oversight

Federal Land Management: Estimates of Value and Economic Effects of Canceled and Suspended Timber Sale Contracts in the Pacific Northwest

Published by the Government Accountability Office on 1997-10-06.

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

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community,    and
      Economic Development     Division

      B-278001


      October 6, 1997


      The Honorable Frank H. Murkowski
      Chairman, Committee on Energy
       and Natural Resources
      United States Senate

      The Honorable Don Young
      Chairman, Committee on Resources
      House of Representatives

      Subject: Federal Land Management: Estimates of Value and Economic
               Effects of Canceled and Susnended Timber Sale Contracts in the
               Pacific Northwest

      Legislative and legal efforts to protect the habitat of two threatened or
      endangered species-the spotted owl and the marbled murrelet-virtually halted
      federal timber sales in the Pacific Northwest during the early 1990s. The
      Department of Agriculture’s Forest Service and the Department of the
      Interior’s Bureau of Land Management (BLM) have responsibility for these
      federal timber sales. As of August 1, 1997, the two agencies had canceled 9
      umber sale contracts and suspended 85 timber sale contracts in the Pacific
      Northwest to protect the habitat of these two species. Those who rely on
      federal timber sales are concerned about the effects of the reduction in timber
      harvesting on the area’s economy.

      To respond to your interest in the federal costs of these cancellations and
      suspensions, we obtained estimates of the value of the timber associated with
      the canceled contracts, as well as the projected effects of canceling these
      contracts on jobs, payrolls, and taxes. The estimates of the timber’s value
      vary, largely because of differences in the key assumptions and methods of
      computing them. We obtained estimates of the cancellation costs and of the
      timber’s value from (1) contractors, (2) the Forest Service, and (3) BLM. We
      also obtained projections of employment, payrolls, and taxes from
      representatives of industry and of both agencies.

                              GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
B-278001
In summary, we found that the federal government paid about $8.6 million to
settle contractors’ claims for the value of replacement timber and for damages
resulting from the cancellations of nine timber sale contracts in the Pacific
Northwest. In addition to these canceled contracts, the Forest Service and
BLM suspended a total of 85 timber sale contracts. The Forest Service plans
to offer replacement timber for most of its 62 suspended contracts. BLM
subsequently lifted the suspension on its 23 contracts, and the timber has
been or is being harvested. Although contractors have filed several lawsuits
over the suspensions, the Forest Service and BLM did not have estimates of
the potential costs to the federal government attributable to these
 suspensions.

The estimates of the va3ue of the remaining uncut timber associated with the
nine canceled contracts varied with the methods of estimation and the
assumptions used. The Forest Service used the original bid price to estimate
the value of the umber remaining under its eight canceled contracts, while
BLM performed an appraisal to estimate the value of the timber remaining
under its single canceled contract. The agencies’estimates totaled about $6.5
million. The various contractors used comparable sales and other market data
to estimate the value of their individual contracts. Their estimates totaled
about $9.4 million.

The estimates of forgone employment range from a low of 264 jobs to a high
of 360 jobs potentially associated with the canceled contracts. We found only
two estimates of forgone payrolls and taxes: The Vice President of the
Northwest Forestry Association estimated that the pay for each job directly
related to timber harvesting would range between $20,000 and $40,000
annually, and the Forest Service estimated that the federal tax revenue could
be $60,000 annually.

BACKGROUND

 For the past few decades, federal policies simultaneously required timber to
 be harvested at or near historical rates and environmental protection to be
 increased. Accompanying these often conflicting policies was an emotional
 debate over which one should receive greater emphasis. The debate
 intensified in the late 198Os,when conflict over the issue gamed national
 attention. A series of legislative and legal battles in the late 1980s led to an
 injunction in 1991 that prevented the Forest Service from preparing any new
 timber sales in the northern spotted owl’s habitat; in 1992, BLM was also
 enjoined from any new timber sales in the owl’s habitat. The marbled


 2                   GAO/WED-9%18R    Canceled and Suspended Timber Sale Contracts
B-278001
mm-relet, a small sea bird that also nests in Pacific Northwest forests, was
listed by the Fish and Wildlife Service as a threatened species in 1992.

From 1991 through 1994, the federal timber sale program west of the Cascade
Range was virtually shut down by court injunctions. Zn April and May of 1994,
the injunctions on BLM timber sales in the Pacific Northwest were lifted, but
litigation over whether BLM could proceed with these sales was not
completed until January 1995. In June 1994, the injunction prohibiting timber
sales on Forest Service lands in the Pacific Northwest was lifted, and the 1995
Rescissions Act required harvesting under some of the suspended timber sale
contracts to begin.

