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The large area of gasoline-impacted soil at this site was remediated and developed into a college. In late 2007 non-federal government entities will have to disclose liabilities associated with cleaning up contaminated properties such as this in their financial statements. Photos: Nicki M. Field
How It Hurts

Complying with the statement requires additional staff hours and technical expertise or funding to obtain appropriate professional services. While government personnel have expressed concern over their ability to comply, in actuality, this is probably the simplest of the problems the standard might present.

More problematic issues may arise because of the impact large liabilities have on a government's ability to issue debt. Most government budgets depend on bonds for the funding of basic infrastructure and capital improvements. This is particularly true of cash-strapped cities impacted by brownfields. Under Statement 49, these cities may have liabilities that limit their ability to borrow at reasonable rates, if at all, leaving them unable to maintain and upgrade infrastructure or fund other city services. In addition, covenant agreements for existing bonds often have limits of liability written into them, and governments might find that once they comply with the statement, they have violated their bond covenants.

Yet if municipalities and other government entities don't comply with Statement 49, they may not be able to secure audit results, or may secure only overly qualified audit results. This means government entities may not be able to borrow at market rates, or worse yet, they may be unable to issue debt at all.

Also, while cities and redevelopment agencies often acquire contaminated properties for redevelopment and retain ownership for years, it may be necessary for them to avoid taking on these properties and sidestep liability. This might hinder redevelopment efforts.

All these possibilities show how GASB Statement 49 could dramatically impact the finances of government entities. In order to be prepared, government entities must assess the extent of their liabilities and develop a plan of action.

Avoid liability

What can you do to offset Statement 49 headaches?

The Governmental Accounting Standards Board's "Statement 49 for Accounting and Financial Reporting for Pollution Remediation Obligations" could throw a wrench in the finances of non-federal government entities, mainly because the statement requires the disclosure of liabilities associated with pollution cleanup–including brownfields and contaminated properties bought for redevelopment. This may cause local governments to incur large liabilities that hinder their ability to borrow and issue debt, a critical element of government budgets.

Once the statement becomes effective, there may be a push by government entities to get such liabilities off their books, either by cleaning impacted properties or by transferring ownership (and associated liability) to private interests.

In order to avoid incurring future liabilities, cities and redevelopment agencies may stop acquiring contaminated properties for redevelopment. One alternative is to convince developers to take on a more active role in property acquisition and cleanup by offering additional tax breaks and other incentives. Other possible strategies for controlling liability may be to use environmental insurance policies to cap or offset liabilities, or increased use of risk transfer or liability buy-out contracts and firms.

What strategy will you take?

Nicki M. Field is project professional and Dan Johnson is vice president with SCS Engineers, San Diego.