Douglas Holtz-Eakin, Ph.D.

Director
Congressional Budget Office
November 17, 2005

Statement of
Douglas Holtz-Eakin
Director
Estimates of the Potential Cost of Claims Under
the Fairness in Asbestos Injury Resolution Act
before the
Committee on the Judiciary
United States Senate
November 17, 2005

Mr. Chairman and Members of the Committee, thank you for the opportunity to
be here today to discuss S. 852, the Fairness in Asbestos Injury Resolution Act of 2005. A copy of the Congressional Budget Office's (CBO's) August 25, 2005, cost estimate for that bill is attached to this statement. My comments this morning will focus on a few general points:
# By CBO's estimate, the Asbestos Injury Claims Resolution Fund would be presented with valid claims totaling between $120 billion and $150 billion, in addition to any financing costs and any administrative expenses.
The bill would terminate payment of new claims if the fund's resources proved to be inadequate.
# CBO's estimate of the claims likely to be filed under S. 852 for compensation for injury resulting from asbestos exposure is based on analyses by a number of experts who, in studying the legislation and similar proposals in the 108th Congress (including S. 1125, and S. 2290),
have relied on a combination of epidemiological data, projections of the incidence of disease in the affected population, and the historical experience of bankruptcy trusts.
# The September 19, 2005, report prepared by the economic consulting firm Bates White, Analysis of S. 852, Fairness in Asbestos Injury Resolution (FAIR) Act, concludes that claims under S. 852 from individuals with
malignant conditions would be far greater than CBO and others estimated, although claims from individuals with nonmalignant conditions would be
far fewer.
# The potential costs of S. 852 are very uncertain. The fund for asbestos claims would probably provide compensation over a period of about 50 years. Forecasts over such a long period are inherently uncertain, and the
data supporting projections of asbestos claims are limited.
The Long-Term Viability of the Asbestos Injury Claims
Resolution Fund. To assess the ability of the proposed fund to pay all valid claims for injuries sustained because of exposure to asbestos, CBO considered several possible projections of the fund's cash flows beyond the 10-year estimate of the legislation's budgetary impact. Under the bill, if the fund's resources (including
borrowing authority) proved inadequate to pay additional obligations, the fund's Administrator would reject new claims and the fund's operations would "sunset."
Claimants could then seek compensation in federal courts.
CBO projects that total receipts to the fund over its lifetime would amount to
about $140 billion, including a small amount of interest earnings on its balances.
2
By CBO's estimate, the fund would be presented with valid claims valued
between $120 billion and $150 billion, in addition to any financing (debt-service)
costs and administrative expenses. Under the legislation, receipts to the fund
would be fairly evenly distributed over its first 30 years. However, even if total
receipts exceeded total claims, more than half of the fund's expenditures for
claims would be paid in the first 10 years of its life, CBO projects. Such an
imbalance between when the fund's anticipated claims payments would be made
and when receipts would be collected would require the Administrator to borrow
to pay claims. Under the bill, the borrowed amounts (including interest costs)
would have to be repaid from the fund's own budgetary resources.
Depending upon the number and timing of the claims, as well as the revenues
collected, investment returns, and interest rates, the fund might or might not have
adequate resources to pay all valid claims. For example, if the value of valid
claims totaled $130 billion, interest costs on the fund's borrowing might amount
to $10 billion, and the interest earned on investments could approach $2 billion,
while administrative costs would add another $1 billion to $2 billion. If the value
of such claims was significantly more than $130 billion, the fund's revenues
might be inadequate to pay all claims.
Estimate of the Number and Types of Claims for
Compensation
In projecting claims against the asbestos fund, CBO considered a variety of
scenarios regarding the number of potential claimants to the fund and varied the
pace of those claims as well as other economic variables. Under one
representative, moderate-cost scenario discussed in this testimony, the value of the
claims would be about $130 billion, near the middle of the projected range of
$120 billion to $150 billion. Those figures include almost 100,000 pending and
future claims for individuals with malignant conditions and almost 1.5 million
such claims for nonmalignant conditions.
To estimate the cost to the fund of compensating claimants, CBO considered four
categories--claims pending on the date of enactment of the bill for malignant
conditions, such claims for nonmalignant conditions, future claims that would be
made by individuals with malignant conditions, and future claims by people with
nonmalignant conditions. As detailed below, CBO used information from
available projections and studies to estimate the number of claims in each
category that would qualify for compensation under the medical conditions
specified in the bill.
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Pending Claims
Individuals who have an outstanding claim with any firm filed in a court on the
date of enactment of S. 852 would have five years to submit a claim for
compensation from the fund. According to CBO's estimates, over the first five
years that the fund is operational, more than 320,000 pending claims would
receive an award from the fund, including over 21,000 for malignant conditions.
There is no comprehensive information regarding the number and type of asbestos
injury claims that individuals have filed in federal and state courts or with existing
trusts under current law. Nor is there reliable information on the number and
award values of such claims that are settled each year. In 2003, Navigant
Consulting prepared an estimate of the number and type of asbestos injury claims
that were pending at that time in federal and state courts.
For its cost estimate of S. 852, CBO used the information collected by Navigant in
2003 and adjusted the data to reflect developments since then. Using projections
about the number of claims expected to be filed in 2004 and 2005 and
assumptions about the pace of settlements for asbestos injury cases, CBO
concluded that the number of pending cases at the beginning of 2006 was likely to
be about 7 percent larger than that estimated for 2003.
CBO did not include in its estimate claims that had been inactive for a number of
years but were still technically pending with at least one company. If the parties to
those claims filed a claim against the new fund, the number of claimants seeking
compensation from the fund in the first four years could be significantly higher
than estimated.
Future Claims for Malignant Conditions
CBO examined several projections of malignancies associated with asbestos
exposure. All of those projections included claimants with asbestos exposure and
lung cancer but with no evidence of pleural disease or asbestosis, though such
claimants would receive no compensation under S. 852. CBO assumed that the
total number of claims for malignant conditions that would be compensated by the
fund would be near the average of the various projections examined (excluding
those claimants with lung cancer who would not be eligible for compensation).
Adjusting for the time that had elapsed since the studies were done, CBO
estimated that between 65,000 and 100,000 claims for malignant diseases would
be compensated by the fund, and the agency's moderate-cost scenario assumes
about 78,000 such claimants. CBO distributed those cases across the categories of
malignant diseases specified in the bill on the basis of the various projections and
the historical distributions of such claims received by the Manville Trust--one of
the older and larger trusts established to settle personal injury claims resulting
from exposure to asbestos.
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Future Claims for Nonmalignant Conditions
The different projections available to CBO of the number of nonmalignant cases
and their distribution among the categories specified in the bill varied greatly.
CBO expected that the ratio of nonmalignant claims to malignancies under the bill
would be similar to the historical ratio of claims compensated by existing
bankruptcy trusts. For example, since 1995, the Manville Trust had received an
average of eight claims for nonmalignant conditions for every claim for a
malignant condition. On the basis of those historical data, adjusted because
nonmalignant claimants could receive larger awards under S. 852 than those
provided by existing trust funds, CBO estimates that, on average, during the first
10 years after enactment, the fund would provide compensation for 10 new claims
for nonmalignant conditions for every new malignancy (including claimants
exposed to asbestos with lung cancer who would not be eligible for compensation
under the bill). That ratio would, CBO expects, decrease over time because of
reductions in the use of and exposure to asbestos. (Other analysts have estimated
the ratio of claims for nonmalignant conditions to malignancies to be as low as 7
to 1 or as high as 17 to 1.) In total, CBO's moderate-cost scenario anticipates
about 1.2 million future claims for nonmalignant conditions.
Comparison of Claims Estimates in the BatesWhite
Report
The Bates White report estimates that the federal asbestos compensation fund
under S. 852 would face over 450,000 pending and future claims for malignant
conditions and fewer than 100,000 such claims for nonmalignant conditions. In
comparison with CBO's estimates, those numbers are about 350 percent higher
for claims for malignant conditions and more than 90 percent lower for claims for
nonmalignant conditions (see Figure 1).
