To Clean Up Landfills, the Leader Should Be Municipalities Using Economic Incentives to Settle

Norman W. Bernstein

Editor's Summary: The Environmental Protection Agency's Superfund program is under increasing attack as slow, inflexible, and inclined toward inconsistent administration in various regions around the country. While EPA defends itself vigorously, asserting that these criticisms are exaggerated and that outsiders often do not acknowledge the complexities of hazardous waste cleanup, the fact remains that in its ninth year of implementation the Superfund program has still not lived up to public expectations.

In this Dialogue and the one that follows, two authors from very different backgrounds conclude that EPA is the wrong tool for at least some of the hazardous waste cleanup needed. Institutionally, they conclude, EPA as a national agency is too blunt and unwieldly to make the difficult, localized decisions required. In the first Dialogue, Adam Babich, a former state assistant attorney general who now represents primarily environmental plaintiffs, points out that state and local leadership is already permissible under the Superfund statute, and urges community leaders to turn first to local and state governments for action to clean up hazardous waste.

In the Dialogue that follows, Norman Bernstein, a former associate counsel for a Detroit automaker whose private practice now consists principally of environmental defendants, focuses on the cleanup of municipal landfills and reaches very similar conclusions. He points out that the key to settlement is the wise use of covenants not to sue and similar economic incentives, and that cites and states can use these tools unencumbered by overly cautious EPA policies.

Mr. Bernstein is a partner with Jenner & Block, which has offices in Washington, D.C. and in Chicago. He led the industry effort that resulted in the New York City landfills settlement described in the text.

[19 ELR 10012]

The approximately 2000 contaminated municipal landfills in the United States represent a monumental financial problem. Perhaps $ 80 billion will be needed to clean them up. At the same time, leaving the task to the U.S. Environmental Protection Agency (EPA) is likely to add expense and delay to the cleanup effort.

A far more workable solution is for municipalities themselves to take the lead at these landfills, with assistance from state governments, and to substitute a system of incentives and marketplace pricing for EPA's enforcement. The environment will be cleaned up faster, control over key decisions will remain in the hands of officials who are responsive to local citizens, and, in the end, corporations will find that they can save money and avoid frustration by working with municipal governments.

The recent New York City landfills settlement illustrates the potential for accomplishment when municipalities take the lead. This Dialogue briefly describes that settlement, and then outlines why municipal-led solutions ought to be favored elsewhere and how they can be encouraged.

The New York City Landfills Settlement

The New York City landfills settlement, reached in late 1988, ends litigation against seven of the original 14 defendants in City of New York v. Exxon Corporation.¹ New York City had sued corporate generators and a waste transporter who had disposed of the corporate generators' hazardous wastes at five municipal landfills.

The seven settling defendants agreed to fund the payment of $ 12,555,000 toward remediation costs in a structured settlement over a period of six years, and $ 1,243,492 toward natural resource damages in a trust fund administered by New York State. In exchange, settling defendants received a full release with no reopeners, effective upon their funding the settlement. The release is for both remediation costs and natural resource damages. The nonsettling companies should not be able to sue them for further contributions.

The seven other original defendants and the more than 300 third-party defendants remain potentially liable. A parallel New York State administrative consent order backs up the federal court settlement reached with New York City.

Factors Leading to Settlement

Two key factors made this breakthrough settlement possible. First, cities and states are not bound by EPA's settlement policies, and New York City and State were willing to be creative. They replaced EPA's policies with incentives to settle and marketplace pricing.

Second, municipal landfill claims are unlike many EPA-led Superfund sites, since the municipalities are themselves potentially liable as owners or operators of the contaminated landfills and often as generators of hazardous substances. Thus, municipalities have a common interest with the industrial community in prompt, cost-effective solutions. Free of EPA settlement policies, municipalities, if they take the initiative, can "sell" (not "give") industry the legal protection it needs, and the money that flows in can help fund cleanups that would otherwise be municipal responsibilities. New York City recognized this. The result can be a "win" - "win" scenario, in which sites are cleaned up more quickly, costs per site are reduced, and transaction costs are lowered. By cleaning sites sooner and more efficiently, the public interest is served.

