Report of the Statewide Grand Jury
March 23, 1994
IN THE SUPREME COURT OF THE STATE OF FLORIDA -- CASE NUMBER 80,142
INTERIM REPORT NUMBER TWO OF THE ELEVENTH STATEWIDE GRAND JURY
(This document has been re-formatted for the Internet)
The IPTF program provides reimbursement to individuals or entities who have expended funds to remediate (clean up, detoxify and restore) property sites containing old petroleum storage tanks. These tanks corrode over time, slowly, silently and dangerously leaking their hazardous contents into the State's water supply. More than 18,000 such sites have been reported to exist in the State, and could qualify for reimbursement under this program.
Approximately 13,000 applications for remediation reimbursement have been received during two "window periods" since the program's inception. After the expiration of the original "window periods, 11 a legislative committee voted, at the end of February, 1994, to extend the program to July, 1996.
The reimbursement program deals in multi-million dollar amounts. After initially reimbursing six million dollars to contractors during 1989, and more than fourteen million dollars in 1990, reimbursements ballooned in 1993 to more than ninety million dollars. If the program is extended, the State of Florida could be committed to spending that much again, if not more. The money to pay for the program comes from wholesale gas taxes, which are ultimately passed on to the consumer at the gas pump.
II. INVESTIGATIONIn a matter brought to our attention by the Office of Statewide Prosecution, we, the members of the Eleventh Statewide Grand Jury, embarked upon an investigation of a business entity that defrauded the State by fraudulently applying for and receiving funds from the IPTF program.
We examined the activities of a financing company which, under the program's auspices, repeatedly applied for "second-tier mark-ups" of fifteen percent. The company's "second-tier mark-ups" totaled more than $750,000.00 and involved dozens of contracts. Second-tier mark-ups are only available to entities having no corporate, financial or beneficial relationship with the contractors. The evidence demonstrated that: (1) the two companies had borrowed millions of dollars together; (2) the principals of each had agreed to guarantee the debts of both companies with their personal assets; and (3) the internal and published literature of both companies touted their "affiliation." Moreover, the contractor agreed to hold the financing companys checks for up to a year, so that the financing company could misrepresent to the Department that the debts were paid. This, in turn, qualified the financing company for illegitimate reimbursement of funds from the IPTF program.
As a result of our findings, we indicated the entity for grant theft, racketeering, and conspiracy. With our advice and consent, the State entered into a plea agreement with the company which the court has accepted. The terms of the sentence are:
- Complete restitution to the IPTF;
- Payment of a large fine;
- Publication of an apology to the citizens of the State;
- Settlement of several civil and administrative actions;
- Reimbursement for the costs of the investigation;
- A three year ethics program for the successor entity.
III. DETERMINATIONSOur investigation, which spanned eighteen months, led us to see a stark, yet basic reality -- that some will stop at nothing for money. The investigation documented a veritable gold-mine available for exploitation by profiteers. A government-sponsored honor system, such as the IPTF program, may be philosophically desirable, but is totally unrealistic when millions of dollars can be pillaged from the public coffers. In the case of the entity we investigated, the IPTF's linchpin of good faith gave way to greed and avarice. This case proves that the program can be abused.
The witnesses who testified before us, from Department auditors and program managers to private industry beneficiaries, concurred that the program needs to be revamped. Violations of both the spirit and the law of the IPTF program will continue to occur until this remedial program is itself remediated. Consequently, we offer a series of suggestions to both the Department of Environmental Protection and the Florida Legislature which would temper the motive and reduce the opportunity for fraud. At the same time, these suggestions would increase the probability of detection and punishment of the dishonest privateers who abuse the system. Technical discussion of the findings of fact underlying our recommendations is attached as an appendix to this report.
IV. RECOMMENDATIONS(1) To ensure that applicants are not reimbursed for costs associated with remediation projects that are not absolutely necessary for the protection of the environment, the Department should consider:
a. Adopting rules which mandate at least a thirty day notice to the State prior to the commencement of a initial excavation;
b. Requiring the contractor's detailed estimate of the amount of soil likely to be removed by the project;
c. Inspecting the site, in the thirty day notice period, to determine if remediation is necessary and evaluate the proposed scope of the project;
d. Repealing the present rule allowing for the unsupervised, non-authorized removal of up to 1500 cubic yards of soil in the initial stages of a remediation project;
e. Prohibiting the use of an unverifiable testing mechanism to determine the degree of soil contamination, unless the Department adopts standards regulating the procedures to be followed in using it, establishes minimum qualifications and training programs for its proper use by site technicians, and, requires documentation that the adopted procedures were followed and that the calibration, maintenance and accuracy of the testing mechanism is up to date at the time of its use.
