oversight

Federal Timber Sales: Process for Appraising Timber Offered for Sale Needs to Be Improved

Published by the Government Accountability Office on 1990-05-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                  ..
United   States   General   Accounting   office
ReDort to Congressional Reauesters




Timber Offered for:’
SaJeNeedstoEk ‘:
Iinmoved
Resources, Community,    and
Economic Development     Division

IS-23891 I

May 2,1990

The Honorable Sidney R. Yates, Chairman
The Honorable Ralph Regula, Ranking
   Minority Membrl
Subcommittee on Interior
   and Related Agencies
Committee on Appropriations
Ilouse of Representatives

In response to your October 26, 1988, request, this is our report on the systems used to
appraise timber offered for sale by the 1’5 Department of Agriculture’s Forest Service and
the Department of the Interior’s Bureau 01’I,and Management. It evaluates the two methods
currently in use and recommends certain :Il,tions to improve the appraisal process.

As agreed with your offices, unless you rclcase its contents earlier, we plan no further
distribution of this report until 30 days aftt,r the date of this letter. At t,hat time, we will
send copies to the appropriate Senate and I louse Committees; interested Members of
Congress; the Secretary of Agriculture; the>Chit,f of the Forest Service; and the Director,
Office of Managcmcnt    and Budget,. Copies will also be made available to other interested
parties.

This work was performed under the genctral direction of John W. Harman, Director, Food and
Agriculture Issues (202) 275-5138. Other major contributors are listed in appendix III of the




J. Dexter ieach
Assistant Comptroller    General
Executive Summary


                   The Department of ,4gricaulture’s Forest Service and the Department of
Purpose            the Interior’s Bureau of Land Management (131,hl) annually sell billions of
                   board feet of timber from the nation’s forests. In fiscal year 1988,
                   receipts from these sales totaled more than $1.4 billion.

                   The Forest Service and I%M appraise timber to establish an advertised
                   selling price. The Chauman and Ranking Minority Member, Subcommit-
                   tee on Interior and Related Agencies, House Committee on Appropria-
                   tions. asked GAO to examine whether the appraisal methods in current
                   use (1) ensure that t lr~ government, receives fair market value for the
                   timber and (2) result in minimum selling prices that, adequately protect
                   the government’s inttarcst and enhance revenues.


                   Various laws and regr(lations require that the Forest Service and N,M sell
Background         timber for its fair market value. Government-wide guidance also pro-
                   vides that sound business management principles generally be used
                   when selling federal resources. IIowever, neither agency is under a legal
                   or regulatory requircmcnt to sell timber at a price that, will recover
                   costs.

                   The two appraisal m&hods used in government timber sales are called
                   the “transaction evidcnccl” and “residual value” methods. The transac-
                   tion evidence method establishes an appraisal prire based on an average
                   for comparable timber sales, while the residual value method est,ablishes
                   an appraisal price thai would enable a purchaser of average efficiency
                   to harvest and procc>ss the timber at a “rtsasonable profit.” Three Forest
                   Service regions USI’(he residual value met hod while the remaining six
                   regions and H1.M IIW the transaction evidence method.

                   After appraising t III’ I imber, the agencies determine a minimum sales
                   price, advertise the ~tlc. accept bids, and award the sale to the highest,
                   bidder. GAO analyzed fiscal year 1988 data for 3,3 1ti Forest Service tim-
                   ber sales and 221 I<I.Ntimber sales. The Forest Service timber sales were
                   from forests in all ninr, of its geographic: regions; H1.M sales were from its
                   forest lands in wcstc%rn Oregon.


                   GAO’S evaluation SI~IWS that using t.he transaction evidence appraisal
Results in Brief   method results in atl~~r~rtlsrd price-the     lowest prices at which the gov-
                   ernment will sell-uhic+r    arc closer to fair market value than does the
                   residual value rntxi hod. This o~urs bec.ausr the residual value method




                   Page 2                              GAO/RCED-90-135   Federal Timber Sales Appraisals
                            has many problems in its implementation due to nonstatistical and out-
                            dated data. While the transaction evidence method better estimates fair
                            market value, it is being inconsistently applied by the Forest Service
                            regions using it. Forest Service headquarters has provided only limited
                            guidance and oversight to the regions to better ensure that their
                            appraisals reflect fair market value and increase revenues to the
                            government.

                            Neither appraisal method is designed to establish a minimum sales price
                            which recovers costs and would protect the government’s interest and
                            enhance revenues. At the Forest Service, where a cost-accounting sys-
                            tem has been in place since 1987,40 percent of the total fiscal year 1988
                            timber sales that GAO reviewed were advertised for less than just the
                            costs of preparing and administering the timber sales. I3LM does not have
                            such a cost-accounting system. However, on the basis of cost data pro-
                            vided by BLM, about 1 percent of the IlLM sales that GAO reviewed were
                            advertised for less than the costs of preparing and administering the
                            sales.



Principal Findings

Transaction Evidence        GAO'S   analysis of fiscal year 1988 Forest Service timber sales data
                            showed that the transaction evidence method, when consistently imple-
Method Superior Predictor   mented, resulted in advertised prices which were closer to fair market
of Fair Market Value        value than prices estimated by the residual value method. When aggres-
                            sive competition exists, the appraisal method used makes little or no dif-
                            ference because competition results in a selling price that equates to fair
                            market value. However. when aggressive competition is lacking, the
                            accuracy of the appraisal method in estimating fair market value is par-
                            ticularly important to protect the government’s interests. For example,
                            about 5 percent of the sales were sold at advertised prices in oral auc-
                            tions with a single bidder. GAO'S analysis suggests that the transaction
                            evidence method, on average, results in advertised prices that could
                            range from 14 to 37 percent higher than the residual value method. Con-
                            sequently, this suggrsts that the government may be able to enhance its
                            revenues on noncompetitivr      sales by using the transaction evidence
                            method of appraisal

                            The residual value method is being implemented with nonstatistical and
                            outdated data. All bllt three Forest Servict regions have switched to the



                            Page 3                            GAO/RC,EI)-W-135   Federal   Timber   Sales Apprdsalfi
                       Executive   Summary




                       transaction evidence, method, citing data problems with the residual
                       value method as well as the fact that the transaction evidence method
                       better estimates fair market value and is less costly to maintain. None-
                       theless, the Forest Service’s two main timber-producing regions continue
                       to use the residual \-alue method and cite limited staff resources and
                       historic use as the primary reasons.

                       Forest Service regions have received limited guidance or oversight from
                       headquarters in deMoping or implementing the transaction evidence
                       appraisal method. Accordingly, regions have developed differing
                       approaches. One appreciable difference GAOidentified was in the
                       “rollback,” or reduction the regions made to their appraisal estimates to
                       stimulate competition and to compensate for any inaccuracies that they
                       believed may have o\,erstat.ed the price developed by their appraisal
                       estimates. One region reduced the appraised price developed by its
                       transaction evidence> method by an average of 47 percent in 1988,
                       whereas all other regions reduced the prices within a range of 5 to 25
                       percent. In fiscal ~‘c’irt. 1988. this region had 18 sales at advertised prices
                       in single-bidder ()ri(I ;hllcTions. With a smaller percentage rollback
                       applied in this rcgic 111,t 1~3government might enhance its revenue on
                       such sales.

                       GAO  also found that I trtl Forest Service does not exercise adequate inter-
                       nal control over thr) I imbcr appraisal process. For example, there is no
                       routine hcadquarttlrs monitoring of how well regional appraisal systems
                       are establishing bid Iiri(.(ss that approximate fair market value.

                       IKM  switched to tht> transaction evidence method during 1988 because of
                       the residual value mchthod’s data problems and cost, and because the
                       agency believed t 1~~t ransaction evidence method better estimates fair
                       market value. G:\( I’S ;malysis of fiscal year 1988 ill,M competitive timber
                       sales showed that sales appraised using the transaction evidence
                       met,hod resulttsd in sfblling prices that better approximated fair market
                       value than thosca ;~pl~r’aixcd using the residual value method.

                                     ..____
Costs Not Considered    Neither appraisal mc\t hod ensures a minimum selling price that will ade-
When Setting Prices     quately protect t 11~government’s interest and enhance revenues because
                        neither method t akos into account the costs of growing and selling the
                        timber. In 1987, the, F’orc~+tService started using, on a test basis, a cost-
                        accounting systc,m u trictl identifies all costs associated with it.s timber
                        sale program. GA(1I iscd this system to compare the costs associated only



                        Page 4                              GAO/RCED-SO-135   Federal Timber   Sales Appraisals
                  Executive   Summary




                  with the sales preparation and administration functions to the adver-
                  tised and sales prices. In fiscal year 1988, the Forest Service advertised
                  about 40 percent of the sales GAO analyzed for prices that were less than
                  these costs and actually sold 24 percent at prices where these costs
                  exceeded the sales prices by over $22 million. These costs do not include
                  the costs of growing the timber, overhead, or foregone interest on the
                  government’s investmcbnt

                  HLM  does not have a cost-account,ing system for its timber sale program.
                  However, RLM furnishcbd tiA0 with available data on sale preparation and
                  administration costs which GAO did not verify. GAO’S comparison of these
                  data with BLM'S fiscal year 1988 sales showed that about 1 percent of
                  sales was advertised and that only one timber sale was actually sold for
                  less than its sale preparation and administration costs.

                  While there can be valid reasons for below-cost sales-e.g., diseased
                  timber may adversely affect other forest resources-+x0      believes the
                  reasons for such sales should be documented by the Forest Service.
                  Information regarding the cost, and purpose of a sale is not currently
                  documented or considered before a sale is advertised. However, accord-
                  ing to Forest Service of‘fickls, the agency plans to adopt guidelines and
                  procedures in late 1990 that would provide guidance on timber sales
                  which do not recovc’r ,~sts.


                  GAO recommends that (he Forest Service provide better guidance and
Recommendations   oversight to improve its timber appraisal process, including developing
                  and using the transaction evidence method in Forest Service regions and
                  discontinuing the use of the residual value appraisal method. GAO also
                  recommends that the 1:orest Service complete actions to ensure that the
                  government’s costs be considered before a sale is advertised and that the
                  reasons for selling below cost be documented by the appropriate official.


                  GM) discussed the information in this report with Forest Service and HLM
Agency Comments   officials. They generally agreed with the facts presented and with GAO’S
                  conclusions and recommendations. GAO included their comments in the
                  report where appropriate,. As requested, however, GAO did not obtain
                  official comments on this report.




                  Page 5                            GAO/RCED90-135   Federal Timber   Saks Appraisals
Contents


Executive Summary                                                                                              2
Chapter 1                                                                                                      8
Introduction            Timbt,r Is Sold Through Bids                                                       9
                        Legal Requirements for Timber Appraisals                                          10
                        .\ppraisal Methods in Current I!se                                                11
                        !jbjectives, Scope. anti Methodology                                              13

Chapter 2                                                                                                  16
Improvements Needed     Problems With Residual Value Method                                                16
                        Transaction Evidcnw Method Superior to Residual Value                              18
in Forest Service            ?Gthod in Estimating Fair Market Value
Appraisal Process to    BLM’s Results Consistent With Forest Service’s                                    20
                        Limitcad tiuidancc and Oversight in Establishing Appraisal                        21
Better Reflect Fair          Systems
Market Value            Conclusions                                                                       22
                        l~twmmendations                                                                   23
                                          --
Chapter 3                                                                                                 24
Advertised Price for    Costs Arc Not ITsed to Establish Advertised Prices                                25
                        Costs Clan Now Bc Dc~tcrmined                                                     25
Forest Service Timber   Comparison of Costs ()f (‘onducting Sales With Advertised                         27
Is Often Not Adequate        and Actual Sales IQ-ices for the Forest Service
                        Comparison of Costs of (‘onducting Sales With Advertised                          29
to Recover Costs of          and Actual Saks Prices for BLM
Conducting Sales        Sales Not Recovering ( ‘osts May Be Warranted in Some                             29
                             Instances
                        C:onclusions                                                                      30
                        Rwommendations                                                                    31

Appendixes              Appendix 1: An Analysis of Appraisal Method Bias in                               32
                            Advertised Priws of Forest Service Timber Sales
                        Appendix 11:I+tcntial and Actual IJnrecovered Sales                               45
                            I’reparation and ‘Idministration    Costs on Fiscal Year
                            1988 Timber Saks, Forest Service
                        Appendix Ill: Major (‘ontribut,ors t,o This Report                                50

Tables                  Table 1.1: Exampk ot’ a Kcsidual Value Determination                               11
                        Table 2.1: Percent agesof Overbids and Rollback Factors in                         20
                             R@ons 1Ising Transaction Evidence Appraisals


                        Page 6                             GAO/RCED-90-135   Federal Timber Sales Appraisals
         Table 2.2: Comparison of Transaction Evidence and                                       21
              Residual Value Appraisal Methods in 1988 Timber
              Sales, With Two or More Bidders at BLM
         Table 3.1: Potential IJnrecovcred Sales Preparation and                                 27
              Administration    Costs on Fiscal Year 1988 Timber
              Sales
         Table 3.2: Actual Unrecovered Sales Preparation and                                     2x
              Administration    Costs on Fiscal Year 1988 Timber
              Sales
         Table I. 1: Description of Factors in Overbid Percentages                               36
              Model
         Table 1.2: Rollback Factor and Appraisal Method by                                      36
              Region for Fiscal Year 1988
         Table 1.3: Estimation Results When the Rollback Factors                                 39
              Are Considered to Be Part of the Appraisal Process
         Table 1.4: Estimation Results When the Rollback Factors                                 42
              Are Not Considered as Part of the Appraisal Process
           ~____~
Figure   Figure 1.1: Forest Service Regions                                                           9




         Abbreviations

         111M      Bureau of Land Management
         GAO       General Accounting Office


         Page 7                               GAO/RCED-90.136   Federal   Timber   Sales Appraisals
Chapter 1

Introdhion


             The federal government is a substantial supplier of timber available for
             harvest. In fiscal year 1988. it, sold more than 12 billion board feet of
             timber.’ Most federal timber lands are managed by two agencies-the
             Department of Agric~rilture’s Forest Service and the Department of Intc-
             rior’s Bureau of Land Management (IQAI). The Forest Service manages
             191 million acres of national forest. system land, while I&M manages
             about 8 million acrts. In fiscal year 1988, the Forest Service sold about
              11 billion board feet of timber for a total price of over $1.25 billion, and
             HI,M sold more than I billion board feet for about $153 million.

