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Home My WebLink AboutSmuggler Superfund - Violators Ability to PayISM -31JNITEDSTArESENVInONMENTALPFIOTECTIONAGE'NCY- WASHINGTON, D,c, 20460 6 1986 OFFiri r)c MFORCA%i�.,, �„o �EMOR"DUM �:()Mft[ANrt N10NtrC,, SUBJECT; Quidance On Determining a ViOlator-s Ability to PAY a Civil Penalty FROM.- Thomds L. Adams, jr. A .\.,. )*V� Assistant AdminstratQr. for Enforcement and Compliance Monitoring TO: Assistant Administrators Regional Administrators This guidance amplifies the discussion in the Unitorm Civil Penalty Policy on how to adjust a penalty when a Violator claims Paying a civil penalty would target figure extreme financial hardship. uld cause This guidance was developed to M 8 the cOmmitment, made in the uniform Civil issued February 16, 1984( and in response to RPenalty policy egional office requests for amplification of the "Framework for Statute - Specific Approaches to Penalty Assessments,, (GM -22). 11- LP.PLICAnILITY This guidance applies to the calculation of civil penalties under medium -specific, policies issued in accordance with the UJft,farm Civil Penalty Policy that EPA imposes on: 14 For-profit publicly or closely held entities; and 2. For-profit entities owned by nOt-for-profit enti.i... This guidance does not apply to. on municipaliThe tcall cnuatiotheon of 1-4ivl penalties that EPA impose$ ies ad r notifor-profit entities, or 2. A violator who files for bankruptcy or is in bankruptl-c,,. proceedings after EPA initiates the enforcement cti... MM This guidance only giveS a general evaluation of the financial health of a violator ann the Possible effects of Paying a Civil penalty for the pwrpoa6 of settlement negotiations. It describes when to apply the ability to pay factor and Provides a methodology for applying the using a computer proqram, ABEL. factor The guidance does not prescribe the amount by which EPA may reduce a civil Penalty if the ability to pay factor is aPP101. The methodology in this guidan'ce will not calcQlat, a sPecific dollar amount that a violator can afford in civil penalties nor does it provide a way to predict whether paying a Qertain amount for a civil penalty will cause an already financially trooblod firm to 90 cut of bu,KQess. rQr an ability to Pay analysis, EPA needs specific financial information from a violator (see section V). EPA includes the financial data in a litigation report only when the data are reque"d by the Department of justice or offered by the violator. TV. THE ABILITY TO PAY FACTOR Under the Uniform Civil Penalty policy, using the ability to pay factor EPA may cansideE to adjust a civil penalty when the assessment of a Civil penalty may result in extreme financial hardship. Financial hardship cannot be expressed in absolute terms, Any '""atich On d violator's ability to Pay—depends on how soon the payments must be made and what the violator has to give up to make the payments. A violator has several options for paying a civil pynalty: 1. UsP cash On hand; 2. Sell aaset$j 3. IMCVease debt by commercial borrowing7 4. I*&DO equity by Zelling StOck7 