NOTE 18

COMMITMENTS AND CONTINGENCIES

Environmental Protection Claims

The State maintains several environmental protection programs including a bonding program for coal operators for mine reclamation, an underground storage tank insurance fund, an abandoned oil and gas well bonding program, and a Landfill Closure Assistance Program (LCAP). Under such programs, the State charges various fees, premiums, other assessments, and sets bonding amounts that operators are required to maintain to ensure that funds are available in the event that the operator is unable to fulfill its environmental protection responsibilities. The bonding programs for operators of coal mines and oil and gas wells are maintained as primary insurance programs for substantially all such operators. The insurance fund for the operators of the underground storage tanks is available to operators who otherwise cannot obtain or afford such bonding. The LCAP program was established in 1991 to provide assistance with closure costs to the landfill owners that do not have the financial viability to meet closure regulations.

Based upon the State’s estimate of the liability for incurred losses under the programs, the bonding amounts and funding structures established by the State have proven inadequate to fund the actual costs of environmental protection that the State has incurred in acceptance of the related insurance risk. As a result, the State has been required at various times to increase fees and bonding rates, as well as make administrative changes in its permitting regulations governing the industries and businesses benefiting from the State’s maintenance of such environmental protection programs.

To date, the revenues generated, including the forfeited bonds, have been less than the State’s estimate of its undiscounted claims liability for such programs, including the estimated cost of claims that have been incurred but not settled and claims that are probable to have been incurred. During 1995 management obtained further information and legal interpretation that has led it to conclude that an obligation of the State to conduct the necessary reclamation efforts required under these programs exists, even if funds are not available for such programs, and that generally accepted accounting principles require recognition of such obligation in the State’s financial statements. Accordingly, management has estimated the total cost of these reclamation efforts to approximate $346 million at June 30, 1995. Because it is not practical to ascertain when such costs will be funded, no consideration has been given to discounting the obligation.

At June 30, 1995 approximately $23 million is available to pay current reclamation costs. Because it is not expected that the remaining estimated reclamation costs will be liquidated by expendable available financial resources, a $323 million obligation is reported as a liability in the State’s General Long-Term Debt Account Group.

In addition, the State, through the Solid Waste Management Board, operated one landfill that has recently been closed. The State has accrued approximately $4.6 million for closure and post-closure costs that is recognized as a liability in the financial statements of other component units.

Litigation

In February 1995, the West Virginia State Legislature adopted broad legislation (Senate Bill 250) that changed a variety of processes related to Workers’ Compensation, including the computation and awarding of benefits and collections of premiums. A petition for mandamus is pending before the West Virginia Supreme Court of Appeals challenging various portions of Senate Bill 250. The petition seeks to invalidate any retroactive application of the enactment, to invalidate the application of the 50% impairment threshold during the consideration of requests for permanent total disability awards, and to invalidate the determination of permanent impairment awards based solely upon the degree of medical impairment. The State is vigorously defending this case and its counsel has advised that the ultimate outcome is uncertain. No provision has been made in these financial statements for the effects of any changes which might result from this litigation. (See Note 14, “Risk Management”)

The State, its departments and agencies, and their employees are defendants in numerous legal proceedings, many of which normally occur in governmental operations. Such litigation includes, but is not limited to, claims assessed against the State for property damage and personal injury, alleged inmate wrongs, other alleged torts, alleged breaches of contract, condemnation proceedings and other alleged violations of state and federal laws. Certain claims have been ruled against the State, but remain unpaid by the State as of the balance sheet date. The State has recognized an obligation in the approximate amount of $36 million for the payment of such claims. This amount is reported in the General Long-Term Debt Account Group, as these judgments are not expected to be paid within the next 12 months.

Other litigation and civil actions filed against the State which could possibly result in a material adverse outcome to the State include: civil claims filed against the Department of Public Safety, Corrections, Regional Jail Authority and other State agencies in the total approximate amount of $60 million; patient liability and medical malpractice suits involving State hospital facilities in the approximate amount of $4 million; and claims for refunds of business taxes and other fines and assessments in amounts totaling $3 million. In addition, there are various claims against the State for personal injury, employment issues, and other matters that are reasonably possible of totaling $13 million. Certain of these claims may be covered by the State’s insurance carrier under its general liability or medical malpractice coverage.

At June 30, 1995, approximately $61,413,000 of tort claims and $7,851,000 of construction claims were pending against the Department of Transportation. With respect to these claims, the Department has obligations of $7,304,000 based on management’s evaluation of the nature of such claims and consideration of historical loss experience for the respective types of action.

It is not possible to predict with certainty the ultimate outcome of all lawsuits pending or threatened against the State, including those discussed above. Based on the current status of all legal proceedings for which accruals have not been made in the State’s financial statements, it is the opinion of management and the Attorney General that the proceedings will not have a material adverse impact on the State’s financial position.

Federal Grants

The State, including its institutions of higher education, receives significant financial assistance from the U.S. Government in the form of grants and other federal financial assistance. Entitlement to those resources is generally conditioned upon compliance with the terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of the resources for allowable purposes. The State provides for estimates of any material disallowance arising in connection with the operation of these federally funded programs as such amounts become reasonably estimable and probable of settlement with available expendable financial resources. Federal financial assistance awards are subject to financial and compliance audits under either the federal Single Audit Act or by grantor agencies of the federal government or their designees. Any further obligations that may arise from cost disallowance or sanctions as a result of those audits are not expected to be material to the financial statements of the State or its component units.

The US Department of Labor (DOL) has asserted a claim against the State for a refund of approximately $19 million, representing the federal portion of the Public Employees Retirement System contributions for the period 1985 through 1988. The State has identified deficiencies in the DOL’s calculations and is contesting the refund claim through the administrative appeals process. Should DOL prevail, it is not likely this refund claim will be funded through the State’s general revenue. The State cannot estimate and has not recorded any liability for such a disallowance or for other similar disallowances by the federal government which may be determined in the future.

Arbitrage Rebates

The Internal Revenue Code of 1986 (the Code) establishes rules and regulations for arbitrage rebates which are applicable to portions of the primary government and most of the discretely presented component units. At present, all arbitrage rebate liabilities have been recorded in the financial statements under accrued and other liabilities and the respective agencies have reserved sufficient amounts for their future payment.

Construction and Other Commitments

At June 30, 1995, the Department of Transportation had commitments of approximately $312,178,000 for construction contracts. At June 30, 1995, the School Building Authority had committed to provide approximately $431,384,000 in grants to county school boards for acquisition, construction and maintenance of elementary and secondary public school facilities. Also, the West Virginia Parkways, Economic Development and Tourism Authority had commitments of $31,863,000 for various turnpike system improvement projects at June 30, 1995.