United States
Environmental Protection
Agency
Office of
Site Remediation
Enforcement (2273G)
May 1995
v>EPA Overview of Ability To Pay Guidance
And Models
The purpose of this document is to identify and briefly describe documents that are relevant to Superfund
ability to pay ("ATP") analyses. The documents fall into two general categories: (1) documents that require
orprovideforconsideration of the ability to pay of potentially responsible parties ("PRPs"); and (2) documents that
describe methods to determine ATP settlement amounts. The Regions should use documents in the first group
in making Superfund ATP determinations. The Regions may also use documents in the second group in
conducting ATP settlements until more specific Superfund ATP settlement guidance is provided by Headquarters.
[Note: Users should not rely solely on this summary document in making ability to pay determinations, but should
instead read the relevant document(s) in their entirety.]
A. GENERAL POLICY DOCUMENTS
The following Agency documents describe situations in which a liable party's ability to pay should be considered.
Although some of these documents do not deal specifically with CERCLA liability, they represent general Agency
policy regarding the use of ability to pay in enforcement cases. For this reason, the documents should be relied
upon in situations relating to the ability to pay potential of Superfund PRPs.
1. General Civil Penalty Policy
The General Civil Penalty Policy is composed of'two
documents: Policy on Civil Penalties and A Framework
for Statute-Specific Approaches to. Penalty Assess-
ments:
a. Policy on Civil Penalties
(EPA General Enforcement Policy # GM-21)
[February 16, 1984]
This is an Agency guidance document that "estab-
lishes a single set of goals for penalty assessment
in EPA administrative and judicial enforcement
actions." Although this document is intended to
address penalty considerations, it is important
because it sets forth the Agency's basic philoso-
phy on ability to pay issues in enforcement cases.
This philosophy indicates that under the goal of
fair and equitable treatment of the regulated com-
munity, the policy must allow for flexibility to
adjust penalties. The policy lists certain factors
that are to be considered in determining penalty
amounts. One of these factors is "ability to pay."
The policy also cautions that a reduction of a
penalty based on ability to pay is only "appropriate
to the extent the violator clearly demonstrates that
it is entitled to mitigation."
b. A Framework for Statute-Specific
Approaches to Penalty Assessments
(EPA General Enforcement Policy # GM-22)
[February 16, 1984]
A companion to the Policy on Civil Penalties, this
policy directs EPA staff on the development of
medium-specific penalty policies for administra-
tively-imposed penalties and judicial and adminis-
trative settlements under statutes enforced by the
Agency. It restates and amplifies some of the
concepts included in the Policy on Civil Penalties
document.
Lack of an ability to pay is identified as one circum-
stance of "compelling public concern" based on
which an enforcement case may be settled for less
than the economic benefit of noncompliance. This
document states that ability to pay settlements are
allowed if "[rlemoval of the economic benefit
would result in plant closings, bankruptcy, or other
extreme financial burden, and there is an impor-
tant public interest in allowing the firm to continue
in business."
Three additional requirements are provided for
use in ability to pay determinations: 1) the violator
has the burden of demonstrating an inability to pay
claim; 2) "EPA reserves the option, in appropriate
circumstances, of seeking a penalty that might put
a company out of business"; and 3) documents-
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tion of all ability to pay adjustments must be
included in case files and other relevant internal
documents.
2. Guidance on Determining a Violator's Ability to
Pay a Civil Penalty (EPA General Enforcement
Policy # GM-56) [December 16,1986]
This Agency guidance document amplifies the discus-
sion in the General Civil Penalty Policy relating to the
use of the ability to pay factor in the imposition of civil
penalties. This guidance document is directed toward
civil penalties imposed on for-profit entities that have
not filed for bankruptcy. It establishes a standard for
the evaluation of an inability to pay claim by stating
that "EPA may consider using the ability to pay factor
to adjust a civil penalty when the assessment of a civil
penalty may result in extreme financial hardship."
Althoughthisdocumentestablishesastandardjtdoes
not determine a specific dollar amount that a party can
afford to pay. The guidance requires the examination
of various options that a violator has for paying a civil
penalty and provides that the Agency may request
copies of tax returns and other financial documents to
support claims of inability to pay. The document also
states that if requested information is not provided, the
Agency should seek the full penalty amount.
"ABEL," a computer prog ram that evaluates thefinari-
cial health of for-profit entities based on the estimated
strength of their internally-generated cash flows, is
introduced in this guidance. (A more detailed descrip-
tion of ABEL is provided below.) The document notes
that, even if the ABEL analysis shows an inability to pay
a penalty with internally generated cash flow, the
Agency should evaluate other possible sources of
payment.