(2) To ensure that applicants are not paid for costs of contaminated site clean-up which is not performed as rapidly and as efficiently as possible, the department should consider:
a. Re-evaluating whether its remediation standards are realistic for every situation, taking into account site usage and environmental impact of the contamination;
b. Withholding some portion of the site-owner's reimbursement until the project has been completed;
c. Establishing specific personnel qualifications and credientaling guidelines for contractors to qualify for the program.
(3) To ensure that applicants receive only those costs authorized by statute, the Department should consider:
a. Immediately conducting a statistically valid market value survey to determine the actual current costs involved in petroleum storage tank clean-up procedures;
b. Establishing reasonable (not average) rates for the reimbursement of contractors;
c. Immediately stopping the payment of rates to any contractor which are not reasonably related to the actual costs established by the survey;
d. Discontinuing the use of rate ranges and suspending any belief that contractors involved in such a lucrative government program will, without verification and scrutiny, seek the lowest possible reimbursement;
e. Immediately requiring applicants to supply supporting documentation of actual costs involved in a remediation project;
f. Re-evaluating its present policy of paying for "tools of the trade," unless it reduces the rates paid out in labor accordingly
g. Disallowing any overhead costs for labor above the contractor's out-of-pocket expense, when the applicant is seeking reimbursement for overhead costs through a 15% mark-up, under Rule 17-773, Florida Administrative Code;
h. Drafting clear rules mandating that only expenses which have actually been paid out are subject to reimbursement under the IPTF program.
(4) To deter fraud in the process and to ensure that unscrupulous applicants who defraud the State are properly punished, the Legislature should consider:
a. Making it a felony for applicants to either fraudulently represent that they qualify for reimbursement or to fraudulently inflate their reimbursement requests with the intent to obtain funds to which they are not entitled;
b. Mandating that reimbursement applicants under the IPTF are subject o the public entity crime debarment provisions of section 287.133, Florida Statutes.
Witnesses from the Department agreed that the above recommendations could be accommodated and would, in fact, be very successful in reducing fraud and abuse of the program.
V. IMMEDIATE CONCERNSBefore the Department can begin to implement these suggested changes, the reimbursement process continues to grind on, and money will be paid to applicants who may have similarly committed a fraud upon n the program. Yet, the Department is obligated by law to issue reimbursement on completed applications within 60 days or pay interest on the claims for the period of delay.
The State, through the Department of Environmental Protection, faces a dilemma: the Department may not be able to thoroughly evaluate each application within the required time period, may in fact disburse funds based on fraudulent misrepresentations, and may then be forced to recover those funds back from profiteers in subsequent legal proceedings.
As a possible solution, this Grand Jury recommends that the Department consider seeking authority for an immediate moratorium on the distribution of any funds from the IPTF until such time as each pending application is given the highest level of scrutiny to verify the claims. The Department could immediately assign a team of internal auditors or financial investigators to complete this review as quickly as possible, using IPTF program funds for this purpose, pursuant to section 376. 3071 (4) (e) , (f) and (h) , Florida Statutes (1991), granting authority to obligate monies to "inspect" and "supervise" the IPTF and to pay "expenses incurred by the Department ... (for reimbursement] of reasonable costs". We believe that continuing to pay claims without this strict scrutiny could violate the Legislative intent that all IPTF funds be spent in "the most cost-effective manner." Section 376.3071(12)(1)(1), Florida Statutes (1992). An executive order under section 216.177(2), Florida Statutes (1993), might be an appropriate method by which to suspend the payment of interest on unpaid claims during this period.
While this recommendation may seem extreme, and others may be more practical, it is our opinion that some action must be taken immediately.
