Higher Education: Opportunities to Strengthen Federal Accountability

In fiscal year 2018, nearly 13 million students and their families received over $122 billion in federal assistance to help them pursue higher education through programs authorized under Title IV of the Higher Education Act of 1965, as amended. Education administers these programs, and is responsible, along with accreditors and states, for maintaining accountability and protecting the federal investment in student aid for higher education.

This testimony summarizes the findings and recommendations from GAO's prior reports, issued between 2014 and 2018, examining Education's role in: (1) recognizing accrediting agencies, (2) overseeing the financial condition of schools, and (3) overseeing schools' student loan default rates. This statement also updates the status of selected recommendations and a matter for congressional consideration.

GAO has identified opportunities to strengthen federal higher education accountability in three areas: educational quality, financial stability, and federal student loan defaults.

Educational quality. Accreditors—independent agencies responsible for ensuring that schools provide a quality education—must be recognized by the Department of Education (Education) as reliable authorities on educational quality. The accreditors can issue sanctions, including terminations and probations, to schools that do not meet accreditor standards. However, GAO previously found that schools with weaker student outcomes were, on average, no more likely to be sanctioned by accreditors than schools with stronger student outcomes, and Education does not make consistent use of sanction data that could help it identify insufficient accreditor oversight. In 2014, GAO recommended that Education use accreditor data in its recognition review process to determine whether accreditors are consistently applying and enforcing their standards to ensure schools provide a quality education. Education agreed with the recommendation, but has yet to use this data in this manner.

Financial stability. Education uses a financial composite score to measure the financial health of schools participating in federal student aid programs, and increases its oversight of schools when it identifies concerns to protect against the risk of school closures. School closures, although rare, can result in hundreds of millions of dollars in unrepaid federal student loans and displacement of thousands of students. However, the composite score has been an imprecise risk measure, predicting only half of closures from school years 2010-11 through 2015-16. This is due in part to the fact that the composite score does not reflect changes in accounting practices and standards, relies on outdated financial measures, and is vulnerable to manipulation. Despite these limitations, Education has not updated the composite score since it was first established more than 20 years ago. In 2017, GAO recommended that Education update its financial composite score. Education has proposed some revisions, but changes have not yet been implemented to protect students and taxpayers against financial risks.

Student loan defaults. According to federal law, schools may lose their ability to participate in federal student aid programs if a significant percentage of their borrowers default on their student loans within the first 3 years of repayment. However, GAO previously found that some schools managed these default rates by hiring consultants that encouraged borrowers with past-due payments to put their loans in forbearance, an option that allows borrowers to temporarily postpone payments and bring past due loans current. Although Education officials and student loan experts said forbearance is intended to be a short-term option, GAO's analysis of Education data found that 20 percent of borrowers who began repaying their loans in 2013 had loans in forbearance for 18 months or more. These borrowers defaulted more often in the fourth year of repayment, when schools are not accountable for defaults, suggesting long term forbearance may have delayed—not prevented—default. In 2018, GAO suggested that Congress consider statutory changes to strengthen schools' accountability for student loan defaults. Legislation has not yet been enacted.

I am pleased to be here today to discuss the federal government’s role in  ensuring accountability in higher education. In fiscal year 2018, nearly 13  million students and their families received over $122 billion in federal  assistance to help them pursue higher education through programs  authorized under Title IV of the Higher Education Act of 1965, as  amended (Higher Education Act). The Department of Education  (Education) administers these programs, and is responsible with the rest  of the “triad”—school accreditors and states—for maintaining  accountability and protecting the federal investment in higher education.  Among Education’s responsibilities, which are specified in the Higher  Education Act and related regulations, are recognizing accreditors  determined to be reliable authorities on educational quality, determining  which schools are financially responsible and can participate in federal  student aid programs, and ensuring that participating schools comply with  related laws, regulations, and policies. However, recent news reports  about students attending low quality schools, an increasing number of  schools closing due in part to financial difficulties, and the substantial  amount of student loans in default have raised questions as to whether  this existing accountability system is sufficient for protecting students and  taxpayers.

Drawing on our prior work on ensuring accountability in the higher  education system, my remarks today address Education’s role in (1)  recognizing accrediting agencies, (2) overseeing the financial condition of  schools, and (3) overseeing schools’ student loan default rates. My  testimony is based on our prior reports on these topics issued between  2014 and 2018 and cited throughout this statement. We used multiple  methodologies to develop the findings, conclusions, and  recommendations for these reports. A more detailed discussion of the  objectives, scope, and methodologies, including our assessment of data  reliability, is available in each report.

The work upon which this statement is based was conducted in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The primary purpose of accreditation is to help ensure that schools  provide a quality education to students. Accrediting agencies, also known  as accreditors, are generally nongovernmental, nonprofit entities that  work with Education and states as part of the “triad” that oversees  postsecondary schools participating in federal student aid programs. The  Higher Education Act and Education’s regulations require accreditors to  meet certain criteria and have certain operating procedures in place to be  “recognized” by Education as reliable authorities on assessing academic  quality (see fig. 1). Accreditors must have their recognition renewed by  Education at least every 5 years. To recognize an accrediting agency,  Education officials and the National Advisory Committee on Institutional  Quality and Integrity (NACIQI), which advises the Secretary of Education  on accreditation issues, review among other things whether the accreditor  applies its own standards, policies, and procedures when they accredit  schools.

While Education is required to determine whether accrediting agencies  have standards for schools in certain areas, such as student achievement  and curricula, before recognizing them, the accrediting agencies are  responsible for evaluating member schools to determine if they meet the  accreditors’ standards. The specific standards that accreditors develop in  these areas can differ, and accreditors may also establish additional  standards in areas not required by law. When schools do not meet  accreditor standards, accrediting agencies may impose sanctions, such  as placing a school on probation or terminating the school’s accreditation.

Education’s Oversight of College Finances

Education conducts annual reviews of the financial condition of all  schools participating in federal student aid programs to determine if they  are financially responsible, based on criteria and processes established in  federal law and regulations. The specific financial responsibility  standards that apply to each school depend on the school’s ownership  type, and the bulk of Education’s financial oversight efforts focus on  private nonprofit and for-profit schools.

One key financial responsibility standard that Education uses to assess  nonprofit and for-profit schools is a financial composite score that is  calculated for each school based on items drawn from the school’s  audited financial statements. The composite score—a metric for  evaluating a school’s financial condition—uses a formula based on three  financial ratios. A passing score is 1.5 to 3.0; a “zone” score is from 1.0  to 1.4, and a failing score is from -1.0 to 0.9. (See fig. 2)

Schools that receive a zone or failing composite score, or do not meet  one or more of the other financial responsibility standards, may continue  to participate in federal student aid programs if they agree to additional  oversight. Education may place these schools under heightened cash  monitoring (increasing schools’ reporting requirements and postponing  the timing for receiving federal student aid payments), or require schools  to post a letter of credit (a financial commitment from a bank to protect  Education against potential liabilities should the school close), or a  combination of the two.

Education’s Oversight of School Default Rates

Education may rescind a school’s ability to participate in federal student  aid programs if a significant percentage of its borrowers—generally, 30  percent or more of borrowers for 3 consecutive years or more than 40  percent in 1 year—default on their federal student loans within the first 3  years of repayment. This calculation is called the cohort default rate. To  compute a school’s cohort default rate, Education divides the number of  student loan borrowers in a cohort—those entering repayment in the  same fiscal year—who have defaulted on their loans in the initial 3 years  of repayment by the total number of a school’s student loan borrowers in  that cohort (see fig. 3). The cohort default rate does not hold schools  accountable for borrowers who default after the initial 3 years. Borrowers  in deferment and forbearance—options that allow borrowers to  temporarily postpone monthly payments— are considered to be “in  repayment” and current on their loans for the purpose of calculating a  school’s cohort default rate, even though borrowers in these loan statuses  are not expected to make any monthly payments.