3.* Interim CERCLA Settlement Policy
(OSWER # 9835.0) [December 5, 1984]
This Agency guidance document identifies ten criteria
governing private party settlements under CERCLA.
One criterion is "ability of the settling parties to pay."
This document states that "the settlement proposal
should discuss the financial condition of that party, and
the practical results of pursuing a party for more than
the government can hope to actually recover."
4.* Guidance on Documenting Decisions Not to
Take Cost Recovery Actions
(OSWER #9832.11) [July 7, 1988]
This document states that the decision to not take a
cost recovery action may be based on the finding that
a PRP is not financially viable or that it is unable to pay
a substantial portion of the claim. This guidance
references the PRP Search Manual (OSWER # 9834.6).
5.* Transmittal of the Super-fund Cost
Recovery Strategy
(OSWER # 9832.13) [July 29,1988]
The Superfund cost recovery strategy requires the
Agency to consider the "financial ability of the poten-
tial defendants to satisfy a judgmentforthe amount of
the claim or to pay a substantial portion of the claim"
when deciding to issue a cost recovery referral.
6.* SubnVrttal of Ten-Point Settlement
Analysis for CERCLA Consent Decrees
(OSWER #9835.14) [August 11,1989]
Commonly known as the "ten point guidance," this
document makes the same reference to ability to pay
considerations as the Interim CERCLA Settlement Policy
document: that the "settlement proposal should dis-
cuss the financial condition of [a] party, and the prac-
tical results of pursuing a party for more than the
government can hope to actually recover."
7.* Interim Policy on CERCLA Settlements Involving
Municipalities or Municipal Wastes
(OSWER # 9834.13) [December 6,1989]
This Agency guidance document describes the
Agency's interim policy for CERCLA settlements with
municipalities. Included in the document is authority
to include special settlement provisions "where a
municipality has successfully demonstrated to EPA
that they are appropriate (e.g., where valid ability to
pay or procedural constraints that affect the timing of
payment exist)."
8.* Rnal Penalty Policy for Sections 302,303,304,
311 and 312 of the Emergency Planning and
Community Right-to-Know Act and Section 103
of the Comprehensive Environmental
Compensation and Liability Act
(OSWER # 9841.2) [June 13,1990]
This penalty policy allows forthe reduction of a penalty
that is "clearly beyond the financial means of the
violator." It reiterates much of what is stated in earlier
penalty policy documents, including the use of ABEL
and the type of information that is to be relied upon in
making an ability to pay determination.
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B. DOCUMENTS THAT ASSIST IN
DETERMINING ABILITY TO PAY AMOUNTS
The following documents identify methodologies that may be relied upon in conducting an ability to pay analysis.
Although the documents which follow provide much useful information for determining an ability to pay amount,
none of these documents represent formal Agency guidance directed specifically at Superfund cases.
1. The ABEL Computer Mode! and
Supporting Documentation
The Agency has developed a computer model that
assists in identifying whether a settlement amount has
the potential to create a financial hardship. The com-
puter program is known as ABEL and the following
three documents, ABEL User's Manual, ABEL User's
Guide, and Supplement to the ABEL User's Manual:
Superfund ABEL, describe the use of, and methodolo-
gies relied upon in performing, an ABEL ability to pay
analysis.
ABEL conducts an ability to pay assessment of a for-
profit corporation. ABEL projects the ability of the for-
profit corporation to pay for the proposed settlement
from future earnings and from a delay in reinvestment
of capital assets.
The ABEL model will calculate certain common finan-
cial ratios that describe the financial strengths and
weaknesses of the for-profit corporation. This part of
the analysis is called a phase one analysis and can be
performed with a minimum of one year of financial
information. ABEL requires at least three years of tax
data to make a phase two projection. The phase two
projection com pares the proposed settlement amount
with projected future cash flows of a for-profit corpo-
ration. The phase two projection then provides the
statistical probability that the corporation can pay the
proposed settlement from the projected future cash
flows.
ABEL is designed to be used by those who are not
familiar with financial information. The ABEL docu-
mentation informs enforcement personnel that a per-
son experienced in ability to pay analysis must exam-
ine the financial information prior to the reduction of a
proposed settlement amount if the ABEL analysis
indicates an inability to pay.
