "Management
 Accountability and Control" defines a material weakness as a deficiency that the Agency head
 determines to be significant enough to be reported outside the  Agency. OMB Bulletin 98-08
 defines a material weakness as a weakness in controls  that creates a risk that errors, fraud or
 noncompliance in amounts material to the financial statements could occur and not be timely
 detected.

 As a part of the fiscal 1999 Integrity Act process, the Agency reported the following two material
 weaknesses that relate to the Agency's financial statements.

 • Construction Grants Close Out. In 1992, EPA designated this area as an Agency weakness
 and in 1996 reclassified it as a material weakness due to the concern that lack of Agency-wide
attention might result in the loss of resources to properly complete the program. In addition,
there were concerns that  millions of dollars in potentially ineligible program costs might not be
available for reuse on other high priority state clean water projects. The Agency is in  the process
of implementing  its corrective action strategy and expects to close out all construction grants by
2006.

                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                      Page 79
                                                                   U.S. EPA Headquarters Library
                                                                          Mail code 3201
                                                                   1200 Pennsylvania Avenue NW
                                                                      Washington DC 20460

-------
 •  Information Systems Security Plans. Our audits have identified deficiencies in the
Agency's information security planning.  Security plans serve as a management control
mechanism to assist officials in the implementation of Agency security policies and in protecting
valuable information technology resources. Organizational security programs are to include the
development, maintenance, and management reviews of information security plans; to date, the
Agency's program and regional offices are not fully compliant.  At risk is the possible
unauthorized access, use, modification, or destruction of EPA information resources that could
result from exploitation of these vulnerabilities. As previously noted, we also consider this
weakness a material weakness, as well as a FFMIA noncompliance.

As a part of the Agency's Integrity Act process, the Agency did not identify and report the
financial statement preparation process as a material weakness.  Rather the Agency elected to
track the Agency's corrective actions in the financial statement preparation process as an
Agency-level weakness. We believe the Agency should report weaknesses in its financial
statement preparation process as an Integrity Act material weakness.
TESTS OF COMPLIANCE WITH LAWS AND REGULATIONS

We tested compliance with provisions of those laws and regulations that could either materially
affect the financial statements or RSSI, or that OMB or we considered significant to the audit.
Our compliance testing did not disclose any material misstatements to the financial statements as
a result of noncompliance with laws and regulations. However, the objective of our audit,
including our tests of compliance with applicable laws and regulations, was not to provide an
opinion on overall compliance with such provisions. Consequently, we do not express such an
opinion. There are a number of ongoing investigations involving EPA's grantees and contractors
which could reveal violations of laws and regulations, but a determination about these cases has
not been made.

Federal Financial Management Improvement Act Compliance

As required by FFMIA, as a part of our audit, we assessed whether EPA's financial management
systems substantially complied with Federal financial management systems requirements,
applicable accounting standards, and the Standard General Ledger at the transaction level. In
planning, performing and reporting on our tests of compliance, we followed OMB Bulletin 98-
08,  "Audit Requirements For Federal Financial Statements."

We found EPA was not in substantial compliance with the FFMIA requirements because of
weaknesses in: (1) the Agency's process for preparing financial statements, and (2) its computer
security controls.  We also identified the following instances of substantial noncompliance with
FFMIA requirements.  Attachment 3  describes the following two noncompliance issues in more

                                   Audit Report 00100231

Page 80                    EPA's FY 1999 Annual Financial Statements

-------
detail and provides our recommendations on actions that should be taken to correct these
noncompliances.

  •    EPA's methodology for accumulating and reporting costs by the Agency's ten strategic
       goals could not be relied upon to fairly state the Agency's costs to achieve each goal.
       Weaknesses in this area affected the quality of cost accounting data EPA managers had
       available during fiscal 1999 to manage their programs. In addition, the Agency was not
       in compliance with Statement of Federal Financial Accounting Standards (SFFAS) No. 4
       that requires EPA to: (1) determine the full costs of its activities, (2) accumulate and
       report cost of activities on a regular basis for management information purposes, and (3)
       use appropriate costing methodologies to accumulate and assign costs to outputs.

  •    EPA was unable, in most cases, to report its intra-govemmental assets and liabilities by
       trading partner because finance offices were not coding transactions to show this
       information. The Treasury Financial Manual requires agencies to report trading partner
       information, so Treasury can eliminate intra-govemmental transactions when it prepares
       the Financial Report of the United States Government. Agencies also need this
       information, so they can manage their assets and liabilities.