             The Forest Service is organized into nine regions (see fig. 1, I ), with the
             two regions on the I’acific Coast producing the bulk of the harvested
             timber in fiscal year 1988. In that year, these two regions, which include
             the states of Califoruia, Oregon, and Washingnm, accounted for nearly
             6.9 billion board fret t)f timber (about 63 pcrcmt of the total timber vol-
             umc sold) and nearly %1.04 billion (83 pcrc*ent of the v;~luc received),
             according t,o the Fort+t Scrvicc’s 1988 annual report.

             ~r~.nz
                  has 12 state offi<xx Most of ixx’s t,imber volume and value are
             obtained from salch III western Oregon. In fiscal year 1988, 92 percent of
             the vohime sold ant1 ! Iii Ixrcent of the valr~c received from HLM timber
             sales came from it 5 \\ ~~,tern Oregon land.




             Page R                              GAO/RCED-90-135   Federal   Timber   Sales Appraisals
Figure 1.1: Forest Service   Regions   ._~   ~~ ~~~~~




                                                 In fiscal year 1988, t ho Forest Scrvic*tBand IILM offered timber in more
 Timber Is Sold                                  than 2~i4,OOOindividual timber salts, ranging in value from less than
 Through Bids                                    $300 to over $6 m illion Gonerally, only larger sales-those with selling
                                                 pric,cs of more than SL!,(KN) or timber volumes of more than 2 m illion
                                                 board t’cct-arr   appr;~i~l.

                                                 When the Forest Scrvlc,t, and HI.M advertise timber for sale, they desig-
                                                 nate arcas to bc har\(~t rtd and solicit bids. The two agencies establish
                                                 the advertised price>. \vlCch is the m inimum bid that will be accepted. by


                                                 Page 9                            GAO,:KCED-W-135   Federal Timber Saks Appraisals
                        Chapter 1
                        Introduction




                        appraising the timber before offering it for sale. Once the timber is
                        appraised, it is advrrt,iscd, bids are accept,ed, and the sale is awarded to
                        the highest bidder. Bidding is by either sealed bids or written bids fol-
                        lowed by oral auctions. With sealed bidding, each potential purchaser
                        submits a written bid. and t,he contract is awarded to the purchaser
                        whose bid exceeded the advertised price by the greatest amount. With
                        oral auction sales, written bids that equal or exceed the advertised value
                        of the timber are required to qualify potential purchasers for further
                        competition by oral bidding. As with sealed bidding, contracts are then
                        awarded to the purchasers whose oral bids exceed the advertised prices
                        by the greatest amount. provided that the purchaser is otherwise quali-
                        fied and responsible


                        Various laws and regulations require the Forest Service and BLM to sell
Legal Requirements      timber for fair market value. IIowever, neit,her agency is under a legal or
for Timber Appraisals   regulatory requirement to sell timber at a price that will recover costs.
                        For the Forest Service>. thrl National Forest Management Act of 1978 (16
                        1T.S.C. lG00 et seq.) authorizes the Secretary of Agriculture to sell tim-
                        ber and other forest products “at not less than appraised value.”
                        Department regulations promulgated in accordance with this authority
                        (36 C.F.R. 223.6) state‘ in part. “The objective of national forest timber
                        appraisals is to est.imatc fair market value     ,” The Forest Service
                        Manual defines fair marktlt value as the “price accept,able t,o a willing
                        buyer and seller both with knowledge of the relevant facts and not
                        under pressure or compLllsion to deal.” In addition, GAO’S Office of the
                        General Counsel has drtcrmincd that appraised value referred to in the
                        law means fair markcst \rall~e.’

                        For lIl.M, two laws prmiarily dicta& the price to be received for timber.
                        The act of 1937 concerning Oregon and California Railroad Grant Lands
                        requires HLM to sell tmtber from former railroad grant lands “at reasona-
                        ble prices on a normal market,.” IU%‘s main timberlands in western Ore-
                        gon are included in thttse former railroad grant lands. BLM’S other timbe
                        sales are guided by thtb Federal Land Policy and Management Act of
                        1976. This act sedtdtcs that the government is to receive fair market value
                        of the use of public lands and their resourt.es “unless otherwise pro-
                        vided for by statutts. ’

                        Additionally,  Office, (bf Management and Budget Circular A-25 sets forth
                        general policies for t,harging for government services and property. The




                         Page 10                           GAO/RCED-SO-135   Federal Timber Sales Appraisals
                                             Chapter 1
                                             Introduction




                                             circular provides that.. “Where federally owned resources or property
                                             are leased or sold, a fair market value should be obtained. Charges are
                                             to be determined by application of sound business management prac-
                                             tices, and so far as practical and feasible in accordance with comparable
                                             commercial practices.”


                                             Currently, two methods are primarily used to appraise timber. These
Appraisal Methods in                         two methods, explained b&)w, arc called the “residual value” and the
Current Use                                  “transaction evidence” methods. The residual value method is used by
                                             three Forest Service rtbgions while the transact.ion evidence method is
                                             used by the other six Forest Scrvic,r regions as well as KM’s Oregon
                                             State Office.


Residual Value Method                        The premise behind the residual value appraisal method is that standing
                                             timber should be advertised at a price that enables a purchaser to (1)
                                             harvest the timber. (2 ) process it into finished products, and (3) sell
                                             those finished products at prices that recover all of the purchaser’s har-
                                             vesting and manufacturing costs and that also allow a margin for profit
                                             and risk.

                                              In calculating the price for standing timber, the agency starts with an
                                              average price for the‘finished pr0duct.s that can reasonably be expected
                                              to be produced from the timber in the sale. These products include pri-
                                              mary products such as lumber and plywood as well as byproducts such
                                              as wood chips used for pulp. From this price, the agency subtracts (1)
                                              the estimated costs of harvesting the timber and manufacturing it into
                                              finished products and (2) an allowance for profit, and risk. What
                                              remains is the residual value, or appraised price. Table 1.1 illustrates a
                                              calculation made under t Iris process in terms of a price per thousand
                                              board feet.

Table 1.1: Example   of a Residual   Value
Determination
                                              Sehng value of end produc:s                                                             $588
                                              Less harvesting costs                                                 $293
                                              manufactunng costs                                                     222
                                              Total costs                                                                              515
                                              Price before proflt and r!sk                                                               73
                                              Less allowance for proflt alld risk                                                        50
                                              Appraised prrce using residual value                                                      $23




                                              Page 11                                GAO,‘RCEI)-YY-I35   Federal Timber   S&s   Appraisals
                       ._
                            Chapter 1
                            Introduction




                            A major consideration in estimating the selling values is the amount of
                            lumber and other finished products that may be produced from a log of
                            a given size and species. At the Forest Service, the amount of the main
                            products-lumber      and plywood-is    commonly estimated using product
                            recovery or “mill” stlldies. These studies are conducted at individual
                            mills and may take up to a year to complete. They involve following
                            selected logs from act,llal harvesting through the milling process to
                            ascertain which products are produced. This procedure allows an esti-
                            mate to be made of t,hc relative quantity of the various products and
                            their quality. Product prices obtained from market indexes are then
                            applied to the estimated volumes to produce an anticipated average sell-
                            ing price for the principal products.

                            The costs included m the appraisal equation are those that contribute to
                            converting the standing timber to the finished product. They include the
                            costs of logging, transportation, and manufacturing, and costs for such
                            items as erosion control and road maintenance. The profit and risk mar-
                            gin is a standard subtraction. At the Forest Service, this margin nor-
                            mally has been in the: range of 9 to 13 percent of the selling value of the
                            products, according t,o a 1987 report prepared by a national working
                            group organized b> the Forest Service and Kational Forest Products
                            Association.

                             Three Forest Servir*ts regions-Region  5 (Pacific Southwest), Region 6
                             (Pacific Northwest), and Region 10 (Alaska)-use     the residual value
                             method as their primary appraisal system.   In February 1988, HLM
                             st.opped using the residual value method and started using the transac-
                             tion evidence method as its primary appraisal system in its Oregon
                             forests.


Transaction Evidence         The transaction evidtlnce method’s objective is to predict the fair market
                             value of timber. 1TndtBrthis method, the Forest Service uses prior timber
Method                       sales in each appraisal zone within the region to estimate the price that
                             new timber sales can be expected to bring. According to Forest Service
                             officials, transaction evidence method appraisals are based on the pre-
                             mise that, if a compc~titivc market exists, the high bid received is a valid
                             indicator of fair ma~~ket value. The transaction evidence method
                             assumes that whilr, the timber will sell for a price that is close to the
                             predicted price, half of the time timber will sell above that price and
                             half of the time it will sell below that price.




                             Page I2                            GAO/RCEW90-135   Federal Timber Sales Appraisals
                         To develop the appraisc.d price using the transaction evidence method,
                         the appraisers must first calculate the average selling price for timber
                         during a defined period of time. The time period used by BLM and the
                         Forest Service varied in length from 1 to 3 years. The high-bid prices for
                         all timber sales during this time in each area are then segregated by spe-
                         cies, weighted by volume, and averaged. These prices then become the
                         base period price upon which ot,her adjustments are made before arriv-
                         ing at the final appraised prices.

                         Adjustments are made to the base period price for a variety of reasons.
                         For example, an adjustment, may be made to reflect market conditions
                         that are different from those that existed in the base period. Adjust-
                         ments are also made to reflect each sale’s individual characteristics. For
                         example, adjustments UC made to recognize differences in factors such
                         as the type of logging system that will be used, the distances that felled
                         timber will be hauled for processing, the quality of the timber, and the
                         amount of road maintenance required. In Region 3, these adjustments
                         are made to individual sale appraisals if they exceed $3 per thousand
                         board feet. For example. if a certain sale characteristic is favorable and
                         exceeds this value whcln compared with the area average (for example,
                         less than average harvesting costs), then the selling price on that sale
                         will be adjusted upwards. If the specific characteristic is unfavorable,
                         i he price will be lowcrc-d.

                         In addition to the adjustments described above, a reduction, or
                         “rollback,” is made to the predicted sale prices. Because the appraised
                         price is based on average’s, which are expected to exceed the price at
                         which the timber will sell for 50 percent of the time, a rollback factor is
                         used to ensure that the advertised price is not set at a level which
                         results in no bids or discourages competition. The value that remains
                         after making adjustments and applying the rollback factor becomes the
                         indicated advertised price

                         Forest Service Regions 8 and 9 have used the transaction evidence
                         appraisal method since the 1970s. Regions 1. 2, 3, 4, and BLM’s Oregon
                         State Office have all switched from the residual value method to the
                         transaction evidence method since 1986.

                         .-__
                         In a letter dated October 26, 1988, the Chairman and Ranking Minority
Objectives, Scope, and   Member, Subcommittee on Interior and Related Agencies, House Com-
Methodology              mittee on Appropriations.   asked us to examine two issues with regard to
                         the current appraisal rtwt hods:


                         Page 13                            GAO/RCED-90-135   Federal   Timber   Sales Appraisals
    Chapter 1
    Introduction




. Whether the current methods ensure that the government receives fair
  market value for the timber it sells.
. Whether the current methods set minimum selling prices that are ade-
  quate to protect thr government’s interest and enhance revenues to the
  Treasury.

    To respond to the first ob.jective, we obtained data bases of Forest Ser-
    vice and HLM timber sales. For the Forest Service, we obtained a data
    base from the Forest Service’s Fort Collins computer center covering all
    nine regions. We conc*trntrated our review on those sold sales greater
    than $2,000 in valura or 2 million board feet in size. For fiscal year 1988,
    the Forest Service data base contained 3,316 sales which met these crite-
    ria. The data base) that we obtained for BLM timber sales showed that,
    sales comparable in size to those of the Forest Service were concentrated
    in western Oregon. The HLM data base contained 221 comparable sales,
    of which 60 were appraised using the residual value method and 161
    were appraised using t ht transaction evidence method.