Education Does Not Use Available Data to Identify Weaknesses in Accreditor Oversight of Schools’ Academic Quality

We have previously reported on a number of challenges with the  accreditation system’s oversight of academic quality. Although Education  is prohibited from specifying the specific content of accreditor standards,  the agency is responsible for assessing whether accreditors are  effectively overseeing schools’ academic quality as part of their criteria for  recognizing accreditors. Our 2014 analysis found that schools with  weaker student outcomes were, on average, no more likely to be  sanctioned by accreditors than schools with stronger student outcomes,  and that the proportion of their member schools that accreditors  sanctioned varied. For example, our analysis of Education’s sanction  data from October 2009 through March 2014 found that two accreditors  sanctioned less than 2 percent of their member schools during this time  frame, compared to 41 percent sanctioned by another accreditor. Our  2017 report also discussed challenges with the accreditation system’s  oversight of academic quality. For example, some experts and literature  stated that accreditors may be hesitant to terminate schools’ accreditation  when they identify issues because such action would adversely affect  schools’ eligibility for federal student aid programs.

Despite inconsistencies in accreditors’ use of sanctions, our 2014 report  found that Education did not systematically examine data on accreditor  sanctions that could have helped it identify insufficient accreditor  oversight and thereby reduce potential risk to students and federal funds.  Accreditors provide Education with records of terminations and  probations. However, Education officials told us that they had not used  this sanction information for oversight of accreditors because Education’s  regulations did not have specific criteria that require them to do so. While  Education is not required to use sanction data or analyze accreditor  sanctions as part of the accreditor recognition process, we found that it  could be useful for Education to consider these data when evaluating  whether accreditors meet prescribed criteria, such as whether they  consistently apply and enforce standards. Federal internal control  standards call for federal agencies to track data to help them make  decisions, as well as conduct ongoing, consistent monitoring to identify  weaknesses. Since accreditors are gatekeepers for tens of billions of  dollars in federal student aid from Education, as well as the key oversight  bodies for ensuring academic quality at schools, we found that failure on  the part of Education to spot weaknesses in accreditors’ processes could  result in poor quality schools gaining access to federal funds.

To strengthen Education’s oversight of accreditors, we recommended in  2014 that Education draw upon accreditor data to determine whether  accreditors are consistently applying and enforcing their standards to  ensure that the education offered by schools is of sufficient quality. For  example, Education could systematically use available information related  to the frequency of accreditor sanctions or could do additional analyses,  such as comparing accreditor sanction data with Education’s information  on student outcomes, to inform its recognition reviews. Education agreed  with this recommendation and initially started to track the number of  accreditor sanctions issued by each accrediting agency. However,  Education has since questioned the usefulness of this information and  has not yet used this sanction data to inform its discussions of accreditor  recognition and oversight. We continue to believe that implementing the  recommendation could help inform Education’s reviews of accreditors and  ultimately reduce potential risk to students and federal funds. For  example, analyses of accreditor sanction data could help reveal patterns  in individual accreditor behavior and the extent to which they are  consistently enforcing standards. This recommendation remains open  and we will continue to monitor Education’s efforts in this area.

Limitations in Education’s Financial Oversight Metric Hinder Its Ability to Identify At-Risk Schools

Holding schools accountable for their financial condition can help protect  taxpayers and students against the risk of school closure, but the  limitations of Education’s financial composite score hamper its  effectiveness at identifying at-risk schools. Although a relatively small  number of schools close each year, these closures can affect tens of  thousands of students and result in hundreds of millions of dollars in  financial losses for the federal government and taxpayers from unrepaid  student loans. However, we reported in 2017 that Education’s composite  score has been an imprecise predictor of school closures. Half the  colleges that closed in school years 2010-11 through 2015-16 received  passing financial composite scores on their last assessment before they  closed. For example, 58 of the 96 schools that closed in school year  2015-16 had recently received passing scores. Closures can be difficult to  predict in part because each school faces its own unique challenges, both  financial and nonfinancial, that can eventually push it into financial  trouble. Education’s composite score is not designed to account for  nonfinancial risks; however, it is a primary means of securing financial  protections in the form of a letter of credit from schools at risk of closure.

The composite score’s inconsistent performance in identifying at-risk  schools is due in part to limitations of the underlying formula and the fact  that it has remained unchanged for more than 20 years. The composite  score is based on common financial ratios that Education selected in  1997 after consulting with an accounting firm, school officials, and other  experts. However, the composite score formula has not been updated  since then and several experts and school officials we interviewed  identified three key weaknesses:

Accounting changes: The composite score has not kept pace with  changes since 1997 in accounting practices and standards, creating  ambiguity and making it more difficult to apply the formula in a uniform  manner. Accounting practices and standards are periodically updated,  for example, to improve the comparability and usefulness of financial  reporting. When these updates diverge from the components and  definitions in Education’s composite score, certain components of the  composite score are no longer directly linked to items on schools’  audited financial statements. These accounting changes can also  cause large shifts in schools’ composite scores. For example,  administrators at one school we talked to said changes to state laws  have affected how some schools categorize their endowment holdings  in financial audits, and that this had the effect of reducing the school’s  composite score from passing to not passing. However, Education  has not updated the composite score formula to ensure the score is a  reliable measure of financial health.

Outdated financial measures: The composite score does not  incorporate new financial metrics that would provide a broader  indication of schools’ financial health. For more than 20 years, the  composite score formula has remained unchanged as the field of  financial analysis has continued to evolve with new measures  becoming important as economic conditions change. For example,  liquidity (i.e., access to cash) has become an important financial  measure since the 2007-09 economic downturn, when some schools  had trouble meeting payroll and fulfilling contractual obligations. More  sophisticated methodologies used by credit rating agencies have  sometimes resulted in assessments of a school’s financial condition  that are strikingly different from the school’s composite score. For  example, in 2016, two credit rating agencies assigned non-investment  grade (i.e., junk bond) ratings to 30 schools that received passing  composite scores from Education.

Vulnerability to manipulation: We previously reported that the  composite score can be manipulated by some schools that take on  long-term debt (e.g., loans with terms in excess of 12 months)  because these debts can increase a school’s composite score and  help it avoid requirements to post a letter of credit. Long-term debt  usually represents a long-term investment in a school’s campus and  buildings, and the composite score formula treats this type of debt in a  positive manner. An accountant for multiple schools told us that  some schools have taken advantage of this provision and taken on a  million dollars in debt in order to obtain a passing composite score.  Corinthian Colleges, which closed in 2015, also exploited this  vulnerability to boost its composite score and avoid having to post a  letter of credit that could have been used by Education to cover some  of the hundreds of millions in student loan discharges resulting from  the school’s closure, according to company documents and Education  documents and officials.

These three weaknesses with the financial composite score hamper  Education’s ability to effectively fulfill its statutory responsibility to  determine whether schools participating in federal student aid programs  are financially responsible. Identifying and responding to risks is a key  component of federal internal control standards, but Education’s financial  composite score formula has remained unchanged for over 20 years  despite significant changes in the financial landscape of higher  education.

To address these limitations, we recommended in our 2017 report that  Education update the composite score formula to better measure schools’  financial conditions and capture financial risks. Education generally  disagreed with this recommendation and stated that the issues identified  in our report did not necessarily mean that the composite score was an  unreliable measure of schools’ financial strength. Since our report was  issued, new regulations have gone into effect specifying that certain  financially risky events, such as those related to litigation and certain  accreditor actions, will generally trigger a recalculation of a school’s  composite score. In addition, Education has also published proposed  regulations that would update some of the definitions of terms used to  calculate a school’s composite score to conform with changes in  accounting standards and also make an adjustment to how the formula  treats long-term debt, which according to Education would be intended to  make the formula less susceptible to manipulation. However, Education  has not finalized these regulations and has not released a timeline for  when it plans to do so, nor has it indicated that it has any broader plans to  update the composite score, as we recommended. Since the existing  composite score calculation remains unchanged, we are leaving this  recommendation open and will continue to monitor Education’s efforts in  this area.