Other Noncompliance Issues

We also identified the following noncompliance issues that did not cause a material misstatement
to the financial statements, but are nonetheless significant.

Disbursements for Multiple Appropriation Grants. EPA is not complying with appropriation
law when making disbursements for grants funded with more than one appropriation.
Disbursements for these grants are made using the oldest available funding (appropriation) first
which may or may not be the appropriation that benefitted from the work performed. Thus, EPA
is not complying with Title 31 U.S.C. 1301 which requires EPA to match disbursements to the
benefitting appropriation. A January 13, 2000, Office of General Counsel decision concluded
that making disbursements for multiple appropriation grants using the oldest available funding
first violates 31  U.S.C.  1301 and is an inappropriate method of charging, except in limited
situations.

User Fees. In response to our prior audit report findings, EPA's OCFO conducted biennial
reviews of user fees required by OMB Circular A-25, "User Charges" and the CFO Act. The
November  1997 review showed five current fees, four proposed fees, and eight exceptions. To
be in complete compliance with OMB Circular A-25, the Acting CFO needs to follow through
and either institute, revise, or update its user fees or obtain exceptions from OMB for the user
fees updated in 1997, as updated by the 1999 review.  See Attachment 3 for a further discussion
of this issue, including the Agency's comments on this issue and our recommended corrective
action.

                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                      Page 81

-------
 PRIOR AUDIT COVERAGE

 During previous financial audits, weaknesses that impacted our audit objectives were reported in
 the areas of:

       • the Agency's process for preparing financial statements, including the Statements of
           Budgetary Resources and Financing;
       • recording unbilled Superfund oversight costs;
       • accounting for and managing Superfund accounts receivable;
       • accounting for and controlling property;
       • recording accrued liabilities for grants;
       • approving payments for interagency agreements;
       • identifying, tracking and reporting EPA's environmental liabilities;
       • recording revenue for Superfund state contracts;
       • documenting EPA's Integrated Financial Management System;
       • complying with federal financial management system security requirements;
       • accounting for payments for grants funded from multiple appropriations;
       • reconciling the  components of Superfund net position;
       • identifying and allocating indirect costs;
       • reviewing Agency fees; and
       • allocating costs to the Superfund Trust Fund.

Attachment 4 summarizes the status of the prior audit report recommendations in each of these
areas. Other sections of this report on internal controls and compliance with laws and regulations
provide additional details on the current status of the Agency's corrective actions.

The Chief Financial Officer (CFO), as the Agency's Audit Follow-up Official, oversees EPA's
follow-up on audit findings and recommendations, including resolution and implementation of
corrective actions. For these prior audits, final action occurs when the Agency completes
implementation of the corrective actions to remedy weaknesses identified in the audit.

We acknowledge that many actions and initiatives have been taken to resolve prior financial
statement audit issues. We also recognize that the issues we have reported are complex, and
require extensive, long-term corrective actions and coordination by the CFO with various
Assistant Administrators, Regional Administrators and Office Directors before they can be
completely resolved. A number of issues have been unresolved for a number of years.

On January 13, 2000, the OCFO and the OIG jointly sponsored a meeting with a number of
senior managers and representatives from the OCFO, the Office of General Counsel and the
Office of Administration and Resources Management to discuss our concerns about the audit
management process and the length of time management was taking to complete corrective
                                    Audit Report 00100231

Page 82                     EPA's FY 1999 Annual Financial Statements

-------
 action on some of our older audit recommendations. The intended outcome of this meeting was
 to ensure a clear understanding of the roles, responsibilities and processes needed to implement a
 quality audit management program.

 We acknowledge  that EPA updated its policy in fiscal  1999 to enhance the audit management
 process (EPA Order 2750, Audit Management Process, revised December 3, 1998).
 Nevertheless, the  Agency's Audit Follow-up Official, OCFO, agreed on a number of additional
 actions to ensure appropriate resources and priority attention by senior management is devoted to
 our prior audit issues and that progress and status on these issues is appropriately discussed in
 management's semiannual reports to Congress.  Because efforts are underway by the OCFO to
 further strengthen and enhance the audit management process, we will monitor the progress
 during fiscal 2000 to determine if we need to make any audit recommendations concerning the
 audit follow-up process and management's reporting of progress made on corrective action plans
 to Congress. Our office will continue to work with the OCFO in helping them to resolve all
 audit issues resulting from our financial statement audits.
RECOMMENDATIONS

We are not making any new recommendations concerning the Agency's financial statement
preparation process. The recommendations we made as a part of the fiscal 1998 audit, when
fully implemented, should correct weaknesses in the Agency's financial statement preparation
process.

