Below-Cost Timber Sales: Overview

Ross W. Gorte
Specialist in Natural Resources Policy
Environment and Natural Resources Policy Division

Dec. 20, 1994

95-15 ENR

CONTENTS

HISTORICAL BACKGROUND
- CONGRESSIONAL DELIBERATIONS
- ADMINISTRATIVE EFFORTS

WHAT ARE BELOW-COST SALES?
- CASH FLOW
- PROFITABILITY
- OTHER MEASURES

WHERE ARE BELOW-COST SALES? .

WHY DO BELOW-COST SALES OCCUR?
- PAST PROMISES
- NATIONAL FOREST LANDS
- MULTIPLE-USE MANAGEMENT

SO WHAT, IF ANYTHING, SHOULD BE DONE? THE FUTURE OF BELOW-COST SALES
APPENDIX A: Net Profit (Loss) as Reported in TSPIRS

SUMMARY

The Forest Service sells some timber at prices that are less than the agency costs to administer the timber program. These "below-cost" timber sales have been debated by Congress for more than a decade, but no policy to address the issue has been adopted legislatively or administratively.

Part of the debate over below-cost timber sales has been over their relative frequency. Various interests have included different costs and revenues, resulting in widely varying estimates of the magnitude of the losses. The Forest Service, at the direction of Congress, developed the Timber Sale Program Information Reporting System (TSPIRS), in part, to attempt to estimate the profits or losses annually for each national forest in a manner consistent with income reporting for private landowners. Another common measure is cash flow, used because it shows the consequences of timber sales for the U.S. Treasury. However, other measures may also be relevant for other purposes, and none provides the "right" answer.

Below-cost sales are most common in certain regions -- Alaska, the Rocky Mountains, the rugged Southeast (the Appalachians to the Ozarks), the Lake States, and New England. The rough terrain often raises agency costs to prepare and administer sales and raises purchaser costs to harvest the timber (thus reducing sale prices). High costs and modest timber values also result from low timber productivity and dispersed stands in the arid, mountainous West. Some timber stands have been degraded, by natural disasters and/or by past management activities (including prior to Federal acquisition), and thus have low timber prices.

Timber sales are made for a variety of reasons. In some cases, the purpose may be to provide timber for a local mill, and mills (and communities) have been built on the at least implicit promise of timber availability. Timber sales may also be used to modify existing conditions -- to reduce fuel loadings, to alter the mix of tree species, to provide habitat for specific animal species, to restore forests to more natural conditions, etc. While alternative means of modifying vegetation exist, timber sales may be more efficient (have a lower net cost to the Treasury and to society) than the alternatives, even though the sales may lose money according to strict financial criteria.

The issue is what, if anything, Congress should do about below-cost timber sales. Some argue that no action is warranted, because the fiscal concern is merely a tool being used to reduce timber sales. However, others are concerned about taxpayer support for the environmental damages that sometimes result from timber sales and/or about reducing the Federal budget deficit. While the debate is often characterized as do nothing or eliminate all below-cost sales, policy choices between these extremes exist. Choices for a below-cost policy include how to measure fiscal results, over what geographic and temporal scales, with what opportunities to demonstrate improvement, and with how much discretion to grant the agency over the final decision.

BELOW-COST TIMBER SALES: OVERVIEW

Financial losses from Forest Service timber sales are a persistent condition. Current concerns about possible losses were first raised in the late 1970s by Tom Barlow, then with the Natural Resources Defense Council (NRDC). One report caught the attention of the House Appropriations Subcommittee on Interior and Related Agencies, which requested Forest Service data on timber sale revenues and costs. In 1984, several studies using these and other data confirmed the NRDC findings. The Committee attempted to constrain the losses, but accepted the argument that the existing data were inadequate for accurately measuring the losses, and agreed to review by the authorizing committees while directing the Forest Service to develop a new timber cost accounting system. Despite numerous hearings over the succeeding decade, and despite efforts to reduce the persistent Federal budget deficit, Congress has not acted to limit the financial losses from Forest Service timber sales.

