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

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                                 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:

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                         *******
      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.

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      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.

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      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

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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

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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

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       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.

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            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

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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

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sites,  especially when viewed against alternatives which involve government
remediation at greater expense and at far more onerous financial terms to
offending polluters.
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