Testimony of Randal O'Toole

on Federal Forest Management and Ownership

before the Forests and Public Land Management Subcommittee

Senate Energy and Natural Resources Committee

November 1995

As a forestry consultant and chief economist for the Thoreau Institute, I have studied federal forest management for more than two decades. Since 1980, I have visited more than half the national forests, including forests in every region of the country, as well as numerous BLM district and state offices, to review their forest plans, timber sale programs, inventory data, and computer models.

One of the things I learned during these visits is that the federal forests are run by well-educated people who truly care about the forests and who want to do the best job possible for the land and the people who use it. But I also learned that large bureaucracies such as the Forest Service and BLM have a life of their own, and that such bureaucracies are driven primarily by incentives to maintain and increase their budgets.

The budgetary incentives for a government bureaucracy come primarily from two sources: appropriations and user fees. Virtually all of the conflicts over federal forest management can be traced to differences between the incentives managers face and the desires of forest users.

Appropriations effectively give managers an incentive to lose money. Appropriations for federal forests are not really necessary because nearly all federal forest resources can be funded out of user fees. But user fees can also create misincentives when managers are allowed to charge for some resources and not for others.

For example, recreationists expect a variety of experiences on federal forests. But forest managers are not allowed to collect user fees from most recreationists and they are not allowed to keep most of the recreation fees they collect. This gives the agencies less of an incentive to pay attention to recreationists than to other forest users. As a result, recreationists feel cheated and unfairly accuse the agency of corruption.

Like recreation, most timber sale costs are appropriated by Congress, which gives managers little incentive to control these costs. Not surprisingly, national forest sale costs have ballooned to more than $100 per thousand board feet since 1990.

In contrast to recreation, the agencies are allowed to charge fair market value for timber, and the Forest Service is allowed to keep a nearly unlimited share of the timber receipts. The same is true for the BLM in the case of salvage sales. Managers have an incentive to maximize the revenues that they keep, but no incentive to return funds to the Treasury. I have even heard managers refer to dollars they give to the Treasury as "losses."

To maximize their own returns at the expense of returns to the Treasury, managers often cross-subsidize worthless timber with other, more valuable timber. This and other tactics means that the amount the agencies return to the Treasury is often less than the appropriated sale costs paid by taxpayers. Environmentalists have called such "below-cost sales" a subsidy to the timber industry, but in fact they are a subsidy to the bureaucracy.

Imagine that the federal government allowed grocery stores to charge fair market value for ice cream, but not for milk. And while grocers could charge for cheese, they couldn't keep the income. Supermarkets would quickly stop selling milk and cheese and sell ice cream or other products instead. Consumers might blame grocers for being corrupt or greedy, but in fact the problem would be perverse incentives created by the government.

This is the situation with the federal forests today. Forest users want efficiently designed timber sales, a variety of recreation, and a broad range of other resources. But their desires are thwarted by a system that rewards managers for bloated costs and for favoring some uses over others. The result has been decades of increasing controversy.

The best incentives are provided by funding management out of net user fees, because such funding gives managers the incentive to engage only in profitable activities--which usually means the activities with the greatest social return. In contrast, an agency funded out of a percentage of gross user fees has an incentive to cross-subsidize unprofitable activities with profitable ones to insure that it keeps its full share of the gross.

Would privatizing the federal forests fix these perverse incentives? Not necessarily. Private lands are just as susceptible as public lands to subsidies and government regulation that favors some uses over others.

For example, the 200 million acres of federal forests cost taxpayers about $10 per acre per year--which should be outrageous since the resources they produce are so valuable that they ought to earn a profit. But the 420 million acres of private croplands cost federal taxpayers up to $50 per acre per year, which causes environmental problems at least as severe as those in the federal forests.

Would transferring the forests, or the management of the forests, to the states fix these perverse incentives? Recently I reviewed the records of nearly 150 state natural resource agencies to see how well they performed. I found:

1. Only about thirty agencies managed to earn a profit, and only about twenty more managed to break even. Nearly all of the agencies that earned a profit did so because they had legal or constitutional trust obligations to produce revenues for schools or other beneficiaries.

2. With just one exception, neither the legislatures nor the top officials of any of the agencies had given any thought to the incentives that budgets or policy had created for on-the-ground managers. As a result, many agencies lost money because they had an incentive to lose, and many of the profitable agencies could have earned even more profits if their incentives were improved.