TOTAL COST TO THE FEDERAL GOVERNMENT FOR
CANCELED AND SUSPENDED TIMBER SALES IS UNCERTAIN

The Forest Service and BLM canceled nine timber sale contracts in the Pacific
Northwest, leaving 24 million board feet (MMBF) of sold timber uncut.
Contractors claimed damages totaling about $15 million to cover the costs of
the interruptions in their operations and the replacement value of the timber.
These claims were subsequently settled for a total of about $8.6 million. The
Forest Service settled the claims that were filed on its eight canceled timber
sale contracts for about $6.7 million. BLM settled the claim related to its one
canceled contract for about $1.8 million. Specific information about the
claims and settlement amounts is presented in enclosure I.

The Forest Service and BLM have also suspended 85 timber sale contracts in
the Pacific Northwest. According to the Forest Service, replacement timber of
similar quality and within the same geographic area will be offered for the
majority of the 62 contracts it suspended. BLM has lifted the suspension on
its 23 contracts, and the timber originally covered by these contracts has been
or is being harvested. Contractors have filed several lawsuits against the
federal government for damages attributable to the delays in harvesting under
the suspended contracts. Because the lawsuits are still in the early stages of
litigation, according to the Forest Service and BLM, it is too early to know
how the courts wiIl decide these cases or whether the government will be
required to pay any damages. We therefore did not obtain estimates of the
potential costs, if any, to the federal government of these suspensions.

Several agency officials referred to our October 1996 timber management
report as the best available estimate of the federal government’s potential



3                   GAO/WED-9%18R   Canceled and Suspended Timber Sale Contracts
B-278001

liability for canceled and suspended timber sale contracts nationwide.’ ln that
report, we looked at timber sale contracts that were suspended or canceled to
protect threatened or endangered species and at claims settled or pending
from October 1992 through June 1996. We also updated information on
pending claims as of October 1, 1996. We reported that the two agencies had
paid more than $6.6 million in claims for 49 canceled or suspended contracts,
faced potential damages of about $63 million on 73 pending claims, and
estimated that their potential future liability could be as much as $238 million
on 225 possible claims. However, our 1996 report did not identify how many
 of these contracts and claims involve Pacific Northwest timber.

ESTIMATES OF THE VALUE OF THE TIMBER RESOURCES VARIED

The estimates we obtained of the value of the 24 MMBF of timber that was
not cut under the nine canceled timber sale contracts varied from about $6.5
million (the total of the estimates provided by the Forest Service and BLM) to
about $9.4 million (the total of the contractors’ estimates). Different methods
and assumptions were used in developing these estimates. The Forest Service
estimated the value of the 20 MMBF remaining under its eight canceled
contracts on the basis of each contract’s original bid price, arriving at a total
estimate of about $4.4 million. Forest Service officials stated that the best
indication of the timber’s value is the amount the high bidder originally paid
for the sale. BLM appraised the 4 MMBF remaining under its canceled
contract, estimating the value of this timber at about $2.1 million as of August
31, 1995. The contractors based their estimates on recent appraisals or
calculations of current value derived from comparable sales and other market
data. This information was included in their damage claims against the Forest
 Service and BLM. Their estimates of the value of the 24 MIMBF remaining
 under the canceled contracts totaled about $9.4 million. Specific information
 about these estimates is presented in enclosure II.

 FEW ESTIMATES OF JOBS. PAYROLLS,
 AND TAXES WERE AVAILABLE

 The estimates we obtained of potential employment range from a low of 264
 jobs to a high of 360 jobs associated with the canceled Forest Service
 contracts. These estimates are based on projections that each MMBF of
 timber harvested would generate from a low of 13 jobs to a high of 16 to 18


‘Timber Management: Opnortunities to Limit Future Liabiitv for Susnended or
Canceled Timber Sale Contracts (GAOIRCED-97-14,Oct. 31, 1996).

