EFAB Robin L. Wiessmann Chair Richard B. Geltman Vice Chair John C Wise Executive Director Members Honorable Pets V. Donwnfci Hbnonbla Beryl F. Anthony Honorable Stephen OoUtmith Hononblo Msyntrd Jackson Mitchell W.Berger Qeorge H. Butcher PeteBntkn WfflUmRChew Eafvd I« Coopet Michael Cur lay Peter M. Emenon Detohn Ferrit Shockley D. Oardoer Stuao P. LeOro* Robert O. LOOM David M.Uck MuiinL-Moiby Oeorp V. Pettrsz* • Debo«hA.PhotUdi» OeorgeA.R«fteU« HudmLRoth Robert P. Sefcvurtt JfanLTocd SiuuF.Vogt Fried* K-Wdboo MMyECenWhilworth N«aYoiUa Joseph L Yottog EttzabcUiYteU Superfund Report No. 1 INCREASING FLEXIBILITY FOR FINANCING THE CLEANUP OF CONTAMINATED SITES This report has not been reviewed for approval by the U.S. Environmental Protection Agency; and hence, the views and opinions expressed in the report do not necessarily represent those of the Agency or any other agencies in the Federal Government. September 1995 Printtdon R*cycl*t Paptr ------- Report of the Environmental Financial Advisory Board of the United States Environmental Protection Agency Increasing Flexibility for Financing the Cleanup of Contaminated Sites Forward from Michael Curley, Chair of BFAB's International Committee: ~ At the last EFAB meeting, the Chairman convened a working group from among the three Committees to put together a scries of recommendations for Superfund. As I mentioned at the meeting, I believe the International ., Committee's 1993 work on financing the clean-up of hazardous waste sites along the border has direct relevance to this question. Below is a long extract of that report with redaction kept to the barest minimum. ' Let me also point out, that the sense which I had in mind in commending the Board's attention to this report is that Superfund should be amended to give it the financial flexibility which the North American Development Bank (NADBank) has. Although the NADBank is a "bank", its charter is very broad. It actually functions as a large "fund", hi that its capital can be used to make loans or to guaranty loans. This is precisely the flexibility which should be built into Superfund. by amendment. To make this old report readible in terms of Superfund, I have replaced the term "NADBank" with "Supcrfund-A". I have also replaced references to the Mexican government or to Mexican government agencies with phrases such as "appropriate government agency". The redacted report follows: ------- ******* In considering the problem of enforcement and the identification of polluters responsible for specific contaminated sites, the Committee divided the issue into two major natural categories. They arc: Category A - contaminated sites where one or more polluters could be ed to the contamination at such site. Category B - contaminated sites where no specific polluters co^|^ foe, causally linked to such sites. In considering the problem of financing remediation efforts for contaminated sites, the Committee adopted a series of seven principles. The first two principles relate to the issue in general. They arc: .• * In accord with the principles of the Stockholm Convention of 1972, those who pollute must pay for their pollution. * Enforcement action should lead to the identification of the polluters which generate hazardous waste. The Committee then adopted two principles which should apply to Category A sites where specific polluters can be causally associated with specific sites. They arc: * The principal private sector polluters should be given the first opportunity to remediate, assuming such remediation is approved by an appropriate government agency. * If a polluter undertakes remediation in good faith, government should support and facilitate such efforts to the greatest extent possible short of public subsidies. ------- Finally, the Committee adopted three additional principles to be applied in Category B circumstances where no specific polluter(s) can be causally associated with particular sites. These principles arc as follows: * In circumstances where particular companies arc known to use or produce hazardous substances, but where they can not satisfactorily account for the disposal of such materials, then these polluters should be required to pay into a General Remediation Fund (the Fund), which should be created for this specific purpose. * Polluters, which cannot properly account for the disposal of their hazardous wastes, should be required to pay into the Fund based on the quantity of hazardous substances used or produced in their businesses and the number of years such firms have been in business at their current sites. * The Fund should be used in conjunction with the other financial incentives described below to remediate Category B contaminated sites which cannot be causally linked to specific polluters. In accord with the above principles, the Committee recommends that a finance program for the remediation of hazardous waste sites be created which incorporates both carrots and sticks, Lc., strong incentives and strong disincentives, and also provides for the financing of site remediation where a particular polluter cannot be tied to a particular site. The Committee believes that both strong incentives and strong disincentives are necessary to bring the private sector into the remediation process. Traditional remediation efforts have historically depended on the absolute identification of polluters and the establishment of a causal link between specific polluters and specific sites. This process can be extremely time consuming, costly and difficult. It may be impossible in many instances. Where it is impossible, an alternative remediation facility should be created, as described below. But even in these Category B circumstances, incentives and disincentives should be created to induce the participation of the private sector to the maximum extent possible. ------- In Category A circumstances, where specific polluters can be causally linked to specific contaminated sites, the Committee believes it would be most effective to design, at the onset, a program which encourages private sector polluters to come forward and to work with the government in a cooperative effort to remediate sites. The Committee feels