This report provides an overview of "below-cost" timber sales -- where revenues are less than the costs of preparing and administering the sales. It provides a brief history of concerns over timber management profitability, discusses difficulties in identifying below-cost timber sales and the regional variation in their occurrence, examines concerns over financial losses and justifications offered for continuing such sales, and discusses relevant aspects of a below-cost timber sale policy for Congress and/or the Administration.

HISTORICAL BACKGROUND

Profitability was an early concern in Federal timber management. Gifford Pinchot, the first Forest Service chief, believed that the national forests could be managed profitably, and should be managed profitably to demonstrate the profitability of long-term sustained timber management to the private sector.(1) Despite the efforts and proclamations by Pinchot and his successor, the Forest Service did not generate net revenues for the U.S. Treasury. In 1920, the third Forest Service chief, William Greeley, proclaimed that timber management was profitable when one included the nonmonetary benefits -- access for recreation and for fire protection, improvement of wildlife habitat, etc.(2) This assertion --that total timber management benefits exceed total costs -- continues to be the Forest Service's principal defense of its management activities.

In 1960, the Forest Service sought, and Congress enacted, the Multiple-Use Sustained-Yield Act.(3) The National Lumber Manufacturers Association (now the American Forest and Paper Association) proposed a substitute that would have included profitability as a goal for national forest management.(4) The substitute was rejected; instead, §4(a) of the Act directed national forest management:

with consideration being given to the relative values of the various resources, [but] not necessarily the combination of uses that will give the greatest dollar return or the greatest unit output.

For the next 20 years, Forest Service timber sales were widely presumed to be generally profitable. In 1962, for example, Forest Service authority for "at cost" sales -- sales priced so as to only recover costs, and not return money to the U.S. Treasury -- was repealed. Nonetheless, there were suggestions of possible problems. In 1970, the Bolle Report decried apparently uneconomical intensive forestry practices on the Bitterroot National Forest in Montana.(5) In 1976, Marion Clawson criticized national forest management as wasteful and inefficient.(6) And later that year, in §6(1)(2) of the National Forest Management Act of 1976 (NFMA), Congress directed the Forest Service to include a representative sample of below-cost timber sales in the agency's annual report. NFMA implicitly acknowledged general timber sale profitability in §14(h), however, in creating the Timber Salvage Sale Fund -- where deposited timber receipts from salvage sales would be used to prepare and administer the sales, with any excess receipts being deposited in the U.S. Treasury.

A challenge to the conventional wisdom of Forest Service timber sale profitability was issued in a 1980 report by Tom Barlow and others for the Natural Resources Defense Council (NRDC).(7) The report compared specified annual protection, management, and investment costs with revenues for each national forests for five years (FY 1974-1978), and found that, depending on the costs included, about half of the national forests had costs exceeding revenues for all or part of that period.

CONGRESSIONAL DELIBERATIONS

An article summarizing the NRDC report caught the attention of Representative Sidney Yates, Chairman of the House Appropriations Subcommittee on the Department of the Interior and Related Agencies. After a discussion with then-Assistant Agriculture Secretary John Crowell about Forest Service timber cost accounting in 1983 hearings, Mr. Yates requested data on timber sale costs and revenues for each national forest.(8) In 1984, four studies using these and other data confirmed the NRDC findings -- that revenues from many national forest timber sales did not cover the costs to prepare and administer the sales.(9)

The House Appropriations Committee responded to these studies in Committee report language for the 1985 appropriations:(10)

First, the Forest Service is directed to develop a true timber sales cost accounting system, which will address the issues of cost allocation and valuation of benefits, specifically related to the commercial timber sales program....
Secondly, bill language has been included which will allow increases in timber sale levels from the previous year in any forest only if the estimated receipts are in excess of annual expenditures for timber sold in at least three of the preceding five years.