 4                   GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
B-278001
jobs. In commenting on our draft report, BLM pointed out that it had
provided replacement timber under the settlement agreement for the canceled
Elkhorn Ridge contract. Consequently, the cancellation of BLM’s Elkhorn
Ridge contract did not have a negative impact on jobs. BLM estimated that
harvesting the uncut timber remaining under the canceled contracts could
provide about 13 jobs per MMBF harvested (5.5 jobs directly related to timber
harvesting and another 7.7 jobs indirectly related). BLM used the model in its
 1995 Resource Management Plan to arrive at its estimate, while the Forest
 Service estimated 14 jobs per MMBF, using data from its Timber Sale Program
Information Reporting System. The Vice President of the Northwest Forestry
Association estimated that harvesting the uncut timber would create eight to
nine direct jobs and another eight to nine indirect jobs per MMBF. He based
these estimates on his knowledge of the industry; the estimates include
positions such as loggers, pulp null workers, and truck drivers. Specific
information about employment estimates is presented in enclosure III.

We found only one estimate of potential payrolls. The estimated payroll for
each job directly related to timber harvesting would range between $20,000
and $40,000 annually, according to the vice president of the Northwest
Forestry Association. Relying on his knowledge of the industry, he estimated
loggers’ average income at $20,000 to $30,000 annually, pulp mill workers’
average income at $40,000 annually, and truck drivers’ average income at
$20,000 annually. This estimate yields an annual payroll of between $3.2
million and $7.2 million potentially associated with jobs directly related to the
20 MMBF of uncut timber remaining under the Forest Service’s canceled
contracts.

We found only one estimate of potential tax effects, which was limited to
federal taxes. Harvesting the timber remaining under the canceled timber sale
contracts could produce $60,000in federal tax revenue annually, according to
the Forest Service. This estimate is equal to 15 percent of the total income
generated in 1996 dollars and uses data from the Timber Sale Program
Information Reporting System. The actual annual revenue would depend on
the rate of harvest.

AGENCY COMMENTS

We provided the Department of Agriculture’s Forest Service and the
Department of the Interior with a draft of this report for review and comment.
The Forest Service and Interior agreed with the information presented in the
report and provided technical clarifications, which we incorporated as
appropriate.

5                   GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
B-278001
SCOPE AND METHODOLOGY

To obtain estimates of the value of the timber and of the potential
employment, annual payrolls, and taxes associated with the canceled or
suspended timber sale contracts, we contacted federal, state, and local
government agencies; a timber industry group; an association of Oregon and
California counties; resource developers; and an environmental group.
Specifically, we contacted representatives of (1) the Forest Service at its
headquarters office in Washington, D.C.; regional offices in Portland, Oregon,
and San Francisco, California; and Olympic National Forest and Siuslaw
National Forest in Washington State; (2) BLM at its headquarters office in
Washington, DC., and state offices in California and Oregon; (3) the
Department of Justice; and (4) the Council on Environmental Quality. We
also contacted local government offici& in Clallam, Grays Harbor, and Skagit
counties in Washington State. We spoke with representatives of the
Northwest Forestry Association; the O&C County Association; the Eel River
Timber Company; the Hoh River Timber Company; Mayr Bros., Inc.; and the
Sierra Club Legal Defense Fund, Inc.

We obtained estimates of the timber’s value from (1) the Forest Service and
BLM, (2) timber contractors, (3) reports of damages claimed, and (4)
settlement agreements. For each of the estimates we obtained, we reported
some of the key assumptions and methods identified. We did not examine or
determine the appropriateness or reasonableness of these assumptions and
methods. Similarly, we reported the employment, payroll, and tax estimates
as reported to us; we did not verify the assumptions or methods used to
compute them. We did not address other potential economic and social
effects of the canceled or suspended timber sale contracts.

We obtained projections of employment and payrolls associated with the
canceled or suspended timber sale contracts from the Northwest Forestry
Association. In addition, employment estimates were provided by the Forest
Service and BLM. Projections of federal taxes were provided by the Forest
Service. Projections of local and state taxes were unavailable. Each of the
employment, payroll, and tax estimates was based on the volume of timber
available for harvest, not on an annual rate of harvest.

We performed our review from April through September 1997 in accordance
with generally accepted government auditing standards.




 6                  GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
 B-278001
 As arranged with your offices, unless you publicly announce its contents
 earlier, we plan no further distribution of this report for 14 days. At that time,
 we will make copies available to the Secretaries of the Interior and of
 Agriculture and to other interested parties. We will also make copies
 available to others upon request.

 If you or your staff have any questions, please call me on (202) 5123841.
 Major contributors to this report were Jennifer Duncan, Diane Lund, Sue
 Naiberk, and Victor S. Rezendes.