5. AMY toward a civil penalty for a period of time what would otharwiao be distributed an profit; or 6, Use internally -generated futurG cash flows by deterring or eliminating some planned future investments. "Ach of these options will affect a for-profit violator'l I tperations to some degree. EPA must decide whether to Qdjusd a proposed Penalty amount and by how much, taking into 4CCOQnt the gravity Of the vioiation and Other criteria in medium - specific guidance. V. INFORMATION TO DETERMINE ABILITY TO pay If ability to pay is at issue, EPA may request from a violator any financial information the A991,1cy needs the v101at0r'5 Claim of extreme financial, to evaluate hardship. A Violator who raises the issue has the burden Of Providing information to demonstrate extreme financial hardship. Financial information to -request fr-OM for-profit entities may include the Most recent five years of-, 1, Tax returns; 2 * Balance :5heeta7 3, Income statements; 4. Statements Of changes in financial POaitiont 5, StatOYnenta Of Oper,ation57 6- Retained earnings statements; 7. Loan applications, financing agreements, "curitY ASreemental 8, A-nnual reports? or 9- Business services, such as COmPuotat, Dun arid Bradstreet, or Value Line, Tax returns are the most COMP19tO and in the most cot,si J tent form for analysis. Tax returns also Provicie financial informatiom in a format for direct input into ABEL. Annual reports atres,�be most difficult the asaistaMe Of a to analYZe and may require financial aQdlyst. When requesting information informally or through interrogatories or discovery, EPA should ask for three to five Years of tax returns alon,g with all Other financial information that a violator regularly Maintains ar. hLasiness records. If a violator refuses to give EPA the information to evaluate the violator's abil'ty to PAyt EPA should seek, the full calculated penalty amol the Violator can pay. unt under the aSSumption that -4- CQ"1DM'1A-L1TY OF FINANCIAL INPOR 0 .................. �=_ N A violator can claim confidentiality z!,r inforrnat'fn 4ubmitted to EPA, la accordance lati3Ons on confidential business: with the regu- _1"PA must give notice 'n-COz-matiOn, 40 CFF, 2. to a viQlator that the M violator .203, assert a busillQss confiCentiality claim. EPA's notice must y contain the information required in 4o CFR 2.203. The not, ftlust include a statement that if the violator submitR Ice information Without a cor'ZiCentialit -financial the information without further no Y claim, EPA may release The violator can make t'ce to the 'violator. a claim Of confidentiality for financial information in a cover letter acc:Qj°np&nyjng informatiQn. Information in not annual reports the, not be entitled to COnfidGntiapl tredtmen,, wnuld V114 AP_E!Ly1Nq THE ABILITY TO PAY FACT Under the terms Of a consent decree, civil penalty in additi-on to a V'01&tOr Pays a necessar making any Capital snvstment ofattai y o comQ into Compliance. EPA considerthe costs ning compliance when applying, the ability to pay to a civil Penalty calculation. factor EPA determines whether to apply the ability to pay factor using a four -step process! 