The bill language limiting timber sale increases on forests with below-cost programs was deleted during the floor debate in an amendment proposed by Mr. Yates at the request of the chairman of the House Agriculture Committee, to allow that Committee an opportunity to deal with the issue legislatively.(11) The Senate Appropriations Committee also objected to direction on timber sales that was related to sale costs and receipts, although agreed with the need for better timber cost accounting and allocation.(l2)

The House Agriculture Committee held extensive hearings on below-cost timber sales, hearing from the Administration and the agency on February 26, 1985, and from 41 witnesses on June 5 and 6, 1985.(13) Despite this extensive review, the Committee developed no legislative proposal and no direction for the Administration or for the Appropriations Committee.

Since 1985, in addition to discussions during House and Senate Appropriation Committee hearings, Congress has held at least 10 hearings focused partly or solely on below-cost timber sales, including at least one in each Congress (the 100th through the 103d). The House Agriculture Committee has held the majority of the hearings, but the House Interior and Insular Affairs, House Government Operations, and Senate Agriculture Committees have also been involved. In addition, two bills were introduced in the 102d Congress (1991) to constrain below-cost timber sales: H.R. 2501, the National Forest Timber Sales Cost Recovery Act of 1991, and H.R. 3414, the Timber Economics Act of 1991. Neither bill was reported by the House Agriculture Committee, and neither was reintroduced in the 103d Congress, since neither of the sponsors (Mr. Jontz of Indiana and Mr. Olin of Virginia, respectively) was reelected.

ADMINISTRATIVE EFFORTS

In response to the congressional direction for "a true timber sales cost accounting system," the Forest Service developed its Timber Sale Program Information Reporting System (TSPIRS). The agency presented a draft proposal to the House Appropriations Committee in March 1986. The General Accounting Office (GAO) examined the proposal, and found several problems.(l4) GAO was then asked to work with the Forest Service on "a basic design for a timber program cost accounting system that will meet the needs of the Congress and the Forest Service."(l5) The Forest Service then supplemented the cost accounting system with additional reports presenting other relevant information on the timber sale program. This three-report system -- the Statement of Timber Sale Revenue and Expenses; the Economic Account; and the Employment, Income, and Program Level Account -- was presented to Congress in 1987.(16) The Forest Service tested TSPIRS in FY 1988, and presented data for the national forests (with State, regional, and national summaries) annually since FY 1989. The Forest Service has also continued to revise the reporting system as new information and understanding is recognized.

The Bush Administration proposed a test of the implications of phasing out certain below-cost timber sales in its FY 1991 budget request (i.e., in February 1990).(17) The House Agriculture Committee held hearings on the proposal in March.(18) In July, the Agriculture Subcommittee approved a bill (H.R. 5292) to prevent the pilot test. Although the subcommittee did not forward the bill for full committee consideration, congressional dissent was viewed as sufficient to preclude the test.(l9)

The Clinton Administration also suggested a phase-out of below-cost timber sales in its initial economic stimulus and deficit reduction program.(20) Although the proposal was not included in the Omnibus Budget Reconciliation Act of 1993 (Pub. L. No. 103-66), the Forest Service drafted a plan for phasing out below-cost timber sales on more than half of the national forests over 4 years, and the draft proposal was made public in the New York Times.(21) That proposal was explicitly rejected as the Administration's policy in Senate Agriculture Committee hearings by the Assistant Secretary of Agriculture for Natural Resources and Environment, James Lyons:

. . . the April 30th New York Times article stating that the Forest Service will end logging on more than a third of the national forests by 1998 is blatantly false and inaccurate.... It is unfortunate that the Chief's request for information was misconstrued as the first step toward shutting down units of the National Forest System. That is not the case, and it does not reflect the policy of the administration on this issue.

The Department of Agriculture is committed to meeting the President's goal of phasing out below-cost timber sales. However, we are presently handicapped by a lack of information necessary to assess alternative approaches to meeting the President's goals.(22)

The study to examine options for reducing below-cost timber sales has not been completed at this time.