Background on Municipal Landfills

For years many municipal landfills were little more than open dumps. Few controls existed on the waste deposited there, and at many sites proper grading and cover was neglected. Haulers of industrial waste were frequently permitted to dispose of their cargoes without consideration as to whether material was hazardous or not. Millions of gallons of waste oil were deposited in the name of "dust control." In a way we all benefitted: the cost of disposal were cheap, and both municipal taxes and industrial disposal costs were less than they should have been. Now we will have to pay the price.

The financial consequences are staggering. The cost of remediation for the five New York landfills has been estimated by New York State as over $ 400 million. A large landfill in California is comparably priced. Small landfills in New Jersey are, according to EPA and New Jersey Department of Environmental Protection estimates, in the $ 40 million per site range. Even taking the small site figures of $ 40 million, the 2,000 such sites around the country will cost $ 80 billion, or ten times the amount presently budgeted for the entire federal Superfund program.

This does not take into account the transaction costs of achieving the settlements. At large multi-party sites, such costs can often equal 25 to 50 percent of remediation costs. Lawyers paid by the hour and bureaucrats following "policy guidance" designed to protect them from criticism can find endless matters over which to differ.

The Roots of the Bureaucratic Problem

The 1982-83 controversy surrounding implementation of the Superfund program has led EPA into an overly cautious approach to settlement discussion with private parties. In 1984, EPA announced unbending settlement policies.² Releases without reopeners were barred, even though exactly why companies that had paid a fair amount in settlement should remain liable was unclear. By attempting [19 ELR 10013] to avoid criticism, EPA had turned Superfund settlements into "blank check" commitments, eliminating the incentive to settle. With incentives gone, nothing was left but "enforcement."

In October 1986, Congress amended the Superfund statute and codified into law many of the 1984 settlement policies. The Agency's response in 1987 was a series of elaborate policy guidance documents that sought to cover every conceivable step in intricate detail. They included the Guidance on Settlements with De Minimis Waste Contributors (June 1987),³ Guidance Covenants Not to Sue (July 1987),⁴ Guidance on the Use of Alternative Dispute Resolution Techniques (August 1987),⁵ Guidance on the Use of Stipulated Penalties (September 1987), Guidance on Notice Letters, Negotiations, and Information Exchange (October 1987),⁶ and Evaluating Mixed Funding Settlements (October 1987).⁷

The flavor of all of these documents is illustrated by the first, the de minimis settlement policy guidance. Congress had attempted to leave openings for common sense. At many sites a relatively small number of companies, perhaps 20 to 40, account for 80 to 90 percent of the waste that went to a Superfund site. A large number of companies, sometime hundreds, accounts for only a small percentage.

For such cases, Congress authorized EPA to reach settlements with potentially responsible parties promptly where the amount of the hazardous substances contributed to the facility and the toxic effect of the substance are minimal in comparison to other hazardous substances at the facility. The Agency was directed to reach such settlements and grant covenants not to sue with no reopeners "as soon as possible" after it had the information necessary to put together the settlement.⁸ Such settlements would produce cash to clean up sites and simplify negotiations by drastically reducing the number of parties, thus also cutting transaction costs. The risks, if any, of quick settlements could be monetized by obtaining a premium from the settling parties.

