Why aren't States getting compensated for costs incurred by the BP oil spill?

[Sinisterniik]

So according to all of the soundbites on the news, governors like Bobby Jindall are begging for money to combat the oil spill:

http://www.npr.org/templates/story/story.php?storyId=127095934

http://www.thestatecolumn.com/articles/2010/06/01/louisiana_closes_fisheries_jindal_calls_on_bp_3443.php

I can’t find a cite on this, but the implications made by many are that the states are forced to wait for either the federal government or BP to provide funds for clean-up operations. However, according to the Oil Pollution Act (OPA) and the National Contingency Plan (NCP), states can spend money and are guaranteed reimbursement from BP (or whoever the liable party is). This is from a summary of OPA (http://wildlifelaw.unm.edu/fedbook/oilpollu.html):

Liability. Each responsible party for a vessel or facility from which oil is discharged, or which poses the substantial threat of a discharge of oil, into the navigable waters, adjoining shorelines or the exclusive economic zone is liable for removal costs and damages resulting from the incident. Removal costs are the costs incurred by the U.S., a state or an Indian tribe under § 1321 of the Clean Water Act, under the Intervention on the High Seas Act, or under state law, and removal costs incurred by any person for acts taken by the person consistent with the National Contingency Plan. Damages are for: injury to, destruction of, loss of, or loss of use of natural resources, recoverable by a U.S. state, tribal, or foreign trustee, including reasonable costs for assessing damages; injury to, or economic losses from destruction of, real or personal property, recoverable by the owner or lessee; loss of subsistence use of natural resources, recoverable by the user. These provisions do not apply to discharges from a public vessel, from an onshore facility subject to the Trans-Alaska Pipeline Authorization Act (43 U.S.C. § 1651 et seq.), or permitted by a permit issued under federal, state or local law. § 2702.

Obviously, I’ve added the bolding.

As you can see, OPA defers to a lot of different pieces of legislation to set boundaries and guidelines. You can find all of them quite quickly by using Google (except for State laws, which are inherently more scattered). I’ve read through most of it and kind find any reason why the states shouldn’t start taking action.

[mhendo]

It’s not clear exactly what you’re asking here.

From the title of your thread, it sounds like you’re asking why the states aren’t already being compensated by BP and/or the federal government.

But then, in the body of your post, it sounds like you’re asking why the states don’t just go ahead and spend the money they need to spend, because they will get repaid later by BP and/or the federal government.

Those are two rather different questions.

Also, it’s easy to say, “Why doesn’t Louisiana just start spending money for the cleanup, knowing that it will be repaid later?” But if Louisiana starts spending money, that money still has to come from somewhere initially, and the state is currently running a 300 million dollar deficit.

[Omar_Little]

Many states are still in budget crisis from the recent real estate bubble crash. States just can’t print money like the Federal Government can, so there may not be funds to spend on clean up that will be later reimbursed. They need the funds now, so they can pay for the clean-up.

[Sinisterniik]

Ok. Let me clarify: I want to know why they don’t get money (from banks/federal government/foreign states/private companies/whoever) to use on the clean up now, such that they can be reimbursed at a future date.

I suppose that this question breaks down further into:

1. Is my legal assessment correct? Would LA, FL or any other state be reimbursed if they spent the money now (in accordance with OPA and NCP)?

2. Is it possible/practical for the states to do this?

Inherently, the first component will be easier to address, but the second is probably the more important question. I am looking for answers to both.

[Sinisterniik]

Many states are still in budget crisis from the recent real estate bubble crash. States just can’t print money like the Federal Government can, so there may not be funds to spend on clean up that will be later reimbursed.

This is part of the reason I asked in the first place, but all states borrow money, from private companies, foreign nations, and even other states in the union. The fact that they are in debt does not automatically preclude them from borrowing money -in fact they regularly do. They also get money from municipal bonds.

By the way, here’s another article that further obscures the legal issue, pulling the 10th Amendment into it.:

http://www.nola.com/news/gulf-oil-spill/index.ssf/2010/05/attorney_general_buddy_caldwel.html

And the letter itself:

052310caldwellletter.pdf

[friedo]

It will be interesting to see if states start issuing special bonds that are backed by anticipated future revenue from BP’s eventual settlement. Kind of a new take on dubious municipal bonds backed by anticipated revenue from whatever they’re building.

[Omar_Little]

@Sinisterniik

The fact that they are in debt does not automatically preclude them from borrowing money -in fact they regularly do. They also get money from municipal bonds.

Most state bonds have spelled out in the indentures the specific sources of repayment, and the uses for the funds. To issue bonds for the clean-up, the State would need to satisfy the bond underwriters (Wall Street Banks) and the rating agencies of their legal right to reimbursement from BP or the Federal government, and BP or the Federal governement’s ability to make good on their obligation. Given the uncertainty of BP’s legal obligation and their ability to fund the clean-up of this size, it may make a tough sell to underwriters and ultimately purchasers of those bonds. Such a substantial discount may be warranted that the States may find it unnatractive financing.

[Sinisterniik]

@Wilbo523

Most state bonds have spelled out in the indentures the specific sources of repayment, and the uses for the funds. To issue bonds for the clean-up, the State would need to satisfy the bond underwriters (Wall Street Banks) and the rating agencies of their legal right to reimbursement from BP or the Federal government, and BP or the Federal governement’s ability to make good on their obligation. Given the uncertainty of BP’s legal obligation and their ability to fund the clean-up of this size, it may make a tough sell to underwriters and ultimately purchasers of those bonds. Such a substantial discount may be warranted that the States may find it unnatractive financing.