WHAT ARE BELOW-COST SALES? (23)

Identifying "below-cost" timber sales is a deceptively simple exercise. Comparing Forest Service timber sale revenues and costs both provides and disguises information about the financial and economic consequences of timber sales. The Forest Service sells timber for many reasons -- to provide wood for manufacturers, to generate revenues, to provide employment, to expand access for motorized vehicles, to alter the composition and distribution of vegetation in an area, and more. Sales are often modified during planning and preparation to mitigate damages to or enhance the value of nontimber resources on or near the sale area, thereby mixing timber and nontimber costs and benefits. Furthermore, Government cost accounting for the disposal of appreciating assets (such as timber) is not as simple and straightforward as many believe. Thus, questions arise about the relevant and appropriate measures of costs and the outcomes of those expenditures.

Different interests measure the financial and economic consequences of timber sales differently. The two most commonly used measures are cash flow and profitability. Other measures are occasionally discussed, although sales that may be warranted but lose money are often called "justifiable below-cost timber sales.(24)

No one measure of below-cost sales is inherently right or wrong in the sense providing the one true picture. Each provides different information on the financial and economic consequences of the timber sale program. Some are useful for monitoring performance, others provide input for planning, while others can assess the wisdom of investments. Probably none, on its own, is sufficient to assess all timber sales or the timber program, but in concert they may provide a reasonably comprehensive picture of the financial and economic consequences of the timber sale program.

CASH FLOW

Cash flow measures the cash receipts and expenditures associated with selling timber. It can be done for individual timber sales, but is more typically measured for national forest timber sale programs, because appropriations and receipts are generally reported only at the national forest level (and at more aggregated levels).

The principal strength of using cash flow is that it directly measures the fiscal impacts of the timber program on the U.S. Treasury. This year's cash receipts are compared with this year's expenditures (which, by law, must equal appropriations), with the difference being the timber program's impact on the Federal budget. The principal limitation of cash flow analyses is that annual data may poorly reflect long-run results; annual cash flow is likely to differ from long-run results, because fluctuating timber program levels lead to wide fluctuations in net cash flow. Furthermore, cash flow will be negative in areas that need substantial investments, even if the investments are financially viable, because current revenues result from existing timber conditions while current costs result in future benefits.(25) Finally, tracking cash flow for each timber sale, even for just the commercial sales, would substantially increase the accounting workload without necessarily increasing our understanding. Existing data are only available at the national forest timber program level which can mask the fiscal impacts of individual sales.

PROFITABILITY

Profitability of timber sales is the other common measure of "below-cost" timber sales. TSPIRS is an attempt to calculate the profitability of the timber sale program on each national forest. It generally follows the structure of an income statement used in the private sector to report profits (or losses) to investors, regulators, and tax collectors. It uses an accrual accounting approach to attempt to match expenditures with the revenues that those expenditures generate. TSPIRS uses cost pools to calculate average activity costs from the applicable period to compare with the current year's timber revenues.(26)

TSPIRS has many critics, arguing that it excludes some relevant costs, includes an asset exchange (purchaser road credits) as revenue, and amortizes investments over excessive periods or not at all. However, in general, TSPIRS adequately measures the profitability of the annual timber program for each national forest.(27) It also provides a systematic measure that can be aggregated to regional and national totals. In general, TSPIRS will show fewer below-cost sales and lower losses than a cash flow analysis, because the current substantial investments in roads and reforestation are cash expenditures that are amortized over decades, while current harvests are not the result of past investments.

The principal limitation with TSPIRS relates to its current measurement level: it cannot be used to assess profitability of individual timber sales. A second limitation is that depressed annual timber harvests -- due to weather conditions, markets, administrative appeals, lawsuits, or whatever -- can result in annual profitability data that may poorly reflect the long-run profitability of the forest's timber sale program.(28) Finally, it should be noted that the TSPIRS results can substantially differ from the cash flow results, primarily because of different treatment of investment costs. Thus, in areas with high road construction and/or reforestation costs, timber sales could be profitable while yielding a negative cash flow.(29)

OTHER MEASURES

Other ways to measure below-cost timber sales have also been described, although annual estimates of below-cost sales using these measures are rare, because TSPIRS and cash flow data are the only widely available annual financial and economic data on Forest Service timber sales.

