Report 2013-122 Summary - August 2014

California Department of Toxic Substances Control: Its Lack of Diligence in Cost Recovery Has Contributed to Millions in Unbilled and Uncollected Costs

HIGHLIGHTS

Our audit of the California Department of Toxic Substances Control (department) highlighted the following:

RESULTS IN BRIEF

The California Legislature required the California Department of Toxic Substances Control (department), within the California Environmental Protection Agency, to have general administrative responsibility for overseeing the State's responses to spills or releases of hazardous substances, and for hazardous waste disposal sites that pose a threat to public health or the environment. The department generally conducts this work under the authority of the Carpenter-Presley-Tanner Hazardous Substance Account Act and the Hazardous Waste Control Act. State law provides the department with the authority, procedures, and standards to investigate, remove, and remediate contamination at sites; to issue and enforce a removal or remedial action order to any responsible party; and to impose administrative or civil penalties for noncompliance with an order. Federal and state law also authorizes the department to recover costs and expenses it incurs in carrying out these activities.

Long-standing shortcomings with the department's recovery of costs have resulted in millions of dollars in unbilled and billed but uncollected cleanup costs (outstanding costs) dating back to 1987. Specifically, the department has acknowledged problems with inadequate procedures, incomplete documentation, and misclassification of certain sites in its database. These issues are so pervasive that the department has not yet determined the exact amount it may be able to recover. As of March 2014 the department's spreadsheet for tracking projects with outstanding costs shows that it has 1,661 projects totaling almost $194 million in outstanding costs, of which nearly $142 million was unbilled and almost $52 million was billed but uncollected.1 These outstanding costs were incurred between July 1987 and December 2013.

The department has created a work plan to conduct a comprehensive evaluation of its outstanding costs. Specifically, the department grouped its outstanding costs into various categories for evaluation to determine the extent to which it could collect those costs. As a result of these efforts, the department has made progress in resolving its outstanding costs. The accuracy of the information related to projects with outstanding costs will continue to improve as the department evaluates the projects and adjusts outstanding costs in its Cost Recovery Billing System (billing system) or initiates cost recovery efforts in accordance with its work plan procedures. However, according to a senior staff counsel, the department is currently evaluating whether to revise its work plan to extend the target completion dates for some of its evaluative tasks until June 2016, to correspond with the expiration of the two-year terms of the 14 new cost recovery positions approved in the fiscal year 2014-15 budget.

The department may not be able to recover all of its outstanding costs due to several factors, such as when the federal and state statutes of limitations (statute of limitations) for cost recovery have expired on projects. The department's preliminary determinations indicated that the statute of limitations has expired for 76 projects with a total of $13.4 million in outstanding costs, which the department may not recover. The outstanding costs also include $73 million for projects involving litigation and bankruptcy. For these projects, the department will not know how much, if any, it could recover of the $73 million in outstanding costs until the legal process concludes for each of the project sites.

In November 2013 the department established updated cost recovery procedures, and it conducted trainings in February and March 2014 with department staff in accordance with its work plan goals. The updated procedures we reviewed contain additional controls that, if followed, could prevent another buildup of outstanding costs. However, we found several areas in which the department could better maximize its cost recovery efforts. Specifically, the department still lacks processes for tracking and monitoring the statute of limitations on contaminated sites and for tracking the progress and resolution of its settlement agreements to ensure that department staff can verify they have updated information. Additionally, it did not always properly implement its new procedures related to responsible party searches. Although the number of instances we tested was limited because few projects had been processed using the new procedures as of May 2014, our review found that the department complied with three other updated procedures.

Further, the department uses various methods to facilitate its recovery of cleanup costs associated with contaminated sites, such as entering into payment plans with the responsible parties or working with the California Office of the Attorney General to pursue litigation. However, the department has not consistently used some of these methods to ensure that it maximizes the recovery of costs from responsible parties. Specifically, the department has not always consistently issued collection letters to responsible parties that are delinquent in their payments or recorded liens on the properties of responsible parties. Additionally, increasing the interest rate charged on billed but delinquent unpaid amounts may improve the timeliness of collections from responsible parties. State law requires the department to charge interest for invoices not paid within 60 days at a rate equal to the rate of return earned on investments in the State's Surplus Money Investment Fund (SMIF). However, the SMIF interest rate is substantially lower than the interest rate charged for late payments by other state entities, such as the California State Board of Equalization (BOE). For example, for the quarter ending June 30, 2013, the SMIF interest rate was 0.246 percent, while the BOE interest rate was 6 percent for the same period. As long as the SMIF interest rate remains low, there is less incentive for responsible parties to make payments on time.

Although the financial planning and business manager stated that the department is planning to rely on the Financial Information System for California (FI$Cal) to replace its current billing system, there are uncertainties about whether the department will have accurate data to load into the new system by the July 2015 implementation date. The department is still in the process of evaluating projects with outstanding costs in its billing system, and according to a senior staff counsel, the department is currently evaluating whether to revise its work plan to extend target completion dates for some of its evaluative tasks until June 2016. Until the department determines when it will finish evaluating these projects, it cannot ensure that it will be able to load accurate information into FI$Cal.

RECOMMENDATIONS

To ensure that it maximizes opportunities to recover its costs, by January 2015, the department should develop a reporting function in its project management database to track and monitor the statute of limitations expiration dates for its projects.

To improve the accuracy of the outstanding costs in its billing system, by January 2015, the department should establish a process to track its settlement agreements to ensure that department staff can verify they have updated information.

To ensure that it maximizes the recovery of its costs from responsible parties, by October 2014, the department should do the following:

To improve the department's efforts to promptly recover its costs, the Legislature should revise state law to allow the department to use a higher interest rate assessed on late payments. For example, the department could be allowed to use an interest rate similar to that used by the BOE.

To ensure that it loads only accurate billing data into FI$Cal, the department should continue evaluating projects with outstanding costs in its billing system to meet the July 2015 implementation date.

AGENCY COMMENTS

The department concurred with the audit findings and plans to implement the recommendations.

1 The department's tracking spreadsheet contained 80 duplicate project entries due to instances where it included a separate record for projects that had both unbilled and billed but uncollected costs. Some of these duplicate entries crossed over into different project categories. Because we were unable to determine which duplicate entries to remove in certain instances, we elected to leave them in both project categories.