VI. CONCLUSIONWe encourage the Department to continue its efforts to obtain the best possible balance between the quickest, practicable clean-up of affected areas and the most cost-efficient use of the funds entrusted by the taxpayers to the IPTF, so that the funds may reach the farthest and do the most good. We also encourage the Department to continue its heightened scrutiny of the applications filed with the program, to actively litigate against any applicant who has misrepresented its claims, and to refer any suspicions of fraudulent transactions to the appropriate authorities for criminal investigation and prosecution. The efforts of the Department in this investigation should send fair and accurate warning to those who attempt to defraud the State: the State will not condone or reward deception.
We ask the Legislature to ensure that the Department is given the authority, the resources, and the backing to carry out this mandate in a responsible manner.
INITIAL REMEDIATION ACTIONThe process of remediating a suspected petroleum-contaminated property begins with the recognition that a leakage may have occurred and should be contained, and that the released petroleum products must be removed. This process is known as an Initial Remedial Action (IRA). An IRA generally consists of the excavation and removal of the soil around a leaking tank, together with any petroleum floating on underground water sources ("free product"). In some IRAs, a quantity of soil which may have been affected or tainted by the petroleum is also removed at that stage. All the soils which are removed must then be treated to eliminate the petroleum and its constituents. This treatment is generally accomplished in Florida by thermal incineration ("burning") of the soil. The excavation, transportation, and treatment of suspected tainted soil is expensive, but may also be accomplished very quickly.
Under Florida's IPTF program, there is no requirement that a contractor or site-owner notify the Department in advance that an IRA is planned. Once the IRA has commenced, the parties have three working days to advise the Department that the activity has begun. During that time, the parties may remove and incinerate up to 1500 cubic yards (approximately seventy truckloads) of soil without even seeking the Department's permission. No independent evaluation of necessity is required by the Department.
We examined the petroleum site clean-up programs of other states. Neither South Carolina, North Carolina, Kentucky nor Texas allows reimbursement for the unquestioned withdrawal of 1500 cubic yards of soil. For example, in South Carolina, the contractor must inform the environmental authority at least 30 days in advance of an IRA's commencement. This restriction allows the authority to examine the site prior to its excavation to determine the type and quantity of necessary remediation.
The Department's witnesses agreed that a 30-day pre-remediation inspection period for large soil removals would not have a significant negative environmental impact, since most of the sites have been in existence and contaminated for many years.
CONTAMINATION TESTINGWhen soil associated with a petroleum leakage is removed by a contractor under the IPTF program, current rules require that an instrument known as an Organic Vapor Analyzer (OVA) probe be used to determine the concentration of petroleum in the soil. It is to this on-site test result, as reported by the contractor, that the Department looks to verify the necessity for removal, and justify the extent of the excavation and treatment.
The Organic Vapor Analyzer (OVA) probe is designed to sample the air above affected soil (head-space) to determine from the existence of hydrocarbons in that air whether there is petroleum contamination in the soil. The results are therefore secondary evidence of soil contamination. The theory is very much like that supporting the use of a "breathalyzer" or "intoxilyzer" to analyze deep-lung breath for blood alcohol level: the instrument suggests the amount of substance in the soil by sensing the presence of associated vapors in the air above it. The accuracy of this result depends not just on the operation of the OVA, but also on the preparation of the soil sample. First, the sample must be collected in a jar and sealed. Next, the jar and its contents must be brought to a particular temperature. Only then can the OVA be introduced in the head-space to determine the amount of hydrocarbons in the vapor thus collected. The optimum temperature is 68-90 degrees Fahrenheit. Warmer samples can produce misleadingly high readings on the OVA. Since Florida can be warmer than 68-90 degrees for a good portion of the year, it is important to ensure that the sampling procedure has been followed, and that the test procedure has been performed correctly on an accurately calibrated OVA.
While the proper sampling procedure is described in the Department's rules, there is no documentation requirement which would reflect the type of sampling performed, the procedures followed, or the soil temperature. While we have learned that the OVA probe itself is not difficult to operate, a simple mistake in protocol can result in very unreliable results. For example, if a plastic container is used rather than glass, the hydrocarbon reading may be based in part on the hydrocarbons found in plastic which can leach into the sample. Additionally, there are no training guidelines, educational requirements, or competency standards for personnel involved in soil testing, which would ensure proper usage of the equipment. There are no OVA instrument maintenance or maintenance-reporting requirements, which would ensure correct calibration.