Some argue that a primary rationale for Forest Service timber sales is to benefit the regional economy, primarily through the timber industry employment and associated income. Certainly employment and income are important measures of the consequences of timber sales, and are reported in the TSPIRS Employment, Income, and Program Level Account. However, separating direct from indirect effects is difficult; some analyses, for example, include pulp and paper and other industrial segments in the timber industry, while others exclude these sectors and secondary processing in the wood products industry (such as wood cabinets).(30) Data exist on the size of industrial sectors, but not on the linkage between Federal timber harvests and employment. Timber sales can also affect other economic sectors, but data on other resource-dependent sectors (e.g., the "recreation industry") and their linkage to timber sale levels are rare. Furthermore, regional economic impacts cannot be assessed for individual timber sales, since the consequences of individual sales are temporary. Finally, employment effects (e.g., duration of unemployment) also depend on general economic conditions, and not just on the level of timber sales.

An alternative is a financial investment analysis, comparing expected revenues with current and expected expenditures. It is a common measure in the private sector, and is particularly appropriate for timber sales intended principally to improve timber productivity, such as thinning and salvage operations. However, when sales are substantially intended or modified to produce benefits without revenues (e.g., for nontimber resources) financial investment analyses provide an incomplete picture. Furthermore, such analyses are difficult, cumbersome, time-consuming, and fraught with uncertainty. Projecting the timing and level of future revenues and expenditures requires knowing not only expected future management practices and their results, but also the relative changes in costs and prices and the likelihood of needed congressional appropriations. The results of the analysis also depend greatly on the interest rate used to assess future revenues and expenditures at a common point in time, and there is little agreement on the "proper" rate.

Other measures are social investment analysis and net public benefits. A social investment analysis differs from the financial investment analysis by including noncash benefits and costs -- the effects on unmarketed resources --while net public benefits also includes unquantifiable benefits, such as possible improvements in endangered species habitat from timber harvesting. The principal strength of such analyses is that they attempt to capture Forest Service timber sales that are intended or modified to produce nontimber benefits. However, social investment analyses have most of the problems of a financial investment analyses, compounded by the difficulties in assessing the timing, level, and value of future effects that are difficult to quantify. Net public benefits cannot be calculated, and are assumed to be determined through public participation in national forest planning; this "defines away" below-cost timber sales, however, because sales that are legal within national forest management are assumed to generate net public benefits.

WHERE ARE BELOW-COST SALES?

Below-cost sales tend to be concentrated in those national forests with low timber values and/or high operating costs. Different definitions of below-cost sales will obviously lead to different conclusions about their frequency and location. Despite the problems with TSPIRS data on timber program profitability, TSPIRS is the only published data on timber sale costs and revenues. Thus, TSPIRS profit (and loss) data for each national forest for FY 1989-FY 1993 are presented in appendix A, and are discussed below. It should be recognized, however, that cash flow would show more below-cost sales, over a wider area, and with greater total losses; the other measures described above would show fewer (or no) below-cost sales, over a smaller area, and with lower total losses.

In general, three factors -- singly or in combination -- account for the losses. First, rough terrain often leads to high operating costs for the agency, both for access and to prepare and administer the sales. Second, low timber densities and dispersed stands (often the result of rough terrain) lead to small commercial timber sale programs, and thus to relatively high overhead costs. Third, some areas have low selling values, either because of poor timber species or quality or because of high operating costs for the purchaser (which could result from rough terrain or from dispersed timber stands).

Several areas show net losses in TSPIRS over the 5-year period:

• Alaska;
• the Rocky Mountains -- Arizona, southern California, Colorado, part of Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming;
• the mountainous Southeast (the Appalachians to the Ozarks) -- Arkansas, Georgia, Kentucky, Missouri, North Carolina, Tennessee, and Virginia;
• the Lake States -- Illinois, Indiana/Ohio, Michigan, Minnesota, and Wisconsin; and
• New England -- New Hampshire and Vermont.