CBO has had a preliminary meeting with authors of the Bates White study but
does not have sufficient detail to fully assess the sources of differences from other
estimates. The agency has a number of questions about the analysis and its
assumptions.
Projections of Claims for Malignant Conditions
The more significant differences between CBO's and Bates White's estimates are
in regard to claims for malignant conditions. Bates White anticipates more than
three times as many claims for Level VIII (lung cancer with asbestosis), nearly
seven times as many claims for Level VII (lung cancer with pleural
abnormalities), and more than 12 times as many claims for Level VI (other
1. The disease levels, enumerated in S. 852, are as follows (from most severe to least severe):
IX = mesothelioma, VIII = lung cancer with asbestosis, VII = lung cancer with pleural disease,
VI = other cancer, V = disabling asbestosis, IV = severe asbestosis, III = asbestosis/pleural
disease B, II = mixed disease with impairment, and I = asbestosis/pleural disease A.
5
Figure 1.
Estimates of Claims Under S. 852 for Malignant and
Nonmalignant Conditions
(Total number of claims)
Source: Congressional Budget Office.
specific cancers) than CBO does (see Figure 2).1 For Level IX (mesothelioma),
Bates White's estimate of claimants is about 20 percent higher than CBO's
projection.
Most estimates of occupational asbestos exposure that CBO has reviewed take as
a starting point a 1982 study from the American Journal of Industrial Medicine by
William J. Nicholson and others. The Bates White report presents an estimate of
the population exposed to asbestos in the workplace that is significantly greater
than the number estimated in that 1982 study.
Apparently, that large increase in the estimated size of the eligible population
accounts for Bates White's higher estimate of claims for Level VIII (lung cancer
with asbestosis). Using that projection of Level VIII claims would add more than
Other Studies
Available to CBO
CBO Bates
White
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
Claims for Malignant Conditions
CBO Other Studies
Available to CBO
Bates
White
Claims for Nonmalignant Conditions
6
Figure 2.
Estimates of Claims Under S. 852 for Particular
Malignant Conditions
(Total number of claims)
Source: Congressional Budget Office.
$40 billion to the value of claims presented to the fund, as compared with CBO's
estimate.
For Level VII or Level VI diseases under the bill, claimants would be required to
demonstrate eligibility for compensation by presenting evidence of pleural
abnormalities and sufficient occupational exposure to asbestos. Under the bill, the
exposure that would count toward the requirements for an award would be
weighted to adjust for both the severity and specific years of exposure. Claimants
would be required to demonstrate 12 years of weighted occupational exposure to
asbestos to qualify for a Level VII award or 15 years to qualify for Level VI.
The Bates White report appears to conclude that not only is the potentially eligible
population (that is, the population that meets the requirements for occupational
exposure) much larger than other studies estimate, but also that the incidence of
pleural abnormalities within that population is greater than others may expect. To
estimate eligible claims for Levels VII and VI, Bates White projects the
occurrence of lung and other cancers within its estimate of the eligible population
and assumes that 10 percent to 25 percent would have pleural abnormalities and
Mesothelioma
Lung Cancer with
Asbestosis
Lung Cancer with
Pleural Disease
Other Cancers
0
50,000
100,000
150,000
200,000
250,000
CBO Other Studies Available to CBO Bates White
Mesothelioma Lung Cancer with
Asbestosis
Lung Cancer with
Pleural Disease
Other Cancers
7
thus qualify for compensation under the bill. The higher estimates of claims for
Levels VII and VI would add between $140 billion and $375 billion to CBO's
estimate of the value of claims under S. 852.
Projections of Claims for Nonmalignant Conditions
Bates White's lower projection of claims for nonmalignant conditions is
significant, though it has less of an impact on the estimated cost of this legislation.
Apparently, Bates White anticipates fewer nonmalignant claims than expected by
CBO for two reasons.
First, Bates White projects only a total number of claimants for Levels II through
V, leaving its Level I estimate at zero. The study appears to assign no cost to
Level I claimants because the authors expect that such claimants (who would
receive only a benefit for medical monitoring) would have little incentive to file
claims and thus would pose no significant cost to the fund. CBO, on the other
hand, assumes an average cost to the fund of $1,000 each for Level I claimants, of
whom CBO expects there would be well over 1 million. That difference in
accounting for Level I claimants explains most of the difference in the two
studies' estimated number of claims for nonmalignant conditions but not for the
difference in the cost of such claims.
Second, Bates White's estimate of 93,900 claimants for Levels II through V is less
than half of CBO's projection for those levels in its moderate-cost scenario. That
lower estimate would decrease CBO's estimate of the value of claims for
nonmalignant conditions faced by the fund by nearly $30 billion. Bates White's
estimate appears to anticipate a federal claims-approval process that is more
restrictive than the process implemented by the existing bankruptcy trust funds.
The projection may reflect recent reports that fraudulent claims for nonmalignant
conditions have been approved by some existing trust funds and an expectation
that the federal system could detect fraud better than the existing bankruptcy trust
funds.
The Operations of the Asbestos Fund Under S. 852 Are
Uncertain
In assessing the budgetary impact of S. 852, it is important to recognize that there
is an enormous amount of uncertainty about the potential costs. No one can be
certain, because of the limited data that are available, as to how many claimants
there would be and how much would have to be paid to them.
Contributing to the uncertainty of the cost to resolve claims under the bill are
some significant features of the claims process that would be defined only after
enactment of the legislation. For instance, the bill would require the Institute of
Medicine of the National Academy of Sciences to conduct a study to examine the
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causal link between asbestos exposure and cancers other than lung cancer or
mesothelioma. If that study were to determine no causal link between asbestos
exposure and any of those cancers, the number of eligible claims for such
conditions (Level VI under the bill) could decline significantly.
Under S. 852, individual claimants would need to demonstrate that they meet
certain thresholds for occupational exposure to asbestos. Those thresholds are
specified in terms of weighted occupational exposure and are measured in years.
Depending on the degree and frequency of exposure to asbestos, workers
performing different jobs in different industries would need to meet or exceed the
weighted occupational exposure thresholds in the bill to qualify for compensation.
The legislation does not specify which types of jobs or which industries would
meet those requirements. In part, that task would be informed by an advisory
committee established under the bill. Other specifications and requirements would
presumably be set in the final rules for the fund's operations. Those
determinations are critical to projecting the number of claims that the fund would
face and cannot be known until the details of the fund's operations are
implemented.
The bill would also require the Agency for Toxic Substances and Disease Registry
to conduct a study to determine if any other contaminated sites pose dangers
similar to those observed in Libby, Montana, where mining activity led to
widespread exposure to asbestos. Because claimants from Libby would receive
higher minimum awards than other claimants and because the bill would mandate
similar treatment for any other sites so identified, the costs could rise depending
upon which sites might be judged similar to Libby and on how many claimants
would be affected.
Finally, CBO's estimate does not take into account the impact of approving any
exceptional medical claims, which are claims that do not fit into the defined
criteria but which might still receive compensation depending upon the findings
of specific panels of physicians. It is difficult to assess how many such claims
might be filed and how liberally those panels might rule on the claims.
CONGRESSIONAL BUDGET OFFICE
COST ESTIMATE
August 25, 2005
S. 852
Fairness in Asbestos Injury Resolution Act of 2005
As reported by the Senate Committee on the Judiciary on June 16, 2005
SUMMARY
S. 852 would establish the Asbestos Injury Claims Resolution Fund (the Asbestos Fund) to
provide compensation to individuals whose health has been impaired by exposure to
asbestos. Under the bill, the Administrator of a new Office of Asbestos Injury Claims
Resolution (the Office) within the Department of Labor would administer the Asbestos Fund
and manage the collection of federal assessments on certain companies that have made
expenditures for asbestos injury litigation prior to enactment of this legislation. A separate
Asbestos Insurers Commission would allocate other payment obligations among insurers
with asbestos-related obligations in the United States. The Asbestos Fund also would absorb
all private asbestos trust funds already existing at enactment. Under the bill, individuals
affected by exposure to asbestos could no longer pursue awards for damages in any federal
or state court and would submit claims to the Administrator, who would then evaluate such
claims and award compensation according to criteria and amounts specified in the legislation.
