Where the VW emissions money is going

A Diesel Progress exclusive

By Mike Osenga

The facts of what some refer to as the Volkswagen emissions scandal are well known and well reported, especially in these markets. Since then, there has been more than a little misinformation about the results of the settlement that resulted from the legal actions: environmental crazies controlled the money that resulted from the scandal, or The Government was making the payouts, or secret forces were at work to underwrite electrification in the United States.

To all three, the answers are; not true, not true and totally not true.

The Volkswagen emissions scandal dates back to 2015, when the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to the German manufacturer. EPA said it found that Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate its emissions controls only during laboratory emissions testing, keeping the vehicles’ NOx emissions within U.S. standards during testing.

The EPA found that when the illegal software controls – popularly called “defeat devices” – used on the engines (specifically 2.0 L and 3.0 L diesels) recognized that the vehicles were not in testing mode, but rather in real-world operation, the emissions controls were turned off. This caused the cars to experience better fuel economy, while emitting up to 40 times more NOx, obviously way over the regulated limits. Volkswagen reportedly put this programming software in about 11 million cars worldwide, including 500,000 in the United States, for the 2009 to 2015 model years.

Long story short, Volkswagen pleaded guilty to criminal charges and signed an agreed Statement of Facts.

In a bit of irony, former FBI Director Robert Mueller, much in the news these days, was appointed as a mediator to oversee the negotiations between claimants, regulators, and Volkswagen, to produce a final consent decree by late June 2016. Among the terms of the final settlement, Volkswagen paid $2.7 billion for “environmental mitigation,” and $2 billion to promote zero-emissions vehicles. Now officially called the VW Environmental Mitigation Trust.

The settlement also resulted in the founding of Electrify America, as a subsidiary of Volkswagen Group of America. Electrify America is building, owns and manages an electric vehicle charging network that includes non-proprietary electric vehicle chargers at over 650 community-based sites and nearly 300 highway sites across the country.

But it is that first part of the settlement, now totaling $2.9 billion, that is the subject here and where much of the confusion reigns.

Who determines who gets The money?
Enter Wilmington Trust, N.A. On March 15, 2017, the court appointed Wilmington Trust as the trustee for the Volkswagen Diesel Emissions Environmental Mitigation Trust to fund eligible environmental mitigation projects (submitted by state and/or Indian tribe beneficiaries) that reduce NOx.

With roots dating back to 1903 and founded by T. Coleman duPont, Wilmington Trust has been serving individual and institutional clients for more than a century. Wilmington Trust is now part of M&T Bank Corp., one of the 20 largest independent commercial bank holding companies in the U.S. with over $120.1 billion in assets.

“As a corporate trustee we typically don’t see transactions like VW. This may be viewed as once in a lifetime. It is a new cutting-edge approach to dealing with environmental issues, as well the funding and establishment of a stand-alone trust,” said David Vanaskey Jr., administrative vice president for Wilmington Trust.

“It’s a unique, large and complex transaction that has been put together here. From our perspective, and at least as we were told back in 2016 and 2017 when the trusts were coming together, that there wasn’t a situation that had precedent like this; a settlement with the federal government, with state and federally-recognized Indian tribe agencies, with a plaintiff and certainly with environmental plans and a mitigation funding mechanism that stands alone,” Vanaskey said.

He added that Wilmington Trust is no stranger to complex financing transactions – financing large equipment deals including aircraft, locomotive and trains, offshore drilling platforms, solar, wind and hydro projects among many.

Wilmington itself does not invest in those sorts of projects, but works with investors, developers or buyers of equipment to facilitate and execute the financing structure, including creating bank accounts, holding collateral, receiving payments or rents, ensuring that the borrower is fulfilling their obligations under the contracts, as well as reporting, completion certificates and more.

“In this case, we worked with the Department of Justice and the EPA, as well as working very closely with state municipalities. We also have an outstanding reputation as a national public finance trustee,” he said.

How common is something like the VW Environmental Mitigation Trust?