1- Determine, if possible, whether claim extreme financial hardship, a violator plans to 2. Determine Whether, Penalty criteria in the -specific guidance requirQ rQnsi,:2eration f abi Policy and mediUM Uniform Civil of to pay; 3. Evaluate the overall financial health of a viol&tot,s operations by analyzin5 financial information ped by Violator or frc)z other Sources, such as businessrovidservicesa ; and 4. P the probabilities of a violator Navin internallY-9.ftorated cash flows to evaluate how g future Facing a pro0osEed financialdecisions. I civilPendltY may affect a Vpayin iolator's , V111' FINA'NSTAL COMPUTER PROGPJ�M EPA's computer program, ABEL, assists in evaluating the financial health of for-profit entities, based or, the estimated strength Of internallY-90nerated cash flowa. ABEL uses financial information on a violator to evaluate health of a the overall fin.n.j., violator (step 3 above), The program use. stanclar'l ��Inanciai ratios to eval,uate a violatorts Money and pay current and long -t ability to borr6ow erm operating expenses, AB,tL also projects t -he probable avallability of gan �uture! internally -grated viOlator's options for paying 'a c7fvI,0wIs tQ evaluate some of Penalty (stap 4 above), EPA is develoPing a user's manual to provide self instruction in the use Of A3EL in additior, to tl.,e doc aids in the computer program. umetItati0n. and help A8suM* that EPA has calculated aa ecunomic benefit fo, Company X of $140,000 and a gravity Component of $110,000 Zoz a total propctmed penalty of p230,000. Proposed Penalty after EPA Presents the CEO for Cam Mpanseveral neg"i"W sessions, and the y X then claims that tho company cannot affora to pay that much. In support of the claim, the CEO produces accounting statements showing that the Eirm paid no income taxes Cor the previous three years and had less than $100,000 'n nOt income for thoas yyara. IPA reqqests tax returns and othdr financial information for the Most racont throe years Ot Company x. tax return information EPA enters the in ABEL and receiv@s thq output in Attachment A. Tte Phase 1 analysis from ABEL is not dispositive of the issue, So nPA performs a Phase 2 analysis. The Phase 2 analysis indicates that COMpany X can finance a civil penalty of $290,000 from internally -generated cash flows, even after plannin, for 1400,000 in pollution control investmento and $50,000 for annual O&M expenses- The table in Phase 2 shows a 99 percent probability that Company x will have future cash flows with a net present value of 1370,061 available o t pay a civil ponalty. Asmumption that Violator Is Not Financially Realthv Assume again that IPA has calculated a total penalty =Mount of AS0,000, Compana y Z clims extreme financial hardship. If the ABEL analysis indicate* that company Z would have little probability of generating 1250,000 in cash flOW9 during the next five Years, EPA would go back to the ppfinancial data sulied by the Violator and look a source of cash,for items that may indicate including loan* Outstanding to corporate Officers, entertainment