CBO estimates that net receipts and expenditures of the Asbestos Fund would increase
projected budget deficits over the 2006-2015 period by about $6.5 billion (excluding debt
service costs).
We expect that sums paid into the fund would be treated in the budget as federal revenues
and that amounts expended to pay claims and administer the fund would be considered new
federal direct spending. During periods when surplus amounts would be collected by the
fund, CBO assumes that most of its assets would be invested in nongovernmental securities.
The net cash flows associated with such investments would also be direct spending.
Over the 2006-2015 period, we estimate that payments to eligible claimants, start-up costs,
investment transactions, and administrative expenses would total nearly $70 billion. Over
the same 10-year period, we estimate that the fund would collect about $63 billion from firms
and insurance companies with past asbestos liability and certain private asbestos trust funds.
2
Consequently, we expect the Administrator of the fund would need to exercise the borrowing
authority authorized under the bill to meet the fund's obligations during this period.
Assuming enactment of S. 852 by the end of calendar year 2005, CBO estimates that almost
$8 billion would be borrowed during the first 10 years.
To evaluate the long-term financial viability of the fund, CBO projected cash flows over the
life of the fund--assumed to be about 50 years--using a variety of assumptions about the
number, type, and timing of future claims likely to be submitted to the fund, and alternative
assumptions about future inflation and interest rates. The legislation is designed to produce
collections totaling about $140 billion over the first 30 years. CBO expects that the value
of valid claims likely to be submitted to the fund over the next 50 years could be between
$120 billion and $150 billion, not including possible financing (debt-service) costs and
administrative expenses. The maximum actual revenues collected under the bill would be
around $140 billion, but could be significantly less. Consequently, the fund may have
sufficient resources to pay all asbestos claims over the next 50 years, but depending on claim
rates, borrowing, and other factors, its resources may be insufficient to pay all such claims.
A more precise forecast of the fund's performance over the next five decades is not possible
because there is little basis for predicting the volume of claims, the number that would be
approved, or the pace of such approvals. Epidemiological studies of the incidence of future
asbestos-related disease and the claims approval experience of private trust funds set up by
bankrupt firms can be used to indicate the range of experience of the federal asbestos trust
fund might face, but those sources cannot reliably indicate the financial status of the fund
over such a long time period.
CBO estimates that the fund would face more than half of all anticipated claims expenses in
its first 10 years, while it would receive roughly constant collections from insurers and
defendant firms over its first 30 years. This conclusion is consistent with other forecasts that
we have reviewed. Because expenses would exceed revenues in many of the early years of
the fund's operations, the Administrator would need to borrow funds to make up the
shortfall. The interest cost of this borrowing would add significantly to the long-term costs
faced by the fund and contributes to the possibility that the fund might become insolvent.
Under the provisions of section 405, the fund would have to stop accepting new claims (a
process known as "sunset") if its current and future resources become inadequate to fulfill
all existing and anticipated obligations, including its debt obligations.
Pursuant to section 407 of H. Con. Res. 95 (the Concurrent Resolution on the Budget, Fiscal
Year 2006), CBO estimates that enacting S. 852 would cause an increase in direct spending
greater than $5 billion in at least one 10-year period from 2016 to 2055.
3
S. 852 contains two intergovernmental mandates as defined in the Unfunded Mandates
Reform Act (UMRA), but CBO estimates that the cost of complying with those mandates
would be insignificant and well below the threshold established in that act ($62 million in
2005, adjusted annually for inflation).
S. 852 would impose new private-sector mandates, as defined in UMRA, on certain
individuals filing claims for compensation for injuries caused by exposure to asbestos;
certain companies with prior expenditures related to asbestos personal injury claims; certain
insurance companies; trusts established to provide compensation for asbestos claims; health
insurers; and persons involved in manufacturing, processing, or selling certain products
containing asbestos. Based on information from academic, industry, government, and other
sources, CBO concludes that the aggregate direct cost to the private sector of complying with
all of the mandates in the bill would well exceed the annual threshold established by UMRA
($123 million in 2005, adjusted annually for inflation).
ESTIMATED COST TO THE FEDERAL GOVERNMENT
The estimated budgetary impact of S. 852 over the 2006-2015 period is shown in Table 1.
The effects of this legislation fall within budget functions 600 (income security) and 900
(interest). CBO estimates that the bill would have little net effect on the budget over the first
five years but would add about $6.5 billion to deficits from 2011 through 2015. (The longterm
budgetary impact of the bill is discussed in the section following the "BASIS OF
ESTIMATE" section.)
BASIS OF ESTIMATE
For this estimate, CBO assumes that S. 852 will be enacted by the end of calendar year 2005.
Based on information from the Department of Labor, we expect that the Asbestos Fund could
become fully operational during fiscal year 2007 and that certain pending exigent asbestos
claims would be paid by the fund in 2006.
CBO expects that the fund's assessments on firms and insurers would be treated in the budget
as revenues and that payments to satisfy claims would be considered direct federal spending.
In addition, because the Administrator would be authorized to invest the fund's balances,
certain cash flows associated with investments in nongovernmental financial instruments also
would be reflected in the budget. Specifically, under the Administration's current procedures
for budget presentation, government funds invested in nongovernmental financial
instruments are recorded as expenses (outlays), and the redemption of such investments is
recorded as a receipt (negative outlay). Under the bill, any noncash assets received from
4
existing private asbestos bankruptcy trust funds (such as the Manville Trust) would have no
budgetary impact until they were liquidated by the Administrator. At that point, both the
assets and any gains or dividends on those assets would be recorded on the budget as
revenues.
TABLE 1. ESTIMATED BUDGETARY IMPACT OF S. 852
By Fiscal Year, in Billions of Dollars
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CHANGES IN DIRECT SPENDING
Claims and Administrative Expenditures
of the Asbestos Fund
Estimated Budget Authority 8.7 21.9 11.1 5.3 5.3 5.3 5.0 4.9 4.7 4.6
Estimated Outlays 8.7 5.6 8.4 9.5 10.8 6.7 5.2 5.1 5.0 4.8
Investment Transactions of the Asbestos Fund
Estimated Budget Authority 0 1.1 0 0 -1.0 -0.2 0 0 0 0
Estimated Outlays 0 1.1 0 0 -1.0 -0.2 0 0 0 0
Total Direct Spending
Estimated Budget Authority 8.7 23.0 11.1 5.3 4.3 5.1 5.0 4.9 4.7 4.6
Estimated Outlays 8.7 6.7 8.4 9.5 9.8 6.5 5.2 5.1 5.0 4.8
CHANGES IN REVENUES
Collected from Defendant Firms 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9 2.9
Collected from Insurer Participants 1.3 4.1 5.0 5.0 5.0 1.1 1.1 1.1 1.1 1.1
Collected from Bankruptcy Trusts a 4.5 0 0.4 1.6 1.6 0 0 0 0 0
Total Estimated Revenues 8.7 7.0 8.4 9.5 9.6 4.0 4.0 4.0 4.0 4.0
CHANGES IN THE DEFICIT
Estimated Net Increase or Decrease (-)
in the Deficit from Changes in Revenues and
Direct Spending 0 -0.3 0 0 0.3 2.5 1.2 1.1 0.9 0.8
NOTE: Numbers in the table may not add up to totals because of rounding.
a. CBO estimates the total value of cash and financial assets of the asbestos bankruptcy trust funds would be $7.5 billion in 2006
and $8.1 billion when liquidated. The federal budget would record the cash value of those trust assets when they are liquidated
by the Administrator to pay claims. CBO estimates that assets of asbestos bankruptcy trust funds would not be fully liquidated
until 2010.