Education’s Ability to Hold Schools Accountable for Loan Default is Limited by Schools’ Ability to Distort Their Cohort Default Rates

The cohort default rate, which is specified in federal law, is a key  measure for holding schools accountable for borrower outcomes and for  protecting borrowers and the federal government from the costs  associated with default. However, in 2018 we reported that this rate has  limitations as an accountability tool. Some schools managed their 3- year cohort default rate by hiring consultants that encouraged borrowers  with past-due payments to put their loans in forbearance, an option that  allows borrowers to temporarily postpone payments and bring past-due  loans current. At five of the nine default management consultants we  selected (that served about 800 schools), we identified examples when  forbearance was encouraged over other potentially more beneficial  options for helping borrowers avoid default, such as repayment plans that  base monthly payment amounts on income. Four of these consultants  also provided inaccurate or incomplete information to borrowers about  their repayment options in some instances.

Although Education officials and student loan experts said that  forbearance is intended to be a short-term option, our analysis of  Education data found that 20 percent of borrowers who began repaying  their loans in 2013 had loans in forbearance for 18 months or more during  the 3-year cohort default rate period. Spending this much time in  forbearance reduces the potential for borrowers to default within the 3- year period, thus helping improve a school’s cohort default rate. However,  postponing loan payments through forbearance can increase borrowers’  loan costs in the long term. For example, a typical borrower with $30,000  in loans who spends the first 3 years of repayment in forbearance would  pay an additional $6,742 in interest, a 17 percent increase, over the life of  the loan. In addition, borrowers in forbearance for 18 months or longer  defaulted more often in the fourth year of repayment, when schools are  not accountable for defaults, than they did during the 3-year period. While  forbearance can help borrowers avoid default in the short term, this  finding suggests that forbearance may have delayed—not prevented— default, potentially resulting in increased costs to the federal government.

Reducing the number of borrowers in long-term forbearance and directing  them toward other options for avoiding default, such as repayment plans  that base monthly payment amounts on income, could help reduce the  number of borrowers that later default and may eventually save the  federal government money. Specifically, for William D. Ford Federal  Direct Loans issued in fiscal year 2018, Education estimates that it will  not recover over 20 percent of defaulted loans. These unrecovered  defaulted loan amounts total an estimated $4 billion, according to our  analysis of Education’s budget data.

Schools are seldom held accountable for their students’ defaults, in part  because of the high rate of borrowers in long-term forbearance. To  examine the impact of long-term forbearance on schools’ 3-year default  rates, we recalculated schools’ cohort default rates by excluding  borrowers who were in forbearance for 18 months or more and who did  not default during the 3-year period. We found that over 260 additional  schools—receiving a combined $2.7 billion in Direct Loans and Pell  Grants in academic year 2016-2017—would potentially have had a  default rate high enough to put them at risk of losing access to federal  student aid programs.

The reduced effectiveness of cohort default rates as a tool for holding  schools accountable creates risks to the federal government and  taxpayers, who are responsible for the costs associated with high rates of  default. Since the way the cohort default rate is calculated is specified in  federal law, any changes to its calculation would require legislation to be  enacted amending the law. Our 2018 report suggested that Congress  consider strengthening schools’ accountability for student loan defaults,  for example, by revising the cohort default rate calculation or using other  accountability measures to complement or replace the cohort default rate.  In the 115th Congress, proposals were introduced to revise, supplement,  or replace the cohort default rate, though none of the legislation was  enacted. This matter for congressional consideration remains open. We  continue to believe that strengthening the accountability measure for loan  defaults could further protect borrowers and the billions of dollars of  federal student aid the government distributes each year.

In conclusion, the large federal investment in higher education makes it  essential that the federal government maintain a robust system of  accountability to protect students and taxpayers. My statement has  highlighted three actions Education and Congress could take to  strengthen the existing accountability tools for educational quality,  financial sustainability, and student loan defaults. Students deserve to go  to schools that provide a quality education and are financially stable.  Taxpayers deserve an accountability system that protects federal student  aid funds from going to schools that are financially irresponsible or push  borrowers into forbearance for long periods in order to reduce the  school’s cohort default rate. We believe that fully implementing the two  recommendations and matter for congressional consideration discussed  in this testimony would improve federal accountability, help students, and  potentially lead to financial savings for taxpayers.

Chairwoman Davis, Ranking Member Smucker, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions that you may have at this time.

If you or your staff have any questions about this testimony, please  contact Melissa Emrey-Arras, Director of Education, Workforce, and  Income Security, at (617) 788-0534 or emreyarrasm@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. GAO staff who made key  contributions to this testimony include Debra Prescott (Assistant Director),  Will Colvin (Analyst-in-Charge), and Brian Schwartz. In addition, key  support was provided by Susan Aschoff, James Bennett, Deborah Bland,  Marcia Carlsen, Alex Galuten, Sheila McCoy, Jessica Rider, and Walter  Vance.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

In FY 2018, nearly 13 million students received over $122 billion in federal assistance to pursue higher education through programs authorized under Title IV of the Higher Education Act.

The Department of Education administers these programs and is responsible for accountability over them to protect students and the federal government's investment in higher education.

We testified about opportunities to strengthen federal higher education accountability in three areas:


Black Lung Benefits Program: Improved Oversight of Coal Mine Operator Insurance Is Needed

In May 2018, GAO reported that the Trust Fund, which pays benefits to certain coal miners, faced financial challenges. The Trust Fund has borrowed from the U.S. Treasury's general fund almost every year since 1979 to make needed expenditures. GAO's June 2019 testimony included preliminary observations that coal operator bankruptcies were further straining Trust Fund finances because, in some cases, benefit responsibility was transferred to the Trust Fund.

This report examines (1) how coal mine operator bankruptcies have affected the Trust Fund, and (2) how DOL managed coal mine operator insurance to limit financial risk to the Trust Fund. GAO identified coal operators that filed for bankruptcy from 2014 through 2016 using Bloomberg data. GAO selected these years, in part, because bankruptcies were more likely to be resolved so that their effects on the Trust Fund could be assessed. GAO analyzed information on commercially-insured and self-insured coal operators, and examined workers' compensation insurance practices in four of the nation's top five coal producing states. GAO also interviewed DOL officials, coal mine operators, and insurance company representatives, among others.

Coal mine operator bankruptcies have led to the transfer of about $865 million in estimated benefit responsibility to the federal government's Black Lung Disability Trust Fund (Trust Fund), according to DOL estimates. The Trust Fund pays benefits when no responsible operator is identified, or when the liable operator does not pay. GAO previously testified in June 2019 that it had identified three bankrupt, self-insured operators for which benefit responsibility was transferred to the Trust Fund. Since that time, DOL's estimate of the transferred benefit responsibility has grown—from a prior range of $313 million to $325 million to the more recent $865 million estimate provided to GAO in January 2020. According to DOL, this escalation was due, in part, to recent increases in black lung benefit award rates and higher medical treatment costs, and to an underestimate of Patriot Coal's future benefit claims.

DOL's limited oversight of coal mine operator insurance has exposed the Trust Fund to financial risk, though recent changes, if implemented effectively, can help address these risks. In overseeing self-insurance in the past, DOL did not estimate future benefit liability when setting the amount of collateral required to self-insure; regularly review operators to assess whether the required amount of collateral should change; or always take action to protect the Trust Fund by revoking an operator's ability to self-insure as appropriate. In July 2019, DOL began implementing a new self-insurance process that could help address past deficiencies in estimating collateral and regularly reviewing self-insured operators. However, DOL's new process still lacks procedures for its planned annual renewal of self-insured operators and for resolving coal operator appeals should operators dispute DOL collateral requirements. This could hinder DOL from revoking an operator's ability to self-insure should they not comply with DOL requirements. Further, for those operators that do not self-insure, DOL does not monitor them to ensure they maintain adequate and continuous commercial coverage as appropriate. As a result, the Trust Fund may in some instances assume responsibility for paying benefits that otherwise would have been paid by an insurer.

GAO is making three recommendations to DOL to establish procedures for self-insurance renewals and coal operator appeals, and to develop a process to monitor whether commercially-insured operators maintain adequate and continuous coverage. DOL agreed with our recommendations.