Moreover, the OVA probe does not produce any documentation of its analysis. Unlike the "intoxilyzer", the OVA does not produce a print-out of its readings. Other methodologies do exist which produce an analysis accompanied by documentary evidence sufficient for independent verification. Laboratory analysis by the use of a gas chromatograph or a mass spectrometer would precisely show the level of contamination in soils, and document those levels for later independent verification. Both methods are widely accepted in the scientific community as accurate, and are typically used in conjunction with quality assurance/quality control protocols which further justify confidence in the results.
The rationale for reliance on an OVA probe over scientific analysis is two-fold: the OVA is cheaper and faster. While a properly used OVA probe could evaluate the "corner gas station" site in one or two days at approximately $100-$300 at present rates, scientific analysis could require two-three weeks and cost as much as $1000-$1500. While this difference is significant, only accurate scientific analyses should be used to justify excavations, when one such "corner gas station" site IRA can cost the State $50,000.
PROJECT STANDARDS AND COMPLETIONAfter the IRA is complete and the obviously contaminated soil and "free product" have been removed for treatment, the second stage of the remediation occurs. This is known as the Contamination Assessment Report (CAR). The site is examined closely by hydrologists and geologists, and samples of the soil and water are taken and scientifically analyzed to determine how much and what kind of contamination remains to be cleaned up following the IRA. once the extent of remaining contamination is established, plans are made for restoration of the property to the cleanest state possible. This final step is called a Remedial Action Plan (RAP).
Today, more than four years after the first remediations under the IPTF program began, only a handful of sites have been closed. There may be two reasons for this. First, the Department's standards for complete site restoration may not be realistic in every circumstance. More importantly, the site-owner or other parties presently bear no responsibility for the length or cost of the project.
Under the IPTF program, the State will reimburse the applicant for all costs on a per-task basis, rather than at the completion of the entire project. The State also pays site maintenance costs for monitoring (up to $10,000 per year) until the remediation is complete. Monitoring an individual remediation site is generally not capital or labor-intensive, and the contractor can monitor many such remediation sites simultaneously. As such, a gluttonous situation is created: feeding at the public trough becomes a very comfortable and lucrative lifestyle for many contractors.
With some 13,000 active sites in the State, the Department simply cannot closely monitor each remediation and push for its completion, but must rely on the integrity of the individual contractor to complete the project within a reasonable period of time. Withholding a portion of the reimbursement until completion creates an incentive for closure.
Clearly, the Legislature intended to minimize the financial impact of petroleum storage tank clean-up on individual site-owners, regardless of their liability in creating the problem. Nevertheless, other states require the site-owner to contribute to the clean-up. Texas, for example, requires a minimum contribution of $1,000.00 and a maximum of $10,000.00, depending on the number of tanks involved in the project. It would seem then that postponing complete financial reimbursement in order to encourage some level of individual responsibility for the total cost of the project would not be an unreasonable burden to place on the site-owner. This is especially warranted in those situations when the site-owner takes advantage of the opportunity, as allowed by the program's rules, to transfer responsibility for the project to a finance company or other party responsible for the clean-up.
CONTRACTOR QUALIFICATIONS AND CREDITIALINGThe IPTF program does not contain any qualifications or credentialing requirements for skilled personnel involved in the site clean-up. On the other hand, Texas has established specific personnel and task descriptions which include personnel titles, specific education and experience qualifications and task assignment descriptions:
Personnel and Qualifications:
Hydrogeologist III (PB) - Typically requires an advanced degree. Requires professional registration when applicable, and 10-12 years experience...;
[For the same position the task assignment description reads:]
Project oversight, Review technical reports, Review remedial action plans, Data Review and analysis;
Personnel and Qualifications:
Field Engineer/Geologist/Hydrogeologist (FD) - Entry level position requiring a degree in engineering, geology, hydrogeology or related science, and 0-1 year experience. Works under close supervision to perform routine field tasks related to the projects; work involves installing monitor wells, aiding in geological mapping, writing field notes, and basic geological analysis.
