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Petrofund Reimbursement for Leaking Storage Tanks

Summary

January 1993


Recent financial problems have caused policy makers to reexamine many state programs and ask whether they can be managed more efficiently and effectively. One such program is the Petroleum Tank Compensation Fund ("Petrofund"), which the Legislature enacted in 1987 to offset most of the cost to clean up soil and water contamination that usually results from leaking petroleum storage tanks.

By encouraging tank owners to clean up contaminated soil and ground water, the Petrofund has helped to improve the environment for all citizens while reducing health risks and physical dangers caused by petroleum leaks and spills. However, the reimbursement program has cost more than legislators expected, and it has operated with insufficient funds since October 1991.

In light of the Petrofund deficit and the amount of money which has already been paid to tank owners (more than $72 million through June 1992), the Legislative Audit Commission directed our office to study the reimbursement program and review current cost control mechanisms.

We addressed the following questions:

  • Are Minnesota's cleanup standards and reimbursement levels appropriate? What does the federal government require, and how do other states manage their programs?
  • What technical services are needed to clean up a contaminated petroleum storage tank site, and what is the cost? What accounts for cost variations?
  • How well does the Department of Commerce run the reimbursement program? How does the Petroleum Tank Release Compensation Board make specific reimbursement decisions? Would procedural and organizational changes promote efficiency?
  • Why is the Petrofund in deficit and what should be done about it?
  • Are additional measures needed to reduce expenses and protect the Petrofund from possible fraud and abuse?

To answer these questions, we analyzed data from the Department of Commerce and Pollution Control Agency and reviewed applicable laws and policies. We attended board meetings, spoke with industry representatives, and interviewed program administrators in Minnesota, the U.S. Environmental Protection Agency, and neighboring states. Also, we visited a tank excavation, testing lab, and several cleanup sites.

In general, we concluded that the Petrofund reimbursement program should not continue in its current form. Over the past five years, the Legislature increased the program's scope and level of reimbursement but did not authorize an increase in revenues. As a result, the program has a significant debt that needs immediate legislative attention. For the longer term, we think that the Legislature should consider refocusing the reimbursement program and changing the way in which the fund is administered.

Overview

The federal government requires most owners to upgrade or replace their old, corroding underground storage tanks with new, leak-resistant models by 1998. Federal regulations also require owners of underground storage tanks to obtain insurance, or its equivalent, to pay up to $1 million for cleanups and third party damages. Although it is not required that states relieve tank owners of their financial obligations, Minnesota and 42 other states have chosen to do so by establishing state-financed reimbursement programs such as the Petrofund. The fund provides the necessary financial assurance mainly because private insurance for old tanks became scarce and expensive.

The petroleum tank cleanup program is administered by the Pollution Control Agency (PCA), and the Petrofund reimbursement program is administered by the Department of Commerce. In accordance with state and federal regulations, underground tanks have been registered with PCA since 1987, and aboveground tanks since 1990. As of September 1992, 44,043 underground tanks at 15,388 locations were registered with the agency.

Service stations and bulk petroleum dealers owned 42 percent of the tanks, non-profit organizations such as governments, schools, and churches, owned 20 percent, and the rest were owned by other manufacturing and service industries. In addition, 15,094 aboveground tanks at 3,391 locations were registered, but PCA estimates that another 3,000 to 5,000 remain to be included.

Many of the tanks are made of bare steel, which almost inevitably corrodes, causing leaks. Other leaks result from overfilling or bad pipe fittings. As of September 1992, PCA had identified 5,374 petroleum leak sites. Most (4,904) have been reported only in the past five years since the Petrofund reimbursement program began. However, the agency estimates that the total number of leak sites, including those already identified, will grow to 11,500 by 1998.

The Petrofund has paid an average of $39,044 per leak site, but this figure will most likely increase because about half the cleanup projects are incomplete. Cleanups involving ground water contamination take much longer and cost more than those involving only contaminated soil.

Minnesota's Petrofund gets its revenues from a penny-per-gallon fee on petroleum distributors, which is not imposed if the Petrofund balance is above $2 million. The fund is administered by a five-member Petroboard, which reviews tank owners' requests for reimbursement of cleanup expenses, determines eligibility, and authorizes payments. By law, two board members represent the petroleum industry, one the insurance industry, and two the state agencies whose staff participate in payment decisions. The Department of Commerce provides support staff for the Petroboard.

Petrofund Deficit

Partly because the Petrofund is comparatively generous, Minnesota has begun and completed more underground tank cleanups than many other states. The cleanup program has made major administrative improvements recently and earned high praise from federal officials. But in consequence:

  • The demand for reimbursement has outstripped the revenues that are available to the Petrofund, and now it lacks the money to pay tank owners promptly.