expenee deductionso , cmpany cars or airplanes, amount Of COMPansation for "POrate officers, compensation for relatives of corporate Officers who do not have clearly definod duties. If thS ABEL Phase I analysis indicates that Company z may havo additional debt capacity (debt/eqQity ratio), EPA would 100hAn the tax returns for the amount of lonS term debt the Mlator is carrying and ae a nalyzny loan applicatioRs the violator Submitted in reaponle to IPA's request for financial information. Frequently, firma can borrow additional money for operations and free uP cash penalties. flow to pay civil Even a firm on to verge of bankruptcy may choose to settle an enforcement action With a civil Penalty provision I - the consent decree, I EPA should always seek some Civil peraity, ABEL and other financial analysis provide a range Of penalty amounts for the Purpose of s9ttlement negotiations, ATTArMIRNT A r4'ATOt FOR A5Ef- EXAMPLE ANALYSIS DATE.- NOVEMBER,24, 19e6 DgrlT =nlay-pv Q. Ze A RATIO LESS THAN INDICATES THE MAY HAVC. ADDXTIONA�. 0"T CAPACITY 4 1.984 A RATIO GREATER THAN "S' NO I CATE:' THE FIRM MAY S HAVE DIFFICULTY BORROWING 1.59 A RATIO GREATER THAN THF- FIRM MAy INDICATES f-laVe DIPPICUI.TY 0MOWING PLEASE ENTER A. c' ARRIACE RETURN TO CONTINUE CURRENT RATIOS 1985 1.10 A RATIO LESS THAN 2.0 MAy LIQUIDITY PRODLEMS. INDICATE A RATIO LESS THAN 2.�) MAY LloujorTy � INDICATE PRORLEMS A RATIO LES3 THAN 2-0 MAY INDIL;A TC LII %I0tTY PRO 8LT-MS °l -EASE ENTER A CArr'IAC E rETURN TO CONTINUE O'EAVER'S RATIOS 1985 0, A RATIO GREATER THAN (').--o HEIALTH,� 30LVfZNCY INDICATE�� 1984 0.1410 A RATIO DETWEEN AND I N D ET':- - r -�M I NATC 0,20 IS 583, '3a ZO A RATIO t�REATER THAN HEALTI,qy ICATFS :3 -OLVC-Ncy PLEASE ENTER A CArIPIAOE: RETURN' TO CONTINUE TIMES INTEREST EARNED A FLATIO LESS THAN SCLOENCY Pr*�OBLEMS MAy INDICATE 1.64 A RATIO LESS THAN 2-0 SOLVENC,e MAY INDICATE r-RQ$LZM3 19 8:_7 Z0 A RATIC LESS THA N P 7, a t" L a m 3 MAY INDICATE FLEA,3E Era TEF; A TO --QNTINUE 0 r) p 250000 ��f l7ion, Wm ABEL INTERPRETS THE OVERALL RESULTS OF THE FINANCIAi RATIOS AS FOLL.OWS3 ALTHOUGH THE FIRM MAY FACE CURRENT CASH (OR LIQUIDITY7. CONSTRAINTS, ITS LONG®TEFL K PROSPECTS ARE GOOD AND IT 5HCUt-0 8E ABLE TO PINANCE PENALTIES AND INVESTMENTS. A PHASE TWO ANALYSIS IS RECOMMENDED. ABEL NOTES THAT THE FIRM'S MOST ft,E'CENT I)EBT--eourTY NATIO IS ZUBSTANTIALLY-SETTER,THAN ITS HISTORZC AVE AGE. ADEL NOTE'S THAT THE FIRM IC Mr)ST RECENT TIMES I'NST E,'EST EARNED 13 GU33TANTIALLY POORER THAN ITS H13TORIC AVERAGE, DO YOU : WISH TO CONTINUE WITH TIIIE PHA TWO ANALYSIS ce OR 00 YQU WISH TO ANAL.YZE A CIVIL PENALTY '(P) OR A NEW I NV" 1-Z 1, 1vtEN T PLEA2E mrQ-r THE INITIAL, PROPQ,5ED' SETTLEMENT PENALTY AMOUNT IN CURRENT DOLLARS 5000); IF TFC ERNZ X3 r'+Q rA7%cc-E-0 t-ENALr-e, ENTER 0, L: 'CF0RE F-ROCEEDIP-46 WITH THE CIVIL F"ENAL TY PNALYEila, i`ISEL WILL REOU IRE CERTAIN AODITIOVAL INFORMATIQfij ANY lN'v'ESTNlr-NT5 WHICH MAY E -E RErOUIRED IN CF',,E,�n- F T M rO ACHIEVE COMPLIANCE. CNTI ZR THE t)EPRECIASLE CAPITAL COST OF THE. NEW (E.Q. , 1000-00) -0 IF THERE IS NO NEW INYEOTMEN-r, F - NTE p. PLEASE'ENTER WHAT YEAR DOLLARS THIS IS (F.. U, EN TEft ANY NON-DEPr�ECIASLE, COSTS Assor-TATED WITH THE NEW !F rHERE IE NO COST Tl!i-;T MEE"ll'-16 THIS L, LbZAZE ENTER 0,* f"t-LAZE EXPRESS 1784)ENTER TI tS ED IN C'N f'ER ANY r4C)N, `-ElUCTIOLZ- 1-t) OUT TAX -Z NO COST-OCIATED WIT�l NEW IF THERE ASC S THAT NIEETS E NEINVESTMENT. PLEASE ENTER 100000 REQUIREMENT PLEASE ENTE' R'WHAT YEAR DOLL.RF�S, THIS 1985 1704), IS,EXPRESSED� IN cNTEFj rHE ANNUAL O&M' COST r OF T?4 NEW 50000 IF THE RE� IS NO O&M COST , ENTER o INVESTMCNT'. PLEASE ENTER WHAT YEAR DOLLARS THIS is EXpRrt5SC 1,984 D IN 1985 THE FOLLOWIP40 STANDARD YALUES ARE USED IN TH I S• SECT I N. (OF 14 REINVESTMENT"FATEZ. NOMINAL DISCOUNT RATE INFLATION RATE a 4,41% 41. MARC I NAL I NCOME TA X RTE INVESTMENT TAX CREDIT 00 YOU WISH TO HAVE T� 4ESE ITEH,3 EXPLAINED OR "f) 7j CC YOU WISH TO CHANGE ANY OF THESE INPUTS,(y OR N)? A8hT-lS` READY' TO "PROW De-Oallb THREE OUTPUT OPTICAjs-, YOU HAVE 'THE Cfqbl,tE PRINT ONLY -THE POSSIBILITY OF THE PRE -ENT VALUE OF THE FIRM'S FIVE YEAR PROJECTED CASH FLOW CXCEEDIr., .EITHER AN INITIAL PPOPQ$ED SETTLEME JT 1"'ENALTY cp A l"STMENT. 6� I-LZrE0 2- PRiNT A TASLE SHOWING THE NET AVAI-LABL I E CASH FLOW WIM AN ANALY.313 OF THE TA2LE. PRINT A DETAILED TA13L.E SHOWING THE COMPON��LC�(Dr� -FIRPI'S CAS14FLOWS- THI�S OPTION MAYBEHEPj9r4c1AL ANALYSTS FJUT IS NOT RECOMMENOED FOR MOST USERS. 2 PLEASEENTER YCUR C14CICr 9,, OR I'l 1 E i'N' E IS A CAN F I NA NCE % GLANCE TH ' THE FIRM 4� THF; FROPOSEO GCTALTEMENT 00,008ASEDCN "'�NALTY cip THE 13TI�ENGTH ojr� GENERATED CASH FLOWS FQR THE NEXT pryCINTERNALLY ANALYSIS AT THIS POINT YEARS. THE E)CES NOT E)EM-ONSTRArE CONCLUSIVELY THE Frpm,s ArlILITY TO FCNAt, Ty. TO MAKE A DETERMINATION, F,Ay THE F:'ROPrJGE-,o THE F1'PH'S OTHER-COFT10�1g, ONE MQST L0(jj-' AT SELLING ASSETS, LUOING OR LEVERAGINOINClNCr%EASjr40 EQUIry, ASEL IS RZAOY'ro SCOIN UNLEVERED AS SETS. POSITION YOUR PRINTEROUTPUT. IF You WI DH PLEASE ZNTCR A C�)RRIASE RETU To THE cjTllT R'N TG IINTINUE OF A NEW PAGE - DATA POR ABEL EXAMPL ANAL Y- I DATE.' NN VE I EI 24, F'ROBAS I L I TY NET r"RESENT VALUE, AVAILABLE EQUIVALENT ANNORL CHARrjE 7169 4A - s5 6().o 67?2Z(�. .5 70.() Lzm 24611 �% Z7 -to"Se. oo 25 9 14 2. C] 7 o :2Q60 IS. 4717-16. 919.0 104x1 o 56 T: IE AaoiVELnAirA PRESC-NTao 14 4 q,9,6, -7 7 PLE' CURRZNT-YEjc�R DOLLARS I ASE E�j-rER A, CAAF�IA33E RETURN TO CON,TINIDE 7ABLLr s�IOWS THE PR08ABILITY THAT T�jg CAN FINAW.4 CI'VIL P�NALTrES OF A 01VEN AMOUNT. FOR J$ '4 ?Z-00 % CHANCE OP FINANCING A I SUM PENALTy Op Up TO s _LjMp OF ',RC)jECf Ej) 471726.56 BASED ON THE STRENGTHS ul-rEPNALLY XGENERATED 'QA,9�t FLOWS, THIS ZZ EQUIVALGNT TO f�LLWING THE FIRM TO MA' PAYMEN73 KE THRgE EQLA4 ANNUAL NQT DEMON THE,.4iALY111 , IHIS POINT DOES STRATE CONCLUSIVELY TH T'He ZN'RLTY- TO F'RM'S ABILITY To pAy MAK'E A DCTER`MlNArICN, ONC MU -7 LOOK AT THE FIRM,S OTHER OPTIONS, INCLU1NIIN(3 INCREA5jt4G4' aCUITYo SELLING ASSET3, On LEVERACINQ U44EIVERED AS-ETS. T'�IJE'(joU WISH To PtRFORM THE r4HAZ3E TWO "ANALYSIS FOR ro AGAIN �Y OR N),-' YOU WISH TO AiNAL'e7E ANUTHER CAc- (Y ORgay 7