    In order to evaluate IIOW effective each appraisal method is in ensuring
    that the government receives fair market value, we developed an eco-
    nomic model to explain the relationships between fair market value,
    government advertiscbd prices, appraisal methods, and other factors.
    lrsing the Forest St>rvictb’s 1988 sales data, we estimated the parameters
    of the model with rogrcssion analysis. These estimates then served as
    our basis for comparmg the ability of the two appraisal methods to
    result in advertised ~~rict~sthat approach fair market value. For this
    regression analysis. WC used 2,80 1 of the 3,3 16 sales contained in the
    Forest Service data base. Of the 2.801 sales, 1,356 used the residual
    value appraisal method and 1,445 used the t.ransact,ion evidence
    appraisal method The details of our regression analysis are described in
    appendix I.

     We tested BLM'S cxpt,ricnce with how well its appraisal methods approx-
     imated fair market values. While we did not use regression analysis as a
     control for other factors, we computed the average advertised and high-
     bid prices to comI)arcJ the relat,ive difference in overbids for the two
     appraisal methods

     To respond to the scc,ond objective, we relied on the data bases referred
     to above. For our analysis, we excluded all sales that were coded “pend-
     ing” in the Forest Service data base. This resulted in a data base of
     3,030 sales for our analysis. We performed a reliability assessment of
     selected data elcmc~nts from bot,h the Forest Service and IILM data bases.


     Page 14                           GAO/KCED-90-135   Federal   Timber Sales Appraisals
-.-____
      Chapter 1
      Introduction




      We used random sampling techniques for the Forest Service data base
      and a loo-percent test of the BLM data base. We found an error rate of
      less than 1 percent for each data base, which we judged to be acceptable
      for our purposes. All discovered errors were corrected.

      In addition, we utilized the Forest Service’s Timber Sale Program and
      Information Reporting System to obtain the costs associated with the
      basic sales preparation and administration costs for each forest. These
      costs were then compared, on a per-thousand-board-foot     basis, with the
      advertised and eventual selling prices of the timber to identify sales that
      were advertised and/or sold for prices that did not recover these costs.
      HIM does not have a cost-accounting system similar to that of the Forest
      Service. We relied on figures BI,M supplied us with t,o make a similar
      comparison. We did not attempt to verify the cost information supplied
      by either the Forest Service or BLM.

      We interviewed headquarters and regional or state officials for both
      agencies and reviewed pertinent documents. We discussed our findings
      with appropriate officials and incorporated their comments where
      appropriate. They generally agreed with the facts presented and with
      our conclusions and recommendations,

      Our review was performed between January and November 1989 in
      accordance with gencrally accepted government auditing standards. As
      requested, however. WV did not obtain official comment,s on this report.




      Page 15                            GAO/RCED-90-135   Federal Timber Sales Appraisals
Chapter 2

Improvements Needed in Forest Service
Appraisal Process to Better Reflect Fair
Maxket Value
  -                                                                                                    -
                 Our evaluation of the Forest Service data shows that the transaction
                 evidence appraisal method results in advertised prices which were
                 closer to fair market value than prices estimated by the residual value
                 method. This occurs because the residual value method has many
                 problems in its implementation. Although the transaction evidence
                 method does a better job of estimating fair market value, it is being
                 inconsistently applied. Forest Service headquarters has provided only
                 limited guidance and oversight to the regions to better ensure that their
                 appraisals reflect fair market value and enhance revenues to the gov-
                 ernment. Our limited analysis of HLM data also showed that nt,&~‘sexpcri-
                 ence with the appraisal methods was consistent with our finding for the
                 Forest Service.

                                                                       -            -___-~
                 The residual value aptnaisal method as explained in chapter 1 attempts
Problems With    to set prices that will allow the purchaser “of average efficiency” to
Residual Value   harvest the timber. nritntrfacture it into finished products, and make a
Method           profit.

                 Most Forest Service regions and IDI’s Oregon Stat,e Office have moved
                 away from using the residual value method. However, three Forest Ser-
                 vice regions, inc~luding Regions 5 and 6. which accounted for 83 percent
                 of all Forest Servict\ timber sold and 83 percent of all Forest Service
                 timber receipts in fis(.al year 1988, continue to use the residual value
                 method. Since 1%X;, four of the nine Forest Srrvjce regions have
                 switched from the t-cwd~~;~l value method to the transaction evidence
                 method, bringing to 51 r; the number of Forest Service regions primarily
                 using the transactiorr r~vrtlencc method. IILM’S Oregon State Office
                 switched from t,ht> r~cwtir~;tl value to the transaction evidence method in
                  1988. Forest Servicing ;Ind IL~I officials cited dissatisfaction with data
                 accuracy, high maintcnancc costs. and inconsistent appraisal values as
                 reasons for the change They also stated that the residual value method
                 was outdated and st ai istically invalid, and that it did not result in a
                 price reflective of’ ~‘;III market, value. Here arc some of the specific criti-
                 cisms they voiced

                 Forest Service off’ic~ials in Region 1 stat,ed that the product recovery
                 studies used for t 11~residual value method were of little or no use and
                 the information thcL\, prctvided could be obtained in less costly ways.
                 Forest Service offic~rals In Region 3 stated that industry complained that
                 the residual wrlw rltc’t ho(l set the price of timber too high in some




                 Page I6                              GAO/RCEIHWlBR   Federal   Timber   Saks Appraisals
  Chapter 2
  Improvements   Need& in Forest Service
  Appraisal Prucess to Better Reflect Fair
  Market Value




  instances and in others, the advertised price was set so low that the tim-
  ber was eventually sold at a price two to three times greater than what
  was advertised.
. A HLM issue paper cit,ed the failure of the residual value method to pre-
  dict the value of standing timber and the high maintenance costs as rea-
  sons for changing. The paper estimated the short-term savings of
  implementing the transaction evidence method to be 25 percent of total
  appraisal cost under the residual value method. RLM also reported that
  timber purchasers and its own appraisers had long been critical of the
  residual value method’s obsolescence.

  Our review of the residual value method showed that the averages used
  for harvesting and manufacturing costs lacked statistical validity. To
  calculate the average harvesting and manufacturing costs on which the
  method is based, in our opinion, it is first necessary to identify the log-
  ging and manufacturing companies located in each appraisal zone. If
  obtaining cost data from all of these companies is not feasible, a statisti-
  cally valid random sample can be selected. If the sample is statistically
  valid, an average can be computed that is representative of all compa-
  nies. According t,o Forest Service officials in Region 6, they do not use all
  logging and manufacturing companies located in each appraisal zone to
  calculate average costs, nor have they identified these companies so that
  a random sample can be selected. Instead, they rely on companies will-
  ing to supply cost data, and they use the same companies year after
  year whenever possible. As a result, the average cost data being used in
  the residual value appraisal process is not statistically valid and may
  not be representative of an “operator of average efficiency.”

  The problem of statistical validity also applies to the average selling val-
  ues used. For example, not all mills located in an appraisal zone are used
  for product recovery studies, and those mills which are used are not
  selected in a way that ensures statistical validity. As with cost data
  only willing mills are used for product recovery studies. These studies
  can take up to a year to complet,e and necessnate the positioning of up
  to 30 people, for a period of 1 week, at all stages of the manufacturing
  process to mark logs as they go through. This procedure is costly and
  greatly increases the mills’ normal processing times while each individ-
  ual log’s products are identified and measured. The selection of mills is
  based on their willingness to volunteer for this inconvenience and loss of
  productivity.  An official in Region 5 told us that some of the product
  recovery studies currently used in the residual value appraisal process
  are over 30 years old.



   Page I7                                   GAO/RCED-9Q-135   Federal Timber   Sales Appraisals
                           Chapter 2
                           Improvements   Needed in Forest Service
                           Appraisal Process to Better Reflect Fair
                           Market Value




                           Despite the problems and limitations of the method, the residual value
                           method continues as the primary appraisal method in the Forest Ser-
                           vice’s two main timber-producing regions-Region      5 (Pacific Southwest)
                           and Region 6 (Pacific Northwest). Region 10 [Alaska) also uses the
                           residual value method as its primary appraisal method. In fiscal year
                           1988, Regions 5 and 6 accounted for 63 percent of all Forest Service
                           timber sold and 83 percent of all Forest Service timber receipts. Officials
                           in these two regions cited limited staff resources and historic use as two
                           reasons for continued use of the residual value method. A Region 10
                           official cited a lark of comparable sales and a fear of industry collusion
                           as the main reasons for keeping the residual value method.


                           C&r analysis of Forest Service timber sales data for fiscal year 1988
Transaction Evidence       indicates that the Forest Service’s advertised prices more closely reflect
Method Superior to         fair market value when they are determined using the transaction evi-
Residual Value             dence appraisal method rather than the residual value method. This
                           suggests that the government could be losing revenue on those sales
Method in Estimating       which lacked aggressive competition (for example, oral auctions with a
Fair Market Value          single bidder) and for which the residual value method was used. Our
                           results also show that inconsistent application of rollback factors can
                           greatly affect the different appraisal methods’ apparent, ability to result
                            in advertised prices which approach fair market value.


Analysis of Timber Sales    To conduct our evaluation of which appraisal method was better able to
                            estimate fair market value, we developed an economic model to explain
Data                        the relationship between final sale prices, or fair market value, and
                            advertised prices as det,ermined by many factors, including the method
                            of appraisal. IJsing t,he model, we were able to estimate the effect on
                            advertised prices of selecting one appraisal method over the other, while
                            simultaneously nccount.ing for the influence of many other factors on
                            advertised prices.

                            In arriving at our estimates of an appraisal method bias in advertised
                            prices, however, we gave special consideration in the analysis to the role
                            of “rollback” factors or the percentage by which appraisals are
                            adjusted downward in arriving at advertised prices. Rollback factors are
                            important because the actual factors used by the Forest Service are not
                            consistent either across regions or appraisal methods. Further, it is
                            unclear whether or not rollback factors should be considered as compo-
                            nents of the appraisal process. Therefore, we conducted several versions
                            of the analysis, including versions in which rollback factors are and are


                             Page 18                                  GAO/RCED-90135   Federal   Timber   Sales Appraisals
                            (‘haptrr 2
                            Improvements   Needed in Forest Srnice
                            Appraisal Procrss to Beltrr Reflect Fair
                            Market Value




                            not considered associated with the appraisal process, and a version
                            which addresses t hc c’(Insistent use of the rollback factors across
                            regions.

                            The results of our analysis suggest that, either when rollback factors are
                            reasonably consistent XI‘OSS regions or if they are considered distinct
                            from the appraisal pro~~css, the transaction evidence method provides a
                            more accurate ref1ec.t ion of’fair market value than does the residual
                            value method. In gcnc~ral. VW found that the transaction evidence
                            method may result in advertised prices that average anywhere from 14
                            to :I7 percent higher t ban those derived from the residual value method.
                            (SW app. I for a more detailed discussion of our methodology and
                            findings.)


Varied Application of the   Ah bough agency ot’f’ic~& believe the transaction evidence method pro-
                            vides a more accuratll rcflcction of fair market value, we found that in
Transaction Evidence        one Forest Scrvict region. it was being applied in such a way as to have
Method                      the opposite effect. The problem stems from the use of a rollback to set
                            final appraisal raos. As chapter 1 explained, because the appraised
                            price is based on av(bI.agcs, the predicted selling price of any timber sale
                            may be set above Lvhat t hc market is willing to pay half of the time. To
                            compensate for this possibility. a downward adjustment is made to the
                            predicted bid price on all sales by using a rollback factor. There is no
                            headquarters guidanc,c on the purpose of the rollback or parameters
                            established as to its size. Our analysis .&wed that Region l’s applica-
                            1ion of the transact ion cvitlencc method resulted in the most significant
                            dit’fercnce between ap~)raisals and high bids of any of the regions using
                            the transact ion cvidcm~c method Table 2.1 shows the comparison
                            bctwern the rollback f’;n?or usccl with the average percentage overbid
                            for each Forest %,I.\ ICY’region using the transaction evidence method.




                            Page 19                                    GAO/RCED-YO-135   Federal Timber   Sales Appraisals
                                                 .~~
                                        Chapter 2
                                        Improvements   Needed in Forrst Srrvicr
                                        Appraisal Process to Better Rrflert Fair
                                        Market Value




Table 2.1: Percentage of Overbids and
Rollback Factors in Regions Using                                                                           Average percentage of
Transaction Evidence Appraisals                                                     Rollback   factor       overbid on competitive
                                        Region                                                 range                         sales=
                                        I                                                           47"                          205
                                        2                                                       5 10                               70
                                        3                                                       5-10                               40
                                        4                                                       5~10                               69
                                        8                                            .~        10~25                               39
                                        9                                                           15”                            48




                                        In fiscal year 1988. licq$on 1 had 18 sales at the advertised price that
                                        were oral auctions wirh only 1 bidder.