The federal government’s Black Lung Disability Trust Fund (Trust Fund)  finances medical and cash assistance to certain coal miners who have  been totally disabled due to pneumoconiosis (also known as black lung  disease). Black lung benefits are generally to be paid by responsible coal  mine operators. However, the Trust Fund pays benefits in certain  circumstances, including in cases where no responsible mine operator  can be identified or when the liable mine operator does not pay.

As we reported in May 2018, the Trust Fund faces financial challenges.  Its expenditures have consistently exceeded revenue and the Trust Fund  has essentially borrowed with interest from the Department of the  Treasury’s (Treasury) general fund almost every year since 1979, which  was its first complete fiscal year. In fiscal year 2019, the Trust Fund  borrowed about $1.9 billion to cover its expenditures, according to  Department of Labor (DOL) officials.

Trust Fund revenue is primarily obtained through a tax on coal produced  and sold domestically, which we refer to in this report as the coal tax.  The coal tax rate has varied over the years. From 1986 through 2018, the  coal tax rate was $1.10 per ton of underground-mined coal and $0.55 per  ton of surface-mined coal, up to 4.4 percent of the sales price. In 2019,  the rate of the coal tax decreased to $0.50 cents and $0.25 cents per ton  of underground-mined and surface-mined coal, respectively, up to 2  percent of the sales price. In 2020, the rate of the coal tax increased to  pre-2019 levels. However, it is scheduled to decrease again beginning in  2021. With less revenue from the coal tax, the Trust Fund will likely need  to borrow more from Treasury’s general fund, and taxpayers will  ultimately be responsible for repaying this accumulating debt.

In June 2019, we reported preliminary observations that coal operator  bankruptcies were further straining Trust Fund finances because, in some  cases, responsibility for benefit payments was transferred from the  bankrupt operator to the Trust Fund. This may occur, for instance, when  the amount of collateral DOL requires from a self-insured coal operator  does not fully cover the operator’s benefit responsibility should the  operator become insolvent.

This report examines (1) how coal mine operator bankruptcies have  affected the Trust Fund, and (2) how DOL managed coal mine operator  insurance to limit financial risk to the Trust Fund. To address both  objectives, we reviewed relevant federal laws, regulations, and DOL  procedures. We also interviewed DOL officials, coal mine operators, and  insurance company representatives. Additionally, we interviewed officials  from the National Mining Association, National Council on Compensation  Insurance (NCCI), National Council of Self-Insurers, and the American  Academy of Actuaries, among others.

To assess how coal mine operator bankruptcies affected the Trust Fund,  we analyzed Bloomberg Terminal (Bloomberg) data and consulted DOL  to identify coal operators that filed for bankruptcy from 2014 through  2016, and whose cases had progressed far enough such that the  outcome (or likely outcome) was known. During these years, domestic  coal production declined from about 1 billion tons in 2014 to about 728  million tons in 2016, which was the lowest annual production level since  1978, according to U.S. Energy Information Administration (EIA) data.  Additionally, bankruptcies filed during these years were more likely to be  resolved at the time we conducted our work than more recently filed  bankruptcies, so their effects on the Trust Fund could be assessed. We  identified eight coal mine companies that filed for bankruptcy during our  selected years. To assess the reliability of the Bloomberg data, we  interviewed Bloomberg officials and reviewed relevant system  documentation. In addition, to assess the completeness of the Bloomberg  data, we conducted a limited legal search for bankruptcy filings and  verified our results with DOL. We determined that the data were  sufficiently reliable for the purposes of this report. To examine how each  of the eight coal mine operator bankruptcies affected the Trust Fund, we  interviewed DOL officials and reviewed DOL-provided documentation. For  instance, we reviewed bankruptcy settlement agreements and  reorganization plans, where applicable. We did not conduct a legal  analysis of the relevant bankruptcy court dockets, and relied solely on  documentation DOL provided to describe these bankruptcies.

To examine how DOL managed coal mine operator insurance to limit  financial risk to the Trust Fund, we analyzed data and documentation on  commercially-insured and self-insured coal mine operators. Specifically,  we reviewed NCCI data on the commercial workers’ compensation  insurance policies purchased by coal mine operators to secure their black  lung benefit liability from 2016 through 2018, the most recent three  complete years of data available. We reviewed the data to identify,  among other things, whether operators had lapses in coverage.

Specifically, we verified whether the 13 largest coal producers that were  not authorized to self-insure maintained adequate and continuous  commercial coverage during these years. We also reviewed DOL  documentation on each of the 22 coal mine operators that were self- insured at the time we conducted our work. For instance, we identified  the amount of collateral DOL required from these operators to self-insure  and DOL’s most recent reauthorization memo that documented its  periodic review of these operators.

We assessed the reliability of the NCCI data in several ways. Specifically,  we interviewed DOL and NCCI officials on how policy data is obtained,  processed, stored, and shared; reviewed documentation including a data  dictionary and users guide; reviewed DOL’s procedures and error checks  for validating that the NCCI data conforms to established parameters; and  reviewed the data for obvious errors, outliers, or missing information and  for logical connections between policy and endorsement data. We  determined that the data were sufficiently reliable for the purposes of this  report. However, we concluded that the beneficiary data we reviewed in  an attempt to determine the extent to which the Trust Fund paid benefits  during fiscal year 2018 on behalf of uninsured operators were not  sufficiently complete and consistently recorded. Thus, we were unable to  assess the effect on the Trust Fund of DOL not monitoring coal operator  compliance with commercial insurance requirements. This condition and  its causes are further described in the report, which form the basis for one  of our recommendations.

We also examined workers’ compensation insurance practices in four  states—Kentucky, Pennsylvania, West Virginia, and Wyoming—to identify  relevant practices that could inform DOL’s administration of coal operator  insurance at the federal level. Such practices may be informative because  both workers’ compensation and federal black lung disability payments  generally support workers with conditions, such as black lung, that were  contracted as a result of their employment. Workers’ compensation is  generally mandated by state law and employers are typically required to  purchase workers’ compensation insurance to secure these liabilities, or  may self-insure. Thus, state practices in monitoring and overseeing  workers’ compensation insurance may provide informative context for  examining DOL’s practices in overseeing federal black lung insurance.

To review state practices for monitoring and overseeing workers’  compensation insurance, we interviewed state insurance commissioners  and reviewed selected workers’ compensation laws, regulations, and  guidance in the four states we contacted. We selected Kentucky,  Pennsylvania, West Virginia, and Wyoming because they were among  the top five coal producing states in 2017, according to EIA data, and  therefore may be most familiar with workers’ compensation insurance that  covers black lung. Additionally, these states provided geographic  variation covering EIA’s three main domestic coal producing regions: the  Appalachian coal region, the Interior coal region, and the Western coal  region. Kentucky is divided between EIA’s Appalachian and Interior coal  regions. These states also provided variation in terms of the options  available to coal mine operators to secure their workers’ compensation  benefit liability. For instance, with the exception of Wyoming, all selected  states allowed operators to self-insure. In Wyoming, coal mining is  considered an “extra-hazardous” occupation and mine operators must  purchase workers’ compensation insurance from a state-provided option.  In our selected states, we obtained information on, among other things,  state practices for determining the amount of collateral required from coal  mine operators to self-insure their workers’ compensation benefit  liabilities, if applicable. We also obtained information about the extent to  which state officials reviewed self-insured coal mine operators to assess  whether the amount of collateral they required changed based on an  operator’s changing financial condition.

We conducted this performance audit from May 2018 through February  2020 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Black lung benefit payments include both cash assistance and medical  care. Maximum cash assistance payments ranged from about $670 to  $1,340 per month in 2019, depending on a beneficiary’s number of  dependents. Miners receiving cash assistance are also eligible for  medical treatment of their black lung-related conditions, which may  include hospital and nursing care, rehabilitation services, and  reimbursement for drug and equipment expenses, according to DOL  documentation. DOL estimates that the average annual cost for medical  care in fiscal year 2019 was approximately $8,225 per miner.