5
To estimate the cost of processing claims, CBO reviewed prior government experience with
similar compensation funds and operations of privately run asbestos funds. We also
discussed the potential costs of administering the fund with the Department of Labor. To
estimate the number and types of claims the Asbestos Fund would receive and when they
would be received, CBO reviewed a number of projections of asbestos injury claims that
were prepared for different purposes by several private groups and individuals, including
those developed by the Asbestos Study Group, Navigant Consulting, the National
Association of Manufacturers, and Legal Analysis Systems during consideration of this bill
and of similar legislation considered by the 108th Congress. In addition, we studied the
history of claims paid and projections of those anticipated to be paid by the Manville Trust
and considered the inaccuracy of past projections of future asbestos injury claims. Finally,
to determine whether the Asbestos Fund could be expected to collect the amount of
assessments from defendant companies and insurance companies that are anticipated in the
legislation, CBO examined financial information for some of the public companies that
would likely be contributors to the fund and the reserves held by insurance companies for
asbestos claims.
Direct Spending
To estimate the amount and timing of new direct spending under S. 852, CBO considered the
cost of administering the Asbestos Fund and the length of time it would take following
enactment for the fund to be fully operational and processing claims. We projected the
number of claims that would be submitted to the fund over the 2006-2015 period, including
those claims that have been filed or will be filed in federal or state courts or with existing
trusts but not settled by the time the bill is enacted (these claims are known as pending
claims). To estimate the cost of paying valid claims submitted to the fund, we considered
the number of claims likely to be submitted by persons with malignant and nonmalignant
medical conditions due to asbestos exposure. We also estimated the net disbursements and
receipts associated with the fund's investment activity. Finally, we considered the borrowing
that might be required in each year in order for the fund to pay claims.
Administration and Start-up of the Asbestos Fund. Based on the cost of operating
existing government compensation funds, the operation of privately run asbestos trusts, and
information from the Department of Labor, CBO estimates that administration of the
Asbestos Fund would require a staff of over 700 employees for the 2006-2015 period, costing
a total of nearly $1 billion over 10 years. Such administrative costs would be paid from the
Asbestos Fund and would not require further appropriation action. For this estimate, CBO
expects that the Office would start accepting claims in 2006, shortly after enactment. During
the first three years of operation, CBO estimates that the Office would receive around
6
185,000 claims per year, but that this number would fall to an average of around 60,000 for
the next seven years, once all currently pending claims are resolved by the fund.
Individuals seeking compensation from the Asbestos Fund would need to file a claim with
the Office within the time specified by the legislation (five years from the date of enactment
for pending claims or five years from the date of diagnosis for future claims). The
Administrator would then have 90 days to present a proposed decision concerning the
appropriate award according to the medical criteria and awards values specified in the
legislation. If the claimant chooses to accept the award, the Administrator would issue a final
decision, and the Asbestos Fund would pay the claimant over the next one to four years. A
claimant could appeal a decision by the Administrator within 90 days of its issuance by
requesting either a hearing or a review of the written record. In those cases, a decision on
the appeal would be required within either 180 days or 90 days, respectively.
Under the bill, any claim pending on the date of enactment would be stayed, unless it were
already before a court. Of the stayed claims, exigent claims (defined by S. 852 as those
claims brought by a living claimant with either mesothelioma or less than one year to live,
or by the spouse or child of a claimant who died after either filing of his or her claim or
enactment of the bill) would receive the earliest attention by the Administrator. Within 60
days of receipt, the Administrator would be required to either approve or disapprove such a
claim as exigent. The bill would require the Administrator to pay exigent claims within one
year for cases of mesothelioma, and in no more than two years for all other exigent claims.
CBO expects that the fund would not be fully operational until at least a year following
enactment of the legislation. Even after appointing an Administrator and Insurers
Commission, this start-up period would be needed to promulgate detailed operating rules and
procedures and to recruit, hire, and train personnel to process claims and manage the fund's
operations. (The Energy Employees Occupational Illness Compensation Program--a similar
federal fund serving a much smaller population--took slightly more than a year to become
fully operational.) During this start-up period, the Administrator and the Insurers
Commission would also need to collect financial information from thousands of firms and
insurers that have made prior expenditures for asbestos injury claims to set appropriate
assessment rates for those insurers and firms.
Payments to Claimants. To estimate the cost of paying compensation claims under the bill,
CBO reviewed projections of asbestos injury claims that were presented to the Senate
Committee on the Judiciary during its consideration of S. 852 and for similar legislation
considered by the 108th Congress. Such projections were based on a combination of
epidemiological data, projections of disease incidence for the affected population, historical
experience of bankruptcy trusts, and projections of the number of injured that would apply
for compensation given the bill's medical criteria and compensation award values.
7
S. 852 defines nine levels of medical impairment that persons exposed to asbestos have
suffered and specifies a dollar amount of compensation that the fund would pay to
individuals who demonstrate both adequate exposure to asbestos and specified medical
conditions. Over time, those award values would be adjusted for inflation. For the lung
cancer levels, the bill stipulates different awards, depending on whether a claimant, currently
or in the past, does or does not smoke tobacco. (For example, claimants having lung cancer
with asbestosis would qualify for compensation under level VIII; awards at this level would
range from $600,000 to $1.1 million, depending on the claimant's history of tobacco use.)
To estimate the cost to the fund of compensating claimants, CBO considered four
categories--future claims that would be made by individuals with malignant conditions,
future claims that would be made by those with nonmalignant conditions, and claims pending
on the date of enactment of the bill for both malignant and nonmalignant conditions. As
detailed below, CBO used information from available projections and studies to estimate the
number of claims in each category that would qualify for compensation under the medical
conditions specified in the bill. Individuals who are eligible for an award would receive
payments from the fund over a one- to four-year period. For this estimate, we assumed that
payments for nonexigent claims would be spread equally over a four-year period. We
assume that claims pending for mesothelioma at the time the bill is enacted would represent
the exigent claims and would be paid in 2006.
Table 2 summarizes the number of claims and total award value for those claims that CBO
projects for each category of claims under the legislation.
Pending Claims. Individuals who have an outstanding claim with any firm filed in a court
on the date of enactment of S. 852 would have five years to submit a claim for compensation
from the fund. CBO estimates that, over the first five years that the fund is operational, more
than 320,000 pending claims would receive an award from the fund.
There is no comprehensive information regarding the numbers and types of asbestos injury
claims that individuals have filed in federal and state courts or with existing trusts under
current law. Nor is there reliable information on the numbers and award values of such
claims that are settled each year. In 2003, Navigant Consulting prepared an estimate of the
number and type of asbestos injury claims then pending in federal and state courts. That
information was collected to inform the consideration of legislation similar to S. 852 in the
108th Congress.
8
TABLE 2. SUMMARY OF ESTIMATED ASBESTOS CLAIMS AND AWARD VALUES
Initial 10-Year Period Life of Fund
Number
of Claims
Award Value
of Claims
(in billions
of dollars)
Number
of Claims
Award Value
of Claims
(in billions
of dollars)
Pending Claims for:
Malignant Conditions 21,000 14 21,000 14
Nonmalignant Conditions 301,000 11 301,000 11
Total Pending Claims 322,000 25 322,000 25
Future Claims for:
Malignant Conditions 42,000 34 78,000 74
Nonmalignant Conditions 620,000 16 1,184,000 32
Total Future Claims 662,000 51 1,262,000 106
Total for All Claims 984,000 76 1,585,000 132
For this estimate, CBO used the information collected by Navigant in 2003 and adjusted the
data to reflect developments since then. Using projections about the number of claims
expected to be filed in 2004 and 2005 and assumptions about the pace of settlements for
asbestos injury cases, we concluded that the number of pending cases in 2006 is likely to be
larger than estimated in 2003--about 7 percent larger.