EPA would have none of it. In its policy guidance document on de minimis settlements, headquarters warned the regional offices "as a general rule, de minimis settlements should not be concluded prior to completion of a PRP [potentially responsible party] search … or prior to such time as the Agency is confident that adequate information about the extent of each settling party's waste contribution to the site has been discovered."⁹ Moreover, de minimis settlements in which a full release is granted "generally should not be pursued until the Agency is able to estimate, with a reasonable degree of confidence, the total response costs associated with cleaning up the subject site, including oversight and operation and maintenance costs."¹⁰

Since Superfund sites typically involve many unknowns and the Agency is reluctant to conclude, even after years of study and litigation, that it is confident about what it will take to meet Agency standards and what it will cost to complete a cleanup, the guidance represents an effort to protect EPA from criticism for settling. The self protective nature of the guidance was made explicit:

In order to protect the Agency … settlements should, in most cases, also include a reservation of rights which would allow the Government to seek further relief from any settling party if information not known to the Government at the time of settlement is discovered…. In addition to the natural resource damage reservation and the reservation for new information, two further … "reopeners" may be required depending upon the facts of the case and the timing of settlement. These reopeners protect the Agency against (1) The risk of cost overruns during the completion of the remedial action and (2) the risk that further response action will be necessary in addition to the work specified in the ROD [record of decision].¹¹

The phrase "protect the Agency" is a recurring theme — a kind of bureaucratic Freudian slip for policies that are supposed to be designed to protect the public in a cost-effective way.

Municipal Landfills Settlements Can Be Accelerated By a Marketplace Analogue

The New York City landfills settlement shows that there is a way to avoid the effects of these policies and to help solve the landfills problem if cities and states work together and take the initiative to solve the problem. The City of New York's claims triggered settlement proposals from industry. The involvement of New York State helped provide complete protection for the settling companies, and at the same time assured the State that the settlement was sound and that the State's interests were protected. The State benefitted directly from the natural resource trust fund that it would administer, and indirectly since the State would have otherwise reimbursed the City for up to 75 percent of its cleanup costs.

New York City and State recognized that ordinary landfill closure costs would have to be borne by the City and State anyway. The real measure was the extent of the difference between what the ordinary landfill closure costs would have been and the costs that now have to be incurred because of the presence of industrial contamination. This difference came to be called the "Delta." The settlement price to be paid should reflect, in a general way, the size of the Delta and the percentage share of the settling companies.

Beyond those basic ground rules, the question is: What is the market price defendants should pay for a release from further liability? If the city and state demand too much for a given degree of protection such as contribution protection and a release without reopeners, the settling companies won't buy. If the companies hold out for [19 ELR 10014] too low a price, the city and state won't sell. Thus, for the transaction to work, an economic bargain must be struck between the degree of protection afforded and the price paid.

Where EPA settlement policies are imposed or where cities and states are not willing to recognize their own responsibility to pay ordinary landfill closure costs, settlement (if any) will take far longer and involve massive and unnecessary transaction costs. This has been the pattern at several small landfills in New Jersey. There the municipalities and the State have refused to accept the Delta approach but instead have attempted to shift substantially all of the burden of municipal and fill remediation to industry through "enforcement." Such efforts are likely to get bogged down.

While the assertion and prosecution of a claim by municipalities is necessary to get the process started, marketplace pricing based on the Delta approach is a far more efficient way of allocating costs and risks than "enforcement," and such bargains are more quickly struck if they are not constrained by complex policy guidance documents.

What Should Municipalities and Companies Do?

On the simplest level, municipalities and companies need to be proactive, not reactive. Waiting for EPA, however tempting, is not a good idea. EPA will not bring with it bundles of money or even technical expertise to solve problems.

The Superfund program, which is already spread thin on industrial sites, cannot possibly fund more than a handful of the thousands of municipal site remedies. In the end, the overwhelming bulk of the funds will have to come from the municipalities, backed by their states' bonding authority, and from the companies whose waste may have been taken to the sites.

Nor does EPA bring any technical expertise. As the General Accounting Office has reported, EPA's technical staff is made up of too many young, inexperienced engineers. Many of the best EPA people have left for higher-paying jobs in industry, and EPA relies heavily on outside contractors. These same engineers can be retained by municipalities with a little guidance, if necessary, from their state's environmental protection agency.