During fiscal year 2019, about 25,700 beneficiaries received black lung  benefits (see fig. 1). The number of beneficiaries has decreased from  about 174,000 in 1982 as a result of declining coal mining employment  and an aging beneficiary population, according to DOL. Black lung  beneficiaries could increase in the near term due to the rise in the  occurrence of the disease in its most severe form, progressive massive  fibrosis, particularly among Appalachian coal miners, according to the  National Institute for Occupational Safety and Health (NIOSH). NIOSH  reported that coal miners in central Appalachia are disproportionately  affected; as many as 1 in 5 show evidence of black lung, which is the  highest level recorded in 25 years. NIOSH has attributed the rise in  occurrence of black lung to multiple factors, including increased exposure  to silica.

Black lung claims are processed by the Office of Workers’ Compensation  Programs within DOL. Contested claims are adjudicated by DOL’s Office  of Administrative Law Judges, which issues decisions that can be  appealed to DOL’s Benefits Review Board. Claimants and mine  operators may further appeal these DOL decisions to the federal courts. If  an award is contested, claimants can receive interim benefits until their  case is resolved, which are generally paid from the Trust Fund, according  to DOL. In fiscal year 2019, about 33 percent of black lung claims were  approved, according to DOL data. Final awards are either funded by mine  operators—who are identified as the responsible employers of  claimants—or the Trust Fund, when responsible employers cannot be  identified or do not pay. Of the approximately 25,700 beneficiaries  receiving black lung benefits in 2019, 13,335 were paid from the Trust  Fund; 7,985 were paid by responsible mine operators; and 4,380 were  receiving interim benefits, according to DOL data. DOL officials told us  that the more common reasons that beneficiary claims are paid from the  Trust Fund include operator insolvency and unclear employment history  of miners, among other reasons (see fig. 2). The operator responsible for  the payment of benefits is generally the operator that most recently  employed the miner.

Federal law generally requires coal mine operators to secure their black  lung benefit liability. A self-insured coal mine operator assumes the  financial responsibility for providing black lung benefits to its eligible  employees by paying claims as they are incurred. Operators are allowed  to self-insure if they meet certain DOL conditions. For instance, operators  applying to self-insure must obtain collateral in the form of an indemnity  bond, deposit or trust, or letter of credit in an amount deemed necessary  and sufficient by DOL to secure their liability.

Operators that do not self-insure are generally required to purchase  coverage from commercial insurance companies, state workers’  compensation insurance funds, or other entities authorized under state  law to insure workers’ compensation. DOL regulations require  commercial insurers to report each policy and federal black lung  endorsement issued, canceled, or renewed in a form determined by  DOL. DOL accepts electronic reporting of this information from insurers  via their respective rating bureaus. DOL retains this information— insured company name, address, federal employer identification number,  and policy and endorsement data—so that DOL staff can later research  claims to determine which operator and insurer may be liable.

As we have noted in prior reports, insurance companies are regulated  primarily by the states with state law providing state regulators with the  authority and funding to regulate insurance. State insurance regulation  is designed to, among other things, help insurers remain solvent and able  to pay claims when due. Effective insurer underwriting and risk  management practices—such as reinsurance–serve a similar function.  While insurer insolvency occurs infrequently, when it does state insurance  commissioners are typically appointed as receiver and supervise the  rehabilitation or liquidation of these insurers, and state guaranty funds  may assume liability for paying covered claims of insolvent insurers that  have liquidated.

Some Self-Insured Operator Bankruptcies Shifted Liability to the Trust Fund, but Commercial Insurance Coverage Can Help Limit Trust Fund Exposure Self-Insured Operators Transferred About $865 Million in Estimated Liability to the Trust Fund, More than Double DOL’s Previous Estimate

Of the eight coal mine operator bankruptcies we identified, three resulted  in a transfer of estimated benefit liability from the coal operator to the  Trust Fund and five did not, according to DOL. Using Bloomberg data, we  identified coal mine operators that filed for bankruptcy from 2014 through  2016. Figure 3 shows how many operators were self-insured or  commercially-insured at the time of bankruptcy, and if responsibility for  benefits was shifted from the bankrupt operator to the Trust Fund.

Three self-insured coal mine operator bankruptcies affected the Trust  Fund. Specifically, the bankruptcies of Alpha Natural Resources (Alpha),  James River Coal (James River), and Patriot Coal (Patriot) resulted in a  transfer of benefit liability to the Trust Fund of an estimated $865 million,  according to DOL. DOL officials said that the amount of collateral they  required from these three operators to self-insure was inadequate to fully  cover their estimated benefit liability. When this occurs, benefit liability in  excess of the collateral can be transferred to the Trust Fund. For  example, the collateral DOL required from Alpha was about $12 million  and approximately $494 million of estimated benefit liability transferred to  the Trust Fund, according to DOL’s estimate (see table 1).

DOL estimates for how these three operator bankruptcies will affect the  Trust Fund have more than doubled from what DOL had previously  reported. In June 2019, we reported that DOL estimated that between  $313 million to $325 million in benefit liabilities would transfer to the Trust  Fund as a result of these bankruptcies. In January 2020, however, DOL  provided updated estimates stating that $865 million in benefit liabilities  would transfer to the Trust Fund as a result of these bankruptcies.  According to DOL, their estimates increased to account for higher black  lung benefit award rates that occurred from fiscal years 2016 through  2019; higher medical treatment cost inflation in recent years; and different  discount rate assumptions. Additionally, DOL’s prior estimate for the  Patriot bankruptcy did not account for future claims and the effect of those  claims on the Trust Fund.

The three other self-insured coal mine operator bankruptcies we identified  did not affect the Trust Fund. Specifically, Arch Coal, Peabody Energy,  and Walter Energy were also self-insured operators, but DOL officials  said that their federal black lung benefit liabilities were assumed by a  reorganized company or by a purchaser, and therefore did not transfer to  the Trust Fund.

DOL officials said that they take three key actions, as appropriate, to  protect the financial interests of the Trust Fund during self-insured  operator bankruptcies.  1.  DOL officials said that they file a claim in every case with the  bankruptcy court for the reimbursement of an operator’s full estimated  federal black lung benefit liability.  2.  If an operator plans to reorganize or if it is acquired by a purchaser,  DOL officials said that they negotiate with the company or the  purchaser, as appropriate, to help ensure benefit responsibility will be  “passed through” to a reorganized operator or purchaser, rather than  be discharged and become the responsibility of the Trust Fund.  3.  If benefit liabilities are not “passed-through” to an operator, DOL  officials said that they seek settlement agreements, whereby the Trust  Fund receives an allowed general unsecured claim in an amount  based on an operator’s estimated benefit liability.

DOL officials said that during the bankruptcy of James River they  negotiated a settlement agreement providing DOL with a general  unsecured claim in an amount commensurate with its estimate of the  operator’s benefit liability at the time of bankruptcy. However, these  officials said that given the low priority under bankruptcy law for their  general unsecured claim, the payout they received was only about  $400,000, which was just a small portion of the estimated benefit liability  that transferred to the Trust Fund.

DOL officials said that during the bankruptcy of Alpha they negotiated  both a “pass through” and a settlement agreement in which certain  liabilities would be transferred to the Trust Fund, while other liabilities  would be retained by Alpha. DOL officials said that they received a payout  from Alpha of $7.4 million, although $494 million in estimated benefit  liability transferred to the Trust Fund. Further, as a condition of the  agreement, DOL officials said that they agreed to let Alpha self-insure  after it emerged from bankruptcy.

Since 2016, several other self-insured operators have also filed for  bankruptcy, according to DOL officials, including Cambrian Coal, Cloud  Peak Energy, Murray Energy, and Westmoreland Coal. DOL officials said  that $17.4 million in estimated black lung benefit liability will transfer to the  Trust Fund as a result of Westmoreland Coal’s bankruptcy. Given the  uncertainty of the bankruptcy process in terms of whether liabilities will or  will not transfer to the Trust Fund, however, DOL officials said that they  could not speculate on how the other bankruptcies may affect the Trust  Fund.