There are exceptions within these general areas. For example, the Allegheny (PA), Apache-Sitgreaves (AZ), Black Hills (SD), Coconino (AZ), Kootenai (MT), Monongahela (WV), and Ouachita (AR) National Forests showed net profits over the 5-year period. Nonetheless, these areas generally describe the regions where TSPIRS reports losses for national forest timber programs.

In total, TSPIRS showed 77 of the 120 national forests losing money over the 5-year period. Half of all national forests (exactly 60) reported losses in all years, and another 10 reported losses in 4 of the 5 years. Six national forests reported accumulated losses of more than $10 million over the 5 years: the Klamath (OR; -$21.1 million); the Wallowa-Whitman (OR; -$16.5 million); the Flathead (MT; -$14.9 million); the National Forests in North Carolina (four forests administered as one unit; -$12.7 million); the Tongass (AK; -$12.1 million); and the Bitterroot (MT; -$10.2 million). The Tongass had the highest losses in any year, with losses exceeding $13 million in FY 1992 and again in FY 1993. (Reported TSPIRS profits from FY 1989-FY 1991, totalling nearly $25 million, offset most of these losses.) Interestingly, the Klamath is surrounded by national forests reporting TSPIRS profits in all 5 years.

The TSPIRS data also indicate that total losses and the number of unprofitable forests are growing. A few unprofitable forests -- such as the Sequoia (CA) and the Lolo (MT) -- have improved, showing profits in the past year or two. However, 72 forests showed losses in FY 1989 and FY1990, 80 forests showed losses in FY 1991 and FY 1992, and 84 forests showed losses in FY 1993. The losses have also grown steadily: -$60.9 million in FY 1989; -$69.5 million in FY 1990; -$88.6 million in FY 1991; -$103.8 million in FY 1992; and -$137.6 million in FY 1993.

Of course, some regions generally show profits in TSPIRS:

• the Pacific Coast -- northern California, part of Idaho, Oregon, and Washington; and
• the Atlantic and Gulf Coastal plains -- Alabama, Florida, Louisiana, Mississippi, South Carolina, and Texas.

Again, there are exceptions to the general profitability of these areas. As noted above, the Klamath (CA) and the Wallowa-Whitman (OR) showed the largest TSPIRS losses over the 5-year period. The Colville (WA) and the Okan-ogan (WA) also showed net losses over the period.

In total, TSPIRS showed 43 of the 120 national forests with net profits over the 5-year period. Nearly one fifth of the national forests (23 forests, 19 percent of the 120 national forests) reported profits in all years, and another 13 reported profits in 4 of the 5 years. Five forests accumulated profits of more than $100 million over the 5 years: the Willamette (OR; $324.5 million); the Umpqua (OR; $211.9 million); the Gifford Pinchot (WA; $124.2 million); the Malheur (OR; $118.4 million); and the Siuslaw (OR; $108.2 million).

Some of the increasing losses reported in TSPIRS can be traced to relatively poor performance on several of the Pacific Coast forests over the past 2 years. Ten forests in that area -- with overall TSPIRS profits -- reported losses in FY 1993 (and four also reported losses in FY 1992): the Deschutes (OR), the Mt. Baker-Snoqualmie (WA), the Mt. Hood (OR), the Olympic (WA), the Payette (ID), the Plumas (CA), the Siskiyou (OR), the Tahoe (CA), the Umatilla (OR), and the Wenatchee (WA). The total FY 1993 losses on these forests was -$36.2 million -- more than the increased loss from FY 1992 to FY 1993, and thus masking stable or improving profitability elsewhere. Two additional forests --the Siuslaw (OR) and the Six Rivers (CA) -- barely reported profits for FY 1993, while several others -- the Gifford Pinchot (WA), the Modoc (CA), the Rogue River (OR), and Umpqua (OR), and the Willamette (OR) -- reported substantially lower profits in the past 2 years than in earlier years. While many of these reported losses and declines are associated with precipitous drops in timber harvests, not all forests with declining timber programs have reported declining profitability; notable exceptions include the Kootenai (MT), the Malheur (OR), and the Shasta-Trinity (CA).