To correct the other FFMIA noncompliances we noted during this audit, we are recommending
the Acting Chief Financial Officer (CFO):

  • incorporate planned fiscal 2000 security plan actions for financial systems into a formal
remediation plan,1

  • establish procedures to identify actual costs by goal, objective and subobjective at the time
the costs are recorded,

  • develop timely, reliable, accurate cost reports to enable managers to monitor the total cost of
their programs,

  • develop a Statement of Net Cost with accurate  and reliable cost information by goal which
can be used for external reporting, and
1 We expect the General Accounting Office will also make recommendations designed to improve the Agency's computer security.

                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                      Pa°e 83

-------
  • issue policies to require all finance offices to expedite the review and input of trading partner
information for the Agency's intra-governmental assets and liabilities.

Our report also contains recommendations related to the other internal control and compliance
issues we identified during this audit.
AGENCY COMMENTS AND OIG EVALUATION

In a memorandum dated February 24, 2000, the Acting CFO responded to our draft report. In the
response, he indicated that his office agrees that further improvements need to be made to the
process for preparing financial statements.  However, the weaknesses we identified in the
financial statement preparation process do not warrant categorization as a material weakness, nor
are they indicative of the Agency's inability to provide managers with information that is
accurate and reliable for use on a day-to-day basis to manage Agency programs. The Acting
CFO also disagreed with our conclusion that the Agency is in noncompliance with the
requirements of SFFAS No. 4, "Managerial Cost Accounting Concepts and Standard for the
Federal Government." The Acting CFO agreed with many of the recommendations and
indicated corrective actions are planned or ongoing to implement these recommendations.
Finally, the Acting CFO expressed appreciation for our cooperation in resolving outstanding
financial statement issues.  The Agency's complete response is included as Appendix II to this
report.

We will continue to support the Agency's efforts to improve its processes for preparing timely,
reliable financial statements.  In particular,  we look forward to working with the Agency to make
improvements in the cost accounting information available to Agency managers to use in
carrying out their environmental programs. We have not changed our classification of the
reported material weakness and noncompliance issue. The rationale for our conclusions is
included in the appropriate sections of this report.
               RESPONSIBILITIES AND METHODOLOGY


EPA MANAGEMENT RESPONSIBILITIES

EPA's management is responsible for:

  •   preparing annual financial statements and Required Supplemental Stewardship
      Information;


                                   Audit Report 00100231

Page 84                     EPA's FY 1999 Annual Financial Statements

-------
  •    establishing and maintaining a system of internal controls; and

  •    complying with applicable laws and regulations.

OIG RESPONSIBILITIES

We are responsible for:

 •     auditing the financial statements to determine if they are free of material misstatements
       and presented fairly in accordance with generally accepted accounting principles, and

 •     evaluating related internal controls and testing compliance with applicable provisions of
       laws and regulations.

AUDIT METHODOLOGY

In order to fulfill our responsibilities, except as described in our opinions, we:

  •    examined on a test basis, evidence supporting the amounts and disclosures in the
       principal financial statements;

  •    assessed the accounting principles used and significant estimates  made by management;

  •    evaluated the overall presentation of the financial statements;

  •    obtained an understanding of the significant internal controls over financial reporting,
       determined whether they had been placed in operation, assessed control risk, and tested
       the effectiveness of significant manual controls relevant to the following significant
       cycles, classes of transactions, and account balances:

       • Receivables and Collections
       • Disbursements and Operating Expenses
       • Payroll
       • Investments
       • Property
       • Budget and Obligations
             o          o
       e Accounts Payable and Accrued Liabilities
       • Fund Balances
       • General Accounting and Financial Reporting

 •    gained an understanding of the significant internal controls related to the RSSI;


                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                      Pa°e 85

-------
  •    inquired of EPA's management as to their methods of preparing EPA's Required
       Supplemental Information;

  •    compared EPA's RSSI and Required Supplemental Information with the Agency's
       principal financial statements;