7&Tl            4-e

 BarryT.HiIl
 Associate Director, Energy,
  Resources, and Science Issues




  7                   GAO/RCED-98-18R Canceled a.nd Suspended Timber Sale Contracts
ENCLOSURE I                                                                                ENCLOSURE I

       AMOUNTS CLAIMED AGAINST AND PAID BY THE FEDERAL GOVERNMENT
                   FOR CANCELED TIMBER SALE CONTRACTS

                                MMBF of timber
 Agency/sale                   Solda       Remainingb        Damages claimedC      Claims paidd

 Forest Service




 Forest Service total         61.291 1           20.002 1          $12,564,417 1     $6,745,700
 BLM
   Elkhorn Ridge              4.028              3.830             2,424,451        1 ,825,230e

 Total                        65.319             23.832            $14,988,868       $8,570,930

*Volume of timber included in the original timber sale contract.

bRemaining volume of timber listed in each settlement agreement between the federal agency and the
purchaser.

‘Amount of reimbursement requested by the purchaser to cover the costs of interrupted operations and the
 replacement value of the remaining volume of timber.

dAmount on which both the agency and the purchaser agreed in the settlement agreement.

eAppraised value of the 5.165 MMBF of timber substituted for the original Elkhorn Ridge timber under the
settlement agreement .




                                         GAO/WED-98-1811 Canceled and Suspended Timber Sale Contracts
ENCLOSURE II                                                                                  ENCLOSURE II
                            ESTIMATES OF VALUE OF REMAINING TIMBER
                             ASSOCIATED WJTH CANCELED CONTRACTS

                                                                 Estimate of value
 Agency/sale                    MMBF remaining”               Agenciesb              ContractorsC

  Forest Service

   Boyd Creek                             1.225              $147,184                  $454,369

   Camel                                  2.148               556,525                   757,398

   Deodar                                 1.076               354,520                   214,490

   Not Bad                                2.161               930,224                 1,320,969

   Stevens                                0.710                127,722                  243,170

   West Boundary                          2.547               255,846                 1,074,483

   Wynoochee       Resale                 8.382              1577,576                 2,651,160
   You Who                  I             1.753 I             480,199     1             470,199

  Forest Service total                    20.002             $4,429,796                $7,186,238

  BLM

   Elkhorn Ridge                          3.830             2,l 13,902d               2,206,801

  Total                                   23.832             $6,543,698                $9,393,039

‘Remaining   volume of timber listed in each settlement agreement between the federal agency and the
purchaser.

bFor the Forest Service’s contracts, this value is based on the original bid price and reflects the remaining
volume of timber, as calculated by a Forest Service representative.     For BLM’s contract, this value is based
on BLM’s appraisal of the remaining volume of timber.

‘Amount requested for each sale, reflecting the costs associated with the replacement value of the remaining
volume of timber.

dThe value of the timber under the canceled Elkhorn Ridge contract was appraised by BLM at $2.113 million
as of August 31, 1995. Before the settlement agreement was reached, a July 1995 appraisal valued the
Elkhorn Ridge timber at $1.4 million.




                                       GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
ENCLOSURE III                                                                                          ENCLOSURE III
         ESTIMATES OF EMPLOYMENT ASSOCIATED WITH CANCELED CONTRACTS

                                                                                        Northwest Forestry
                        BLM’s estimate         Forest Service’s estimate               Association’s estimate

                     Jobs per      Jobs per      Jobs per       Jobs per               Jobs per        Jobs per
 Employment            MMBFa     20 MMBFb.”        MMBFd        20 MMBF                  MMBP         20 MMBF”
                                                          f                f
   Direct                 5.5            110                                             a t0 9     160 to   la0
                                                          f                f
   Indirect               7.7            154                                              a t0 9    160   to 180
 Total                    13.2           264            14           280’               16 to 18      320 to 360

aEstimate based on the model in BLM’s 1995 Resource Management                 Plan.

bBLM provided replacement timber for the Elkhorn Ridge contract; therefore, no jobs were lost because of
this contract’s cancellation. Accordingly, this total reflects only the volume canceled under the eight Forest
Service contracts.

‘Reflects GAO’s calculations.

dEstimate based on the Forest Service’s Timber Sale Program Information Reporting System.                       This estimate
was not divided into direct and indirect jobs.

*Estimate provided by the Vice President of the Northwest Forestry Association.

‘Not available.




 (141103)


 10                                       GAO/RCED-9%18R Canceled and Suspended Timber Sale Contracts
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