“While this transaction is indeed unique, environmental mitigation probably happens a little bit more than you would think,” Vanaskey said. “They generally happen around significant events like the BP Deepwater Horizon oil spill. In a major environmental situation, where at some point there should be claims and there’s going to be an obligation to pay, there’s going to be some sort of infrastructure that is going to be to set up to facilitate that.”

“In the VW case we worked with our sales, legal, risk management and compliance teams, talked about where the risks are, talked about what trust services we could provide or maybe what we couldn’t do, as it related to the information that was presented to us.

“Part of our value proposition is that we could represent what we believe is a pretty compelling story about our commitment to the business, access to key decision makers, and our skills, experience and expertise. And that resonated with the decision makers in the federal government and the state and Indian tribe beneficiaries who were represented around the table,” he said.

“We made it to the short list. There were follow-ups and questions and then we really got down to the business in the late first quarter, early second quarter of 2017 negotiating the trust agreements for the formation of the VW Environmental Mitigation Trust,” Vanaskey said.

How It Works

The key question is, how does the distribution of the VW Environmental Mitigation Trust funds work?

In its simplest form, the money is available only through individual state (and tribal, Puerto Rico and DC) agencies. The amount of money each state is entitled to was determined by the number of 2.0 L and 3.0 L diesel-powered cars that were registered in a state at the time of the consent decree. Federally-recognized Indian tribe beneficiaries have a separate trust agreement and are equitably allocated funds utilizing an annual funding cycle, which includes a calculation that considers available funds and the number of participating beneficiaries.

The key point here is that individuals, groups, companies or people with good ideas cannot access the VW Environmental Mitigation Trust funds. The money is only available through the state agencies listed above.

As a result as detailed above, California receives the most money, over $422 million, while Puerto Rico, North Dakota, Hawaii, South Dakota, Alaska, Wyoming and the District of Columbia receive the least at $8.125 million.

The trust is fully funded, being paid in three installments in November 2016, 2017 and 2018.

The timeline for distributing the money is 10 years, starting from the anniversary of the trust, October 2nd, 2017. Thus, funding is available through 2027, said Russell L. Crane, assistant vice president and senior relationship manager for Wilmington Trust who administers most of the day-to-day operations of the fund.

Where & How The Money Is Spent

One of the central tenants, and one of the most misunderstood, is that based on the terms of the agreement, there are 10 types of projects, called Eligible Mitigation Actions (EMAs) that the trust money can be used to fund. All have a goal of reducing NOx, the offending emission regulation that VW was accused of violating. “If it (an application) doesn’t meet one of these 10 EMAs, then in accordance with the Trust Agreement we send it back,” Crane said.

These 10 EMAs are shown below and additional detail can be found at vwclearinghouse.org.

One of the other misunderstood aspects of the fund is that it is not used to buy new machines or engines, such as if a state wanted to buy new, cleaner construction equipment for the Department of Public Works.

“Replace or repower is a good way to think of all this,” Crane said. “It is replacement for existing equipment. We’ve had people say, ‘we want to buy a new “thing.’ 

“Our answer is, what are you replacing? You have to have something you are replacing. If the state’s Department of Public Works wants money for 10 new pieces of equipment, we’re going to ask what 10 machines are you replacing?

“So if it’s a large truck, whether it’s got a dumper on it or a garbage truck is irrelevant. We’re looking at the engine, does it fit in this class, and can they afford it with their allocation?

“This is different from previous settlements,” Crane said. “And this is where there is a learning curve for the states and tribes. They are used to a grant process like the big tobacco settlement, where it is ‘here’s a big pot of money and go spend it wisely and send us a report.’

“Here they are actually being tasked to submit an Eligible Mitigation Action project. They have to submit a budget; they have to submit estimated costs from proposed vendors. There’s a whole list of supporting documentation they must include as attachments to their funding request. We review it page by page and say, ‘well you need an itemized budget here – not just a total.’

“For the 50 US States, DC, and Puerto Rico, the money is designated for each beneficiary. There is a separate trust account for Wisconsin, for example. But it’s not like ‘here Wisconsin, you’ve got this $60 million, go spend it on clean stuff,’” Crane said.