For this estimate, CBO did not take into account the number of claims that are still
technically pending with at least one company but have been inactive for several years. If
the claimants' lawyers actively seek out those individuals to file a claim against the fund, the
number of claimants seeking compensation from the fund in the first four years could be
significantly higher. An award from the Asbestos Fund for such individuals would be
reduced by the value of any other awards received for a given claim. CBO estimates that the
average award from the fund over the 2006-2015 period for pending malignant claims would
be about $650,000 and that awards for such claims would total $14 billion. We estimate that
awards for pending nonmalignant claims would average around $38,000; total awards for
those claims would be $11 billion over the next 10 years.
Future Claims for Malignant Conditions. CBO examined several projections of
malignancies associated with asbestos exposure. While all of those projections included
claimants with asbestos exposure and lung cancer but with no evidence of pleural disease or
asbestosis, such claimants would receive no compensation under S. 852. CBO assumes that
the total number of claims for malignant conditions that would be compensated by the fund
would be near the average of the various projections we examined (excluding those lung
9
cancer claimants who would not be eligible for compensation). Adjusting for the time that
has elapsed since the performance of the studies that we examined, those studies varied from
65,000 to 100,000 claims for malignant diseases that would be compensated by the Asbestos
Fund. This estimate assumes that there would be about 78,000 such claimants. We
distributed those cases across the categories of malignant diseases specified in the bill based
on the various projections and on the historical distributions of such claims received by the
Manville Trust. On this basis, CBO estimates that the average award for malignant
conditions over the next 10 years would be $800,000 and that the total value of awards for
such conditions over that period would reach $34 billion.
Future Claims for Nonmalignant Conditions. The different projections available to CBO of
the number of nonmalignant cases and their distribution among the categories specified in
the bill vary greatly. CBO expects that the ratio of nonmalignant claims to malignancies
under the bill would be similar to the historical ratio of claims compensated by existing
bankruptcy trusts. For example, since 1995, the Manville Trust has received an average of
eight claims for nonmalignant conditions for every claim for a malignant condition. Based
on those historical data and because nonmalignant claimants could receive larger awards
under S. 852 than those provided by existing trust funds, CBO estimates that during the first
10 years after enactment, the fund would compensate, on average, 10 new claims for
nonmalignant conditions for every new malignancy (including claimants exposed to asbestos
with lung cancer who would not be eligible for compensation under the bill). CBO expects
that this ratio would decrease over time because of reductions in the use of and exposure to
asbestos. (Other analysts have estimated the ratio of claims for nonmalignant conditions to
malignancies to be as low as 7:1 or as high as 17:1.) In total, CBO anticipates about
1.2 million future claims for nonmalignant conditions.
CBO estimates that around 85 percent of claims for nonmalignant conditions filed with the
Asbestos Fund would be eligible for medical monitoring reimbursement (level I) from the
fund. Such reimbursement, roughly $1,000, is the lowest rate of payment specified for
nonmalignant conditions. This claims estimate is based on available research involving a
sample of the exposed population with nonmalignant conditions and the history of claims
filed with the Manville Trust. To evaluate the history of such claims, CBO reviewed the
trust's estimate of how claims received under its 1995 trust distribution process (TDP) would
have been compensated under the 2002 TDP. (The later TDP contains categories for
nonmalignant conditions more similar to those under S. 852.) Overall, CBO estimates that,
over the next 10 years, the average payment for nonmalignant conditions would be about
$26,000 and total awards for such conditions would amount to $16 billion.
Investments of the Asbestos Fund. Section 222 would authorize the Administrator to
invest amounts in the fund to ensure that there are sufficient sums to make payments to
claimants. That section appears to imply that the fund's Administrator could invest surplus
10
amounts in private securities. For this estimate, CBO assumes that the managers of the fund
would keep 20 percent of the investments in Treasury securities and 80 percent in non-
Treasury securities. The current budgetary treatment of federal investments in non-Treasury
instruments is specified in the Office of Management and Budget's (OMB's) Circular A-11,
which states that the purchases of such securities should be displayed as outlays and the sales
of such securities and returns, such as dividends and interest payments, should be treated as
offsetting receipts or collections.
CBO estimates that investing 80 percent of fund balances in private securities would result
in net receipts of $200 million over the 2006-2015 period. The fund would make net
investments in 2007, when its collections would exceed its expenditures. In subsequent years
when expenditures would exceed collections, the difference would be made up by drawing
down assets from the fund, starting with any assets received from other asbestos trust funds.
Liquidated assets and earnings from private trust funds would be considered revenue in the
federal budget, while the value of assets privately invested by the Administrator would be
recorded as offsetting receipts upon liquidation.
For this estimate, CBO used its projections of the return on Treasury securities to predict
investment earnings of the fund for both private securities and government securities.
Although private securities may well yield higher gains over the long term, such investments
carry much greater risk than government securities. The difference between projected returns
on private securities and government bonds can be seen as the cost investors must be paid
to bear the additional risk of holding private securities instead of government bonds. Thus,
adjusted for the additional cost of risk associated with private securities, the net expected
returns on private securities are the same as those on government securities.
Revenues
Receipts to the fund would come from three sources: defendant companies that have spent
more than $1 million on asbestos injury litigation, insurance companies that have made more
than $1 million in such payments, and existing private trust funds formed to settle asbestos
claims. Over the life of the fund, defendant companies would be expected to contribute
$90 billion, less any credits granted for the establishment of private bankruptcy trust funds
set up after July 31, 2004 (known as bankruptcy trust credits); insurance companies would
be called upon to contribute just over $46 billion, less bankruptcy trust credits. CBO is
aware of one bankruptcy trust that would be eligible for such credits--the Halliburton
Bankruptcy Trust. CBO estimates that the bankruptcy trust credits of defendant companies
would total $2.4 billion over the 30-year period, or $80 million per year, with the credits
being apportioned to all defendant companies based on their share of the total amounts of
payments for the year. Insurers would have an estimated $1.5 billion in bankruptcy trust
11
credits; those credits would go to the insurers who paid into trusts set up after July 31, 2004.
All assets of existing asbestos trusts (about $7.5 billion) would be transferred to the fund.
Defendant companies. Section 202 would specify $90 billion, less any bankruptcy trust
credits under section 222, as the amount to be collected from defendant companies. The
minimum aggregate annual payment would be $3 billion, less any bankruptcy credits. CBO
estimates that annual payments would total $2.9 billion over 30 years. For the purpose of
determining each firm's contribution, each one is assigned to a tier based on its prior asbestos
expenditures and whether it is in bankruptcy proceedings.
The actual amounts paid by firms might differ from that implied by their tier assignments
because the bill would allow certain exemptions for small businesses and modifications of
assessments, based on financial distress or inequity or based on whether a firm meets the
criteria for being classified as a distributor. The bill also would allow the Administrator to
increase the amount that defendants would pay if the total payments fall short of the
minimum aggregate annual payment amount.
The defendants' contributions could decline over the 30-year period for two reasons. First,
if more defendant companies exist and make payments than CBO estimates, the payments
in the earlier years would exceed the minimum required payment. Because the aggregate
payments cannot exceed $90 billion less bankruptcy credits (or a net of $87.6 billion), any
excess amounts paid in earlier years would reduce the amounts needed to be paid in the
future years. Second, the required total payments could decline in later years if the
Administrator determines that full payment is not required, and each company's assessment
would decline proportionately.
The amount the fund would collect from defendant companies depends on a number of
unknown factors:
? The number of subject companies and the tiers into which they would fall;
? Which of those companies would be subject to exemption or modification of their
contributions and whether some affiliated entities would elect to be treated separately
or jointly;
? The size and nature of the assets of firms in liquidation;
? The number and characteristics of subject firms that may go into bankruptcy during
the assessment period; and
? How much funding is needed to satisfy claims and other expenses of the fund.
