NACWA Regulatory Alert (RA 06-01)

Action Please By:
April 14, 2006

The Government Accounting Standards Board (GASB) is seeking comments on a new, proposed standard – Accounting and Financial Reporting for Pollution Remediation Obligations (Draft Standard). The Draft Standard (http://www.gasb.org/exp/ed_pollution_remediation_obligations.pdf) is intended to improve how state and local governments account for any liabilities or expenses associated with the cleanup of pollution. NACWA is still reviewing the Draft Standard, but it may have implications for your agency’s financial reporting/accounting practices and NACWA is encouraging its members to review the draft. Comments are due to GASB by May 1, 2006, and NACWA is asking that any members with comments on the Draft Standard contact Chris Hornback, NACWA’s Regulatory Affairs Director, at 202/833-9106 or chornback@nacwa.org by April 14, 2006.

GASB is an independent, private-sector, not-for-profit organization that establishes and improves standards of financial accounting and reporting. GASB pronouncements generally apply to the financial reports of all state and local government entities, including general purpose governments. Additional information on GASB and which entities are required to follow its standards is available on its website (http://www.gasb.org/facts/index.html).

Accounting and Financial Reporting for Pollution Remediation Obligations
The new GASB Draft Standard, also referred to as an Exposure Draft, outlines when and how ‘pollution remediation obligations,’ in other words any liabilities (e.g., cost outlays) associated with addressing the current or potential effects of existing pollution by participating in remediation activities, should be reported in a government’s financial statements. Specifically, the Draft Standard provides that when a local or state government knows or reasonably believes that a site is polluted, it should evaluate whether its obligation to participate in the remediation of that pollution is considered a liability. Furthermore, when a “reasonable estimate can be made of the range of potential outlays to settle the liability,” the ‘obligation’ should be recognized as a liability and reported accordingly.

While most of the language in the Draft Standard refers to remedial activity associated with Superfund-related cleanups, its applicability is much broader. Appendix C of the Draft Standard includes a series of examples where the reporting standards might apply, including remediation associated with leaking underground storage tanks, water pollution from abandoned waste dumps, and asbestos removal activities.

Potential Applicability to Clean Water Act Activities
The Draft Standard appears to apply to the obligations of a local government to clean up a ‘polluted’ water body, for example under the total maximum daily load (TMDL) program. In fact, the Draft Standard references the Clean Water Act in its definitions section. However, the Draft Standard also notes that pollution remediation obligations do not include pollution prevention or control obligations with respect to current operations, such as obligations to install emissions scrubbers or treat effluent. The critical issue of applicability appears to hinge on whether the obligation is associated with pollution that is ‘existing’ or associated with a ‘current’ operation.

Given the examples provided in Appendix C, NACWA does not believe that the Draft Standard was intended to cover obligations a community has assumed associated with meeting a TMDL, for example, even though the ‘pollution’ causing the impairment may be ‘existing’. In this example, NACWA believes the cost outlays associated with improving the treatment works to meet a TMDL and ‘remediate’ the problem, are associated with current operations and therefore not considered obligations for the purposes of this standard.

NACWA Preparing Comments; Seeks Member Input
NACWA will be developing comments to GASB to clarify the applicability of the Draft Standard to the TMDL scenario and other possible Clean Water Act activities that involve current operations. In addition, there may be other issues associated with the standard on which NACWA members have comments. NACWA is asking that any members with comments on the Draft Standard contact Chris Hornback, NACWA’s Regulatory Affairs Director, at 202/833-9106 or chornback@nacwa.org by April 14, 2006.