strongly that, if both the system of rewards and penalties is strong enough, polluters will have the incentive to work with the government rather than against it. CATEGORY A SITES For Category A sites, bearing in mind the beneficial effects which a well-designed program can have on the process of identifying responsible and cooperative polluters, the Committee recommends a program containing the \. * following four elements: 1) If identified polluters will not undertake remediation efforts in a timely manner, then an appropriate government agency, or any appropriate political subdivision, should immediately undertake such efforts to the end that the cost of such remediation efforts be levied against the offending polluter in a manner in which such costs arc immediately due and payable. In addition to the normal judicial procedure under state or federal law for . collecting such sums, additional sanctions, such as fines for non-payment and the temporary closure of the polluter's facility until such time as the debt is discharged, should also be considered. This clement constitutes the disincentive, or stick, approach. Under this alternative, polluters can expect to pay considerably more for remediation than if they had undertaken it themselves. It is simply a fact of life that whenever public funds are involved, the time, effort and expense of undertaking projects Increases significantly because of the need to observe all of the appropriate safeguards of public funds. The other disincentive factor, of course, is that the polluter will be required to pay immediately for the remediation performed by the government as well as any fines or penalties ------- which may be applicable. If the polluter docs not cooperate, he will not be offered any financial incentives. 2) On the other hand, if the polluter undertakes, on its own, in good faith, the appropriate remediation efforts and effectively remediates the offending site to the satisfaction of the appropriate government agency, then the government should extend certain financial assistance to the remediating polluter to facilitate such efforts. In addition, remediating a site to the satisfaction of the appropriate government agency should also limit the polluter's legal liability for such site. This constitutes the incentive, or carrot, approach. 3) One form of financial assistance which could be extended is the sponsorship or support of a loan to the polluter from Superfund-A. In this regard, Supcrfund-A should be encouraged to offer the longest possible amortization period for such loans. If possible, terms as long as fifty to one hundred years should be offered. There arc two reasons why such long amortization, periods are important. The first is that it will simply reduce the rcmcdiator's financial burden by lowering his annual payments. The second is that it will dramatically enhance the effect of the second form of financial assistance described below. Moreover, it should be noted that there arc recent precedents for fifty to one hundred year terms in the international capital markets which will undoubtedly be used to fund Supcrfund-A's contemplated borrowings. In addition, Superfund-A should be encouraged to offer the lowest possible interest rate, short of public subsidy, on such loans as well. Under an appropriate structure Superfund-A could be rated "AAA" by national credit rating agencies. If possible, such rates should be passed along to polluters that remediate in good faith. This will be a major incentive since few companies will be able to float long-term debt at AAA rates only on the strength of their own credit. 4) A second form of financial assistance would involve the creation of tax increment districts in the environs of the site to be remediated. A tax increment district is a financial instrumentality in use in many areas ------- throughout the United States.- It involves freezing the amount of real property taxes paid to traditional governmental recipients of such taxes for property within the district, based on the levels of taxation prior to the creation of the district. Thus, the traditional governmental recipients of such taxes suffer no diminution of revenues. On the other hand, as property values within the district increase, the taxes paid with respect to the incremental value only are used for other purposes. In this case, it is proposed that the good-faith rcmcdiator be rewarded with part of the benefit of his remediation. In specific, it is proposed that the taxes collected based on the incremental value of real property in and around remediated hazardous waste sites inure to the credit of the polluters that undertook in good faith to remediate such sites. It is proposed that the incremental tax receipts be paid to Superfund-A to buy down the outstanding principal balance of the loan to the remediating polluter. When the remediator's loan is fully amortized, the incremental tax revenues can revert to the appropriate government jurisdictions. Under such.circumstances, the extraordinarily long amortization period proposed for the Superfund-A loan to the remediating polluter assumes great significance, since the longer the loan period, the more beneficial will be the mitigating effects of the tax increment revenues on the cost burden of the remediating polluter. Assuming that a tax increment district would encompass not only the site itself but also a substantial amount of adjoining property (which actually enjoyed significant economic benefits from the successful remediation), over, thirty, fifty or even one hundred years, the incremental tax revenues from such properties should dramatically reduce the rcmcdiator's financial burden. Even small increments in tax revenues will, over a fifty to one hundred year period, drastically reduce the rcmcdiator's loan. CATEGORY B SITES ------- For Category B sites, involving polluters who cannot be causally linked to specific sites, the Committee's recommends a program containing the following four elements: 1) A General Remediation Fund should .be created under the auspices of Superfund-A. Tlw Fund should be the primary financial resource for the remediation of Category B sites. Polluters which cannot properly account for the disposal of their hazardous wastes should be compelled to pay into the Fund based on the estimated amount of hazardous waste they have produced over time. Payment into the Fund constitutes the stick, or disincentive. 