WHY DO BELOW-COST SALES OCCUR?

Three general reasons are typically presented to explain why below-cost timber sales occur: past promises; the nature of the national forest lands; and the nature of multiple-use management. In addition, individual sales and/or entire timber programs might have been predicted to be above-cost, but unanticipated price fluctuations or site-specific costs might have changed the results. For example, TSPIRS had showed the Boise (ID) National Forest to be slightly above-cost, netting $1.1 million from FY 1989-FY 1992, despite losses in 2 of those 4 years; however, timber prices rose from $92 per thousand board feet (MBF) in FY 1992 to $235 per MBF in FY 1993, leading to FY 1993 profits of more than $21 million.

PAST PROMISES

One justification for continuing below-cost sales is the at least implicit Forest Service promise to provide timber from the national forests. Many sawmills, and communities, have been located because of the expected timber supply from the national forests. In a few cases, the clearest example being the Tongass in southeast Alaska, national forest timber was intentionally used for economic development, to create an industry where none had previously existed.(31)

The promise of supplying timber from the national forests is an old one. The 1897 Act that first authorized the sale of timber identified one of the purposes of the forest reserves (now national forests) as "to furnish a continuous supply of timber for the use and necessities of citizens of the United States." The Multiple-Use Sustained-Yield Act of 1960 expanded on this promise by requiring national forest management for sustained yields, defined in §4(b) as:

"Sustained yield of the several products and services" means the achievement and maintenance in perpetuity of a high-level annual or regular periodic output of the various renewable resources of the national forests without impairment of the productivity of the land.

Thus, national forest management was intended to produce outputs, apparently without regard to the financial results of such production. In 1976, NFMA further implied sustained production in §13(a) by generally limiting national forest timber sale levels to an allowable sale quantity "which can be removed from such forest annually in perpetuity on a sustained-yield basis."

Together, these laws at least imply an expectation of continued timber sales from the national forests, and some have argued that the promise is a guarantee.(32) Most observers note that, while sustained timber sale programs have been promised, they are not legally enforceable. By establishing other conditions on national forest management, Congress, the executive branch, and the public through its participation in national forest planning may choose to constrain, or even eliminate, timber sales in some areas.

NATIONAL FOREST LANDS

The nature of the national forests lands is another reason for below-cost timber sales. Many of the early forest reserves were established in the Rocky Mountains to protect watersheds, sustain flows for navigable waterways, and reduce downstream flooding. The Weeks Law was enacted in 1911 to authorize acquisition of lands in mountainous areas of the East for similar reasons. Thus, many of the lands have low timber growth rates and/or species with low timber values .

Some national forests have also been degraded, often prior to their acquisition or protection. Poor timber harvesting practices, principally on private timberlands before World War II, is one cause. Abandoned, eroding agricultural lands were also acquired and typically planted to fast-growing tree species to stop the erosion, although (with 20-20 hindsight) the species are now considered inappropriate for those sites. Natural disasters -- most commonly forest fires, insect and disease epidemics, and windstorms -- can also degrade forests; Hurricane Hugo in September 1989, for example, probably contributed to the loss reported in TSPIRS for the Francis Marion-Sumter (SC) National Forests in FY 1991.

Despite the poor inherent or historical condition of some national forests, timber sales may still be warranted. Some vegetative manipulation may be desirable, to reduce fuel loadings and the risk of damage by fire, to invest in future timber production, to enhance water flows or wildlife habitat, to alter existing vegetation for a more sustainable or naturally functioning ecosystem, and for other reasons. Selling timber may be an efficient tool for manipulating the vegetation, achieving the desired results at lower cost to the government than alternative methods; however, the relative efficiency and public acceptance of timber sales versus other means of altering vegetation can only be assessed on a site-specific basis.