Thus, waiting for EPA does not mean waiting for a monetary or technical solution to arrive. All that will arrive are bureaucrats and their policy guidance documents. There are also public policy and financial reasons to move promptly. Municipalities have a public responsibility to remedy known environmental problems from municipal landfills to protect public health. Moreover, the longer a remedy is delayed the more expensive it is likely to be. The extent of any groundwater contamination will likely grow worse with each passing year. The cost of each remedy component, such as the cost of a given size clay cap, will go up each year. Inflation, shortage of talent, increased environmental damage, and increased regulatory expectations will more than offset any savings of the time value of the money.

For similar reasons it makes sense for industry to work with municipalities to resolve these problems before EPA becomes involved. Once municipalities and industry are addressing a problem, there is little danger that EPA will intervene, unless someone asks it to. The New York City landfills consent decree that provided a full release for the settling companies did not directly bind EPA since it was not a party to the litigation. But so long as the City and State are proceeding to remedy the situation there will be little for EPA to do. Any additional relief sought by EPA against the settling companies would come before the same judge who found the original settlement to be fair and signed the decree releasing the settling companies.

Moreover, discouraging companies from settling, by suing them after they have settled with state and municipal governments, is hardly in EPA's interest. EPA can easily do without the talent and money quagmire that would be involved in relitigating landfill cost and remedy issues that are already resolved. Thus, industry does not have to wait for EPA in order to obtain protection. Indeed, waiting for EPA will actually assure under EPA policy guidance that industry will not get protection.

The basic steps necessary to resolve the landfills problem for municipalities and industry are as follows:

For Municipalities

1. Don't wait. If you have a problem, retain a competent environmental engineering firm to come up with a cost-effective solution.

2. Meet with the industrial firms whose material went to the site. Offer to pay for the costs of ordinary landfill closure if they will pay the incremental amount above ordinary landfill closure costs (the Delta) attributable to the presence of industrial wastes at the site. Recognize that there will be a problem of allocation among the potentially responsible companies and cooperate by providing any available information as to who sent what to the site.

3. If the companies can't or won't cooperate voluntarily, consider filing a lawsuit to bring them to the bargaining table.

4. Bargain in good faith, using incentives such as a full release without reopeners and full contribution protection that protects the settlers from suits by nonsettlers, to exact a fair price and reduce transaction costs.

5. Don't plead poverty. Unlike local industry, you don't have to face competition and you have the state's bonding authority behind you. Use your individual and collective political skills to seek your state government's acceptance of its fair share of the burden. Several states, including Michigan and New York, have already proposed or implemented bonding to raise the necessary money to help with municipal landfill remedies. It may also be possible to cover a portion of the ordinary landfill closure costs by contributions in kind that are the economic equivalent of money. For example, the City of Indianapolis is considering making available its wastewater treatment plant to treat landfill leachate, thereby eliminating the cost of constructing a separate wastewater treatment plant at an Indiana site.

For Industry

1. Don't wait. The longer you wait, the more expensive the problem will become, and the greater the risk that EPA will become involved.

2. Respond to requests for voluntary participation by municipalities and try to work out the allocation problems. If necessary those companies that are willing to settle may [19 ELR 10015] have to do so on their own, and then proceed to seek contribution from nonsettlers.

3. Don't "stonewall." Forcing the municipality and state to litigate will only increase transaction costs and may only delay, not accelerate, your ability to get at companies that won't pay their fair share. Although Superfund provides a right to contribution, a number of courts have severed and stayed third-party claims because of the size and complexity of Superfund (particularly landfills) cases. That happened in the New York City landfills case.

4. If litigation occurs anyway, don't spend all of your time and effort on preparing for a trial that may never occur. (The romance between lawyers and depositions and document production should be broken off or at least controlled). Concentrate a substantial portion of your effort on achieving settlement if the municipality accepts the Delta approach as the basis for bargaining.

5. Bargain in good faith to buy the full release and contribution protection you need to make the settlement financially sound.