Through June 1992, the Petrofund had made or approved payment on nearly 2,000 claims at a cost of $72 million. However, most of these claims were made only in the past two years. In fiscal year 1992 alone, the Petroboard agreed to pay $44 million to tank owners. However, the maximum Petrofund revenues are only about $30 million annually since yearly petroleum consumption has been constant at about three billion gallons for the past decade.

We found that the Petrofund had a $7.8 million deficit in June 1992, so tank owners had to wait several months for revenues to accumulate after the Petroboard approved payment of their claims. By October, minutes show that the Petroboard had approved additional payments and faced a shortfall of about $11 million.

The Pollution Control Agency and Department of Commerce have estimated that the Petrofund will approve payments of $300 to $360 million more to tank owners by 1998, when most of the tanks must be upgraded or replaced. Considering the current deficit and backlog of unprocessed claims (together, about $30 million), this suggests that the Petrofund may be short $150 to $210 million in six years. However, the Petrofund's actual future deficit could be much larger than the agency and department have estimated because unregistered leaking tanks are regularly discovered, and 52 percent of the cleanup projects are incomplete.

When complete, we estimate that the projected 11,500 cleanup projects could ultimately cost an average of $70,000 each and a total of more than $800 million. If so, at the current maximum rate of $30 million in annual revenues, it would be necessary to collect the one-cent-per-gallon fee continuously for another 24 years.

Reasons for the Deficit

Six main factors help to explain the Petrofund's financial problems. First:

  • Minnesota's Petrofund reimbursement program covers more tank owners, more generously, than most other states.
The Minnesota program covers 90 percent of cleanup costs up to $1 million, charges no deductible, and almost always pays whatever prices are submitted, without auditing claims for reimbursement. Most other states have funds similar to the Petrofund but exclude aboveground tanks and require owners to pay at least the first $10,000 of cleanup costs. Further, some states limit the rates they will pay for specific services, and they regularly send inspectors to see that work was actually completed.

Second:

  • The Legislature has significantly expanded the Petrofund reimbursement program without increasing revenues.

When the Petrofund program was enacted in 1987, it required a $10,000 deductible from tank owners and paid only 75 percent of the remaining costs up to $100,000. Since then, legislators eliminated the deductible, raised the maximum reimbursement to 90 percent, and changed the ceiling to $1 million per leak site and $2 million per tank facility. Nevertheless, the fee on wholesale petroleum has remained at one cent per gallon.

Third:

  • Minnesota has made better progress than most other states in identifying and cleaning up leaks.

Only seven states have completed more cleanups than Minnesota, and most of those are large industrial states. In general, prompt corrective actions are desirable because they will reduce or contain the damage from petroleum contamination, and cleanup costs are likely to be reduced accordingly. However, the speed and vigor of Minnesota's cleanup program has overwhelmed the Petrofund, Petroboard, and staff at the Department of Commerce.

Fourth:

  • Cleanup efforts have proven to be technically difficult and unexpectedly costly, especially when petroleum has contaminated ground water.

When only the soil is contaminated by petroleum (about half of the Petrofund's leak sites), cleanups can be completed in 4 to 18 months at a cost from $17,692 to $42,508. However, when ground water is contaminated, successful cleanup projects may take six years and cost $217,692 to $542,508. Some projects may continue for 20 to 50 years or more, and others could go on indefinitely unless cleanup technology improves.

Fifth:

  • The Department of Commerce and Petroboard lack sufficient resources to run the reimbursement program cautiously and efficiently.

The recent increase in the number of reimbursement applications has prevented Petrofund staff from reviewing claims for adequacy and cost control purposes. The claims analysts do their work manually, and they have fallen six months behind in processing incoming applications. Furthermore, Minnesota has fewer staff than most nearby states.

Sixth:

  • Claims against the Petrofund are paid with little effort to ensure that cleanup costs are reasonable and legitimate.

Petrofund staff conduct only a basic review of claims, mainly to determine eligibility, not to determine whether charges are appropriate. None of the claims have ever been audited by the Department of Commerce, but the department estimates that the Petrofund could save up to $5 million annually if staff were available to detect and investigate unreasonable, false, and fraudulent claims.

We reviewed two other potential reasons for the Petrofund's deficit but found little evidence to support one and withheld judgment on the other. First, some policy makers suspected that the Pollution Control Agency set Minnesota's cleanup standards so high that they bankrupted the Petrofund. Our results showed that this is not the case.

