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SUMMARY

The Office of the Auditor General has conducted a performance audit of the Department of Environmental Quality, Waste Programs Division pursuant to a November 20, 2002, resolution of the Joint Legislative Audit Committee. This audit was conducted as part of the Sunset review process prescribed in A.R.S. § 41-2951 et seq and is the second in a series of four reports on the Department of Environmental Quality. The first report focused on the Water Quality Division, and the subsequent reports will focus on the Air Quality Division and an analysis of the 12 statutory Sunset factors.

The Department's Waste Programs Division regulates underground storage tanks (USTs), landfills, and other facilities that store solid waste and hazardous waste, such as dry cleaning solvents.¹ The Division also operates or assists with two cleanup funds. One, the State Assurance Fund, assists underground storage tank owners and operators with cleanup costs if their tanks leak. The second, the Water Quality Assurance Revolving Fund (WQARF), is for cleaning up sites that have been contaminated by hazardous substances.

Changes made to the State Assurance Fund,and Department should take additional actions
(see pages 11 through 19)

The Legislature recently made changes to the State Assurance Fund (Fund), and the Department should take additional actions to increase compliance with financial assurance requirements and to reduce costs to the Fund. The Fund, supported by a $.01 per gallon excise tax on regulated USTs, based on the quantity of regulated substances placed in a tank in any calendar year, assists qualifying UST owners and operators with up to $1 million per leak to clean up leaking underground storage tank sites. The Legislature created the Fund in 1990 to help UST owners meet federal and state requirements for financial responsibility. These regulations require that UST owners acquire a minimum level of financial assurance to cover costs associated with the cleanup of leaking USTs. Although this assurance could normally be provided through private insurance, in the late 1980s private insurance became less available as insurers declined to continue writing policies. The Fund was intended to help fill the gap created by the declining insurance availability. However, insurance is currently available and affordable, and most UST owners and operators who are in compliance with financial assurance requirements have private UST insurance.

In May 2004, legislation making several important changes to the Fund was passed. First, the legislation changed the requirement that UST owners and operators first access their own insurance before applying to the Fund. Additionally, the legislation set June 30, 2006, as the last day that UST releases can be reported to the Department to maintain eligibility for cleanup assistance from the Fund. Owners and operators of leaking USTs who have not reported releases by that date will need to access their alternative financial assurance mechanism, such as private UST insurance, to pay for cleanup costs.

The legislation also created a Regulated Substance Fund to succeed the State Assurance Fund in July 2011. The Regulated Substance Fund will provide cleanup assistance to sites for which the UST owner cannot be located within 90 days. The legislation directs the Department's director to transfer money from the State Assurance Fund to the Regulated Substance Fund once all State Assurance Fund claims are paid. However, if the State Assurance Fund still has unpaid claims in July 2011, then the Regulated Substance Fund will not receive any funding until the claims are paid. Further, the $.01 per gallon excise tax will not begin funding the Regulated Substance Fund as scheduled until all the State Assurance Fund's claims are paid.

The Department should build on the legislative changes to the Fund by taking steps to improve UST owners' and operators' compliance with financial assurance requirements. Compliance with these requirements will be even more important as eligibility for the State Assurance Fund ends, when owners and operators have only their own financial assurance to provide for cleanup of leaking USTs. As of January 2004, only 62 percent of UST facilities have met these state and federal requirements. The Department should continue its work to improve the rate of compliance with financial assurance requirements, including using formal enforcement actions if necessary.

Additionally, the Department should take steps to reduce costs to the Fund. First, the Department should reassess the Fund's cost ceilings to see if they are too high. Private consultants who are hired by the owners, operators, or Fund volunteers to clean up a leaking UST site can bill the Fund for the cleanup work that is performed.² However, there are limits, called cost ceilings, on the amount that consultants can bill the Fund for various cleanup activities. Key UST stakeholders convened by the director believe that cleanup costs are inflated to the point that the cost ceilings are no longer the upper limit, but have become the going price of the cleanup work. Further, according to some fund management staff, the cost ceilings are higher than they should be because they were based on a cost survey that was created using a flawed method. If the Department uses a cost survey to create its next set of cost ceilings in June 2005, department management should ensure that methodology used to perform the cost survey is appropriate. Further, fund management should explore the possibility of using competitive bidding for cleanup work as a method for controlling costs.

Division should improve its hazardous waste enforcement efforts
(see pages 21 through 28)

The Department should improve the timeliness of issuing, escalating, and resolving hazardous waste enforcement actions. The Division is responsible for ensuring that all hazardous waste in Arizona is stored, transported, and disposed of properly. It is important for hazardous waste to be managed properly because it can represent a significant public health threat. An enforcement action, whether informal or formal, is taken when violations of hazardous waste laws and regulations are found at a facility. However, the Division sometimes takes several months to issue an enforcement action when it finds a violation. For example, while the Division's policy requires it to send an enforcement action to a facility's responsible party within 45 days of the inspection, the Division has taken longer than 90 days to issue some actions. Although the Division immediately notifies the facility of serious violations in writing at the time of the inspection, not as much detail and information is included as on the official enforcement action. Further, the responsible party may be unaware of the details for compliance regarding less serious violations and therefore remain out of compliance longer. In addition, the Division does not always escalate enforcement actions to the next level when responsible parties do not correct their facilities' violations and return to compliance.

To improve its enforcement efforts, the Division should take several steps. First, the Division should explore ways to streamline its review and approval process for enforcement actions. The Division should also modify its computer system so that it will produce reports that management and staff can use to track the status of enforcement actions that are in the review process. Finally, the Division should escalate enforcement actions to the next level as appropriate.

Other pertinent information
(see pages 29 through 36)

During the audit, auditors gathered information about the State's Water Quality Assurance Revolving Fund (WQARF) program, also known as the State Superfund program. The WQARF program is the state program responsible for identifying, assessing, and cleaning up soil and groundwater contaminated with hazardous substances. In many respects, WQARF is similar to the federal Superfund program, and both programs are currently responsible for cleaning up sites in Arizona. However, reforms in 1997 substantially changed several key aspects of WQARF. These reforms included dedicating more revenues to the program and changing the liability standard to assign financial responsibility based on each party's proportion of the contamination.

As of March 31, 2004, the 33 sites on the WQARF registry were in various stages of cleanup. At all 33 sites, the Department has evaluated the current risk to the public and the environment. At 10 sites, cleanup work has not yet begun. Sixteen sites are in the process of undergoing or have just completed the remedial investigation, which is the first step. One site is in the feasibility study stage, which identifies several options for cleanup. One site has just begun the process to identify the final cleanup plan, two sites have proposed final cleanup plans in place, and for three sites work on the final remedy is ongoing. In order to assign financial liability, the Department has started searches for parties potentially responsible for contamination at all 33 sites.

According to the Department, it has recovered $12.4 million for cleanup from responsible parties, and responsible parties have also spent another $120 million for cleanup on their own. Lastly, auditors determined that for fiscal year 2004, the Departments' categorization of the WQARF program's administrative costs and the methodology used to calculate these costs appear appropriate.

¹ Effective August 2, 2004, UST regulation is located in the newly created Tank Programs Division.

² A volunteer is someone who has acquired ownership or control of property where a UST is located, but is not the owner of the UST. A volunteer may provide for cleanup of a leaking UST and may receive Fund coverage, but is not legally liable for cleanup.