Small Business
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RESEARCH SUMMARY
United States Small Business Administration
Office of Advocacy
RS 150
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Environmental Financial Responsibility
by Robert E. Burt
1994. 78p. Meridian Research, Inc. 1010 Wayne Ave., Ste.
1220, Silver Spring, MD 20910 under contract no. SBA-6646-OA-91
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Purpose
The objectives of financial responsibility programs, as envisioned
by Congress, are to ensure that funds are available when needed
and that firms internalize the costs of environmental protection.
In mandating these requirements, Congress made little or no provision
to ensure that suitable mechanisms for demonstrating financial
assurances are available to small businesses; that the assured
funds will, in fact, be readily available if needed; or that the
tax treatment of these mechanisms is reasonable and equitable.
This study examined environmental financial responsibility programs
to determine what problems they pose for small businesses and
whether they can be redesigned to have lesser impacts on small
businesses while continuing to achieve their intended legislative
goals.
Scope and Methodology
This research addressed a variety of financial responsibility
mechanisms, the extent to which they can meet the objectives of
the legislation, and the cost and availability of these mechanisms
to small business. Both public and private sector funding mechanisms
were examined.
Private sector mechanisms included trust funds and related financial
instruments, surety bonds, letters of credit, insurance for environmental
damages and corrective action, and insurance against business
failure.
Public sector mechanisms included publicly provided insurance
for environmental damages and corrective action, public bond pools,
and other arrangements based on fees or taxes on either affected
firms or the general public.
Highlights
- Financial responsibility programs have helped significantly
by avoiding delays in locating sources of funding, failure of
firms to take adequate care, and financial distortions by firms
attempting to evade or mitigate responsibility. Different financial
responsibility requirements cover different events, such as closing
a facility and post-closure care, corrective actions, land reclamation
and environmental restoration, and third-party liability involving
property damage and bodily injury. Federal financial responsibility
programs have been developed for third-party liability, future
corrective actions and activities designed to prevent future corrective
actions.
- Generally, publicly administered financial mechanisms - such
as the government-provided insurance, assigned risk pools and
public funds set up by many states - provide adequate funds, internalize
costs and generally meet the needs of small businesses. Private
mechanisms however, are unable to serve the small business market
consistently, tending to force small firms to over-internalize
costs and driving out many smaller firms.
- In 1978, the Environmental Protection Agency (EPA) issued
the first ruling to establish financial responsibility requirements
in response to the Resource Conservation and Recovery Act (RCRA).
RCRA required owners/operators of hazardous waste management facilities
to demonstrate that funds would be available, when needed, to
cover contingencies resulting from the operation of these facilities.
The EPA assumed that most operators could obtain insurance, letters
of credit or surety bonds from the private sector. However, because
most small operators were unable to obtain the necessary financial
support to demonstrate financial responsibility, or because the
cost was more prohibitive than anticipated, thousands of small
businesses were closed during the 1980s.
- As of the date of this report, the EPA had left a number of
very substantial gaps in its financial responsibility programs.
For example, the EPA has no financial responsibility requirements
and no financial relief mechanisms for covering corrective actions
at hazardous waste treatment, storage and disposal facilities
(TSDF); third-party liability after facility closure; or post-closure
care beyond 30 years. Because the remaining small businesses are
forced to rely solely on private financial responsibility mechanisms,
many will be forced to close. As a result of the lack of private
funding, the EPA has begun reviewing each facility on a case-by-case
basis before implementing financial responsibility requirements.
- The critical importance of matching financial responsibility
mechanisms to particular problems must be addressed. Because private
sector alternatives do not address the small business markets
consistently, public funding programs must also be provided if
the very basic goals of financial responsibility programs are
to be met. Public funding programs must also consider reducing
the total values that a firm must meet by allowing build-up periods
to meet future financial responsibility programs; allowing firms
to use reasonable interest rates in calculating funds needed to
address future events; limiting the number of years for which
financial responsibility is required for post/closure care or
corrective action periods; and requiring financial responsibility
only in the amount needed to actually address the problems at
the site.
- Tax and bankruptcy laws have a major effect on the cost and
usefulness of various private financial alternatives. Tax laws
treat funds set aside for financial responsibility as if they
were still under the control of the firm, taxing these funds as
part of the firm's income or property. Taxes on such funds would
be considerably lower if such funds were not treated as assets.
The cost of setting such funds aside also would be lower. If bankruptcy
laws were changed to give high priority to financial responsibility
obligations, simple managed accounts - without trustees or guarantors
- could be used to meet a firm's financial obligations. Such an
approach would permit small firms to meet the financial test of
self-insurance.
Ordering Information
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)
Order Number: PB95-100301
Cost: A05; A01 Microf.
*Last Modified 6-11-01