This is a well-thought out response, but again -what is the legal issue? As far as I can tell it’s spelled out in OPA and the NCP that BP does have a legal obligation to pay for the clean-up, and that if they don’t someone else will.

From http://www.businessweek.com/news/2010-05-05/obama-backs-significantly-higher-spill-damage-cap-update2-.html:

Beyond clean-up and containment, BP must be held responsible for the damages this spill causes,” White House communications director Dan Pfeiffer wrote on the White House website yesterday.

One of those lawmakers, Democratic Senator Robert Menendez of New Jersey, is co-sponsoring legislation to raise the limit on damages awards from a spill to $10 billion from $75 million under the current law, which was passed in 1990. The cost to BP of cleaning up the spill isn’t affected by the cap.

(I’ve added the bolding)

And I again refer to the OPA legislation itself (Govinfo):

(d) Liability of third parties

                       (1) In general

    (A) Third party treated as responsible party

        Except as provided in subparagraph (B), in any case in which 
    a responsible party establishes that a discharge or threat of a 
    discharge and the resulting removal costs and damages were 
    caused solely by an act or omission of one or more third parties 
    described in section 2703(a)(3) of this title (or solely by such 
    an act or omission in combination with an act of God or an act 
    of war), the third party or parties shall be treated as the 
    responsible party or parties for purposes

So unless someone proves that this is “an act of God”, someone is still liable to repay all the clean-up costs.

From Exxon Valdez oil spill - Wikipedia

In the case of Baker v. Exxon, an Anchorage jury awarded $287 million for actual damages and $5 billion for punitive damages. The punitive damages amount was equal to a single year’s profit by Exxon at that time. To protect itself in case the judgment was affirmed, Exxon obtained a $4.8 billion credit line from J.P. Morgan & Co. This in turn gave J.P. Morgan the opportunity to create the first modern credit default swap in 1994, so that J.P. Morgan would not have to hold so much money in reserve (8% of the loan under Basel I) against the risk of Exxon’s default.[22]

If Chase back was willing to back a private company like Exxon with 4.8 billion dollars, I have a feeling they would be comfortable backing a state that is guaranteed by law to have their money reimbursed.

[Sinisterniik]

Just to clarify, “omission” is a defined term that doesn’t look like it’s going to apply (as previous quotes have indicated):

Sec. 2703. Defenses to liability
(a) Complete defenses

A responsible party is not liable for removal costs or damages under 

section 2702 of this title if the responsible party establishes, by a
preponderance of the evidence, that the discharge or substantial threat
of a discharge of oil and the resulting damages or removal costs were
caused solely by–
(1) an act of God;
(2) an act of war;
(3) an act or omission of a third party, other than an employee
or agent of the responsible party or a third party whose act or
omission occurs in connection with any contractual relationship with
the responsible party (except where the sole contractual arrangement
arises in connection with carriage by a common carrier by rail), if
the responsible party establishes, by a preponderance of the
evidence, that the responsible party–
(A) exercised due care with respect to the oil concerned,
taking into consideration the characteristics of the oil and in
light of all relevant facts and circumstances; and
(B) took precautions against foreseeable acts or omissions
of any such third party and the foreseeable consequences of
those acts or omissions; or

    (4) any combination of paragraphs (1), (2), and (3).

(b) Defenses as to particular claimants

A responsible party is not liable under section 2702 of this title 

to a claimant, to the extent that the incident is caused by the gross
negligence or willful misconduct of the claimant.

(c) Limitation on complete defense

Subsection (a) of this section does not apply with respect to a 

responsible party who fails or refuses–
(1) to report the incident as required by law if the responsible
party knows or has reason to know of the incident;
(2) to provide all reasonable cooperation and assistance
requested by a responsible official in connection with removal
activities; or
(3) without sufficient cause, to comply with an order issued
under subsection (c) or (e) of section 1321 of this title or the
Intervention on the High Seas Act (33 U.S.C. 1471 et seq.).

[Omar_Little]

As with any legal issue, it is subject to interpretation, probably ultimately in the courts. If you were lending someone money, would you want to risk your ability to collect upon some future court verdict? Borrowing money now, for the specific purpose of clean-up and the sole source of repayment being reimbursement from BP, would appear very risky from a bond investors perspective.

[friedo]

BP has just set up a $360 million escrow fund for Louisiana to use to dredge sand barriers to protect their coast.

The same article mentions that they have paid $170 million to Louisiana, Alabama, Mississippi and Florida for other purposes.

[Sinisterniik]

@friedo

BP has just set up a $360 million escrow fund for Louisiana to use to dredge sand barriers to protect their coast.

The same article mentions that they have paid $170 million to Louisiana, Alabama, Mississippi and Florida for other purposes.

Thank you for the link. I’m aware of all of these figures, but to the best of my knowledge (correct me if I’m wrong), BP did this all voluntarily to help their PR. Louisiana officials still had to meet with BP to convince them to help.

The OQ is whether Louisiana had the authority to go ahead and build those sand barriers without consulting BP or the Federal Government and then be subsequently reimbursed. I still haven’t seen to the contrary…

[Sinisterniik]

@Wilbo523

As with any legal issue, it is subject to interpretation, probably ultimately in the courts. If you were lending someone money, would you want to risk your ability to collect upon some future court verdict? Borrowing money now, for the specific purpose of clean-up and the sole source of repayment being reimbursement from BP, would appear very risky from a bond investors perspective.

Point taken, but my understanding is that the purpose of the OPA legislation was to ensure that the Feds, states and Indian Tribes wouldn’t have to worry about court decisions or slow bureaucracy before enacting a clean-up operation (that and raising compensation limits). If what you say is true then 90% of that legislation was completely useless…

Of course, this could be the case. It won’t be the first time that Congress has passed meaningless legislation.