Lame Duck LSP bill shines light on flaws in privatization

Warning: this is a long and rambling complex post, so you may want to hit the delete button right now.

What it boils down to is this: Would you promise not to sue your doctor based only on his/her certification that he/she did a good job? Of course not. Would a town promise not to sue a builder based only on the builder’s engineer’s certification that the construction project was done right? Of course not.

But the state of NJ has promised not to sue toxic site cleanup contractors, developers, and polluters based only on the certification of their paid private cleanup contractor that the cleanup was done right. Absurd? Of course.

And just think – the promise (a legal “covenant”) is automatic. That’s right, no review by those pesky state lawyers and DEP bureuacrats. We wouldn’t want to slow down the land transaction and development process!

And the legal and technical terms and conditions of the legal covenant are written by – you guessed right – the lawyers and private contractors for the polluters and developers!

So, buyers beware. Given the extent of toxic pollution in NJ, the legislature has turned all land into the equivalent of that sweetheart deal for Florida (swamp)land.

Grace Sica, NJ Sierra Club, opposed S3040 as Sierra's "worst nightmare" and urged that Governor Corzine's Executive Order 140 be codified before new Governor assumes office.

Today, the Senate Environment Committee released  S3040 (Smith; D -Middlesex; Ciesla – R-Ocean) by unanimous vote.

According to the S3040 bill statement, the bill would:

This bill would provide consistency so that a covenant not to sue by operation of law for a remediation that has department oversight for which a no further action letter is issued would be available just as for a remediation that is performed by a licensed site remediation professional for which a response action outcome (RAO) is issued. This correction to the law would apply retroactively to October 16, 2009.

The hearing on the bill provided an opportunity to revisit a structural policy flaw that did not get much attention during the legislative battle over the recent privatization of the toxic site cleanup program and creation of the “Licensed Site Remediation Professional” (LSP) program.

The issue relates to what is known as a “covenant not to sue”. NJ has a history of suing polluters and has recovered hundreds of millions of dollars in damages, so any covenant not to sue issued by the State provides a valuable protection to the person that receives it. This is especially the case now, when huge state budget deficits create fiscal incentives to sue polluters and recover funds as a revenue tool to close budget gaps.

In my view, significant changes in law related to the “covenant not to sue” (CNS) issue remained under the radar during deliberations and passage of the recent LSP bill (CNS changes were codified at NJSA 58:10B-13.2). As such, today’s hearing on S3040 (a bill requested by DEP to correct a technical oversight in the recently enacted law with respect to the CNS issue) provided a legitimate opportunity to revisit the ignored aspects of the CNS issue.

I testified in opposition to S3040 today, primarily on the grounds that it invited abuse, created moral hazard, protected wrongdoers, and that allowing private consultants and their polluter/developer clients to benefit financially and legally via self certification created conflicts of interest. I mentioned that the Wall Street collapse was caused by market failures, unregulated conflicts of interest, lax regulatory oversight, false certifications by professionals, and privatization – the exact same polices promoted by the NJ LSP program.

During my testimony, I also took strong exception to the description of the bill as a minor technical correction. The Committee Chair took exception to this and affirmed the credibility of DEP. In my view, the credibility of individuals and the integrity of the process were brought into question in how this was handled. (audio of hearing here)

Specifically, in looking into the legislative history, the CNS issue was not vetted during the DEP Stakeholder process that preceded and developed DEP’s recommendations for the legislative process. The narrower and more controversial aspect of the CNS, i.e. the implications of allowing a private Licensed Site Professional (LSP) to self certify and receive the liability relief provided by a CNS was not vetted in any of the 11 White Papers that arose out of the DEP Stakeholder process. In fact, at least 2 of those 11 White papers expressly stated that DEP would continue to control and exclusively issue the CNS. There is no mention of a major new policy to allow a private LSP to self certify and receive a CNS. In fact, DEP recommended that a new insurance fund be created to manage the unfunded liability related to the finality of the CNS. The DEP did not include the CNS issue in its recommendations in the “Legislative Reform Summary“. The CNS issue is not explored on the DEP website. Governort Corzine’s Executive Order #140 does not mention CNS issue.

The legislative debate did not explore the implications of allowing a private LSP to self certify and receive a CNS from the State of NJ. The introduced version of the bill S1897, did not include a CNS for self certified LSP provision.  The written DEP Testimony of Commissioner Jackson and Assistant Commissioner Kropp [pdf 30 Kb] did not address the private LSP certification to receive a CNS.. The CNS is often implicit in discussion of the concept of “finality”, because the CNS is the final cleanup decision document issued by DEP and it alleviates liability for additional cleanup. Accordingly, in fact, DEP’s testimony regarding “finality” did raise concerns and recommend a liability insurance fund:

Finality and Protection Against Remedy Failure. One issue raised by the business community during the stakeholder sessions was their desire for the Department to provide for “finality” as part of the cleanup process. We believe the ability to do this exists through the use of the previously established, but never used, Remediation Guarantee Fund coupled with the expansion of our existing financial assurance requirements. The Remediation Guarantee Fund was set up to provide funding for the Department to use to remediate properties when a person, who was required to set up a remediation funding source, failed to conduct that remediation.