12
Some sources have indicated that as many as 8,400 firms may have paid sufficient prior
asbestos claims to be covered by the legislation. CBO could not verify this figure. Based
on information that CBO could obtain about firms that have incurred asbestos litigation
expenses, we estimate that about 1,700 defendant firms would be required to make
contributions to the fund under the bill. It was possible to determine the likely tiers for about
500 of those firms. The remaining firms were assigned equally to the two lowest tiers, based
on the assumption that firms with unknown tier assignments were those with lower asbestos
claims payments. No reduction in the number of firms was made for those exempt due to
size. Similarly, CBO made no upward adjustment to account for defendant firms not
identified.
Tier I firms are firms that have filed for bankruptcy. Revenues for tier I firms expected to
emerge from bankruptcy were obtained, where possible, from public sources. No reliable
information could be obtained about the possible contributions of tier I firms that are likely
to liquidate. Firms that securities analysts expect to earn revenues in 2006 were assumed to
make the required payments, and no reduction in contribution was made for firms that would
receive hardship or inequity adjustments in their contributions or for consolidated payments
made by affiliated groups.
Insurers. Section 212 would specify just over $46 billion, less any bankruptcy trust credits,
as the amount to be collected from insurers over a 28-year period. In the case of insurers, no
allocation or formula for payments is specified in the legislation, although the legislation
does specify how much in aggregate would be collected for each of the 28 years. The bill
would create an Asbestos Insurers Commission to determine an allocation among the
insurance companies. The bankruptcy trust credit would represent a dollar-for-dollar
reduction in the amount of liability an insurer would pay under the bill for any contributions
to bankruptcy trusts established after July 31, 2004. CBO estimates that the value of the
bankruptcy trust credits would be $1.5 billion. Either the allocation determined by the
Asbestos Insurers Commission or one agreed upon by the subject companies would
determine how much each insurer would pay of the $46 billion total.
S. 852 would direct insurers to contribute an aggregate initial payment of no more than
50 percent of the first year's required $2.7 billion within 90 days after enactment. The bill
would authorize the Administrator to calculate the initial payment obligations of insurers and
handle other matters related to the collection of the funds. However, the initial payment
amounts would not be considered final until the Insurers Commission has been formed,
promulgated its allocation methodology, and issued its final determination of liability of the
insurers. Based on the procedural steps specified in the bill, CBO expects that such
determination would be made in fiscal year 2007.
13
The participating insurers would pay interest on any difference between their ultimate
liability and the amount of the interim payment. Any insurers who paid more than their
ultimate liability would receive interest on the excess amount. The bill specifies that the
interest rate on any overpayments or underpayments would be the same rate. CBO estimates
that the fund would be able to collect the initial payment from insurers by the end of fiscal
year 2006 and that the demands on the fund for payments would prompt the Administrator
to seek to collect the maximum allowed for the initial payment--50 percent of the first year
obligation. CBO further assumes that the remaining 50 percent of the first year's payment
would be collected in the second year with the associated interest and the second year's
contribution.
Existing Asbestos Trust Funds. Based on publicly available information, CBO determined
that the existing private trust funds set up to compensate claimants currently contain about
$7.5 billion in assets. Under the bill, those assets would be transferred to the new Asbestos
Fund in the first year following enactment. Until that transfer occurs, we assume that claims
paid by these funds would roughly equal investment income. The assets of existing trusts
are invested in a variety of financial instruments, and only the cash and U.S. obligations in
these trusts would be recorded in the federal budget as revenues of the government when
transferred. The private securities in the trusts (together with any earnings) would be
recorded as revenues only when converted to cash or U.S. obligations.
Based on the financial reports of the Manville Trust, CBO estimates that 56 percent of
transferred trust assets (about $4.5 billion) would be recorded as revenues in 2006. For this
estimate, we assume that the remainder of the assets would only be sold as needed to finance
spending in later years. The proceeds of those sales would be recorded as revenues to the
fund at that time.
Offsets and Guaranteed Payment Surcharge. The bill would allow firms and insurers to
reduce their individual assessments by the value of any asbestos claims paid after the
enactment date of S. 852 and before 2007, when CBO expects the fund's full operations
would start. It also would authorize certain payments by subject companies to guarantee
collection of the mandated amounts. For the purpose of this estimate, CBO assumes that
these provisions would have no net effect on annual payments by firms and insurers.
Offsets for Exigent Claims Paid During Start-up of the Fund. In the interim between
enactment of S. 852 and the time when the fund would begin full operations, defendants and
insurers may settle or face judgments on exigent asbestos claims that the fund is unable to
process or pay. Firms and insurers could use those settlement amounts as a dollar-for-dollar
offset against their assessments, reducing the payments required to be made to the fund.
14
Guaranteed Payment Surcharge and Guaranteed Payment Account. The Administrator of
the fund could impose on each defendant participant a surcharge to offset any shortfalls in
the annual aggregate payment amounts. If the payments by defendant participants exceed
the minimum aggregate annual payment of $3 billion, less bankruptcy trust credits, the
excess amount, up to $300 million, would be set aside in the guaranteed payment account as
a form of self-insurance by the fund, with any excess funds being carried forward to the next
year. For this estimate, CBO assumed that the Administrator would assess a surcharge on
all firms when necessary. If the funds in the guaranteed payment account are insufficient to
ensure that the minimum annual payment is raised in any year, the Administrator of the fund
would be able to levy a guaranteed payment surcharge on the defendant participants on a pro
rata basis.
Secondary Effects on Other Revenue Sources. The payments made by defendants and
insurers and the sums received by claimants could affect taxable income under the federal
corporate and individual income tax systems. This cost estimate includes no effects of those
transactions on federal income taxes paid by claimants or businesses. Those secondary
effects are likely to be insignificant in any event.
Payments made into the fund would be tax-deductible and would thus reduce the corporate
income tax liability of participating firms. But in the absence of this legislation, firms would
have to pay asbestos damages set in the courts, which would also be tax-deductible. It is
impossible to say with any confidence whether the amounts that would be paid out by
defendant firms and insurers under this legislation would be higher or lower than what they
would expend in its absence through the tort system. The best assumption under the
circumstances is that the bill would have no significant effect on corporate taxable income
or on the government's receipts from corporate income taxes.
Similarly, the tax treatment of payments received by claimants would be unchanged from
what it is now--effectively excluded from taxable income and therefore having no effect on
taxes paid by individuals. There might be some reduction in income tax receipts if a
significantly larger proportion of payments goes to claimants rather than to their attorneys,
who would pay tax on the income. But this would depend on whether more claimants think
they can navigate the new system set up under the legislation without legal assistance than
is the case under the existing one--a circumstance that cannot be known. CBO expects that
any change in the allocation of awards between attorneys and claimants would be too small
to significantly affect income tax receipts.
15
BUDGETARY IMPACT OF THE ASBESTOS FUND AFTER 2015
To assess the long-term financial viability of the Asbestos Fund, CBO considered several
possible projections of the fund's cash flows beyond the normal 10-year estimate of the
legislation's budgetary impact. When estimating such cash flows, the provisions of
section 405 are critical. That section of the bill would sunset the fund's operations by
directing the Administrator to reject new claims if the fund's resources (including borrowing
authority) prove inadequate to pay additional obligations. Under S. 852, claimants could
seek compensation in federal courts if the fund were to sunset. In determining whether or
not to sunset, the Administrator would consider the unpaid costs of any approved claims and
previous borrowing against future revenues. Section 405 also would require the
Administrator to return remaining assets to certain nongovernmental trust funds--but only
in the event of a sunset.
CBO estimates that total receipts to the Asbestos Trust Fund over its lifetime would amount
to about $140 billion, including a small amount of interest earnings on its balances. We
estimate that the fund would be presented with valid claims worth between $120 billion and
$150 billion in addition to any financing (debt-service) costs and administrative expenses.