Higher Advertised Prices                When timber salts arf‘ competitive. the advertised price is only a start-
                                        ing point for the coml)catitivc bidding. Competition tends to raise the
Could Enhance                           advertised price to fair market value. Accordingly, the accuracy of the
Government Revenues on                  appraisal is of litt Ic unportance when competition exists.
Some Sales
                                        For those sales wl11c91 lacked aggressive competition in the bidding,
                                        advertised prices ;issllm<’ greater importance regardless of which
                                        method is used. For c>xample, a single bidder at an oral auction need bid
                                        no more than thtb ad\ crtised price to be high bidder, so that the govern-
                                        ment receives no prcMum above t,he advertised price. In fiscal year
                                        1988. about ,5 perching of the sales were sold at advertised prices in oral
                                        auctions with a singIt bidder. Therefore, for those sales which lack
                                        aggressive compel it ic~n. I he government may enhance revenues by using
                                        that appraisal mc*tttod which results in advertised prices that are closer
                                        to fair market viil\llt As previously stated, the transaction evidence
                                        method rt>sults in ;Icl\-clrtiscd prices that average from 14 to 37 percent
                                        hightlr than t hc ~~c~~~ti~~al
                                                                     value met hod.

                                                                                                                        __~
                                         We also tested IUI’S ~~xperiencc with how well its appraisal methods
BLM’s Results                            approximated fair markrt values. Although we did not use regression
Consistent W ith Forest                  analysis to control t‘c11’    c)ther factors, a simple comparison of averages
Service’s                                suggests results (.olrxistc>nt with those of our analysis of the Forest Ser-
                                         \+cc,. The transac,i icII I t,vidence method more closely reflected fair mar-
                                         ket \,aluc on c~oml~c*t  Iti\,caly bid sales in fiscal year 1988 than did the
                                         residual value mt’t IN id. The results are presented in table 2.2. The table


                                         Page 20                                   GAO/RCED-W-135     Federal Timber Sales Appraisals
                                         Chapter 2
                                         Improvements   Needed in Forest Service
                                         Appraisal Process to BetIer Reflect Fair
                                         Market Value




                                         shows that the average percentage of overbids using t,he residual value
                                         method was twice that of the transaction evidence method.

Table 2.2: Comparison of Transaction
Evidence and Residual Value Appraisal                                                                                         Difference/
Methods in 1988 Timber Sales, With Two                                           Average                                      advertised
or More Bidders at ELM                                           Number        advertised      Average          Average               price
                                         Method                  of sales             price    high bid      difference          (percent)
                                         Transaction
                                           evidence                   147           $516,627   $731,315         $214,688                 42
                                         Residual value                60           $316,538   $584,809         $268,271                 85




                                         Although the transact ion evidence method is better than the residual
Lim ited Guidance and                    value method in reflecting fair market value, we found that. the differ-
Oversight in                             ences in the application of the rollback factor in Region 1 were lim iting
Establishing Appraisal                   this method’s effect ivcncss wit,hin the Forest Service. The differences
                                         between regions rcflcct. in our view, lim ited guidance and oversight
Systems                                  from Forest Scrvicc, h(~adquarters.

                                         The Forest Service m itnual st,ates that, the development of appraisal data
                                         is a regional responsibility, Forest Service headquarters provides lim ited
                                         guidance to regions in establishing appraisal systems primarily through
                                         field trips to provitl(> t ethnical assistance in system design. Forest Ser-
                                         vice officials told IIS that while the regions have the responsibility to
                                         design their own appraisal systems, considerable influence is exerted
                                         throllgh the recomtn(,ndations of the assistance teams during the field
                                         visits. IIowever, t hc f’inal regional appraisal system does not need for-
                                         mal approval by Forest S(brvict> headquarters.

                                          The Forest Servic.tl alxo has little oversight of how the regions c.onduct
                                          the appraisal procc’ss WC found no ongoing Forest Service headquarters
                                          review of how wc4l c~rch region’s appraisal system is predicting the
                                          evcnt,ual selling prlc~~ of timber sales. Hids arc not being monitored
                                          nationally so that ;~l)l~raisal systems can be adjusted accordingly.

                                          An Agriculture Insptxc.tor General report on timber appraisals (Audit
                                          Report No. 08627.:%-SF). dated .January 1986, also criticized the Forest
                                          Scarvice for poor in(tLrnal controls over the appraisal process. In that
                                          report, the Inspec,tor Gcnc~ral c,rit,ic-ized the Forest Service fol




                                          Page 21                                       GAO/RCEI)-SO-135   Federal Timber Sales Appraisals
              Chapter 2
              Improvements   Needed in Forest Service
              Appraisal Process to Better Reflect Fair
              Markel Value




              identify and correct Kt~g~onal appraisal methods which do not result in advertised
              values which are reasonat~lc estimates of fair market value for Kational Forest
              timber

              Along with recommendations for better internal controls, the Inspector
              General’s report also recommended that Region 1 adopt a rollback factor
              that results in advert iscd rates being within 76-86 percent of the high
              bid and that all regions adopt standards that result in advertised rates
              t,hat are reasonable c,stimates of fair market value. In April 1990, Forest
              Service officials informed us that they were finalizing an action plan to
              address these recommendat ions.

              While we did not make a detailed review of the internal controls over
              appraisals at ISLM’SOregon State Office, our review of selected internal
              controls indicates that they were adequate. The appraisal system hand-
              book was reviewed hy hc>adquarters, and the appraisal system is main-
              tained at the state office. The state office supplies the district offices
              with the selling value and equations they are to use. Districts may mod-
              ify these equations to fit specific sale conditions. Bids are monitored by
              the state office, which prepares a “shadow appraisal” on every adver-
              tised sale. This appraisal is compared with the one the district prepares,
              and major differtm.css ;W explored.


              Our analysis shows that the transaction evidence appraisal method,
Conclusions   with consistent apt)lic ation of rollback factors. results in advertised
              prices which are closcbr to fair market value than does the residual value
              method. When coml)rstition exists, the appraisal method used makes lit-
              tle difference becatlc:(, c.ompetition encourages the receipt of fair market
              value. IIowever, when competition does not exist. the advertised price is
              very often the sellmg pri(e. Accordingly, where comparable sales data
              exist, it is impcratrx CLthat the Forest Service switch from the residual
              value to the transact ion c,vidence appraisal method to increase the
              ret,urn to the govc~t11r1~w1 by better approximating fair market value.

               We also found that : he Forest, Service does not exercise adequate inter-
               nal control OVL’I-the 1Imber appraisal process. There is no routine head-
               quarters monit,oring cIf how well regional appraisal systems are
               establishing bid pric.tts that approximate fair market value. As a result,
               the regions are inc~onsistently developing and applying appraisal sys-
               tems. In particular. Region l’s appraisal system establishes the advrr-
               tiscd price by using ;I rollback factor which is nearly twice that of any




               Page 22                                   GAO/RCED-90.135   Federal Timber Sates Appraisals
                      Chapter 2
                      Improvements   Needed in Forest Srrvice
                      Appraisal Process to Brttrr Reflect Fair
                      Market Value




                      other region. We are concerned that in sales without competition,                   this
                      could significantly reduce revenues to the government.

                                                  .~-
                      As a result of our analysis, we recommend that the Secretary of Agricul-
Recommendations       ture direct the Chief of the Forest Service to take the following actions
                      to improve its timber appraisal process:

                  . Improve the guidance i o regions on developing and maintaining timber
                    appraisal systems.
                  . Require routine headqltarters monitoring of how well regional appraisal
                    systems are approximating fair market value.

                      In addition, we recommend that in order to establish bid prices that bet-
                      ter approximate fair nlarket~ value, the Chief of the Forest Service
                      direct:

                  . Regions 6 and 6 to hwttch to the transaction evidence appraisal method.
                  l Region 1 to reductl its rollback factor to be more consistent with the
                    other regions.




                       Page 23                                   GAO/RCED-90-135   Federal Timber Sales Appraisals
Chapter 3

Advertised Price for Forest Service Timber Is
Often Not Adequate to Recover Costs of
Conducting Sales
                The advertised timber prices established by the Forest Service do not
                ensure recovery of the costs of even preparing and administering the
                sales. As a result, man\. sales are advertised and eventually sold for
                prices which do not rc’c’ovcr these costs. We found that 40 percent of the
                sales in our data base for fiscal year 1988 were offered for less than the
                Forest Service’s estimated costs of preparing and administering them.
                Twenty-four percent of the sales were sold for about $22 million less
                than these cstimattttl (,osts. Moreover, these figures do not inchide the
                costs of growing the timber, overhead, or the foregone interest on the
                government’s investment in timber activiticx

                Before 1987, the Forclst Service did not have a cost-accounting system
                which could dev?l(Jp timber program costs. However, in 1987, the Forest.
                Service developed a u jst-accounting syst,em that determines costs associ-
                ated with growing thus timber, preparing and administering timber sales,
                and general overh<h;ttl. In this report. we chose to emphasize the fact
                that timber sales arc’ t’requcntly advertised and/or sold at prices that do
                not even recover thtGr preparation and administrative     costs. If we had
                included all costs in our analysis, the percentage of sales which did not
                rt’covor costs would h;tvc~ been much higher.

                While the Forest Srr~ ICCis not required by law to recover or consider
                costs, we believe that For& Service policy should consider all vests
                when setting advcrtistd prices. We believe the cost-accounting system
                should be used to f’st ablish minimum advertised prices which will gcner-
                ally promote the re(‘o\ t’ry of the timber program costs. When the Forest
                Service chooses to ~6.11thr t,imber at less than these costs, it, should docu-
                ment the reasons 11h) the, sale is being advertised at a lower price.

                IKM does not have XII xcounting system that establishes timber sales
                costs. Cost data sulq)Iwd by KLM on fiscal year 1988 sales in Oregon ind-
                cate that three sales. I lr about 1 percent, kvere offered for salt at less
                than the costs of pr~~l)xing and administering the sales and that one was
                sold at, about $3.900 Itbss than these costs. We did not verify thcl accu-
                racy or completentlss of the cost data ISI.Mreported. Because HI.TVI   lacks a
                cost-accounting syst~rn, we believt> that it is impossible to draw any c’on-
                elusions from our (comparison of NI.YI’Scosts of preparing and adminis-
                tering the sale with ;rtlvc>rtised or selling prices.




                Pa@? 24                             GAO/RCEII-90-135   Frdwal   Timber   Sales Appraisals
                        Chapter 3
                        Advertised Price for Forest Swvicr Timber   Is
                        Often Not Adequate to Rrrovrr Costs of
                        Conducting Saks




                        Aside from activities involved in growing the timber to harvest, the For-
Costs Are Not Used to   est Service timber salt, process can take over 10 years from the time
Establish Advertised    initial sale planning begins through the harvest. Typically, about 8 years
Prices                  before the sale award. approximate sale boundaries are identified, the
                        general conditions of the area are surveyed, and a brief logging and
                        transportation plan is l)repared. Three years later, a sales description,
                        including location and approximate timber volume, is published in each
                        national forest’s listing of upcoming timber sales. During the next 5
                        years, a variety of other sale preparation activities are undertaken such
                        as assessing the environmental impacts of harvesting the timber, esti-
                        mating the timber volumc~ more accurately. and appraising the timber.

                        The contract to harvest the timber is awarded under competitive bidding
                        procedures to the highest bidder. The contract terms often call for the
                        timber to be cut in 3 to 5 years, but cutting time can range from 1 or 2
                        months for small sales to 10 years for large sales. The Forest Service
                        monit,ors the purchaser to ensure that access roads to the timber are
                        built correctly. only designated trees are cut, the trees are cut according
                        to contract specifications, damage to the soil or streams is minimized,
                        and various other cant ract requirements are complied with. After the
                        harvest, the area is rclforested by natural means or new trees planted.

                         In addition to the costs of growing the timber, the Forest Service incurs
                         costs to prepare timber for sale, supervise harvesting, and do subse-
                         quent reforestation. IIowt~vrr, applicable legislation governing sales of
                         Forest Service timber does not rcquirc the Forest Service to recover
                         these costs on indi\,idual sales. As a result, these cost,s are not consid-
                         ered by the Forest Servic,tb when appraising and setting the minimum
                         advertised price for which timber is offert,d for sale. This, in turn, often
                         results in the Forclst Service’s offering and eventually selling timber for
                         less than even thcb c,osts of preparing and administering the sales.


                         Before 1987. the Forest Sclrvicc’s accounting system could not provide
Costs Can Now Be         detailed cost informal ion associated with timber sales. In its fiscal year
Determined               1985 appropriations, however. the Forest Service was requested to
                         develop a cost-accounting system which would, among other things, pro-
                         vide this information   Tht Forest Service was instructed to work with us
                         in developing the xysr tm This system was tested in fiscal years 1987
                         and 1988, and impl~mrntcd in fiscal year 1989.

                         The Timber Sale l’rogram Informat,ion and Reporting System identifies
                         timber program cysts on a forest-by-forest basis. It attempts to match


                         Page 2.5                                    GAOjRCED-90-135   Frderal   Timber   Saks Appraisals
Advertised Price for Forrsl Srr%ic~r Timber   Is
Often Not Adequate to Rrrovrr Costs of
Conducting Sales




costs with the revenues they produce by accumulating costs into multi-
year pools. A certain dollar amount from the pools is then expensed
annually on the basis of a formula which includes the amount of timber
actually harvested. If no timber is harvested in a given year, then no
costs are expensed from the pools.

Two cost pools accumulate multiyear costs The first cost pool is called
the “sale activity pool ” This pool includes costs which can be specifi-
cally identified witlr individual sales on the forest. It contains the costs
necessary to plan and prepare timber sales. For example, costs to iden-
tify sale boundaries, prepare necessary environmental documents, and
advertise sales are t>lirred in this pool. Each year. a certain amount of
the accumulated costs is expensed. The amount to be expensed is deter-
mined by dividing the total costs in the pool by the volume of sales
under contract for that year and then multiplying the result by the vol-
umc of timber harvesied during the year.