  •    obtained an understanding of the automated internal control structure of the subsystem
       interfaces with IFMS;

  •    completed a separate audit addressing the adequacy of critical mainframe operating
       systems libraries, program property tables and supervisory call programs;

  •    reviewed the work of the GAO relative to computer security controls at EPA to determine
       their findings and that we could rely on their work;

  •    documented the status of corrective actions in the Agency's FFMIA remediation plan,
       dated March  31,  1999;

  •    followed-up on findings and recommendations from previous audits that could materially
       affect the financial statements;

  •    obtained an understanding of management's process for evaluating and reporting on
       internal controls and accounting systems as required by FMFIA;

  •    compared the material weaknesses  reported in the Agency's FMFIA report to the material
       weaknesses we found;

  •    tested compliance with applicable sections of laws and regulations that either materially
       affect the financial statements or RSSI, or that OMB or our office considered significant
       to the audit; and

  •    performed sufficient tests to report  whether EPA's financial management systems
       substantially  comply with Federal financial management systems requirements,2
       applicable accounting standards, and the Standard General Ledger at the transaction level
       as required by the FFMIA.

Detailed  system documentation was not available that would have allowed us  to develop an
understanding of the IFMS  automated transaction level control structure and to test those
2 We evaluated whether EPA was in substantial compliance with OMB Circular A-I27; OMB Circular A-130. Appendix 3; and Joint
Financial Management Improvement Program system requirements, as identified in OMB Bulletin 98-08. We also evaluated systems
budgetary reporting requirements, as stated in OMB Circular A-l I.

                                     Audit Report 00100231

Page 86     '                 EPA's FY 1999 Annual Financial Statements

-------
 automated controls. Our systems compliance work also was limited to evaluating the scope and
 methodology of three reviews performed by the Treasury Financial Management Service:
 (1) EPA Financial Systems' Compliance with OMB Circular A-127, dated November 4, 1999;
 (2) IFMS  Documentation Evaluation, dated September 1999; and (3) EPA Financial Systems'
 Compliance with OMB Circular A-130, dated August 25, 1999.  In addition, we performed field
 work to evaluate the adequacy of Agency actions to revise core financial systems security plans,
 which were identified in the Agency FFMIA remediation plan, dated March 31, 1999.

 We met with GAO and discussed the results of their computer security control review of EPA
 and attended the GAO exit conference with EPA on February 2, 2000. This allowed us to
 develop an understanding of the issues. We reviewed a GAO summary of the issues and
 reviewed supporting work papers.  We further reviewed the qualifications of the GAO staff and
 obtained assurance of their independence to satisfy ourselves that we  could rely on their work.

 The information presented in EPA's Management Discussion and Analysis is supplemental
 information required by OMB Bulletin 97-01, entitled "Form and Content of Agency Financial
 Statements."  OMB Bulletin 98-08, "Audit Requirements for Federal  Financial Statements,"
 requires that we obtain an understanding of the internal controls designed to ensure that data
 supporting the measures are properly recorded and accounted for to permit the preparation of
 reliable and complete performance information. Our audit work related to EPA's Management
 Discussion and Analysis was limited to comparing the financial information included in the
 document with information contained in the principal financial statements.

 Details of Audit Field Work

 We selected statistical and non-statistical samples from EPA's detailed accounting records
 supporting various  financial statement amounts. We tested these sample transactions to
 determine if they were adequately supported by documentation and were recorded in accordance
 with internal control policies and procedures and applicable laws and  regulations.  We also
 reviewed other supporting documentation, such as worksheets and schedules, that the Agency
 used in preparing its financial statements. In addition, we applied certain analytical review
 procedures to account balances.

 The financial management records and supporting documentation we  reviewed were maintained
 by Financial Management Centers in Washington, D.C., Research Triangle Park, Cincinnati and
 Las Vegas; Financial Management Offices in EPA's regional offices;  the Office of the Chief
 Financial Officer; various offices within the Office of Administration and Resources
 Management; the Office of Enforcement and Compliance Assurance (OCEA); and by
 Headquarters and regional program offices.  To gain an understanding of established internal
 control procedures, and to evaluate these controls, we also interviewed personnel in these offices
and reviewed applicable policies and procedures.  In addition, we conducted a physical inventory
of a sample of property items, and we observed the Agency's physical inventory of its property.