  • Among the 50 states, Minnesota's soil and water cleanup standards are neither the most stringent nor the most lenient.

Last June, the Pollution Control Agency increased the level of petroleum contamination it will allow in soil. Also, we found that the agency's water standards allow a higher level of cancer risk than several other states.

Second, policy makers suspected that the deficit could have been caused by rampant fraud and abusive practices by the cleanup industry. This is unlikely, although investigators are actively pursuing a few suspicious cases.

Our analysis of reimbursement data showed:

  • Wide variations in cost can logically be explained by the extent and complexity of cleanup activities.

The larger, more difficult cleanup projects were more expensive mainly because tank owners received more services under PCA-approved plans. For example, contractors installed greater numbers of monitoring wells, excavated larger amounts of soil, and used multiple treatment methods, both for water and soil. However, the agency stressed to us that it is difficult to precisely determine which of many possible approaches will be most effective and economical.

Recommendations

Over the past five years, the Petrofund reimbursement program has cost about $12.50 per car, yet this has not been enough to meet expenses. And, unless the program fundamentally changes, drivers are likely to pay an additional $5 per car annually for the foreseeable future and, still, the Petrofund deficit would grow.

We think the Petrofund reimbursement program poses two general questions for policy makers. First, how can the program pay for its current financial obligations? Second, can the state afford to continue the program in its present form?

Existing Debts

In our opinion, the state should pay tank owners' legitimate claims as soon as possible. In fact, if that does not occur, the potential exists for the Environmental Protection Agency to declare the Petrofund insolvent, that is, unacceptable as a financial assurance mechanism. Minnesota tank owners then would be required to quickly find or develop alternative methods such as self-insurance to assure the federal government that they have the financial resources to pay for cleanups and potential damages to third parties. This would be difficult, particularly for small businesses and non-profit organizations.

Between the $23 million backlog of unprocessed claims and $11 million in unpaid, approved claims, we estimate that the Petrofund is now about one year behind its obligations. To pay tank owners more promptly, the Legislature would need to authorize more revenue. Therefore, we recommend that:

  • The Legislature should consider authorizing the Petroboard to raise revenues on a temporary basis by doubling the penny-per-gallon fee on wholesale petroleum.

If the Legislature prefers not to give the Petroboard authority to raise the wholesale petroleum fee, it could consider other sources of revenue such as tank fees, tax-exempt bonds, and the general fund. Alternatively, tank owners will wait longer for payment and may face financial hardships.

Future Considerations

On a longer term basis, the reimbursement program will not be viable unless revenues are enhanced, expenses are reduced, or both. As a first step:

  • The Legislature should consider refocusing the Petrofund program after 1998.

At that time, most tank owners are required to have leak-resistant tanks, and the primary mission for the reimbursement program should be complete. Thereafter, the Petrofund or some other funding mechanism would be needed in limited cases, for example, to pay for unfinished cleanup projects, leak sites where tank owners cannot be identified, and situations where responsible parties are unable or unwilling to pay. However, the fund's role would be much smaller than it is now, and the current one-cent fee would probably be adequate when imposed on an irregular basis, as needed.

After 1998, we think tank owners should obtain insurance from sources other than the state and generally be responsible for cleaning up leaks that would result mainly from improper maintenance and operation of the new or upgraded tanks. The state would not need to continue bearing the responsibility of direct reimbursement, particularly since most leaks pose relatively low risk to public health, welfare, and the environment.

If the Legislature were to establish a definite "sunset" date within the next few years, we think it would encourage the development of a market for private insurance. If insurance remained scarce as the sunset date approached, the state could extend the deadline, offer loans or grants instead of direct reimbursement, or assist tank owners through a joint underwriting association, among other options.

Ways to Limit the Program

In the meantime, the Legislature could take additional steps to reduce program expenses. Although administrative changes could increase efficiency and reduce some costs, we think that the only certain way to significantly reduce expenditures is to limit the program. Thus, we recommend:

  • The Legislature should consider reinstating some of its previous restrictions and adding other limits on Petrofund reimbursements.

In Chapter 4, we present several options which could be used in combination to reduce the Petrofund's total expenses. Among the possibilities are (1) to restore the $10,000 deductible which the Legislature lifted in 1989 and (2) to return the fund's share of cleanup costs to the original 75 percent.

If claimants had paid a $10,000 deductible since the program began, we estimate that the Petrofund would have saved about $16 million or 22 percent of expenditures through June 1992. If the Legislature had reinstated the same deductible for fiscal year 1993, when the Department of Commerce expects that the Petroboard will approve payments of about $37 million, the Petrofund could have saved roughly $8 million. However, a deductible would be a major financial burden for some tank owners. To address special needs, policy makers could consider reimbursing tank owners different amounts depending on their financial resources.