State Insurance Regulation and Insurer Practices Help to Protect the Trust Fund from Assuming Responsibility for Paying Benefits of Commercially-Insured Operators

Insurance contracts or policies to secure operators’ benefit liabilities are  required by law to include a provision that insolvency or bankruptcy of an  operator does not release the insurer from the obligation to make benefit  payments. As previously discussed, state insurance regulation, insurer  underwriting and risk management practices, and state guaranty funds  also help to protect the Trust Fund from having to assume responsibility  for paying black lung benefits on behalf of bankrupt coal operators. Thus,  by being commercially insured, the two operator bankruptcies we  identified that filed for bankruptcy between 2014 and 2016—Energy  Future Holdings and Xinergy Ltd—did not affect the Trust Fund,  according to DOL (see fig 3).

State insurance commissioners monitor the financial health of insurers,  including performing periodic examination of insurer financial statements.  Further, rating agencies, such as Standard & Poor’s, Moody’s, and AM  Best, issue insurer financial strength ratings, which represent the  agencies’ opinions on insurers’ financial strength and ability to pay policy  and contract obligations. Eight of the nine insurers that issued  approximately 90 percent of the workers’ compensation policies with  federal black lung coverage from 2016 through 2018, according to our  review of DOL data, had at least an “A-” financial strength rating from  AM Best (with the one remaining being a state insurer that was not  rated).

In deciding whether to provide federal black lung coverage, insurers we  interviewed said they consider an operator’s historical black lung claim  losses, financial condition, and mine location among other factors.  However, insurance company officials identified various challenges in  writing and pricing black lung coverage that produces an appropriate  amount of premiums to cover expected losses. The challenges cited by  these officials included the long latency period of black lung disease;  changes in law regarding benefit eligibility and how the disease is  defined; the ability of miners to refile claims indefinitely; and the inability  of insurers and operators to settle claims. One official noted that there is  much risk and little profit in black lung coverage.

Insurance companies can use reinsurance to protect themselves from  catastrophic losses that could threaten their solvency and ability to pay  claims, and to reduce wide fluctuations in their annual losses. For  example, workers’ compensation claims can take years to fully develop  after premiums have been set, which in turn can adversely affect an  insurer’s financial position if premiums have underestimated actual  claims. Insurance company officials said that they reinsure their workers’ compensation coverage, but some said that their reinsurance policies  either explicitly excluded occupational disease claims, including black  lung, or cover black lung but have conditions and loss thresholds that  would generally result in the exclusion of such claims. However,  reinsurance, even if it does not explicitly cover federal black lung claims,  can help manage the risk of workers’ compensation losses and losses in  other lines of insurance that an insurer writes, thereby indirectly helping to  ensure that the insurer can pay all types of claims, including federal black  lung.

If an insurer becomes insolvent, state guaranty funds reduce the potential  for the Trust Fund to assume responsibility for paying claims. States have  different rules for guaranty fund benefit coverage and limits. In the states  we reviewed, state guaranty funds generally pay federal black lung  benefits, although there may be certain limitations on the claims they will  pay. For example, in West Virginia, there is no maximum claim limit that  the state guaranty fund will pay on standard workers’ compensation  claims; but in Kentucky, a state guaranty fund official told us that, in the  guaranty fund’s opinion, state law limits federal black lung claims to  $300,000. Also, a guaranty fund could reject a federal black lung claim,  which could result in the Trust Fund having to assume responsibility for  paying the claim. An official from one state guaranty fund that maintained  data on rejected black lung claims said that the most common reason for  rejection is that claims are filed after the date set by the bankruptcy court  for receiving claims. DOL officials said it is very uncommon for the Trust  Fund to assume responsibility for federal black lung claims of insolvent  insurers. However, DOL does not maintain data to readily determine the  extent to which this actually occurs, as discussed later in this report.

DOL’s Limited Oversight Has Exposed the Trust Fund to Financial Risk, and Its New Self-Insurance Process Lacks Enforcement Procedures

In overseeing coal mine operator self-insurance in the past, DOL did not  estimate future benefit liability when setting collateral; regularly review  operators to monitor their changing financial conditions; or always use  enforcement tools available to protect the financial interests of the Trust  Fund, such as by revoking an operator’s ability to self-insure, if warranted.  In July 2019, DOL began implementing a new self-insurance process  that, if implemented effectively, should help to address some of these  past deficiencies. Specifically, DOL plans to consider an operator’s future  benefit liability when setting collateral and to review self-insured operators  more frequently. However, the new process still lacks procedures for self- insurance renewals and coal operator appeals, which could hinder DOL  from taking enforcement actions to protect the Trust Fund as needed.  Additionally, DOL does not monitor whether operators that do not self- insure maintain adequate and continuous commercial insurance coverage  as required by law.

DOL Did Not Estimate Future Benefit Claims When Setting Collateral and Regularly Review Self-Insured Operators

Agency regulations require DOL to obtain collateral from coal mine  operators applying to self-insure in an amount deemed by DOL to be  necessary and sufficient to secure the payment of the operators’ liability.   To determine collateral amounts under the former process, agency  procedures stated that DOL first assess an operator’s net worth by  reviewing, among other factors, the operator’s audited financial statement  and black lung claims information. DOL then determined the amount of  collateral equal to 3, 5, or 10 years of the operator’s annual black lung  benefit payments made at the time of the operator’s self-insurance  application, depending on its net worth. Specifically, if net worth was $1  billion or greater, agency procedures stated that DOL set collateral equal  to 3 years of benefit payments. If net worth ranged from $500 million to $1  billion, DOL set collateral equal to 5 years of benefit payments. If net  worth ranged from $10 million to $500 million, DOL set collateral equal to  10 years of benefit payments. Agency procedures did not permit  operators with net worth less than $10 million to self-insure.

DOL’s former process for determining collateral did not routinely consider  potential future claims for which an operator could be responsible. DOL  had periodically reauthorized coal operators to self-insure, by reviewing  an operator’s most recent audited financial statement and claims  information, among other things. DOL prepared memos documenting  these reviews and communicated with coal operators about whether their  financial circumstances warranted increasing or decreasing their  collateral. Estimating future costs based on sound actuarial practice is  essential to the integrity of the insurance and the risk financing system  and is key to fulfilling the promises embodied in insurance contracts,  according to Actuarial Standards Board standards. Additionally, in three  of the four states we contacted, state insurance officials said that they  used actuarial methods to assess an operator’s future estimated benefit  liability when considering how much collateral should be required to self- insure. The remaining state, Wyoming, did not allow coal mine  operators to self-insure.

Table 2 provides information on the 22 operators that were self-insured  under DOL’s former process, including the date of each operator’s last  DOL reauthorization; the amount of DOL-required collateral; and the  operator’s estimated black lung benefit liability, if available.

Agency regulations state that DOL may adjust the amount of collateral  required from self-insured operators when experience or changed  conditions so warrant, but DOL did not regularly monitor these  operators to reauthorize their ability to self-insure. In reviewing DOL’s  most recent reauthorization memos for each of the 22 self-insured  operators, we found that while some of these operators had been  reauthorized more recently, others had not been reauthorized by DOL in  decades. One operator in particular had not been reauthorized by DOL  since 1988.

DOL officials stated that from 2009 to 2012, six employees handled coal  operator reauthorizations and associated work actions. Due to attrition,  however, this number dropped at times to three employees, according to  DOL officials. Additionally, DOL had no written procedures that specified  how often reauthorizations should occur after an operator’s initial 18- month reauthorization. In contrast, in two of the four states we contacted,  state insurance officials were required to review self-insured employers at  least annually.

DOL Did Not Always Use Enforcement Tools to Protect the Trust Fund

Revoking an operator’s ability to self-insure, fining mine operators for  operating without insurance, and placing liens on operator assets are  tools DOL has available to mitigate financial losses to the Trust Fund.  Based on our review of DOL documentation, however, we found  instances when DOL did not use these tools to protect the Trust Fund, or  was hindered from doing so because of an operator’s ongoing appeal or  bankruptcy.