The second cost pool is called the “growth activity pool” and includes
those costs related to growing timber. F’or example, precommercial thin-
ning, pest control. :III~ fertilization costs would be placed in this pool.
This cost pool has ;I rnu~h longer life than that of the sale activity pool
because the costs as~ckrted with it are those necessary to bring the tim-
ber to the stage where> it is once again available for sale. These costs are
generally described to be investments in future timber stands. Again, a
certain amount of 1he costs in the pool is c~xpenscd annually on the basis
of formulas dcvclopetl as part of the cost-accounting system. The annual
amount expensed from this pool was not imludcd in our analysis.

Other costs assock~tr30 with the timber sale program are not placed in
pools because they ar11directly related to the revenue generated in the
year in which they WP imurred. These costs are expensed annually as
they OWL~I‘. These ;amrual charges include forest-level overhead and the
costs associated with administering sales actually being harvested.

 Finally, the government incurs costs of foregone interest on its invest-
 ments in timber act.icrlies. These costs are not explicitly reflect,ed in the
 cost-accounting system, tbut would he relevant lo an economic analysis
 of timber program c osts and profitablility.

 The annual expensed amount from the sale activity pool and the costs of
 the annual harvest in:: expenses were included in our analysis of sales
 advertised and/or sold below their preparation and administrative
 c,osts. The exclusion I cIf’growth act,ivity pool costs and overhead co&


 Page 26                                       GAO/RCED-YO-13.5 Frdcral   Timber   Sales Appraisals
                                            Chapter 3
                                            Advertised Price for Forrst Service Timber   Is
                                            Often Not Adequate to Rrcwrr     (‘osts of
                                            Conducting Sales




                                                          ___-~            ~~                                                     ___--
                                            from this analysis does not imply that we believe they should not be
                                            recovered or considered when setting a timber sale’s advertised price. In
                                            this report. we chost~ to emphasize that timber sales are frequently
                                            advertised and/or sold at prices that do not even recover their prepara-
                                            tion and administrativc~ costs. If we had also included these other costs
                                            in our analysis, the pc~c’cntage of sales which did not recover cost,s
                                            would have been match higher.


                                            Our comparison of t hc Forest Service’s costs of preparing and adminis-
Comparison of Costs                         tering timber sales wrtlt advertised sales prices showed that about 40
of Conducting Sales                         percent of the fiscal year 1988 sales were advertised at prices that were
                                            less than t,he Forest Scrvkc’s preparation ;md administration costs.
With Advertised and                         Twenty-four JKT~YT~I 01’these sales wet-c sold at prices which did not
Actual Sales Prices for                     recover about $22 ruilllorr of lhesr costs.
the Forest Service

Forest Service Advertised                   The Forest Service xl\ crtised about 40 percent of the 3,030 fiscal year
                                            1988 sales we revic\vc~cl for prices that were less than their preparation
Nearly 40 Percent of Its                    and administration co\ts Table 3.1 summarizes for each region the total
Sales at Less Than Costs of                 nnmber of sales. t hcstlttmber advertised at less than their preparation
Conducting Sales in Fiscal                  and administration costs. and the potential amoums of unrecovered
Year 1988                                   preparation and atim~~list ration c,osts. (The results for the individual
                                            forests within cac.11rcS::iotr iIr(’ coniained in :iJIp. II. )

Table 3.1: Potential Unrecovered Sales
Preparation and Administration   Costs on                                                          Advertised at less than costs of
Fiscal Year 1988 Timber Sales                                                                               conducting sales
                                                                          Total number of      Number of                         Potential
                                            Region                                  sales          sales                         amounta
                                                                                       304            254                     519,015,266
                                            2                                           96             57                        2.944.998
                                            3                                           72             28                        1 135,952
                                            4                                            118           59                        1820740
                                            5                                            426          208                       19.535.714
                                            6                                            759          110                        8,761,883
                                            8                                            721          216                        3.207.848
                                            9                                          528            282                        4 660.160
                                             IC                                           tj             5                         765,266
                                             Total                                   3,030          1,219                    $61,847,827




                                             Page 27                                      GAO/KCW)-90.135   Federal Timber   Saks Appraisals
                                          Chapter 3
                                          Advertised Price for Forest Srrvice Timber   Is
                                          Often Not Adequate tu Recover (:osts of
                                          Conducting Saks




                                          As table 3.1 shows, the%largest amount of potential unrecovered prepa-
                                          ration and administration costs occurred in Regions 1 (Northern) and 5
                                          (Pacific Southwest). but all regions had sales which were advertised at
                                          less than these costs. If competition had not resulted in higher selling
                                          prices, the potential unrecovered preparation and administration costs
                                          would have totaled about $62 million.

                                          Not only did Regions 1 and 5 have the highest potential unrecovered
                                          preparation and administration costs, but they also had higher average
                                          costs per thousand board feet than the other regions. Without doing a
                                          detailed analysis, it is difficult to know why these two regions have
                                          higher timber sale preparation and administration costs and more poten-
                                          tial unrecovered costs than the others.


Forest Service Actually                   The Forest Service actually sold 24 percent of the sales included in our
                                          analysis for $22 million less than their preparation and administration
Sold 24 Percent of Its Sales              costs in fiscal year 198X. The regions showing the largest amounts of
for Less Than the Costs of                unrecovered preparation and administration costs were also Regions 1
Conducting Sales                          and 5. These results are summarized in table 3.2. (The results for indi-
                                          vidual forests within each region are contained in app. 11.)

Table 3.2: Actual Unrecovered Sales
Preparation and Administration Costs on                                                      Sold at less than costs of conducting
Fiscal Year 1998 Timber Sales                                                                                 sales
                                                                       Total number of      Number of
                                          Region                                 sales         - sales                  Actual amount
                                          1                                          304            120                      $3,912,639
                                          2                                            96            49                       2.734,75%
                                          3                                            72           ~21                         923,448
                                          4 -~                                        116      -~ 44                          1391 328
                                          5                                          426             59                       4,510 919
                                          6               -~                         759             51                       3,263,544
                                          8                                          721            152                       2,249,079
                                          9                                          528        - 217                         3,081,507
                                          10                                            6              1                         45,332
                                          Total                                    3,030           714                     $22.112,554




                                          Paye 28                                      GAO/RCED-SO-135   Federal Timber Sales Appraisals
                           Chapter 3
                           Advertised Price for Forest Sewicr Timber   Is
                           Often Not Adequate to Rerovrr Costs of
                           Conducting Sales




                           Our comparison showed that BLM advertised three of its fiscal year 1988
Comparison of Costs        western Oregon timber sales for prices less than their preparation and
of Conducting Sales        administration costs, but, actually sold only one of their sales for less
With Advertised and        than these costs. The unrecovered costs on this sale amounted to $3,937.
                           As stated earlier, ~I,Y does not have a cost-accounting system. In order
Actual Sales Prices for    to perform an analysis similar to that conducted at the Forest Service, it
BLM                        was necessary to rely on agency-supplied cost figures. These cost figures
                           represented sale preparation and administration costs on a district
                           office basis and were not independently verified by us. Because HLM
                           lacks a cost-accounting system, we believe that it is impossible to draw
                           any conclusions from our comparison of HLM’S basic costs with adver-
                           tised or selling prices.


                           The multiple use object IVCSin national forest land use plans include gen-
Sales Not Recovering       erating a fair return to the government, as well as contributing to local
Costs May Be               and national economicIs and to nont,imber resources. In general, we
Warranted in Some          believe that advertising sales t.hat are not, expected to cover the costs of
                           even preparing and st4ling the timber are not consistent with sound bus-
Instances                  iness management practices. Office of Management and Budget govcrn-
                           ment-wide guidance provides that sound business management
                           principles generally bc used when selling federal resources. As private
                           sellers would not gemlrally undertake such sales, they may also be
                           inconsistent, with thtl notion of yielding fair market value. While there
                           can be valid reasons for below-cost sales--c.g., diseased timber may
                           affect other resourct’s--we    believe that the reasons for such sales
                           should be documented by the Forest Service.


Forest Service Examines    The Forest Service currently has three initiatives underway dealing
                           with the issue of salts which do not recover costs. The first initiative
Issues of Sales Which Do   examines the feasibility. of establishing national guidelines and proce-
Not Recover All Costs      dures, the second initiative is the Below-Cost Commercial Timber Sale
                           Pilot Test contained in I hts fiscal year 1991 budget proposal, and the
                           third initiative is a stlttly of minimum bid rates. All three initiatives use
                           data from the Timber Sale E’rogram Information and Reporting System.

                           In August     1989, thr For& Service formed a task force to develop and
                           test draft   national guid+xlincs and procedures regarding timber sales
                           which do     not, recover all costs. The objectivcx of the guidelines is to pro-
                           mote cost    efficiency of Individual national forest timber sales programs.




                           Page 29                                     GAO/RCED-SO-135   Federal Timber Sales Appraisals
              Chapter 3
              Advertised Price for FOIYM Sm-vicrr Timber   Is
              Often Not Adequate to Recowr (‘o&s of
              t‘onductiny Saks




              A draft of these guidelines states that each national forest should ana-
              lyze and utilize opportunities to reduce inefficiencies in its timber pro-
              gram by reducing costs and enhancing revenues. If a national forest’s
              timber program is not recovering all costs, the draft guidelines state that
              one action to be taken would be to increase the minimum acceptable bid
              price so that it COWI’s all current-year costs. The Forest Service is cur-
              rently testing the guidelines at four national forests and expects to
              report on the results later in fiscal year 1990.

              The President’s budgtt for fiscal year 199 1 included a proposed test to
              evaluate the implications of phasing out certain below-cost commercial
              timber sales and to determine whether the loss in local economic activity
              and revenues can bt, offstlt through the expansion of recreational pro-
              grams. The test will cXvahlatc the effects on 12 national forests.

              In March 1990, the Forest Service initiated a study of the minimum bid
              rates. The current. minimum rates were revised in 1979. The objectives
              of the study are to d~elop and evaluate alternative approaches for
              computing minimum hid rates for the timber being offered for sale. The
              study team will bc examining various cost -recovery alternatives using
              the cost information from the Timber Sale Program Information Keport-
              ing System. Forest Service officials believe that a 3- to 5-year phase-in
              period is needed 10 allow each national forest supervisor to thoroughly
              analyze the cost data that. are now available so that cost reductions and/
              or program effic%~nc~~c~scan be identified and instituted.


               The Forest Scrvic,tB advertised 40 percent, of the fiscal year 1988 timber
Conclusions    sales we reviewed at prices which would not have recovered the costs of
               preparing and administering that sale. If competition had not resulted in
               higher selling pncc>s. the Forest Service would have experienced about a
               662 million short t’all of these costs to revenues. With competition, this
               potential shortfall TV;ISreduced to around $22 million. As previously
               stated. we did not inc.lude all costs of growing and selling the timber in
               our analysis, but this does not imply that all costs should not be consid-
               cred when setting the’advertised price. If we had included all costs, the
               perccbntagc of salrs wl1ic.h was advertised below these costs as well as
               the percentage w1ric.h was sold that did not recover costs would have
               been much higher R.e believe that the main reason why even the prepa-
               ration and adminisl ration cost,s were not recovered on more sales was
               that the Forest SC~VICY~   does not, and is not required to, consider costs
               when setting the ;III\ t,rtised price. IIowcver, the Forest Service has



               Page 30                                      GAO/RCED-SO-135   Federal Timber   Saks Appraisals
                  Chapter 3
                  Advertised Price for Forest Service Timber   Is
                  Often Not Adequate to Rrcowr Costs of
                  (imducting Saks




                  started actions to consider all costs related to growing and selling the
                  timber in establishing minimum acceptable bids.

                  We believe that thr Forest Service should consider all of its costs related
                  to timber sales when setting advertised prices for timber sales. In those
                  instances where these costs exceed what the appraisal process predicts
                  the timber is worth, a formal decision needs to be made to (1) raise the
                  advertised price to covt’r these costs, (2) not, proceed wit,h the sale, or
                  (3) sell the timber but document the reasons for doing so.

                  -__
                  We recommend that thus %cretary of Agriculture direct the Chief of the
Recommendations   Forest Service to consider all t.imber sales costs in establishing adver-
                  t,ised prices for timber salts.

                  We also recommend t liar the Secretary of Agriculture direct the Chief of
                  the Forest Service to adopt the formal decision-making process
                  described above as an integral part of its forthcoming guidelines and
                  procedures regarding timber salts which do not recover costs.




                  Page 31                                      GAO/RCED-90-135   Federal   Timber Sales Appraisals
An Analysis of Appraisal Method Bias in
Advertised prices of Forest Service
Timber Sales
                    This appendix presents our analysis of whether Forest Service advcr-
                    tised prices for timber sales have been significantly higher or lower
                    when the residual value appraisal method is used rather than the trans-
                    action evidence appraisal met.hod. An appraisal method bias in Forest
                    Service advertised prices can result, as discussed in chapter 2, from dif-
                    ferences in the theory underlying the two appraisal methods and/or the
                    manner in which the\. are applied across the country. Since the advcr-
                    tised price is the minimum price that the Forest Service will accept on a
                    sale, higher advertised prices generally imply that the Forest Service
                    will obtain more rr’vcm~es for those sales where there is little or no com-
                    petition among bidders.