Under the legislation, receipts to the fund would be fairly evenly distributed over its first
30 years. However, even if receipts exceed claims, CBO estimates that more than half of the
fund's expenditures for claims would be paid in the first 10 years of its life. Such an
imbalance between when the fund's anticipated claims payments would be made and when
receipts would be collected would require the Administrator to borrow to pay claims. Under
the bill, the borrowed amounts (including interest costs) would have to be repaid from the
fund's own budgetary resources.
Depending upon the precise timing and value of claims presented to the fund as well as the
exact revenue collected, investment returns, and interest rates, the fund might or might not
have adequate resources to pay all valid claims. For example, if the value of valid claims
totaled $130 billion, interest costs on the fund's borrowing might amount to $10 billion, and
interest earned on investments could approach $2 billion, while administrative costs would
add another $1 billion to $2 billion. If the value of such claims were significantly more than
$130 billion, the fund's revenues might be inadequate to pay all claims.
Because of the uncertainty and sensitivity of the variables that affect the fund's balances, any
long-term projection over five decades must be viewed with considerable caution. Operating
the Asbestos Fund would be an entirely new governmental task, and CBO and other analysts
have little basis for judging how the Administrator would implement the legislation. The
discretion available to the Administrator and insurance commission with respect to the
allocation of costs, provision of adjustments, and levying of surcharges makes the flows into
and out of the fund hard to predict with much reliability. Furthermore, the projections that
1. Statement of Professor Eric Green, Boston University School of Law, before the Senate Committee on the Judiciary, June 4,
2003.
16
have been made in recent decades of the number of asbestos claims likely to be filed were,
in hindsight, much too low, suggesting that there might be a significant risk of
underestimating the number of future asbestos claims. In addition, receipts to the Asbestos
Fund would depend on the continued viability of the firms required to pay into it, which is
also uncertain.
The Asbestos Fund's Operations Are Uncertain
Contributing to the uncertainty of the cost to resolve claims under the bill are some
significant features of the claims process that would only be defined after enactment of the
legislation. For instance, the bill would require the Institute of Medicine of the National
Academy of Sciences to conduct a study to examine the causal link between asbestos
exposure and cancers other than lung cancer or mesothelioma. If that study were to
determine no causal link between asbestos exposure and any of those cancers, the number
of claims for such conditions (level VI under the bill) could decline significantly. The bill
would also require the Agency for Toxic Substances and Disease Registry (ATSDR) to
conduct a study to determine if any other contaminated sites pose dangers similar to those
observed in Libby, Montana. Because claimants from Libby would receive higher minimum
awards than other claimants and because the bill would mandate similar treatment for any
sites so identified, the costs could rise depending upon which sites might be judged similar
to Libby and on how many claimants would be affected. Also, this estimate does not take
into account the impact of approving any exceptional medical claims, which are claims that
do not fit into the defined criteria but which might still receive compensation depending upon
the findings of specific panels of physicians. It is difficult to assess how many such claims
might be filed and how liberally those panels might rule on the claims.
Past Estimates of the Number and Value of Asbestos Claims Have Been Inaccurate
Forecasts of asbestos claims made over the past decade have failed to accurately predict the
magnitude, scope, and evolution of asbestos claims. According to one witness that testified
on similar legislation previously before the committee, "in every instance where companies
or trusts have attempted to project future asbestos claims, they have always seriously
underestimated."1 Most estimates of future claims rely on a combination of epidemiological
information and statistical estimation techniques using historical data. Such models contain
a number of potential sources of error in forecasting.
17
In 1988, experts estimated that the number of future claims against the Manville Trust would
range from 50,000 to 200,000. By January of 1991, the trust had already received more than
171,000 claims. Through the summer of 2005, the Manville Trust had received 690,000
claims. The most recent claims forecast performed for the trust estimated that the trust may
receive up to 1.4 million additional claims.
CBO's estimates of the number and distribution of claims that would be compensated by the
Asbestos Fund under S. 852 are based on forecasts similar to those that have been prepared
for the Manville Trust. Therefore, it is possible that the number of claims that would be
compensated under S. 852 could deviate in significant respects from our estimates in terms
of cost, timing, or both.
Revenue Collections Are Uncertain
The revenue stream that would be generated by the legislation is highly uncertain. Although
the aggregate amount of the levy on defendant firms and insurers is fixed over the first 30
years, a number of factors described earlier make it difficult to project the annual receipts
with much reliability.
First, identifying the defendant participants and where they would fall in the different
payment tiers is difficult, if not impossible, without legislation requiring the information to
be disclosed. (Tier placement directly affects the amount a defendant company would pay
into the fund.) Many of the prior asbestos settlements were made outside of the court system
and, as such, are not public record. This lack of information means that the number of
defendant companies in each tier and the resulting payments could be either higher or lower
than the numbers used in preparing this estimate.
If the number of defendants is significantly higher than assumed in this estimate and if claims
remain at or about the level estimated, the likelihood of insufficient funding available to
settle claims would be reduced. At the end of the first 10 years, if excess monies existed, the
Administrator could decrease the payments required by the defendants by up to 10 percent.
Similar stepdowns in payments could also occur after 15, 20, and 25 years should funding
exceed claims levels sufficiently to warrant such a reduction.
To determine the impact of a significantly higher number of defendant companies making
payments, CBO estimated the revenues and the resulting effects on cash flow if there were
an additional 650 companies in each of the two lowest tiers. This scenario would result in
approximately 3,000 defendant companies paying into the fund and, assuming that the
number of claims projected by CBO is correct, the fund would be able to pay all claims
projected by CBO and there would be no early sunset due to lack of funds to pay claims.
18
Conversely, significantly fewer defendant participants who meet the criteria for payments
under this bill would result in higher levies on the existing defendant participants to ensure
the minimum aggregate annual payment of $3 billion less bankruptcy trust credits. This
continuing drain on firms' resources could lead to more bankruptcies and even higher levies
on the remaining firms.
Thirty years is a long time-span for a business. Even under ordinary conditions, economic
circumstances lead many firms to liquidate over time. Normal attrition will be exacerbated
by the costs of dealing with asbestos liability--either under the current system of litigation
or under the legislation itself. The legislation's provisions for adjustments based on inequity
or financial distress might mitigate business bankruptcies, but at the cost of even greater
uncertainty in the value of the fund's future revenue stream. The legislation also would allow
the Administrator to impose a surcharge to guarantee payment of amounts that some firms
would be unable to pay. The success of this surcharge depends, in turn, on estimating the
attrition among firms.
The bill proposes no absolute deadlines concerning the establishment of the Asbestos
Insurers Commission. Some of the tasks involved in promulgating a methodology and
producing final billings to the insurers are well defined and have specific time frames, while
time frames for other activities are not clearly specified. CBO expects that appointing and
confirming the five members and establishing the final allocation methodology for
participating insurers would take at least 12 months. If the process were to take longer, it
could delay the payments from insurers and possibly necessitate more borrowing than CBO
has projected.
Federal Liability if the Trust Fund's Resources are Inadequate to Pay Claims
So long as the fund's Administrator does not borrow from the U.S. Treasury beyond the
means of the fund to repay such borrowing, the government's general funds would not be
used to pay claims. Furthermore, section 406 states that the legislation would not obligate
the federal government to pay any part of an award under the bill if amounts in the Asbestos
Fund are inadequate.
ESTIMATED LONG-TERM DIRECT SPENDING EFFECTS
Pursuant to section 407 of H. Con. Res. 95 (the Concurrent Resolution on the Budget, Fiscal
Year 2006), CBO estimates that enacting S. 852 would cause an increase in direct spending
greater than $5 billion in at least one 10-year period from 2016 to 2055.