Due to the poor incentives, I found many inconsistencies between state programs. New Hampshire makes sure that its state parks cover all their costs with user fees, but its forestry program loses money. Montana makes money on its forestry program, but Arizona cross-subsidizes forestry with profits earned from its grazing program.

So state management won't necessarily improve incentives or save taxpayers money. But I did find that the best-managed state agencies are well managed not because they are state but because they are built around the trust framework. Trusts do not insure profits or good management, but they do provide clear goals and minimal political interference.

Based on all of these results, I urge this subcommittee to focus not on the question of Who owns the forests? but on the question of What are the incentives facing forest managers? To provide the best incentives, I urge the subcommittee to build federal forest reforms around the trust concept.

Here is my proposal. First, turn the federal forests into a series of forest trusts. The trusts could be individual national forests and BLM districts, or all of the forests in each state, or divided along other lines. The exact size of each trust is not important, although I suggest that a trust larger than a current Forest Service region would be unwieldy and a trust smaller than a current national forest would be susceptible to economic failure.

Membership in each trust would be open to anyone willing to pay a nominal annual fee, perhaps about $20 per year. For example, I might join the Mt. Hood, Gallatin, and North Carolina forest trusts as these are some of my favorite forests. Members of each trust would elect the board of trustees who might serve rotating four-year terms, so one-fourth of the board members would be up for election each year.

Each board of trustees would be obligated to manage the federal forests in trust for the American people, so no transfer of title would be needed. The board would have the power to hire and fire the trust supervisor and to approve the trust's annual operating plans. The trusts would have to obey the same environmental laws as any other landowner but would be relieved of the mandate to write expensive and useless forest plans and environmental impact statements for everything they do.

Unlike many state trusts, the federal forest trusts I propose would not have a trust obligation to make money for a particular beneficiary. But, if properly designed, they would have an incentive to make money, which is even better than an obligation. As General Motors--which lost $15 billion over several recent years--will tell you, you can't make money by simply ordering managers to do it.

The incentive would come from funding the trusts out of the net income they earn each year. At the end of each year, an auditor from, perhaps, the Department of Agriculture or Interior would ask each trust two questions: How much did you spend? And how much did you take in? The trust would keep the difference--the profits--to spend when and as it sees fit. I estimate that this would provide the forest trusts with nearly $1.5 billion per year. The remaining receipts would be divided as follows:

Wild rivers and wilderness areas would be placed in a separate series of state or regional wilderness trusts that would dedicate the receipts from wilderness users to buying "conservation easements" on adjacent lands. For example, a wilderness trust could bid on timber sales and leave the trees for wildlife and recreationists. The trusts would have about $100 million per year with which to expand the wilderness system.

To get the trusts started, Congress should seed them with funding equal to the previous year's budget for each forest or district. Since the national forests spend only about half of the Forest Service budget, and BLM districts spend only about 40 percent of the BLM's budget, this would immediately save taxpayers about $1 billion. Thereafter, the savings would exceed $2 billion per year, for a total savings of $9 billion in five years.

The keys to this proposal are a series of checks and balances similar to those in the U.S. Constitution. These include:

Federal forest trusts would benefit nearly all forest users. Recreationists would have to pay more to use the forests, but in doing so they would give managers incentives to provide them with what they want. Commodity users would have a steady supply of the resources they need without having to worry about political changes.

With an end to federal below-cost recreation, private landowners could profitably charge recreation fees, which would also encourage them to reduce user conflicts on their land by changing their management. Taxpayers would save billions of dollars per year.

The only real losers would be the bureaucracies, since the forest trusts would replace the Washington, regional, and state offices, and probably many of the people in the forest and district offices. But the remaining employees could professionally manage the forests with fewer worries about appeals, lawsuits, and changes in political administration.

Federal forests controversies offer a true win-win solution because nearly all forest resources are marketable through user fees, yet few are fully valued today. Moreover, Congress can implement these proposals without the highly charged step of transferring the title, or even the management, to the states or to private owners.

I have described the proposals outlined here in much more detail in the Spring, 1995, issue of Different Drummer magazine, which is published by the Thoreau Institute. If implemented, they will resolve federal forest controversies and insure that the forests are run for the best interests of the American people.

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