Surface Mining:

Cost and Availability of Reclamation Bonds

PEMD-88-17: Published: Apr 8, 1988. Publicly Released: May 3, 1988.

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In response to a congressional request, GAO assessed the availability and cost of surety reclamation bonds for surface coal mine operators in four states to determine the reasonableness of rate-setting procedures.

GAO found that: (1) since 1984, mine operators have had difficulty in obtaining reclamation bonds because of a decrease in the number of companies underwriting the bonds; (2) some underwriting companies required as much as 100 percent of the bond's face value as collateral; (3) the use of non-surety bonds in three of the states it reviewed increased from 6 percent in 1984 to 15 percent in 1986; (4) no new company entered the reclamation bond market between 1984 and 1986 in three of the states; and (5) the coal market's economic condition and the extended-liability-period requirements created uncertainties in the surety industry. GAO also found that: (1) since July 1985, seven surety underwriters have become insolvent, affecting about 400 operators and more than $50 million in bonds; (2) 70 percent of the outstanding bonds were replaced either by other surety bonds or by some collateral mechanism; (3) while the large mine operators were able to obtain replacement bonds for 75 percent of their bonds' value, smaller operators obtained replacements for only 10 percent of their affected bonds' values; and (4) surety bonds have historically proven to be the most frequently used financial assurance mechanism in all the states it reviewed. GAO believes that a market may exist for other companies offering similar services.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Further exploration of alternatives to traditional bonding mechanisms within environmental safeguards of legislation. OSMRE has identified bonding as a research priority area for FY 1989, encouraged field officials to become more involved in assisting states with bonding issues, and is exploring possibilities of federal/state guarantees on bonding pools.

    Recommendation: The Secretary of the Interior should direct the Office of Surface Mining Reclamation and Enforcement (OSMRE) to explore ways to develop a bond market in which more bond sources are available to responsible coal mine operators and regulators are more confident that reclamation will be timely and successful. This should be done by bringing together all relevant parties, including surety representatives, coal mine operators (particularly smaller operators), environmental groups, and state officials. Among the matters that should be discussed are whether: (1) the liability period for reclamation bonds could be shortened without negatively affecting the environment; (2) state bond pools could be developed in additional states as an alternative bonding mechanism; and (3) innovations in underwriting reclamation bonds could be introduced without increasing the risk of bond forfeitures.

    Agency Affected: Department of the Interior


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