In September 2001, DOL required $5 million in additional collateral  from James River, which would have increased its collateral from $0.4  million to $5.4 million. Although DOL did not receive the additional  collateral, it did not revoke the operator’s authority to self-insure,  which is a potential option under agency regulations. Further, DOL  had not reauthorized James River at any point from August 2001 until  it filed for bankruptcy in April 2014. If DOL had revoked James River’s  ability to self-insure, it could have potentially prevented the Trust Fund  from being responsible for claims based on a miner’s employment  from 2001 through 2016, when James River liquidated. Additionally, if  the operator had been unable to obtain commercial insurance, DOL  could have potentially fined the operator for each day it operated  without insurance. Instead, DOL took no action during these years  and estimated benefit liability of $141 million was shifted to the Trust  Fund, according to DOL. DOL officials stated that they do not have  records explaining why James River did not provide the additional  collateral or why they did not revoke its authority to self-insure.

In August 2014, DOL required $65 million in collateral from Patriot,  increasing its collateral from $15 million to $80 million. Patriot  appealed this decision and, in the 8 months that followed before  Patriot filed for bankruptcy in May 2015, DOL did not obtain additional  collateral, or revoke Patriot’s ability to self-insure because the appeal  was still pending. DOL officials said they would not typically revoke an  operator’s authority to self-insure during an ongoing appeal. As a  result, DOL was hindered from using this enforcement tool.

Liens on operator assets can be an effective tool to protect the Trust  Fund if an operator defaults on its benefit liabilities, but DOL officials said  that they are hindered from using this tool if an operator files for  bankruptcy. DOL can place a lien on a coal operator’s assets under  federal law if they refuse the demand to pay the black lung benefit  payments for which they are liable. In the event of bankruptcy or  insolvency, federal law states that the lien imposed shall be treated in the  same manner as a lien for taxes due and owing to the United States  under certain laws. However, DOL officials said that operators rarely  stop paying benefits until after they file for bankruptcy. Once a bankruptcy  occurs, DOL officials said that they are generally prevented by the court  from placing a lien and taking an operator’s assets in lieu of payment of  current and future benefit liabilities. Under bankruptcy law, DOL officials  said that they have no special status over other creditors with outstanding  financial claims. Instead, DOL officials said that obtaining sufficient  collateral is a better way to protect the Trust Fund.

DOL Has Implemented a New Self-Insurance Process, but It Lacks Procedures to Help Ensure Enforcement Actions

In July 2019, DOL began implementing a new process for coal mine  operator self-insurance that should help to address some past  deficiencies if implemented effectively. Specifically, DOL is to consider an  operator’s future benefit liability when setting collateral and plans to more  frequently review self-insured operators (see text boxes). Under the new  process, DOL officials plan to assess the risk of operator bankruptcy  using various financial metrics related to profitability and solvency. As a  result, DOL officials said that the amount of collateral they will require  from operators to self-insure going forward will be based on both an  estimate of an operator’s current and future black lung liability and the risk  of default due to insolvency. As of October 2019, DOL officials said that  most self-insured operators had submitted their application and  supporting documentation and that they were reviewing this information to  decide whether these operators should continue to be self-insured.

DOL’s New Self-Insurance Process Will Include Estimates of Future Benefit  Liability  Coal mine operators applying to DOL to self-insure will be required to submit: a completed application;  a certified consolidated financial statement for each of the 3 years prior to its  application;  recent black lung claims information; and  a certified actuarial report on the operator’s existing and future black lung  benefit liabilities.

DOL plans to use the information submitted by coal mine operators to assess the  insolvency risk of each operator using various financial metrics related to profitability  and solvency. Depending on the results of their analysis, DOL plans to categorize  the risk-level of each applicant as low, medium, or high. DOL will then set the  amount of collateral required to self-insure by linking the operator’s risk category to a  corresponding percentage of the operator’s actuarial estimated benefit liability. DOL  policies state that they would require a high-risk operator to secure with collateral 90  percent of estimated benefit liability, a medium-risk operator to secure 45 percent,  and a low-risk operator to secure 15 percent. However, in February 2020, DOL  officials said they plan to revise these percentages to 100 percent, 85 percent, and  70 percent for high-risk, medium-risk, and low-risk operators, respectively.

DOL’s New Self-Insurance Process Will Require More Frequent Coal Mine  Operator Reviews  Coal mine operators that are already authorized to self-insure will be required to        submit:

DOL plans to use the information self-insured operators submit to update their  insolvency risk analysis. If an operator’s risk category changes (e.g., from low-to  medium-risk), DOL plans to send a form to the operator requiring an additional  amount or type of collateral. Upon receiving the completed form, and proof that the  collateral has been obtained, DOL stated that they will notify the operator that its  a self-insurance renewal application (annually);  a financial summary (quarterly);  a certified consolidated financial statement (annually);  black lung claims information (annually); and  actuarial estimate of benefit liability (to be submitted every three years).  authority to self-insure has been reauthorized.

DOL’s new self-insurance process made important changes, but  overlooked other key internal control improvements that are needed to  protect the financial interests of the Trust Fund. DOL’s new requirements  for setting collateral and for the annual and quarterly review of self- insured operators are key components of internal controls, which call for  agency management to implement control activities through policy.  However, DOL’s new self-insurance process lacks procedures that could  help to prevent past oversight deficiencies from reoccurring. Among other  things, DOL’s procedures do not specify (1) the duration of an operator’s  self-insurance authority, (2) the time frames for submitting renewal  applications and supporting documentation, and (3) the conditions under  which an operator’s self-insurance authority would not be renewed.  Without such procedures, DOL has no basis to take enforcement action  should an operator not submit its self-insurance renewal application and  supporting documentation.

DOL staff are also hindered from taking enforcement action during an  operator’s ongoing appeal, as previously mentioned. DOL policies state  that an operator may request reconsideration if its self-insurance  application has been denied or if it believes the collateral required by DOL  is too high to secure its benefit liabilities. However, DOL lacks procedures  that specify, among other things, the length of time that operators have to  submit supporting information. Further, DOL does not specify a goal for  how much time DOL appeals decisions should take. For example, in  October 2015, DOL recommended revoking Murray Energy’s (Murray)  authority to self-insure due to deteriorating financial conditions. Murray  appealed this decision, and DOL officials said they postponed responding  to the appeal until their new self-insurance process was implemented so  that they could evaluate Murray under its new process along with the  other self-insured operators. However, Murray filed for bankruptcy in  October 2019 and DOL had not revoked its authority to self-insure or  requested additional collateral because Murray’s appeal was still pending  and DOL was still evaluating how much collateral it would require from  the operator under its new self-insurance process.

DOL Does Not Monitor Whether Coal Mine Operators Maintain Commercial Insurance Coverage

DOL does not monitor coal mine operators that do not self-insure and,  thus, must commercially insure their federal black lung liabilities to make  certain they maintain adequate and continuous coverage as required by  law. DOL previously monitored operators' compliance with the program's  insurance requirements by annually sending letters to a selection of  operators seeking confirmation that they had maintained adequate  coverage, but discontinued the process once the agency began receiving  NCCI policy data. In order to use the policy data for the purpose of  identifying operators that have not maintained coverage, DOL would, as a  starting point, have to maintain a record of all employers that operate a  coal mine. However, DOL officials explained that they do not currently  maintain such a record.

In the absence of effective DOL monitoring of operator compliance, we  evaluated the potential risk that uninsured operators could pose to the  Trust Fund. Specifically, in examining the 13 largest coal operators that  were not approved to self-insure their federal black lung liabilities and,  therefore, had to obtain commercial coverage, we found that some  insurers erred in reporting endorsements and in one instance an operator  did not have adequate coverage.

We found six operators (parent or subsidiary) that were not insured for  the entire 3 year period from 2016 through 2018, according to our  review of DOL data. When we discussed our findings with DOL,  agency officials had to research each operator individually and in  some cases contact the operator or their insurer to find out whether or  not they had been covered. DOL concluded that these entities were  insured. However, the insurers had not properly reported the federal  black lung endorsement on new policies or subsequent renewals, in  addition to other reporting issues.