None of this means that the bargaining process will be easy. Situations where municipalities were the owners and operators of a facility at the time of disposal are different, at least in degree, from situations of privately owned landfills, where the municipal involvement was limited to the disposal of ordinary household trash and garbage containing a small percentage of hazardous substances. Situations where the municipality also sent incinerator sludges, municipal garage or transit authority wastes, hospital wastes, or other hazardous substances fall somewhere in between. Small municipalities can work with larger ones or groups or associations of small municipalities, in the same way that industrial small generators frequently band together with common counsel to avoid being taken advantage of by larger industrial generators.

Companies that sent PCBs to a site where the remedy costs are being driven by PCB contamination must bear a heavier share of the costs than companies that sent paper boxes, construction debris, and other nonhazardous material as the bulk of their wastes. Companies that sent oily wastes, paints, or small quantities of solvents fall somewhere in between, depending on the kind of contamination that is driving the remedy cost and the quantities involved.

Issues of timing are also important. If the municipality or state already has money budgeted for studies, more money may not be needed for several years. Thus, the "structured settlement" approach used in the New York City landfills settlement, in which money is paid to an insurance carrier for an agreement by the carrier to pay the municipality a defined larger sum over a period of years, helps both the municipality and the settling companies. It ensures that the municipality gets both the money when it needs it and the benefit of the time value of the money, while reducing the immediate costs to the settling companies. Conversely, some "up front" money may be needed to deal with natural resource damage issues or other immediate problems.

The portion of Delta costs to be paid by the specific companies that participated in a settlement should also reflect some estimate of the litigation risks the municipality will run, based on its own conduct and that of the companies involved, and the availability of other nonsettling companies to help pay the balance of the Delta costs in the future and thereby mitigate the risks of settlement.

The experience in resolving these allocation, timing, and risk sharing issues does not reside in government lawyers or engineers, but in the private sector. Municipalities and companies should take advantage of that experience to resolve landfill problems without unnecessary transaction costs and rely on marketplace pricing rather than on EPA enforcement and guidance.

1. No. 85 Civ. 1939(EW) (S.D.N.Y. filed Mar. 12, 1985), digested at ELR PEND. LIT. 65856. An interim decision is reported at 633 F. Supp. 609, 16 ELR 20850 (S.D.N.Y. 1986).

2. EPA, Interim CERCLA Settlement Policy (Dec. 5, 1984), 50 Fed. Reg. 5034 (1985), ELR ADMIN. MAT. 35050.

3. EPA, Interim Guidance on Settlements with De Minimis Waste Contributors under SARA § 122(g) (June 19, 1987), 52 Fed. Reg. 24333 (1987), ELR ADMIN. MAT. 35067.

4. EPA, Covenants Not to Sue Under SARA (July 10, 1987), 52 Fed. Reg. 28038 (1987), ELR ADMIN. MAT. 35060.

5. EPA, Guidance on the Use of Alternative Dispute Resolution Techniques in Enforcement Actions (Aug. 6, 1987), ELR ADMIN. MAT. 35123.

6. EPA, Interim Guidance on Notice Letters, Negotiations, and Information Exchange (Oct. 19, 1987), 53 Fed. Reg. 5298 (1988), ELR ADMIN. MAT. 35145.

7. EPA, Evaluating Mixed Funding Settlements Under CERCLA (Oct. 20, 1987), ELR ADMIN. MAT. 35117.

8. Comprehensive Environmental Response, Compensation, and Liability Act § 122(g), 42 U.S.C. § 9622(g), ELR STAT. CERCLA 44061.

9. EPA, Interim Guidance on Settlements with De Minimis Waste Contributors under SARA § 122(g) (June 19, 1987), 52 Fed. Reg. 24333 (1987), ELR ADMIN. MAT. 35067, 35068.

10. Id. at ELR ADMIN. MAT. 35069.

11. Id. (emphasis added).