ABEL is not designed to evaluate the ability to pay of
other financial entities such as municipalities, partner-
ships or individuals.
a. ABEL User's Manual
[October 1991 Version]
This manual provides step-by-step instructionsfor
using the ABEL model. The ABEL User's Manual
describes how the ABEL model can be used in
assessing a for-profit corporation's ability to pay
one or more of the following expenditures: civil
penalty; environmental clean-up costs; and/or pol-
lution control equipment costs. The User's Manual
also provides background information on key as-
sumptions used in the model (e.g., reinvestment
rate), and how these can be altered by the user.
b. ABEL User's Guide [October 1991]
This guide is available in two versions, an "uncut"
version for government users of the ABEL model
(which contains confidential information) and a
non-confidential version for outside users of the
model (which is now availablefor purchase through
the National Technical Information Service (NTIS)).
The government version of this document pro-
vides internal enforcement guidance on how EPA
staff can effectively use the ABELcomputer model
in settlement negotiations. Specifically, this docu-
ment describes what additional analyses should
be performed if ABEL predicts that a violator'scash
flow will not be sufficient to pay proposed penalty
and/or cleanup costs.
The User's Guide relies upon 3-5 years of federal
income tax returns to perform the analysis and
also describes other documents that should be
requested from a violator, as well as publicsources
of information.
SupplementtotheABELUser'sManual: Superfund
ABEL [September 1992 Version]
This supplement to the ABEL User's Manual pro-
vides information on use of the ABEL model for
Superfund calculations. The Superfund ABEL
model is easierto use when estimating the present
value of costs associated with the work that is
agreed to be performed. However, the standard
values utilized by the Superfund ABEL model relax
the criteria for determining a financial hardship.
Accordingly, the Superfund ABEL model may iden-
tify more financial hardship situations than the
standard ABEL model. If the conclusion reached
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by the Superfund ABEL model is that the for-profit
corporation has the ability to pay, the chances of
the corporation demonstrating an extreme finan-
cial hardship are small.
2. Beyond ABEL Ability to Pay Guidance
[February 1993]
This guidance document is designed to assist EPA
personnel to "go beyond ABEL" and assess ability to
pay in cases where the ABEL computer model pro-
duces a negative or ambiguous result. Because ABEL
is designed as a conservative screening tool that fo-
cuses only on internal cash flow, it may produce a
negative or ambiguous result when a violator has the
ability to pay through other means, such as reduction
of unnecessary expenses, sale of or borrowing against
assets, or assumption of additional debt.
The guidance gives step-by-step instructions on how
to investigate potential sources of funds, and contains
worksheets toguidethisanalysisandtodraw attention
to key information in tax returns and/or other financial
statements. The analysis focuses on identifying luxury
assets, undervalued assets, loans to or from officers
and shareholders, unnecessary officers' salaries, and
certain other expenses. The result is a more sophisti-
cated analysis than that provided by ABEL
The guidance suggests methods of adjusting an ABEL
inputto allow ABELto estimate the ability to pay of sole
proprietors, partnerships, and Subchapter S corpora-
tions. Also, the guidance provides additional cautions
that help to clarify when a financial analyst should be
consulted.
3. Individual Ability to Pay Guidance
[June 1992]
If a violator files only an individual federal income tax
return, ABEL cannot be used. The Individual Ability to
Pay Guidance was developed by Industrial Economics,
Inc., the EPA contractor that supports the ABEL model,
for sole proprietor, partnership and individual inability
to pay claims in the State of Iowa's underground
storage tank (LIST) program.
Although this document was not written by EPA, it can
be useful in a case involving an individual's inability to
pay claim. This document is not a computer program
but provides a method to determine an individual's
ability to pay. In a method that is similar to the ABEL
model, this document draws information from indi-
vidual tax forms, including Form 1040, Form 1040A, or
Form 1040EZ.
This document characterizes the financial strengths
and weakness of an individual in comparison to aver-
ages determined from income level, family size and
county of residence. The document relies on income
and expense information to project the availability of
income afterthe payment of identified expenses and to
determine if additional debt capacity exists.
The guidance provides advice on how to make a final
ability to pay determination, including instructions on
topics such as: how to understand the results, when it
is appropriate to do additional research and verifica-
tion (including consultation with a financial analyst),
and how to consider extenuating financial circum-
stances (e.g., current sale or purchase of real estate).