The Legislature raised the fund's share of cleanup costs from 75 percent to 90 percent in 1989. If coverage for fiscal year 1993 had been set at 75 percent, with the $10,000 deductible, we estimate that the Petrofund could have saved another $5 million. Also, tank owners' economic self-interest would have been stimulated, and that might have helped to avoid some costs.

Together, these two measures could have eliminated the Petrofund's current deficit, but they would not be sufficient to pay for the six-month backlog of unprocessed claims. To achieve more savings, we suggest that the Legislature consider limiting Petrofund reimbursement to certain types of tanks, classes of owners, and situations.

For example, the Legislature could require large petroleum marketers to pay a higher percentage of cleanup costs than small businesses, government units, and nonprofit organizations. The Legislature could restrict coverage to underground tanks, as other states often do, eliminate coverage for small residential and farm tanks that are not subject to federal financial assurance requirements, and pay only those tank owners who fully comply and cooperate with rules and regulations. The Legislature also could limit reimbursement to leak sites with the greatest threat to public health and the environment and stop paying for ongoing costs of cleanup projects after a certain period of time, such as five years.

Administrative Changes

The Petroboard has acknowledged that it has been unable to carefully review or keep up with the volume of reimbursement claims it has received over the past two years. Claimants now must wait six months for their applications to reach the board, plus another four to five months after the Petroboard approves payment. Staff currently spend considerable time preparing typewritten, two-page summaries of claims for case-by-case review by the Petroboard.

In general, we found that the Petroboard spends too much time on the details of routine claims payment. By delegating much of this activity, the board could spend more time developing rules and policies. This would further expedite claims processing and is the current practice in most of the states we surveyed.

To reduce payment delays and increase productivity in the future, we recommend that:

  • The Legislature should amend Minn. Stat.<D> <185>115C.09 to require the Petroboard to delegate authority to the executive director and staff to pay routine, uncontested claims.

The Petroboard would continue to hear appeals from dissatisfied claimants and could decide on payment of large claims, for example, those over $75,000. These would amount to about 35 to 50 claims per meeting.

To facilitate the delegation of authority to staff:

  • The Petroboard should promulgate a standard schedule of prices for reimbursement of specific cleanup services.

Formal price guidelines would provide a basis for staff reimbursement decisions and could help to reduce expenses to the Petrofund by strongly encouraging tank owners to select economical contractors. Some other states have already implemented this method of cost control using their own and national data.

Although the Legislature mandated a study of cleanup costs for consideration in 1993, the study was performed by an active cleanup contractor, and some data entry services were donated by a petroleum industry association. Because these parties were not totally disinterested in the results, we think the study's price estimates should be carefully reviewed before they are used to determine future Petrofund payments.

By limiting the Petroboard's direct involvement in payment decisions, the delegation of authority would also reduce the potential for conflicts of interest between claimants and board members, some of whom represent the petroleum industry. To reduce this potential even more, the Legislature could change the board to an advisory group, as in Wisconsin, or entirely reconstitute it.

Further, we recommend that:

  • The Legislature should appropriate sufficient money from the Petrofund to allow the Department of Commerce to audit and process claims efficiently.

In our opinion, the Petrofund needs additional resources and renewed attention. At a minimum, we suggest hiring an auditor, installing an automated claims processing system, and adding staff with technical expertise in claims management, insurance, and statistics.

In addition, the reimbursement program requires more than two claims analysts, who could be state employees or third-party administrators. We suggest that the Department of Commerce study its own and other resources, and then prepare an appropriate request for the Legislature's consideration.

Finally, we recommend that:

  • The Petroboard should develop a clear set of criteria for reimbursement, including the adopted price guidelines, and disseminate the information to all tank owners as soon as they report leaks to the Pollution Control Agency.

The criteria could be added to the standard information packet that the Pollution Control Agency sends to tank owners after they call to report leaks. Currently, the agency outlines the general requirements for cleaning up leaks and gives only a little information on reimbursement. We think the added cost to mail specific reimbursement information would be more than covered by a reduction in the number of faulty reimbursement applications that tank owners later submit.

Summary

Overall, we think the petroleum storage tank cleanup program has been beneficial to the state. However, its success has exceeded the resources available to the Petrofund reimbursement program. Legislators expanded the reimbursement program but did not provide commensurate revenues or resources to adequately support the changes. We think it is now time for policy makers to address the program's financial and administrative problems, and we hope this report will provide useful guidance.

 

 

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