                    Ideally, we would cst mate any appraisal method bias in advertised
                    prices by selecting ;I 1epresentative timber sale and then comparing the
                    advertised price for that sale that would result from each of the two
                    appraisal methods. Although available data did not permit this straight-
                    forward method of a controlled experiment, we used regression analysis
                    t.o approximate such a comparison. For our analysis, we developed a
                    model to explain hoa, variations in timber sale overbid percentage, or
                    sale prices as a perc~ontage of associated advertised prices. are deter-
                    mined by a variety 01’administrative, market, and appraisal-related far-
                    tors. Ey including t,hc appraisal method among t,he factors that ma>
                    explain the overbid 1)erc*c.ntage, we could test statistically for the pres-
                    ence of a bias in ad\ ( rt lscd prices that is associated with the selection
                    and/or application 01 an appraisal method. We estimated the paramet,ers
                    of the model with nonlinear regression analysis, facilitating a test for an
                    appraisal method bitts while simultaneously controlling for the effects of
                    many other factors cm I he overbid percentages. Our results suggest that
                    advertised prices ar(’ significantly higher (anywhere from 14 to 37 per-
                    cent) when determitllld by using the transact,ion evidence method rathttr
                    than the residual value met hod.

                    This appendix prcn’tcies / 1) the theoretical development of the model of
                    Forest Service tinrbcxt. sales overbids, (2) a discussion of the estimation
                    methodology and da1 a, and (3) a discussion of the estimation results and
                    sensitivity analysis


                    We developed a model of the overbid percentages from expressions for
A Model of Timber   each of the two c~ltnponc~~ts of an overbid; the sales price and the advcr-
Sale Overbid        tised price. Equation 1 describes the sales price as equal to timber ma).-
Percentage          kct value adjustcltl (tlthc3r up or down because of both administrative
                    factors and oth(lr nl;lrkct factors.


                    Page 32                            GAO/RCED-90-135   Federal Timber Sales Appraisals
Appendix I
An Analysis of Appraisal Method Bias in
Advertised Prices of Forest Service
Tiimhrr Snlrs




Equation    1: Sales priccb = [timber market value] * [l +
               f(administrative   factors + market factors)]

Timber market value represents the fair market value of the timber for
sale under competitive market conditions. This value should, therefore,
reflect supply and demand conditions for the timber of the sale and, in
so doing, account for a number of considerations such as extraction
costs and profit rates at levels considered to be industry norms under
competitive conditions. Many administrative and market factors, how-
ever, may deviate from industry norms on some sales and result, there-
fore, in the deviation of the sales price from timber market value.

Administrative     fact,ors include the timber sale contract specifications,
e.g., the type of cont,ract and whether the sales price is considered to be
a flat rate or will be escalated according to future market prices. Market
factors include the nature of the competition surrounding the sale, e.g.,
the number of biddtars or degree of competition and whether the bid
method is an oral auc‘t,ion or sealed bid. As administrative or market
factors deviate from industry norms on a given sale, so will each bid-
der’s perspective on profit and risk, costs, or his/her own market
(monopoly) power, in regards t.o that sale. Consequently, the resulting
bids could result in a final sales price either more or less than the timber
market value.

Both the transaction cvidcnce and residual value methods can be viewed
as attempts to approximate timber market value prior to a couple of
adjustments which rc>sult in the final advertised price. Equation 2, then,
describes the advertised price as being equal to the timber market value,
adjusted by appraisal Pnctors.

Equation 2: Advertised price = Itimber market value] * [I - rollback fac-
            tor] / [ 1 + g(salvage and appraisal method)]

One adjustment, or apljraisal factor, applied to about 30 percent of all
sales, and which results in lowering advertised price, is the classification
of the t,imber sale as salvage, A sale can be classified as salvage if a
large percentage (around 40 percent) of the timber is damaged. In such
cases, the Forest Ser\ic,c will adjust advertised prices downward
because it is anxious to dispose of the timber and minimize bug infesta-
tion and other probkms associated with damaged or dead timber.




Page 33                                   GAO/RCED-SO-135   Fedwal   Timber   Sales Appraisals
                       Appendix I
                       An Analysis of Appraisal Mrthcd Bias in
                       Advertised Priers of Fcwvst Service
                       Timber Salrs




                       Another ad,justmc~nl ;lpplied to all sales is to rollback the timber market
                       value approximated hy i he appraisal by some percentage to attract bid-
                       drrs to the sale’ ‘1’h(>perc,entage of the rollback can differ across regions
                       as does the application aspect of the different appraisal methods. It is
                       difficult, therefore. to disassociate rollback factors from the application
                       aspecat of the two mot I~ods of appraisal. Nonetheless, as discussed below,
                       we deal with this issll(, of appraisal method and rollback factor associz
                       tion by estimating the parameters of the model both with and without
                       the rollback factors (~~nsidcred to be associated with the appraisal
                       process.

                       Finally. we inslutk t Ir11appraisal method among the factors that can
                       affect advertised pt’lc’l’. This will permit a statistical test for the pres-
                       ence of an appraisill n1(1thod bias in advertised prices. We obtain an
                       expression in equal ion 3 for the overbid percentages (i.e.. the sales price
                       divided by the advc*l.t tsed price) by dividing equation 1 by equation 2.

                       Equation :3: Ovct’bid 1Ic~rc~t~ntage  = [ 1 + f(administrative factors t
                                    mark(bt l’;~~iot~s)]* [ 1 t g(salvage and appraisal
                                    factors )I 11 -- rollback factor]

                       The advantage of t~qll&on 3 is that timber market value, which
                       appcarcd in hot h c’cl~i:lticnts 1 and 2, has been divided out, thereby elimi-
                       nating the nr~tl to IIU11loI1hc>supply       and demand for timber. Konethe-
                       less, tbquation 3 still ;illo\ts us to test for tlie presence of an appraisal
                       met hod bias in 120t.~~\1   St3rvic.e advertised 1jriccs.


                       LVc obtaincLd data f 1.1ml t h(l Forest Service on all timber sales of more
Estimation             than $2.000 for fisc’;~I yc’ar 1988. The data set contained information on
Methodology and Data   a nurnbcr  of :rdmin~s~ t.itt ivc, market, and appraisal factors. Those fat-
                       tors we sclcctcd 10 [,I’#IVI~IV detail to equation 3 are described in table 1.1.




                       pag:r 34                                  GAO/RCEI)-90-135   Federal Timhrr   Sales Appraisals
                                           Appendix I
                                           An Analysis of Appraisal Method Bias in
                                           Advertised Prices of Fomst Sewire
                                           Timber Saks




Table 1.1: Description   of Factors   in
Overbid Percentages      Model             Factor                     Description
                                           Administrative   factors
                                           NOSBA                      = 0 If the sale I; restricted to a Small E&&s       AdmInIstratIon
                                                                        status firm and 1 If not
                                           SALEMETH                   = 1 If the method of sale (flnal sales prcce) IS a flat-rate, and 0 If
                                                                        the method IS quarterly escalation of sale price
                                           ROADS                      = 1 If road costs are Included in the advertrsed pnce and 0 if
                                                                        iltherwlse
                                           F&M6                       = 1 If the contract form IS a 6 or 6A or 6T. and 0 If otherwise
                                           FORM9                      = 1 If the contract form IS a 9 or ST,-and 0 If otherwrse
                                           FORtiT      -              = 1 If the contract form IS a 3T, 6T. 6A. or 9T, ImplyIng tree
                                                                        measured rather than scaled sale, and 0 If otherwrse The one
                                                                        remalnrng form not accounted for by any of the FORM factors is
                                                                        (ontract form 3. whrch serves as the base case
                                           Market factors
                                           BIDDERS                    =    ihe number of bidders I” auction or closed bid sale
                                           SEALED                     =    1 If closed brd sale and 0 If open auction
                                           tiZE                -      =    Estimated volume of sale in mllllon board feet
                                           ACRES                      =     rhe acreage of the sale area
                                           SIZE/ACRES                 =    A measure of density of the timber stand for sale
                                           HIGHBID                    =     ’ If the SEA classrflcatlon of Ihe high bidder IS that of a large
                                                                          firm and 0 If otherwIse
                                           Appraisal factors
                                           NgSALVG                    = 1 If the sale IS not classrfred as a salvaae sale and 0 If ri IS a
                                                                        salvage sale
                                           TEA                        = 1 If transactjon-evidence method was used to arnve at
                                                                       advertcsed price and 0 11residual value method was used
                                           R@F                        = Rollback factor preset either to the mean of a range of rollback
                                                                        percentage used !n each region (different numbers for each
                                                                        rcgron), or the weighted average of means of ranges for all
                                                                        regions (one number), depending on the nature of the lest for
                                                                        apprarsal melhod bias


                                           The rollback factor can vary both within and across regions; however,
                                           variations within a region are constrained within a given range. Table
                                           1.2 presents the rollback factor ranges for fiscal year 1988. As indicated
                                           in table 1.1, we considered two versions of the rollback factor in estimat-
                                           ing the parameters of the, model to achieve different perspectives on the
                                           test for an appraisal method bias. We believe these two perspectives
                                           were necessary, in part, hccaause,as can be seen in table 1.2, the average
                                           rollback factor for Region 1 was appreciably different from that of all
                                           other regions.




                                           Page 35                                       GAO/RCED90-135      Federal Timber Sales Appraisals
                                           Appendix I
                                           An Analysis of Appraisal Method Bias in
                                           Advertised Prices of Forest Service
                                           Timber Sales




Table 1.2: Rollback Factor and Appraisal
Method by Region for Fiscal Year 1988                                                                                  Rollback   factor range
                                           Region            Appraisal method                                                         (percent)
                                           1                 Tra%actw- evidence                                                               47”
                                           i!                TransactIon evvjence                                                         -5 10
                                                                                              .~~
                                           3                 Transactjon ewdence                                                           5-10
                                           4                 Transaction ewdence                                                           5~ 10
                                           5                 Residual value                                                               11-15
                                           6                 Residual value                                                                    10
                                           8                 TransactIon ewdence                                                          lo-25
                                           9                 TransactIon evidence                                                             1 5”
                                           “Represents the actual average rollback factor for 1988 Averages were not obtalned from all regions

                                           Substituting the specific factors described in table I. 1 for the general
                                           terms of equation 3, and taking the natural logarithm of both sides of
                                           equation 3, results in equation 4, which can be estimated. The reason for
                                           the logarithmic transformation    is to convert what we assume to be a
                                           multiplicative  error structure for equation 3 to an additive error struc-
                                           ture in equation 4 in order to facilitate estimation.

                                            Equation 4: Ln(ovcrbid percentage) = Ln[l + Al + A2*(1/BIDDERS) +
                                                        A3*SEALED + A4*(SEALED/BIDDERS)           + A5*SIZE +
                                                        AG*(SIZE/ACRES) + ATHIGHBID + A8*NOSBA +
                                                        AS*SALEMETH + AlO*ROADS + Al l*FORMG +
                                                        Al2”IWRMS + AlS*FORMT] + Ln 11 + A14*NOSALVG
                                                        +A15*TEA] - Ln[l - rollback factor], where Al through
                                                        Al5 ar‘~ i he parameters to be estimated.

                                            The specific factors listed in table I. 1 are substituted into equation 3 in a
                                            straightforward    manner with three exceptions. First, BIDDERS is
                                            inverted to impost t.he assumption that a change in the number of bid-
                                            ders has a relatively larger effect on sales price (or overbid percentage)
                                            if the number of bidders is small to begin with rather than large. In
                                            other words, we assume t,hat adding one more bidder will introduce rela-
                                            tively more competition if the number of initial bidders is only 2 or 3
                                            rather than 10 or 11. Second, we introduce the interactive term
                                            (SEALED/BIDDERS)       to account for the fact that the number of bidders
                                            is unknown to each bidder in sealed bid sales, whereas the number of
                                            bidders is known by all in oral auctions. This term will permit BIDDERS
                                            to have different effects on the overbid percentage, depending on the
                                            bid method. Third, we include a constant term Al among the administra-
                                            tive and market fac,tors to account for any factors which are not explic-
                                            itly represented in the expression.


                                               Page 3fi                                    GAO/RCEDW135        Federal Timber Sales Appraisals
                     Appendix I
                     An Analysis of Appraisal Method Biasin
                     Advertised Prices of Fwest Srrvice
                     Timber Saks




                     We estimated the parameters of equation 4 from Forest Service data on
                     timber sales for fiscal yctar 1988 using nonlinear least squares regression
                     analysis.’ The entire data set contains 3,3 16 sales but we used only
                     2,801 to estimate equation 4. We excluded the six sales from Region 10
                     (Alaska) from the sample because that region is different in many ways
                     from all others. We also excluded 180 oral auction sales with only one
                     bidder and 161 direct sales (sales made after an auction with no bidders)
                     because they provide no information on how the various factors, includ-
                     ing an appraisal method bias, contribute to the overbid percentage. For
                     these sales, the lack of’ direct competition results in a zero overbid
                     regardless of any other factors. IIowever, WC included sealed bid auc-
                     tions with one bidder in the sample because, when the bidding is sealed:
                     the one bidder will not know prior to submitting his/her bid that there
                     are no other bidders, or competitors, for that sale. In addition, we
                     excluded 168 sales from the sample because either some data fields were
                     missing or we detected inconsistencies indicative of data entry errors.