                                    Audit Report 00100231

                           EPA's FY 1999 Annual Financial Statements                      Page 87

-------
Our fieldwork for the audit was performed from June 9, 1999 through February 24, 2000.
Except as previously discussed in this report, we conducted our audit work in accordance with:
generally accepted auditing standards; the standards applicable to financial audits contained in
the Government Auditing Standards, issued by the Comptroller General of the United States; and
OMB Bulletin No. 98-08, "Audit Requirements for Federal Financial Statements."  These
standards require that we plan and perform our audits to obtain reasonable assurance that the
financial statements are free of material misstatement. We believe that our audit provides a
reasonable basis for our opinions.

This report is intended solely for the information arid use of the management of EPA, OMB and
Congress, and it is not intended to be and should not be used by anyone other than these
specified parties.  We caution that misstatements, losses and noncompliance may occur and not
be detected by the tests performed and that such testing may not be sufficient for other purposes.
 fones O. Rauch
 assistant Inspector General for Audit
U.S. Environmental Protection Agency
February 24, 2000
                                     Audit Report 00100231
Page 88                      EPA's FY 1999 Annual Financial Statements

-------
           Audit Report 00100231
EPA's FY 1999 Annual Financial Statements
                                                                 Page;

-------

-------
                                  ACRONYMS
AC&C
APGs
APR
ASAP

B&F
BAS
BCCP
BRTs

CCRs
CERCLA
CFO
CFO Act
CSRS

EASY
EDCs
EMPACT
EPA
EPM
EPAYS

FAS
FASAB
FECA
FERS
FFMIA
FMFIA
FTE
FY

GAO
GMRA
GPRA
GSA

IFMS

LUST

MD&A
Abatement Control and Compliance
Annual Performance Goals
Annual Performance Report
Automated Standard Application for Payments

Buildings and Facilities
Budget Automation System
Business Continuity and Contingency Planning
Business Resumption Teams

Consumer Confidence Reports
Comprehensive Environmental Response, Compensation, and Liability Act
Chief Financial Officer
Chief Financial Officers Act of 1990
Civil Service Retirement System

Electronic Approval System
Endocrine-disrupting Chemicals
Environmental Monitoring for Public Access and Community Tracking
Environmental Protection Agency
Environmental Program and Management
EPA Integrated Payroll and Personnel System

Fixed Assets Subsystem
Federal Accounting Standards Advisory Board
Federal Employees Compensation Act
Federal Employees Retirement System
Federal Financial Management Improvement Act
Federal Managers' Financial Integrity Act
Full-time Equivalents
Fiscal Year
General Accounting Office
Government Management and Reform Act of 1994
Government Performance and Results Act of 1993
General Services Administration

Integrated Financial Management System

Leaking Underground Storage TankFebruary 27, 200044

Management's Discussion and Analysis
U.S. EPA Headquarters Library
       Mail code 3201
1200 Pennsylvania Avenue NW
   Washington DC 20460
                                    Audit Report 00100231
                          EPA's FY 1999 Annual Financial Statements
                                                                                 Page 91

-------
NAAQS
NPL
NFS

OCFO
OECA
OEI
OIG
OMB
OPA

PM
PRO
PRPs

RP

S&T
SARA
SO,
SRF
SSCs
SFFAS
STAG

TM+

UAOs

WCF

XL

Y2K
National Ambient Air Quality Standards
National Priorities List
Nonpoint Source

Office of the Chief Financial Officer
Office of Enforcement and Compliance Assurance
Office of Environmental Information
Office of Inspector General
Office of Management and Budget
Oil Pollution Act

Particulate Matter
Program and Research Operations
Potentially Responsible Parties

Responsible Parties

Science and Technology
Superfund Amendments and Reauthorization Act of 1986
Sulfur Dioxide
State Revolving Fund
Superfund State Contracts
Statement of Federal Financial Accounting Statndards
State and Tribal Assistance Grants

Travel Manager Plus

Unilateral Administrative Orders

Working Capital Fund

excellence and Leadership

Year 2000
                                      Audit Report 00100231
Page 92
                            EPA's FY 1999 Annual Financial Statements

-------
     For more information, contact:

     Financial Management Division
 U.S. Environmental Protection Agency
           Ariel Rios Building
1200 Pennsylvania Avenue, N.W. (2733R)
         Washington, DC 20460
              Audit Report 00100231
       EPA's FY 1999 Annual Financial Statements                Pa°e 93

-------

-------

-------

-------