2) Polluters which are required to pay into the Fund should be offered incentives to more actively participate in the hazardous waste site remediation process. This is especially true of polluters which are required to make substantial payments into the Fund. In these cases, a polluter should be offered the opportunity to take the responsibility for remediating a particular site, regardless of the fact that such polluter cannot be causally linked to such site. This is where the carrots, or incentives, come in. There are four proposed incentives: A) The first incentive would be that, once the polluter and the appropriate government agency have agreed on the scope of work to be done at a particular site as well as the estimated costs associated with the agreed upon scope of work at such site, those costs would be divided into two components. The first component would be for the account of the polluter, which is the amount the polluter was required to pay to the Fund. The second component would be for the account of the Fund. This would be the balance of monies needed pursuant to the agreed remediation cost estimate. The Fund's . component of the cost would be expressed in absolute dollars not in a percentage. Thus the Fund would be required to pay X dollars regardless of actual cost. Thus, if, because of private sector efficiencies, the polluter were able to accomplish the site remediation to the satisfaction of the appropriate government agency at a cost below the estimate, the polluter would be able to reduce its own contribution on a dollar for dollar basis. ------- B) The second incentive would be to offer the polluter who takes responsibility for the remediation of a Category B site the opportunity to finance his component of the remediation cost through the same long- term loan facility described above for Category A sites. C) The third incentive would be to offer the actual ownership of the Category B site, itself, to the polluter who takes responsibility for the remediation of such site. This incentive should be regarded as an option. Its value would depend on the location of the contaminated site and the estimated value of the site after remediation. D) A fourth incentive, which should also be regarded as an option, is that in circumstances where a polluter is offered the ownership of a Category B site which he elects to remediate, he could also be offered a generous, long-term real property tax abatement. This would enhance the economic value of the remediated land. 3) Regardless of whether a private sector polluter or an appropriate government agency or a political subdivision thereof undertakes the responsibility for remediation of a Category B site, a tax increment district, as described above for Category A sites, should be created encompassing properties around such site, hi this case, however, the incremental property tax payments from such Category B tax increment districts should be made into the Fund to increase the amount of money in the Fund. In this regard, it should be noted that once an annual stream of incremental property tax payments is regularly being made into the Fund, this revenue stream can be capitalized by Supcrfund-A through the issuance of debt sccuritizcd by such revenue streams. Thus, even small annual incremental property tax payments from Category B tax increment districts can have a significant, near-term effect on the amount of monies available for Category B site remediation. 4) In conjunction with Category B site remediation efforts, consideration should be given to the prioritization of sites for remediation. Sites which pose acute threats to public health should always have highest priority. But in circumstances where sites do npt pose an acute threat to public health, consideration should be given to ranking the sites on the basis 8 ------- of their post-remediation economic value. There would be two benefits to this approach. First, this would naturally increase the value of the incentives described above for private sector polluters, to undertake the remediation of Category B sites. Second, this would also increase the revenue potential of the proposed tax increment districts which has the further effect of increasing the amount of monies in the Fund available for Category B site remediation. In summary, the Committee believes that hazardous waste enforcement efforts can be strengthened and augmented by the development of a financing program which would: create strong incentives for polluters to undertake the remediation of the hazardous waste sites, as well as a strong disincentive for not undertaking such remediation. Such a financing program would include: * Loans from- Supcrfund-A to identified polluters, who elect to remediate sites to which they have been causally linked, at the lowest, unsubsidizcd interest rates for terms of up to fifty or even one hundred years. * The creation of a General Remediation Fund into which polluters would pay who could not be causally linked to individual sites; and .the use of such Fund as the primary financial resource for the remediation of sites which cannot be causally linked to specific polluters. » * The creation of tax increment districts encompassing the property benefiting from the remediation, and the use of the incremental tax proceeds to buy down the principal on Supcrfund-A loans to remediating polluters or to support the efforts of the General Remediation Fund. * The creation of a scries of financial incentives for private sector polluters to undertake the remediation of hazardous waste sites to which they either could, or could not, be causally linked. The Committee believes that such a program, incorporating the above elements, will greatly facilitate the remediation of hazardous waste disposal ------- sites, especially when viewed against alternatives which involve government remediation at greater expense and at far more onerous financial terms to offending polluters. 10 ------- |