                     Since we consider the issue of whether rollback factors should be associ-
Estimation Results   ated with the appraisal process as unsettled, we present one set of
                     results, in table 1.3, on the basis of the assumption that rollback factors
                     are associated with t hcsappraisal process, and a second set of results, in
                     table 1.4, on the basis 01 the assumption that there is no such associa-
                     tion. When considered associated with the appraisal process, variations
                     in rollback factors across regions reflect differences in the application,
                     rather than theory. of t hc appraisal process. Therefore, we can apply an
                     alternative perspect iv<, to t.he results in table I.3 as compared with those
                     in table 1.4, in that the latter isolate t,he theoret,ical differences (apart
                     from application diff‘t~r(~nces) between the two appraisal methods
                     because rollback factor\ arc disassociated from the estimate of bias for
                     table I.4 results.

                     We present two sets of results from the estimation of equation 4 in table
                     1.3. The first, set is based on the sample of the 2,801 sales described




                     Page 37                                  GAO/RCED-90-135   Federal Timber Sales Appraisals
Appendix I
An Analysis of Appraisal Method Bias in
Advertised Prices of Forest Service
Timber Saks




above, while the scc.ond set is based on a sample that excludes Region 1
sales from the first set, sample, resulting in a sample of 2,571 sales. WC
estimated equation 4 with and without Region 1 sales to examine the
sensitivity of the estimation results to the fact that the rollback facto1
used in Region 1 is c,xtraordinarily large relat.ivc to that used in the
other regions.

We obtained the estimates presented in table 1.3 by imposing a constant
rollback factor across all regions. Specifically, we adjusted the depcn-
dent variable, overbid percentage. according to the weighted average of
the rollback factors nationwide (the latter version of the rollback factor
described in table I. 1 ).’ This assumption forces any effects on overbid
percentages caused by actual differences in rollback factors to be
reflected, at least in part, in the estimate of A1.5, the parameter for
transaction cvidencc met hod that is used to test for an appraisal method
bias. In other words, 1his assumption results in the treatment of rollback
factors as associat4 with the appraisal process. The statistical signifi-
cance of the paramc~tc~r Al5, then, is interpreted as a test for the pres-
ence of the combination of theoretical and application components
(including rollback factors) of any appraisal method bias.




Page 38                                   GAO/RCED-90-135   Federal Timber   S&s   Appraisals
                                         Appendix I
                                         An Analysis of Appraisal Method Bias in
                                         Advertised Prices of Forest Service
                                         Timber Sales




Table 1.3: Estimation Results When the
Rollback Factors Are Considered to Be                                                         All regions                  Excluding Region I
Part of the Appraisal Process            Variate                       Parameter           Estimate       T-stat.           Estimate      T-stat.
                                         CONSTANT                              Al                 1 53      17 56”                  1 32    1579
                                         1 /BIDDERS                            A2              -2 61      -15.83”                -2 22    -14 22’
                                         SEALED                                A3                - 56      -7 32’                  - 25  ~ -3 T$+
                                         SEALEDjBDDRS                            A4                1 75          10 43”              1 34            8.30’
                                         SIZE                                    A5                002            3 14”              002             343’
                                         SIZE/ACRES                              A6              - 19           -I a7               - 14           -146
                                         HIGHBID                                 A7                  10            2 47”               07            1 61
                                         NOSBA                                   A8                  18            4 59”               15            4 09”
                                         SALEMETH                                A9                  06            1 23                OS-           1 04
                                         ROADS                                  A10              - 11           -3 23”              - .09          -2 63”
                                         FORM6                                  All                 018             ?7              0003               01
                                         FORM9                                  Al2              - 02             - 44                 07            1 49
                                         FORMT                                  Al3              - 1i-          -2 53”              -.05           -1 02
                                         NOSALVG                                Ai                - 25         -1531a               - 21          -12.28’
                                         TEA                                    Al5             - 018            - 83               - 15           -6 i+
                                         R-SQUARED                                                        30                                 33
                                         ‘iStgnkxntly   different from zex ,It the 95.percent canftdence level for a two-talled test

                                         In general, the two set5 of results in table I.3 are similar. One notable
                                         exception is the estimate of the parameter associated with the transac-
                                         tion evidence method variable, A15. When we include all regions, the
                                         estimate of Al 5 is not statistically significant, suggesting that there is
                                         no appraisal method blas in advertised prkes. However, when we
                                         exclude Region 1 sales from the sample, Al5 is statistically significant
                                         and negative, suggesting that overbid percentages are smaller, and con-
                                         sequently. adverti&     prices are relatively higher, when the transaction
                                         evidence method is usc~l by the Forest Service to determine advertised
                                         prices.;

                                          The statistical significance of Al5 is sensitive to the inclusion of Region
                                          1 in the sample for two reasons: (1) these estimates are made with the
                                          assumption that rollback factors are a component of the appraisal pro-
                                          cess so that differcnccs in the factors across appraisal methods are




                                          Page 39                                           GAO/RCED-90.135        Federal Timber      Sales Appraisals
Appendix I
An Analysis of Appreisal Method Bias in
Advertised Prices of Forest Service
Timber Sales




reflected in the estimate of Al5 and (2) Region 1 sales were all done
with the transaction evidence method, and the average rollback factor
applied to Region 1 sales was more than twice that of all other regions.”
The inclusion of Region 1 in the sample, then, appreciably increases the
average rollback factor for all transaction evidence method sales rela-
tive to residual valur, method sales in the sample. Since larger rollback
factors result in lowtar advertised prices, all else equal, it is not surpris-
ing that the significance of Al5 is sensitive to the inclusion of Region 1.
These results suggest that such a large difference or inconsistency in the
application aspect (use of rollback factors) of the different appraisal
methods is capable of’dominating the effect on advertised prices of any
theoretical differences, or differences prior to rollback adjustments, that
might exist between appraisal methods.

Results in table I.3 xvhich are consistent with or without Region 1 sales
include negative and significant parameter estimates both for l/BID-
DERS, A2, suggesting that the overbid percentage rises with the addi-
tion of bidders (i.e., more competition), and for NOSALVG, A14,
suggesting that a salt. classified as salvage implies a lower advertised
price and therefore a greater overbid percentage. Further, the parame-
ter estimate for SEALED, A3, is negative and significant, suggesting that
sealed bid auctions result in smaller overbid percentages. However, this
result must be inter-pret,ed in conjunction with the interaction term
SEALED/BIDDERS.        which is intended to account for the fact that bid-
ders in sealed auctions do not know the number of other bidders with
whom they are competing. The estimate of its parameter, A4, is positive
and significant, ant1 when evaluated at t.he mean number of bidders in
sealed bid auctions suggests that sealed bids do not result in a smaller
overbid percentagt, than oral auctions.’

 Other consistent results include positive and significant parameter esti-
 mates for SIZE ant1 NOSHA, A5 and AS, suggesting that there are econo-
 mies of scale (lowtxr average costs) associated with large timber volumes
 and large firms. rts;l)ectively, that are not adequately captured in the




 Page 40                                  GAO/RCED-90-135   Federal Timber Sales Appraisals
Appendix I
An Analvsis of Aoaraisal Method Bias in
Advert&d    PI&   bf Forest Service
Timber Sales




appraisal or advertised price, and that can result in larger overbid per-
centages.x One last consistent result is the negative and significant
parameter estimate for ROADS, AlO. We expected this result because
A10 serves to mathematically correct for a distinction between the
observable and the true advertised prices for sales with roads. Road
costs are included in the observable advertised price and, therefore, also
are reflected in the sales price (i.e., road costs are included in both the
numerator and denominator of overbid percentage), but the government
compensates the winning bidder for those road costs.” The negative esti-
mate of AIO, then, accounts for a negative adjustment to overbid per-
centage for sales with roads because the observable overbid percentage
would have been greater had road costs been netted out of both the
numerator and denominator of overbid percentage, as is effectively
accomplished from the perspective of bidders through government com-
pensation for road costs

Table I.4 presents results of an alternative test for the significance of an
appraisal method bias. For this estimation, we adjusted overbid percent-
ages by the mean of the range of the rollback factor for each region to
reflect advertised prices prior to the application of rollback factors.‘”
This effectively precludes rollback factor differences from influencing
the estimate of A15. The estimate of A15, then, should reflect all theo-
retical and application components of a bias in appraisal methods apart
from rollback factors, and thus will not be sensitive to rollback factor
differences as are the results in table I.3 (where sensitivity to rollback
factor differences across appraisal methods resulted in our presentation
of results determined from samples with and without Region 1). Fur-
ther, if we assume that any application components of a bias apart from
the rollback factors are small, then any appraisal method bias evident in
the estimate of Al5 would be interpreted as entirely due to theoretical
differences in appraisal methods.




 Page 41                                  GAO/RCED-SO-135   Federal Timber Sales Appraisals
                                         Appendix I
                                         An Analysis of Appraisal Method Bias in
                                         Advertised Prices of Forest Service
                                         Timber Sales




Table 1.4: Estimation Results When the
Rollback Factors Are Not Considered as                                                                                         All regions
Part of the Appraisal Process            Variate                                          Parameter                        Estimate-       T-stat.
                                         CONSTANT                                                 Al                              1 53        17 75”
                                         l/BIDDERS                                                A2                           -2 52       -15 64”
                                         SEALED                                                     A3                           - 37        -4 82”
                                         SEALED/BDDRS                                               A4                            1 59         9 54”
                                         SIZE                                                       A5                             002         3 29”
                                         SIZE/ACRES                                                 A6                           - 16        -1%
                                           .-. ,- -
                                         HIGHRIO                                                    A7                              09          2 12
                                         NOSBA                                                      A8                              12          3 ooa
                                         SALEMETH                                                   A9                             0%             j4
                                         ROADS                                                     A10                           - 07        -2 02”
                                         FORM6                                                     All                          - 004          - 10
                                         F&l9                                                      Al2                               13         2 52”
                                         FORMT                                                     Al3                            004                 10
                                         NOSALVG                                                   Al4                           - 19             -12 4ld
                                         TEA                                                       Al5                           - 19             -10 21”
                                         R-SQUARED                                                                                          .34
                                          %gnlflcantly d!fferent fromi zero at the 95 percent confidence level for a ivmtakd   test

                                          The results presented in table I.4 are similar to those presented in table
                                          I.3 for the sample which excludes Region 1 sales. Specifically, the csti-
                                          mate for parameter Al5 is negative and significant, suggesting that the
                                          overbid percentages are smaller, and therefore advertised prices are rel-
                                          atively higher, when the transaction evidence method is used by the
                                          Forest Service to determine advertised prices.

                                          In comparing the size and significance of the estimates for parameter
                                          A15, the results suggest that the appraisal method bias is stronger when
                                          rollback factors are considered apart from the application component of
                                          the appraisal met hods. On the basis of the sample means of the different
                                          factors of equation 1 and the estimated parameters in table I.4 and table
                                          I.3 (for the sampltl csxc*luding Region 1 sales), we evaluated the estimates
                                          of Al5 in terms of’tlow much higher advertised prices have been when
                                          determined from t he transaction evidence method rather than the
                                          residual value method. On the basis of the results presented in table I.3
                                          for the sample t.hat excludes Region 1, or if rollback factors are consid-
                                          ered as part of thtb appraisal process but applied in a reasonably consis-
                                          tent manner, our estimate of Al5 suggests, with 95-percent confidence,
                                          that the transact,ioll evidence method will result in advertised prices
                                          from 14 to 29 perc.ent greater than the residual value method. On the
                                          basis of the results presented in table 1.4, or if rollback factors are not


                                          Page 42                                          GAO/RC,ED-SO-135 Federal Timber            Sales Appraisals
                       Appendix I
                       An Analysis of Appraisal Method Bias in
                       Advertised Prices of Forest Service
                       Timber Sales




                       considered a part of the appraisal process, our estimate of Al5 suggests,
                       with 95percent confidence, that the transaction evidence method will
                       result in advertised prices from 22 to 37 percent greater than the
                       residual value method. Combining these two analyses, or regardless of
                       the association between rollback factors (when consistently applied)
                       and the appraisal process, our estimates of Al5 suggest that the trans-
                       action evidence method results in advertised prices between 14 and 37
                       percent greater than under the residual value method.


                       We conducted several other estimations to examine the sensitivity of the
Sensitivity Analysis   results presented above to alternative samples and specifications of the
                       model. Specific alternative samples we tried included dropping all sal-
                       vage sales, adjusting overbid percentages to exclude road costs from
                       both the sales and advertised price components, and excluding some
                       observations which were suspected of being influential (too highly
                       weighted). The alternative specifications we examined included a log lin-
                       ear. rather than nonlinear, structure, and different locations for the con-
                       stant term in the nonlinear structure version. Finally, we also compared
                       the mean overbid percentages across appraisal methods but without any
                       attempt, to control for the effects of other factors. None of these alterna-
                       tivc estimations or approaches produced results concerning the cxis-
                       tence of an appraisal method bias which were different from those
                       presented above.