Field work preparation and planning, supervise site assessment activities, site reconnaissance/mapping, Remedial system installation, limited data review and analysis, obtaining permission to access off-site properties, monitoring activities, supervise over excavation activities"
Guidance Manual Reimbursement from the Petroleum Storage Tank Remediation Fund Form TWC-0230, Published by the Texas Water Commission, December er 1992; PST 92-07 at 16.
Because the nature of the work to be performed by the contractors is environmentally sensitive, not to mention very costly, the Department should take steps to set similar qualification requirements and deny participation to any contractor who does not comply.
REIMBURSABLE COSTSUnder section 376. 3071(12) (d) , Florida Statutes (1993), the Department must reimburse actual and reasonable costs for site rehabilitation.
At the beginning of the program, applicants were not required to prove actual costs before receiving reimbursement. It was not until June 25, 1991, that applicants were required to include documentation, such as invoices, of the expenses underlying the request.
The Department created a schedule of reimbursable amounts which contains an "average cost" as the baseline, based on a random survey of filed applications, to be used in conjunction with a ceiling, known as "excess cost", generated by a multiplier of 30% for labor and 50% for all other expenses. Any requests for amounts below the ceiling are paid by the Department without question; any requests which exceed that amount are paid only at the baseline or average amount.
We learned that this two-tier (baseline plus excess) system was put into place to take into account good faith differences in reimbursements sought. According to the witnesses, the schedule was supposed to be confidential, to prevent any company from seeking the highest cost known to be disbursed. Through testimony, we learned that the Department's use of the "excess cost" schedule is now widely known within the industry. Since it has become known that the Department is willing to pay amounts which are 30-50% higher than the average costs previously requested, it is not surprising that contractors or subcontractors will take advantage of this bonanza.
Consider this: according to the schedule, the Department will pay between $20 and $26 per hour for manual labor, and between $27.50 and $35.75 per hour for clerical labor. With "minimum wage" currently set at $4.25 per hour, a contractor could profit by as much as 400% from the State. Under the schedule, the Department will also pay between $75 to $112.50 per day for car rental reimbursement. Compare this to the State's contract with a national car rental agency for a $20-$40 per day rate for State employee work-related travel.
We considered whether the scheduled amounts contain an allowance for overhead, but we learned that items typically denominated as overhead costs were separately reimbursable under the program. An example of these costs would be "tools of the trade," such as hand augers ($15.00-$22.00 per day), surveying equipment ($15.00-$22.00 per day) or concrete saws ($75.00-$112.50 per day), all of which any competent contractor would already own or possess when the contract is signed; or services such as copying costs which would normally be considered part of the expense of running an office.
None of the other state programs we examined is as generous as Florida's, either in terms of the amount of reimbursement or the breadth of activities and equipment covered. For example, in North Carolina ":tools of the trade" are not reimbursable, nor are "excess costs." In South Carolina, reasonable costs guidelines are much lower than in Florida, even though the costs in South Carolina must include any mark-up sought by the contractor (unlike Florida where two tiers of 15% mark-ups are allowed in a separate section of the rules, unaffected by the Department's reasonable costs guidelines).
REIMBURSEMENT QUALIFICATIONSWe have examined the agency's rules concerning the qualifications and applications for reimbursement under the program. Specifically, we learned of various ways the rules can be manipulated to allow applicants "reimbursement" of money which they have not yet expended. one such method is created by the interpretation of two words used at different time periods in the same rule: "paid" and "incurred."
In applications submitted prior to June 25, 1991, the applicant was required to certify that "all outstanding financial obligations, integral to this ... task have been paid." This seems to mean that only those costs which had been expended would be reimbursed. However, due to a rule change effective on June 25, 1991, the applicant is now required to certify that "all outstanding financial obligations integral to this ... task have been incurred".
The American Heritage Dictionary, 2nd Edition (1985) defines "incur" to mean "to become liable or subject to, especially as the result of one's actions." In the generally accepted sense, therefore, "incurred" is different from "paid". Moreover, we have heard testimony that this usage of the word "incurred" is a generally accepted term of art in the field of accounting.
What makes this situation even murkier and therefore subject to abuse is that another part of the rule defines "incurred" as "allowable costs have been paid."