The concept of a CNS via private LSP certification – which shifts risks to the public for additional cleanup – clearly conflicts with the DEP recommendation of a privately funded insurance fund to pay for remediation when private responsible parties failed to conduct full cleanups.

The only place I found mention of the issue was buried in the fie print of the Committee statement on the February 26, 2009 Committee substitute:

The bill adds a new term – “final remediation document” – to existing law that would include both a response action outcome issued pursuant to the provisions of the bill and a no further action letter as issued under current law.  The bill would amend the liability provisions in the “Spill Compensation and Control Act” to provide the same liability protection to recipients of a response action outcome as is currently provided under the law to recipients of a no further action letter.  In addition, recipients of a response action outcome would be deemed, by operation of law, to have received a covenant not to sue.

[Update: I just found he CNS provision – in Section 31 of the SCS. ]

After today’s hearing, I spoke with Assistant Commissioner Kropp. Kropp called the CNS “a useless piece of paper” that signifies nothing. I found that an incredible statement. I reminded her of her testimony regarding the Massachusetts program, which does not put the State in the role if providing an imprimatur – or surrendering legal options – based on the private certifications of LSP’s. As such, a Massachusetts LSP’s do not obtain any liability relief as was done in the NJ law.

So, after all this background, let’s get to the bill.

According to the S3040 bill statement, the bill would:

This bill would provide consistency so that a covenant not to sue by operation of law for a remediation that has department oversight for which a no further action letter is issued would be available just as for a remediation that is performed by a licensed site remediation professional for which a response action outcome (RAO) is issued. This correction to the law would apply retroactively to October 16, 2009.

Irene Kropp, DEP Assistant Commissioner for Site Remediation testifies in support of S3040 today

The bill was described by sponsor and Chairman Smith and the testimony of DEP Assistant Commissioner Irene Kropp as correcting an oversight in the recently enacted controversial Licensed Site Remediation professional (LSP) bill passed earlier this year. That law privatized the toxic site cleanup program by creating a new “Licensed Site Remediation Professional” (LSP) program. The LSP program fundamentally changed the way toxic site cleanups are conducted.

Previously the toxic site cleanup process was overseen by DEP or directly conducted by DEP contractors.

The new law allows private consultants (LPS’s) – who are working for the polluters or those responsible for the costs and legal liability for the cleanup – to self certify that the cleanups they conduct are safe and comply with legal requirements.

Obviously, this creates huge conflicts of interest.

First, there are huge economic incentives to cut corners on the cleanup. A private LSP owes a duty to his client, the polluter. This would include minimizing the client’s cleanup costs an legal liability. Also, a private LSP has a competitive incentive to serve his client before the public interest. Any LSP’s that tended to recommend costly cleanups would be out competed for work by those that could deliver low costs cleanups. Thus, privatization of the cleanup process creates incentives to cut costs, or a race to the bottom.

Second, there are inherent uncertainties and pervasive judgments in the science and regulatory requirements for a proper cleanup. A conservative approach which stresses protection of public health and the environment can lead to far more extensive – and costly – cleanups than if the judgments are driven by private economic considerations. The law vests the private LSP with control over these judgments regarding protection of public health and the environment. These judgments are inherently governmental functions that should never be privatized.

Under the old cleanup program,  after DEP determined that a site was completely and properly cleaned up, the DEP would issue a “No Further Action” letter (NFA).  DEP also would issue a “covenant not to sue” (CNS), a legal promise that provided finality and legal protection for land purchasers, developers, and polluters. The NFA/CNS met the gold standard – the private market could rely on the DEP issued NFA and CNS as valid legal documentation that a site was safe and that there was no risk of legal liability at the site.

Under the new LSP program, the LSP private self certification replaces DEP’s cleanup approval. Instead of an NFA, a private LSP is now allowed – with no direct DEP oversight – to certify that a cleanup is in compliance with DEP regulations. This private LSP certification is called a Remedial Action Outcome (RAO) .

Obviously, from a practical standpoint, the privately certified RAO always is a very different – and less credible – animal than a government issued NFA.

The bill released today shines a light on the fact that legally they now are the same – meaning that the state of NJ has surrendered legal rights to sue polluters based exclusively on a private certification.