One of these six operators also had, inadvertently, not maintained  adequate commercial coverage for its mining operations in Texas,  and had not self-insured those operations. In this instance, the  operator obtained an excess loss policy that only pays claims once  they exceed a high threshold and, therefore, is not sufficient by itself  to secure the payment of the operator’s benefit liabilities. DOL data  does not include information on excess loss policies and, while the  data NCCI provides on standard workers’ compensation policies with  federal black lung endorsements lists operators’ addresses, they do  not provide the specific states for which endorsements apply.

Designing processes to achieve agency objectives and respond to risks is  a principle of effective internal controls. Without a process to monitor  operator compliance with program insurance requirements, DOL risks not  identifying a lapse or cancellation of operator coverage. This could result  in the Trust Fund having to assume responsibility for paying benefits that  would otherwise have been paid by an insurer.

DOL officials said the Trust Fund infrequently pays claims on behalf of  uninsured operators due to the civil penalties that it can impose on  operators and certain company officers. These officials also said that  operators that do not maintain insurance coverage typically employ few  miners and are out of business by the time a claim is filed and, thus,  cannot be held liable for benefit claims. However, DOL officials  acknowledged that they do not track how often claims are paid by the  Trust Fund on behalf of uninsured operators that should have been  insured.

We attempted to examine the extent to which claims were paid by the  Trust Fund in fiscal year 2018 on behalf of uninsured operators that  should have been insured. We found that DOL’s black lung claimant  and payment system does not identify whether potentially responsible  operators should have had commercial insurance coverage. The data on  responsible operators and insurers, as well as the basis on which an  operator was determined to be responsible, were not consistently  recorded. DOL officials said that the data fields that identify responsible  operators and their insurers should reflect the information collected from  DOL’s initial determination. DOL officials said that in some cases, after an  adjudication decision determined the Trust Fund was responsible for  paying benefits, claim examiners may have deleted the previously  recorded responsible operator and insurer data, creating potential  inconsistencies in the data.

DOL officials acknowledged that its processes and guidance for recording  information on responsible operators and the basis for those decisions  resulted in inconsistent and potentially inaccurate recording of claim and  benefit data. As a result, DOL issued preliminary guidance in February  2019 to field supervisors and claims examiners. However, the revised  guidance does not include how to identify potentially responsible  operators that should have had commercial coverage but did not.

Monitoring agency internal control systems and evaluating the results of  those activities is a principle of effective internal control. Without  complete and consistently recorded information on potentially responsible  operators and insurers, and the basis for determination decisions, DOL is  not able to effectively evaluate the financial impact claims paid on behalf  of uninsured operators have on the Trust Fund. Determining the financial  impact of these claims would be important to DOL’s evaluation of the  effectiveness of a process for monitoring operator compliance with black  lung program insurance requirements.

The Black Lung Disability Trust Fund faces financial challenges, and  DOL’s limited oversight of coal mine operator insurance has further  strained Trust Fund finances by allowing operator liabilities to transfer to  the federal government. DOL’s new self-insurance process may help to  address past deficiencies in setting collateral and reviewing self-insured  operators if implemented effectively. However, DOL still lacks procedures  on self-insurance renewals and coal operator appeals that could help to  ensure that DOL staff will take enforcement actions when needed.  Establishing clear self-insurance renewal procedures could better position  DOL to take action to protect the Trust Fund should an operator not  submit its renewal application and supporting documentation, or comply  with DOL’s collateral requirements. Procedures that identify time lines for  self-insured operators to submit documentation supporting their appeals,  and that identify a goal for how much time DOL should take to make  appeals decisions could help to ensure that DOL is able to revoke an  operator’s ability to self-insure, when warranted.

Commercially-insured federal black lung liabilities can limit the Trust  Fund’s exposure to financial risk, but only if operators maintain adequate  and continuous coverage as required. Currently, DOL does not identify  lapses or cancellations in coverage among commercially-insured  operators until after a claim is filed. Establishing a process to identify  lapses and cancellations in coverage before claims get filed could help  prevent the Trust Fund from becoming responsible for these claims.

We are making the following three recommendations to the Department  of Labor:

The Director of the Office of Workers’ Compensation Programs should  develop and implement procedures for coal mine operator self- insurance renewal that clarifies how long an operator is authorized to  self-insure; when an operator must submit its renewal application and  supporting documentation; and the conditions under which an  operator’s self-insurance authority would not be renewed.  (Recommendation 1)

The Director of the Office of Workers’ Compensation Programs should  develop and implement procedures for self-insured coal mine operator  appeals that identify time lines for self-insured operators to submit  documentation supporting their appeals and that identify a goal for  how much time DOL should take to make appeals decisions.  (Recommendation 2)

The Director of the Office of Workers’ Compensation Programs should  develop and implement a process to monitor operator compliance with  commercial insurance requirements and periodically evaluate the  effectiveness of this process. This process should be designed to  detect errors and omissions in reporting insurance coverage using  complete, accurate, and consistently recorded data.  (Recommendation 3)

We provided a draft of this report to the Department of Labor (DOL) for  review and comment. Their written comments are reproduced in appendix  I. DOL also provided technical comments and clarifications, which we  have incorporated, as appropriate. DOL agreed with our three  recommendations and said it is acting to implement them to achieve  further improvements in ensuring the effective oversight of coal mine  operator insurance.

DOL acknowledged the importance of improving oversight of coal mine  operator insurance and commented that it made major oversight  improvements in recent years. DOL commented that it began developing  a new coal mine operator self-insurance process in 2015, before GAO  began its review, and DOL formally approved this process in 2017. In July  2019, DOL stated that its new process was finalized when the Office of  Management and Budget (OMB) approved the forms to collect financial  and other information from coal mine operators. DOL stated that it is now  reviewing information obtained from coal mine operators, and expects to  set the amount of collateral required to self-insure under its new process  in the first half of 2020. We commend DOL’s efforts to address the  deficiencies of its past self-insurance process. However, we remain  concerned about continuing coal operator bankruptcies and the looming  unsecured black lung benefit liabilities that still threaten the Trust Fund.

DOL commented that adopting GAO’s recommendations would further  improve its oversight of coal mine operator insurance going forward.  Specifically, DOL reported that it will (1) ensure letters granting or  renewing self-insurance authority will inform operators that their  authorization expires in one year and that they must submit renewal  information three months in advance of the expiration date, (2) ensure  letters denying self-insurance will inform operators that they have a 30- day appeal period (limited to one extension) and that DOL has set a goal  of resolving all appeals within 90 days of the denial letter, and (3) modify  existing computer systems to identify lapses or cancellations of  commercial insurance coverage, and require operators identified as  having lapsed or cancelled coverage to obtain or provide proof of  coverage within 30 days.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of Labor, and other  interested parties. In addition, the report will be available at no charge on  GAO’s web site at http://www.gao.gov.

If you or your staffs should have any questions about this report, please  contact Cindy Brown Barnes at (202) 512-7215 or  brownbarnesc@gao.gov, or Alicia Puente Cackley at (202) 512-8678 or  cackleya@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  II.

Appendix I: Comments from the U.S. Department of Labor

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contacts named above, Blake Ainsworth (Assistant  Director), Patrick Ward (Assistant Director), Justin Dunleavy (Analyst-in- Charge), Monika Gomez, Courtney LaFountain, Rosemary Torres Lerma,  and Scott McNulty made key contributions to this report. Also contributing  to this report were James Bennett, Nancy Cosentino, Caitlin Cusati, John  Forrester, Alex Galuten, Ellie Klein, Emei Li, Corinna Nicolaou, Almeta  Spencer, Curtia Taylor, and Shana Wallace.

The federal government’s Black Lung Disability Trust Fund faces financial challenges and has borrowed billions to cover costs. The Trust pays benefits to certain coal miners when no coal mine operator can be held responsible, or when the liable operator does not pay.

Three coal mine operator bankruptcies have further strained Trust finances by transferring $865 million in estimated benefit responsibility to the Trust—and more bankruptcies are expected.

Our 3 recommendations to the Department of Labor call for better oversight of coal mine operator insurance to help limit the federal government’s future financial liability.