The necessity for absolute clarity is not minor. There is a large difference between certifying that a company owes the money and certifying that the company has paid the money. The rule as amended provides that a person responsible for site rehabilitation who has no financial interest in the site would qualify to receive reimbursement when the program task was done, presumably without regard to whether the underlying costs were paid.
In our investigation of the criminal case described in this report, we examined a situation where applications were made for reimbursement by a company which had written checks for $2,700,000 to "prove" to the Department that all expenses had been "incurred," when it had an agreement with the payee that the checks would be held for an indefinite period of time (up to a year) before being cashed. In the accounting sense those debts were "incurred" because the company had obligated itself, but we found that the checks themselves were not paid. As a result of this ambiguity in the Department's rules, the company has been arguing that it is entitled to reimbursement for claims filed after June 25, 1991. This kind of confusion does not benefit anyone except those who would take advantage of it to enrich themselves at the expense of the IPTF.
Last year, the Department recognized and successfully dealt with another instance of draftsmanship of the IPTF rules detrimental to the financial integrity of the program. This concerned the identification of those entities which could seek fifteen-percent mark-ups under Rule 17-773.350, Florida A dministrative Code.
Following the June 25, 1991 rule change, no mark-ups were allowed where a "financial, familial, corporate or partnership interest exists" between any of the parties involved in the remediation. But, the June 25, 1991 rule does not define what "familial, corporate or partnership interest" or "beneficial relationship." mean. There is a definition of "financial interest" in the rule, but this concerns the applicant's pecuniary interest in the real property itself.
In our investigation, we heard evidence that this failure to precisely define the terms, offered dishonest entities the opportunity, to apply for mark-ups for companies which factually were substantially related to each other. Once the Department became aware of this loophole, during the course of this investigation, it reacted quickly by putting definitions of "familial, financial and beneficial interests or relationships" into the IPTF program rules as of April 22, 1993. The Department also changed the wording of the rules so that "corporate and partnership" no longer needed to be defined. Closing these loopholes prevented further abuse of the IPTF program by unqualified recipients.
SANCTIONS FOR MISREPRESENTATIONSThe actual act of misrepresenting information on an application for reimbursement under this program is a misdemeanor. See sections 376.303(l)(f) and 376.3071(12)(f), Florida Statutes (1993) and section 403.161(l)(c). However, we are aware of the existence of other false representation statutes which constitute felonies. For example, section 287.094(l), Florida Statutes (1993) makes it a second-degree felony punishable by up to fifteen years in prison and a fine of $10,000.00 to falsely represent an entity as a minority to qualify for the State contract preference. Section 337.135, Florida Statutes, is similar, but concerns road contracts.
Upgrading the sanction for misrepresentation in the application process would not be without precedent within the program itself: the IPTF legislation already contains within it the felony crime of falsifying records to conceal the existence of a serious petroleum storage tank leak in section 376.3071 (10) (a) , Florida Statutes (1993).
Section 287.133, Florida Statutes, authorizes the debarment of companies convicted of certain crimes from doing further business with the government for a period of three years. Prior to 1992, the Legislature specifically exempted crimes against the reimbursement program from this statute. In 1992, this exemption was removed, yet the question remains open as to whether reimbursement applicants (as opposed to contractors with the State) are subject to this strict sanction for fraudulent business conduct.
THIS REPORT AND ITS APPENDIX ARE RESPECTFULLY SUBMITTED to the Honorable Robert B. Carney, Presiding Judge of the Statewide Grand Jury, this____ day of March, 1994.
MARY SUSAN SMITH
Grand Jury of Florida
I, MELANIE ANN HINES, Legal Adviser, Eleventh Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this Report and its Appendix this _____day of March, 1994.
MELANIE ANN HINES
Grand Jury of Florida
I, JAMES J.SCHNEIDER, Assistant Legal Adviser, Eleventh Statewide Grand Jury of Florida, hereby certify that I, as authorized and required by law, have advised the Grand Jury which returned this Report and its Appendix this ____ day of March, 1994.
JAMES J. SCHNEIDER
Assistant Legal Adviser
Grand Jury of Florida
THE FOREGOING Report and its Appendix were returned before me in open court this _____day of March, 1994.
JUDGE ROBERT B. CARNEY
Grand Jury of Florida