19
ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS
S. 852 contains two intergovernmental mandates as defined in UMRA. First, it would
preempt state laws relating to asbestos claims and prevent state courts from ruling on those
cases. Second, the bill would require state governments to comply with requests for
information from the Asbestos Insurers Commission. CBO estimates that any cost associated
with this mandate would be insignificant and well below the threshold established in that act
($62 million in 2005, adjusted annually for inflation).
The bill would authorize $15 million from the Asbestos Trust Fund for state, local, and tribal
governments to monitor and remedy naturally occurring asbestos. Any related costs to those
governments would be incurred voluntarily as a condition of receiving federal aid.
20
ESTIMATED IMPACT ON THE PRIVATE SECTOR
S. 852 would impose new private-sector mandates, as defined in UMRA, on:
? Certain individuals filing claims for compensation for injuries caused by exposure to
asbestos;
? Certain companies with prior expenditures related to asbestos personal injury claims;
? Certain insurance companies;
? Trusts established to provide compensation for asbestos claims;
? Health insurers; and
? Persons involved in manufacturing, processing, or selling certain products containing
asbestos.
Based on information from academic, industry, government, and other sources, CBO
concludes that the aggregate direct cost to the private sector of complying with all of the
mandates in the bill would well exceed the annual threshold established in UMRA
($123 million in 2005, adjusted annually for inflation) during the first five years those
mandates would be in effect. CBO cannot determine the direction or magnitude of the net
impact of the bill's mandates on claimants, defendant companies, or insurance companies
over the long term.
Asbestos Injury Claims
The bill would prohibit an individual from bringing or maintaining a civil action alleging
injury due to asbestos exposure. Currently, individuals can file asbestos injury claims against
any number of defendants in state or federal court. Under S. 852, individuals would only be
able to receive compensation for asbestos-related injury by filing a claim with the federal
Asbestos Fund established by the bill. A claimant would be able to recover from the fund
if that person could meet the bill's medical criteria, which are based on the severity of the
asbestos-related disease. Claims pending as of the date of enactment would be stayed, except
for certain pending civil actions.
Some individuals who would receive compensation under current law would not be qualified
to receive compensation under the bill. Further, some individuals would receive more
compensation for their asbestos injury claims under current law, while others would receive
21
more if S. 852 is enacted. The direct cost of the mandate to claimants would be the
difference between the total settlements and judgments that would be obtained under current
law and the compensation that would be obtained by claimants under S. 852.
Based on information from academic, industry, and other sources, CBO assumes that
claimants who would be deemed ineligible for compensation under the bill would be
predominantly from the "unimpaired" category. Because comprehensive data relating to
asbestos exposure, litigation, and compensation are not available, it is difficult to predict the
number of claimants who would receive compensation and the amount of the settlements
they would receive under current law. Unimpaired claimants historically receive multiple
settlements of a few thousand dollars each from as many as half-a-dozen defendants.
According to several expert sources, settlements for unimpaired claimants may range in value
from $3,000 to $50,000 per claimant. Also, according to several sources, a large proportion
of claims currently pending could have their settlements precluded or delayed under the bill.
Further, experts predict that many individuals would probably receive less compensation in
the first five years under S. 852 than under current law. Consequently, CBO expects that the
direct cost to claimants of complying with this mandate could amount to hundreds of millions
of dollars over the 2006-2010 period.
Assessments on Defendant Companies
Section 202 would impose a new mandate on defendant participant companies, defined in
the bill as certain companies with prior expenditures related to asbestos personal injury
claims. Such defendant companies would be required to pay an annual assessment to the
Asbestos Fund totaling a minimum of $3 billion in each of the first five years, less any
bankruptcy trust credits. Defendant participants would be required to pay over the life of the
fund a total of not more than $90 billion, less any credits.
Section 204 would require the Administrator of the Asbestos Fund to impose a surcharge on
each participant required to pay contributions into the fund to make up for any shortfalls in
a given year due to nonpayment by some participants. The amount of surcharge to be paid
would be determined by the Administrator. CBO expects that the Administrator would
assess a surcharge on all firms sufficient to compensate for this loss and that the surcharge
would be imposed differentially on defendant companies to reflect their different risks and
to maintain their roughly equivalent contributions. However, CBO expects that there would
be no surcharge on defendant companies during the first five years of the mandate.
The amount the fund would receive from defendant companies would depend on a number
of factors, including the number of subject companies and the tiers into which they would
fall. Based on data from industry and other sources, CBO estimates that the defendant
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companies would pay $2.9 billion per year into the fund over the 2006-2010 period.
According to industry and academic sources, defendant companies in aggregate currently pay
asbestos litigation and settlement costs on an annual basis close to the amounts that would
be required by the bill in the next five years. Thus, CBO estimates that the incremental costs,
if any, for those companies to comply with those mandates would not be significant over the
first five years the mandates would be in effect.
Assessments on Insurance Companies
Section 212 would impose a mandate on insurers with asbestos-related obligations. The bill
would require those insurance companies to contribute to the fund, and specifies that their
contribution would satisfy their contractual obligation with the defendant companies to
compensate claimants for injuries caused by asbestos. The bill does not, however, specify
any allocation or formula for such payments to the fund. The amount of the contribution to
the fund for individual insurance participants would be determined by the Asbestos Insurers
Commission established under the bill.
The aggregate contributions to the fund of all participating insurers would average
$2.7 billion in the first and second year and $5 billion in years three through five.
Participating insurers would be required to pay over the life of the fund a total of $46 billion,
less any bankruptcy trust credits. Based on information from industry sources, CBO
estimates that insurers would pay a total of about $20.4 billion into the fund during fiscal
years 2006 through 2010. According to industry information on asbestos liability costs,
insurance companies in aggregate would have expected costs for asbestos claims under
current law close to the amounts that would be required by the bill over the next five years.
Thus, CBO estimates that the incremental costs for those insurance companies to comply
with the mandates would not be significant over the 2006-2010 period.
Asbestos Settlement Trusts
Section 402 would require asbestos settlement trusts, established to provide compensation
for asbestos claims, to transfer their assets to the Asbestos Fund no later than 90 days after
the enactment of the bill. Such a requirement is an enforceable duty, and therefore, a
mandate under UMRA. Based on information from the trusts and industry sources, CBO
expects that such trusts would transfer approximately $7.5 billion in assets to the fund in
2006. The cost to the trusts of the mandate for the trusts in that year would be the value of
the assets net of amounts that the trusts would otherwise pay for compensation and
administrative costs in that year.
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Health Insurance
Section 409 would impose a private-sector mandate by prohibiting health insurers that offer
a health plan from denying, terminating, or altering coverage of any claimant or beneficiary
on account of participation in a medical monitoring program under this bill or as a result of
any information discovered as a result of such monitoring. This mandate would have no
direct cost because such a medical monitoring program does not exist under current law.
Ban on Products Containing Asbestos
Section 501 would prohibit persons from manufacturing, processing, or distributing in
commerce certain products containing asbestos. The bill would require the Administrator
of the Environmental Protection Agency, not later than two years after the enactment of the
bill, to promulgate final regulations prohibiting commerce in such products (with some
exceptions). In addition, the bill would require persons who possess a product for the
purpose of commerce that is subject to the prohibition, not later than three years after the
enactment of the bill, to dispose of that product by means that meet federal, state, and local
requirements. A number of products and processes still use asbestos, including brake pads
and linings, roofing materials, ceiling tiles, garden materials containing vermiculite, and
cement products. According to industry and government sources, products are readily
available to replace products containing asbestos, and the disposal of such asbestos products
would not be difficult. Therefore, CBO expects that the direct cost of complying with this
mandate would not be large.
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ESTIMATE PREPARED BY:
Federal Spending: Mike Waters and Kim Cawley
Federal Revenues: Barbara Edwards
Impact on State, Local, and Tribal Governments: Melissa Merrell
Impact on the Private Sector: Paige Piper/Bach
ESTIMATE APPROVED BY:
Robert A. Sunshine
Assistant Director for Budget Analysis
G. Thomas Woodward
Assistant Director for Tax Analysis