Nevada’s state-managed fund for cleaning up leaky underground gasoline storage tanks has become a “corporate welfare system” benefiting large businesses, according to a state audit that estimated improved “management and accountability” would save the fund up to $65 million.

The audit into the state’s Petroleum Fund, managed by the Division of Environmental Protection and formed to provide financial assistance for leaks and clean up of underground petroleum storage tanks, drew sharp responses from state officials including Gov. Steve Sisolak during its presentation last month to the Executive Board Audit Committee (composed of statewide elected officials including the governor, lieutenant governor, attorney general, secretary of state, controller and treasurer).

Officials expressed concern over financial practices of the board, a lack of physical on-site inspection for completed projects and three documented instances of possible billing fraud committed by several environmental contractors who continued to work with the division.

“I can tell you that under the audit committee that you're before today, this isn't going to be tolerated,” Sisolak said at the meeting. “I mean, this is just simply not acceptable. Submitting false invoices, as the lieutenant governor said, the public deserves better than this and we're certainly going to give them better than this.”

Nevada’s Petroleum Fund was put in place in 1989 after the federal government published its first set of regulations and requirements for underground storage tank operators — typically gas station owners, but also including some residential owners who use the tanks for storing home heating oil. Funding for the program comes from a $100 annual fee for tank owners and a $0.0075 cent fee on each gallon of gas refined or imported into the state to operate the state-managed insurance program, which helps pay for leaks or spills from underground petroleum storage tanks.

The audit report stated that the fund had “strayed from its legislative intent of helping small businesses” in the petroleum industry in favor of helping larger companies (defined as having more than $500,000 in gross revenue). Of more than $230 million spent through the fund on clean-up efforts, only $4.9 million had gone to small business clean-ups; only four businesses since the fund was created in 1989 have been designated as a “small business.”

Auditors wrote in the report that larger businesses are “likely financially able” to cover the cost of insuring for petroleum leaks, and that a needs-based grants program established by the fund in 2017 to help with infrastructure repairs and upgrades could have a wider reach if the fund limited its scope to small businesses.

“The Fund was not intended to primarily provide state funding for large corporations,” auditors wrote in the report. “Limiting funding to small businesses would allow the Fund to make more grant funding available to prevent spills.” 

Greg Lovato, the state’s Environmental Protection Administrator who sits on the fund’s board, told audit committee members that the seeming disparity was because of the low revenue limit for the definition of “small business” and that the original point of the fund was to help ensure equal access to financial assistance for leak clean-ups.

“But again, it's our view that the equity that was being sought in the original legislation was really more to allow access to this form of financial assurance required by the federal regulations as opposed to that claims are paid out on a preferential basis to small businesses,” he said.

Peter Krueger, a lobbyist for the Nevada Petroleum Marketers and Convenience Store Association, said that the current ownership structure and natural inflation has changed dramatically since the small business definition of $500,000 in gross revenue limit was put in place. He said he would welcome discussions on changing the definition and revenue limit, and especially parsing out revenue between sales of all goods from a gas station as opposed to only fuel sales.

“Are we talking revenue from the sale of fuel or Twinkies? It makes a difference,” he said in an interview.

Auditors also identified issues with internal controls and a lack of on-site inspections prior to approving claims from the fund, plus three possible instances of fraud between 2014 and 2016 including inflated bids and false invoices submitted by independent contractors working with the Petroleum Fund. 

Although the audit report notes that staff of the fund have not conducted full audits of the more than $230 million spent in clean-up cases, it states that fund staff are in the process of implementing a new claim tracking database for expenditures, payments and invoices. But it also noted that staff of the Petroleum Fund had no written policies for reimbursement and that the fund had failed to follow a similar 2001 audit that recommended staff of the fund conduct on-site inspections for approved clean-up projects.

Lovato said the examples of fraud had not been prosecuted, and that the board had taken action to correct and reduce the reimbursement amount and changed policies to prevent similar situations from happening again. But he said some of the individuals who were engaged in suspected fraud are still working for the state — a detail that drew the ire of audit committee members.

“It certainly seems we're talking about all of the work that you're doing to prevent these things from happening in the future, but it seems like the best way to prevent these things from happening in the future is to not work with the people who have done them in the past,” state Treasurer Zach Conine said.

In an email, Lovato said that the three instances were suspected but never legally proven to be fraud or abuse by the division, and that two of the three instances were referred to former Attorney General Adam Laxalt’s office in 2015. He said that the Petroleum Fund Board had preliminarily identified questionable claim reimbursements and substantially lowered them in all three cases, and that the board had adopted policies to prevent or reduce recurrence of potential fraud.

Attorney General Aaron Ford’s Chief of Staff, Jessica Adair, said the office was looking into the cases of alleged fraud and why charges were not brought when the potential of fraud was discovered.

The audit report also identified several other issues with the risk-management tools and other internal controls used by the Petroleum Fund, including issues with 12 “legacy” cases that were opened prior to 1995 and are still ongoing.

“Since the Fund pays 100 percent of the reimbursements on these 12 open legacy cases, there is no incentive for the owner/operators or (Certified Environmental Managers) to close these cases,” the report stated.

In its response, the Division of Environmental Protection agreed to implement the recommendations. Auditors will update the executive branch audit committee on compliance with the report during its meeting at the end of 2019.