                       The results presented above suggest that the question of the existence of
Conclusions            an appraisal method bias is dependent on the role assigned to the
                       rollback factors in the appraisal process and the extent to which the
                       rollback factor is similarly applied. If rollback factors are considered as
                       a component in the application of appraisal methods, then our results
                       suggest that there was not an appraisal method bias for fiscal year
                       1988. Ilowever, the results also suggest that an appraisal method bias
                       would have been found, indicating that transactions evidence appraisals
                       result in advertised prices from 14 to 29 percent higher than residual
                       value appraisals, if the rollback factor for Region 1 alone had been more
                       in line with that of all other regions, or put differently, if rollback fac-
                       tors were applied in a more consistent manner across regions. Further,
                       this bias appears strongest, resulting in advertised prices, determined
                       with the transaction evidence method, of from 22 to 37 percent greater
                       than those determined with the residual value method, when rollback
                       factors are considered not to be associated with the appraisal methods
                       in any way.


                       Paye 43                                   GAO/RCED-99-135   Federal Timber   Sales Appraisals
Appendix 1
An Analysis of Appraisal Method Bias in
Advertised Prices of Forrst Srrvire
Timber Sales




Higher advertised prices achieved with the transaction evidence method
rather than the residual value method imply that the government would
likely increase revenue on sales for which there is little or no compcti-
tion if the advertised prices were determined by the transaction tvi-
dence method. In 1988, at least 167 sales involved no competition;
specifically only one bidder was involved in an oral auction. There may
have been other sales with less aggressive behavior on the part of the
bidders, although WY‘can cite no evidence to document this possibility.




 Page 44                                  GAO/RCED-90-135   Federal Timber   Saks Appraisals
Appendix     II

Potential and Actual Unrecovered Sales
Preparation and A dministration Costs on Fiscal
Year 1988 Timber Sales, Forest Service

                                                  Advertised   sales                                      Sold sales
                          Total number of        Number            Potential                          Number            Actual
Forest                              sales    below cost        nonrecovery                        below cost      nonrecovery
Region 1
Beaverhead                              5               4           $231,785                                    4                   $116,853
Bitterroot                              9               9            610,700                                    5                     210,722
Panhandle                              80                          4,370,841
                                                       60                                                   - 19 ~~               ~~ 356,682
                                                                                                                                       ~~
Clearwater                             35              25          1411 183                                    12                     316.003
Custer                                  3               3            164417
                                                                                                             - 3 ~-                  ~~84,377
                                                                                                                                         ~~~~
Deerlodge                               8               8            858971                                     6                     221,374
Flathead                               29              28          1,977.008                                   14                     402,795
GFdlatln                                 .               .                     .                                 .                            .
Helena                                  9                9           476,428                                        8                  225,432
Kootem                                 82              67          3 702,584                                       20                  447,488
Lewis & Clark                           6             ~6             278,770                                        6                  217,774
Lolo                                   23             23           2,973 285                                       17                1,067,483
                                                                                                                -
Nezperce                               15              12          1.959,294                                        6                  245,656
Totals, Region    1                   304            254         19,015,266                                       120               3,912,639

Region 2
iig Horn                                                 1             41,850                                       .                            .
                                                                                                            -           ~~-
Black Hills                                              4            246,814                                       3                  245.061
Grand Mesa-Uncompahgre-
Gumson                                                 16             530,724                                      16                 529 232
Medlclne Bow                                            3              29,102                                       2                 Y3.337
Nebraska                                                2              17,761                                       2                   17,759
RIO Grande                                              5              20 818                                       1                    2,839
Arapaho
-         Roosevelt                                     6             218,199                                       6                  217,565
 Rout7                                                  4             379,700                                       4                  369,168
                                                                                                            -
Pike & San Isabel                                                     310,917                                       3                  308,576
 San Juan-                                                             14,539                                       2                    8,165
Shoshone                                                               24,977                                       4                   17,779
 White River                                                        1.109,597                                      6                   995,277
 Totals, Region 2                                      57          2,944,998                                      49                2,734,758
                                                                                                                                   (contmued)




                                 Page 45                                        GAO/RCED-90-135   Federal       Timber        Sales Appraisals
                                                                                                                            -
                               Appendix II
                               Potential and Actual Unrecovered Sales
                               Preparation and Administration   Costs cm
                               Fiscal Year 1988 Timber Sales, Forest Service




                                                    Advertised         sales                                      Sold sales
                         Total number of          Number                   Potential                          Number            Actual
Forest                             sales       below cost             nonrecovery                         below cost      nonrecovery
Region 3
Apache~Sltgreaves                     16                  2’                   6,774                                 .                        .
CXSX                                  12                  R                  185,962                                 6             110,382
Clbola                                 2                  .                         .                                 .                   .
Coconlno                                  8                   1               33,282                                 I                1,962
Coronado                                   .                  .                     .                                 .                    .
Glla                                      3               iI>                516.360                                 2             483.598
Kalbab                                    9                1                  11 018                                 1              11.018
Lincoln                                   7                                  248,415                                 5             187 084
Prescott                               2                      Lr,              4,147                                 2               4,145
Santa Fe                              11                      Ia             129,994                                 4             125.259
Tonto                                  2                        .                   .                                 .                    .
Totals, Region 3                      72                28                1,135,952                                21              923,448

Region 4
Ashley                                17                 Ii                  442,538                                11             317 110
Ease                                  20                      L               53,800                                 1               77,630
Brldger-Teton                          3                      LI,             55,415                                 2               35,005
Caribou                                2                                       a 505                                 .                        .
Challis                                1                                      30,943                                 1               12,529
Dwe                                    5                          .                 .                                .                     .
Fish Lake                              1                                      34,178                                 1               25,070
Humboldt                                   .                                        .                                .                     .
Manil-LaSal                               i                                      350                                 1                  350
Payette                               23                                       4 016                                 1                3.440
Salmon              -~                 9                                     359 736                                 5              229 357
Sawtooth                                .                         .                    .                              .                       .
Targhee                               27                 I F:                701 286                                16              634,179
Tolyabe                                2                      L               33 838                                 2               32 905
Ulnta                                      1                   .                    .                                 .                    .
Wasatch                                   4                   I               96,135                                 3               83 753
Totals, Region 4                     118                 59               1,820,740                                 44           1,391,328
                                                                                                                                (continued)




                                Page 46                                                GAO/RCED-96-135   Federal Timber   Sales Appraisals
                              Appendix II
                              Potential and Actual Unrecovered Sales
                              Preparation  and Administration  Costs on
                              Fiscal Year 1988 Timber Sales, Forest Srrvic~




                                                     Advertised<*                                                    Sold sales
                      ._._. ..-.. .--. _.           Number                 PCktential                            Number            Actual
Forest                            sales          below cost             nonrecovery                           below cost     nonrecovery
Region 5
Angeles                                     .                 .                         .                                .                      .
Cleveland                                   .                 .                         .                                .                      .
Eldorado                              26                      8                75,351                                    2             10,774
lny0                                  ~5                      4               185 267                                     .                  .
Klamath                               51                     46             6,275,129                                   14          1504.398
Lassen                                44                      8             1,711,969                                    2          1,051,062
Los Padres                              .                      .                      .                                  .                   .
 Mendoclno                             17                    12               984,927                                    6            778,992
 Modoc                                  8                          2          384,906                                    1             33,475
 SIX hers                              21                          a        1 316.655                                    1             97,043
 Plumas                                85                    26               763.748                                    9            421,431
 San Bernadlno                           .                     .                        .                                 .                     .
 Sequoia                               13                    10               765,352                                    5            322,498
 Shasta                                lb                     I               307.605                                     .                  .
 Sierra                                26                     3               389,776                                     1             341
                                                                                                                                        -I   I
 Stanislaus                            41                    35             3,164,871                                   13            176,457
 Tahoe                                 77
                                       “l                    I?
                                                              ,V              666.376                                    4             71,156
Trlnlty                                36                    26             2 543,782                                    1             40,222
Lk Tahoe Basin                           .                     .                      .                                   .                  .
Totals, Region 5                     426                 208              19,535,714                                    59         4,510,919

Region 6
Deschutes                               21                         8         1 193,485                                    7           Y66,YtV
Fremont                                 28                         2           169,639                                    2           169,639
Gifford Plnchot                         75                         6           403,580                                    2            76,391
Malheur                                 44                         4            49,515                                    2            44,670
Mt Baker-Snoqualmle                     57                         3            53,141                                    1             7,164
Mt Hood                                 57                         9           527,745                                    4           216,416
Ochoco                                  13                          .                  .                                   .                  .
 Okanogan                                    9                 4               285376                                     3            229,182
 Olympic                                    39                 8               275,674                                    3              18,975
 Rogue her                                  49                 5               540,417                                    1            207,906
 Sisklyou                                   41                18             3 070.609                                    2             65,495
 Sluslaw                                    53                 2                 7,756                                    2              -7,756
 Umatilla                                   15                     6           664,442                                    4            590,124
                                                                                                                                   (continued)




                                Page 47                                                     GAO/RCED-90.135   Federal Timber Sales Appraisals
                               Appendix II
                               Potential and Actual Unrecovered Saks
                               Preparation  and Administration  Costs on
                               Fiscal Year 1988 Timber Sales, Forest Service




                                                 Advertised sales                                      Sold sales
                        Total number of        Number             Potential                        Number             Actual
                                            below cost                                          below cost     nonrecovery
Forest                            sales                    .~ nonrecovery
                                                                ~.~
Umpqua                               127                1            15,461                                1           10,261
Wallowa-Whltman                       31               0            674,742                               6          380,869
Wenatchee                               8               I             3,573                                .                 .
Wlllamette                            27               2               9,230                               1               7,658
Wlnema                                34              13             586,292                               6             230,442
Colvllle                              31               9             231,206                               4              33,614
Totals, Region 6                     759             110          0,761,003                               51          3,263,544

Region 6
Alabama                               32                a             50,554                               5               18,887
Daniel Boone                          25               13            148,521                               5               37.790
Chattachooche-
Oconee                                30               10             48,345                               6               25.719
Cherokee--                            15                5            100,350                               5               83,256
Florida                               32                4             19,284                               3                8,381
Kisatchle                             85                  6            8,856                               2                1,423
MISSISSIPPI                          130               ;‘5           358,490                              24              323.399
Geo. WashIngton                       32               :i 1          683,300                              30              621,663
Ouachlta                             109                ‘4            74 097                               7               26,340
Ozark St FrancIs                      47                  I          105,561                               5               47,289
North Carolina                        39               33            829,026                              24              426,033
Francls Marlon Sumter                 53                ‘0           103,226                               6               82,716
Texas                                 65               ‘>            222,941                               6              180,342
Jefferson                             27              25             455,297                              24              365,841
Totals, Region 6                     721             216          3,207,848                              152           2,249,079

Region 9
Chequameqon                            49                           749 954                               45              573 266
Chlppewa                               41                           450,391        -                      22              179.229
Huron~Manlstee                         32                            62,489                                9               27,805
Mark Twain                             98                             30.704       -                       5               II ,540
Nlcolet                                35                           438,869                               17              195,628
Ottawa                                 44                           489.736                               24              315,510
Shawnee                                 a                           452,492                                7              445,515
Supenor                                46              4C         ~1,093,290       ~.                     38              838,211
Hiawatha                               38              ‘3:          335,651                               25              183.590
Wayne-Hoosier                           5                              1,635                                .                     .
Allegheny                              38                                    .                              .                     .
                                                                                                                      (contjnued)




                                Page 48                                        GAO/RCED-90135   Federal Timber   Sales Appraisals
                           Appendix II
                           Potential and Actual Unrecovered Sales
                           Preparation and Administration  Costs on
                           Fiscal Year 1988 Timber Saks, Forwt Service




                                                            -____
                                               Advertised       sales                                        Sold sales
                    Total number of          Number                 Potential                            Number             Actual
Forest                        sales       below cost           nonrecovery                           below cost      nonrecovery
                                                                                                                        .____-
Green Mountain                    18                16                385,577                                 16           257,696
Monongahela                       28                 s                 43,444                                   4           35,049
White MountaIr                    20                14                125,928                                   5           18,468
Mamstee                           28                  .                       .                                  .                 .
Totals, Region 9                528               282               4,660,160                                217           3,oai,507

Region 10
Chugach                               .                 .                       .                               .                       .
                                                                                        ~-   - -_
Tongass                              6               5                 765.266~~-~~~.                           1              45,332
Totals, Region 10                    6               i                765,266                                   1              45,332
Grand Totals                  3,030             1,219           561,847,827                                  714        $22,112,554




                           Page 49                                              GAO/RCED-W-135      Federal Timber   Sales Appraisals
Appendix   III

Major Contributors to This Report


                          Gus Johanson, Assist ant Director
Resources,                John P. Murphy, Jr., Assignment Manager
Community, and            Gene Wichmann, Assignment Manager
                          Scott Smith, Economist
Economic
Development Division,
Washington, D.C.

                          Leo H. Kenyon. Regional Management   Representative
Seattle Regional Office   Jill J. Lund, Evaluator-in-Charge
                          Hugo W. Wolter, I+,aluatoI
                          Stan Stenersen, Evaluator




(021025)                  Page 50                        GAO/RCED-SO-135   Federal   Timber   Sales Appraisals
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