“The way it works is – okay Wisconsin, you’ve got this money set aside, and then you’ve got certain requirements that you need to do in order to get access to that money.

“Wilmington Trust did not set it up this way. It was the Federal government in the terms of the settlement decree. And then that was reflected that back into the trust agreement.

“Part of that goal is to minimize the discretion of a trustee. We (Wilmington Trust) don’t say this is a good project or a bad project. As a fiduciary, we want to be able to say we have the required information that’s submitted to us from the designated state agency. It’s signed by the right people. It’s one of the 10 allowable EMA projects. It contains attachments A through F, check, check, check,” Crane said.

“We’re not making any value judgments on any EMAs. It’s more of a process judgment. It puts us at arm’s length from the decision making on the merits of a project. We’re not the environmental guru here saying, you know, that’s not good enough. You need more of this or less of that.”

However, as Crane said, it’s not simple as a state or tribal agency coming in and saying they want money to replace 100 buses. “We want to know the areas that they are considering replacing buses, is it a non-attainment area? We let them put the language in there, if they came back and just said, ‘give us $10 million for 100 buses,’ we’d ask for more details.”

Protections
“It is important for the public and the industry to know that this is not being done behind the curtain,” Vanaskey said. “States and tribes are making certifications that they are going to use the money for what they said they were going to use it for,” he added. “Plus, every state and tribe has to publish the projects and have public comment on it.

“They have a set beneficiary reporting obligation,” Crane said. “Each beneficiary (state or tribe) has to produce a semi-annual report. Six months after receiving their first disbursement of funds, they have to start reporting; semi-annually for the previous six months under penalty of perjury, that this information is correct.

“They have to report and say, where is this project, what’s the status? When do we estimate completion? And then if there are any hitches or anything, they have to report that, as well.”

All of this disclosure is conveyed on the VW Trust public website at www.vwenvironmentalmitigationtrust.com, where each state and tribe that has been designated as a trust beneficiary has its own dedicated web page, and members of the public can view reports and approved funding requests.

“There are also provisions [in the trust agreements] that if there are leftover funds, they can’t play with that money,” Crane said. “They have to send it back to the trust and then it can be used for something else. Say (for a state) a $10 million project comes in $9.5 million. The $500,000 goes back for something else and it goes right into their dedicated allocation sub-account. And they can request and draw it down for another project.”

Progress
So did states line up and start submitting proposals to access these funds almost immediately in October 2017? Not exactly, Crane said.

“We didn’t actually didn’t start dispersing funds to states until July of 2018. A lot of states are still coming up to speed. Some states were early adopters in 2018,” he said, naming Arizona, Georgia, Maine, Minnesota, Nebraska, Nevada, Oklahoma, Oregon and Rhode Island. (See below, which includes data from the Trustee’s semi-annual report dated February 15, 2019.)

Crane said that through May 2019, disbursements totaled close to $150 million to 16 states, which in addition to the aforementioned states now also includes California, Colorado, Idaho, Iowa, Louisiana, Missouri and Ohio. He added that in the same period the trustee had disbursed nearly $6 million to 25 Indian tribe beneficiaries.

Electrification
Another misunderstood thing about the VW Environmental Mitigation Trust is electrification. As mentioned above, NOx reduction is the primary purpose of the funding. According to Crane, EPA, as part of the terms of the agreement, limits 15% of a state or tribe’s funding to zero-emissions vehicles (ZEV). “EPA didn’t want them to just do all ZEV and leave the offending, polluting older vehicles on the road.”

So Far

Crane said the initial projects funded were mostly school and transit bus replacements and a variety of electrification projects – mostly charging stations.

“School buses are politically popular,” Crane said. “But as we’ve said, we don’t weigh in on all that. But it is interesting to see the states and tribes working out where their priorities are for these funds.”

But the bottom line, given that this is largely a financial story, is that the states have barely scratched the surface in determining where these funds will be spent. There is still a lot of money to be allocated between now and 2027.

What is clear is that almost every dollar spent from the VW Environmental Mitigation Trust, is going toward something that will improve air quality in the United States.

This article will also appear in the July print and digital issues of Diesel Progress.