4. Guidance for Calculating Municipal and Not-for-
Profit Organizations' Ability to Pay Civil Penal-
ties Using Current Fund Balances [March 1993]
This is a pilot guidance document developed by the
Office of Prevention, Pesticides, and Toxic Substances
(OPPTS) for use in determining the ability of govern-
mental entities (municipalities) and other not-for-profit
(NFP) organizations to pay civil penalties. The docu-
ment suggests a method of determining the ability to
payfrom unreserved funds. It does not evaluate other
methods of paying for the proposed settlement such
as borrowing, raising taxes or paying over time.
The document describes how to use NFP financial
statements to perform an ability to pay assessment for
.three types of organizations: (1) municipalities and
states; (2) private colleges and universities; and (3) NFP
hospitals. This document also contains background
information onfinancial accounting practices and types
of financial statements used by NFP entities, which
differ from those used by for-profit companies.
5. The Road to Rnancing, Assessing and
Improving Your Community's Credrtworthiness
[September 1992]
Developed by the Office of Water, this document
provides brief descriptions of municipal financial char-
acteristics and discusses how changes in these finan-
cial characteristics will .project improvement in a
municipality's financial health. It is a useful tool in
describing some of the concepts of assessing the
ability to pay of a municipality. This document may be
useful for those who are unfamiliar with municipal
financial characteristics.
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6. Financial Capability Guidebook
[March 1984] .
This Office of Water document is to be used to deter-
mine whether a .municipality can demonstrate that it
can ensure adequate building, operation, maintenance
and replacement of a publicly owned treatment works.
The most important section of this guidebook is the
Supplemental Information Sheet and instructions
(pages 52-68). The instructions allow for a character-
ization of a municipality that is equivalent to what the
ABEL analysis does for a business. However, there is
one major note of caution. The analysis is not intended
for a Superfund ability to pay analysis but for the
construction and operation of a publicly owned treat-
ment works. For this reason, the Guidebook provides
a higher ability to pay estimate than may be applicable.
7. Financial Review Methodology for Wastewater
Discharge Noncompliance Cases
[September 17.1984] '
This document was prepared by Peat Marwick, an
accounting firm, for EPA Region V. The methodology
is similarto that in the Financial Capability Guidebook,
but it allows for a greater number of years of financial
information to be examined and a more detailed dis-
cussion of the financial indicators. The document has
the same limitation as the Financial Capability Guide-
book, in that it subjects the municipality to a more
rigorous standard than Superfund ability to pay settle-
ments.
8. Ability to Pay Interrogatories
[June 16,1994]
This draft OECA document provides model interroga-
tories, requests for production, and judicial and admin-
istrative subpoenas for discovery of information and
documents in cases where ability to pay is an issue.
The interrogatories are intended to be tailored to
specific cases, taking into account the size and struc-
ture of the violating entity.
Separate model interrogatories and requests for pro-
duction Of documents are provided for: (1) corpora-
tions; and (2) individuals and sole proprietors. Inter-
rogatories to corporations request information on:
corporate structure and management; equity and debt;
parentand subsidiary entities; insurance coverage; tax
and financial information; assets; liquidation of assets;
and claims and judgments. Interrogatories to individu-
als and sole proprietors request information on per-
sonal and business assets, liabilities, income, expenses,
and other financial matters. [NOTE: This document
can be released only to government employees.]
9. Ability to Pay Case Memorandum
[August 1,1993]
This Office of Enforcement document summarizes all
the significant cases in the area of ability to pay, as of
the date of issuance. The memorandum summarizes
environmental case law related to topics such as:
application of statutory provisions that require ability
to pay to be considered in civil penalty assessments
(e.g., section 109(a)(3) of CERCLA); which party has the
burden of proving an ability (or inability) to pay; factors
that may'be considered in assessing ability to pay;
alternative payment plans; and types of financial infor-
mation that may be presented to a court on ability to
pay issues. [NOTE: This document can be released
only to government employees.]
ADDITIONAL INFORMATION
If you have any questions or comments on this Fact Sheet, please contact Bob Kenney (703-603-8931) or Leo Mullin
(703-603-8975) of the OSRE Policy and Program Evaluation Division (PPED).
If you would like copies of the documents summarized in this Fact Sheet, they are available from the following
sources. Documents identified by an asterisk (*) are found in the CERCLA Enforcement Policy Compendium.
Copies of the complete Compendium or individual documents, may be ordered by EPA personnel from the
Superfund Document Center (703-603-8917). [If requesting the complete Compendium, ask for Documents # PB-
93-963623 and PB-92-963623; if requesting specific documents, ask for the OSWER document number listed
above.] Other referenced documents are available from Tracy Gipson (202-260-3601) of the OSRE Regional
Support Division.
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