MULTIPLE-USE MANAGEMENT

The nature of multiple-use management is also a factor in below-cost timber sales. Many critics have descried the "inefficiency" of Forest Service management, claiming that costs are far higher than for private landowners.(33) Such comparisons may be unwarranted, however, because the Multiple-Use Sustained-Yield Act directs administration of the National Forest System "for outdoor recreation, range, timber, watershed, and wildlife and fish purposes." The Act then defines multiple use in §4(a):

"Multiple users means the management of all the various renewable surface resources of the national forests so that they are utilized in the combination that will best meet the needs of the American people; making the most judicious use of the land for some or all of these resources or related services over areas large enough to provide sufficient latitude for periodic adjustments in use to conform to changing needs and conditions; that some land will be used for less than all of the resources; and harmonious and coordinated management of the various resources, each with the other, without impairment of the productivity of the land, with consideration being given to the relative values of the various resources, and not necessarily the combination of uses that will give the greatest dollar return or the greatest unit output.

This lengthy definition clearly indicates that the Forest Service is not to manage principally to generate revenues or profits, although this is commonly a management purpose for private lands.(34) Achieving multiple values and sustaining productivity necessitates different management styles and practices than are appropriate for profit-making ventures, and thus costs should be expected to differ. The extent to which higher Federal timber management costs result from the multiple-use mandate and whether such costs are relevant for financial decisionmaking are subjects of endless debate.

SO WHAT, IF ANYTHING, SHOULD BE DONE?
THE FUTURE OF BELOW-COST SALES

Some have argued that nothing should be done about below-cost sales, because the apparent fiscal concern is simply being used to reduce Forest Service timber sale levels. This may well be true for some (possibly most) critics of below-cost timber sales, and improved financial performance, therefore, might not reduce the conflict over national forest management.

Nonetheless, some are concerned about taxpayers financing the environmental damages that occur from some timber sales, and others are concerned about the size of the Federal budget deficit. In his FY 1994 budget, President Clinton proposed phasing out below-cost timber sales, as part of his package to reduce "subsidies" for extractive resource uses of Federal lands. The FY 1995 House Republican Budget Initiative also proposes to eliminate below-cost timber sales by directing the Forest Service "to bring down the costs of managing their programs .... without reducing receipts."(35)

Much of the debate over a below-cost timber policy has focused on two approaches: do nothing, because below-cost concerns are not the real issue; and cease all below-cost timber sales, because the justifications are inadequate. Between these two extremes, however, are a multitude of possibilities.

A forthcoming Forest Service report, prepared by a policy analysis team with an intergovernmental oversight and review team and tentatively titled Timber Program Issues: A Technical Examination of Policy Options, identifies and compares the economic consequences of several options for reducing Federal fiscal losses from below-cost timber sales.(36) This report, which is expected to be available by the end of 1994, also discusses the relevant choices for establishing a policy on below-cost timber sales. Those choices include:

• Measurement of fiscal performance. As discussed above, cash flow and TSPIRS profitability are commonly used in the below-cost debate, but other measures might be appropriate for some sales (e.g., stewardship or personal use sales) or for some sites (e.g., salvage in devastated areas or lands not suited for timber production);
• Geographic scope of assessment. TSPIRS measures timber programs for entire national forests, but sale-by-sale decisions are possible; other scales (e.g., watersheds or ranger districts) may also be feasible;
• Temporal scale of assessment. Cash flow and TSPIRS analyses focus on annual performance, while national forest plans make decisions that can apply for a decade or more. To compensate for annual fluctuations, performance could be assessed using rolling averages for multiple years or by permitting one or a few years of losses within a period (e.g., losses in 2 of the past 5 years might be acceptable);

• Opportunities for improvement. Debates have focused on past performance, but managers might be able to improve the fiscal results of the timber sale program if they are told that fiscal results will be a standard for continuing sale programs. Furthermore, timber prices are likely to rise, as Federal sale programs decline and even low levels of inflation persist, and thus below-cost programs might become above-cost programs in the future. The implementation period and criteria for reestablishing terminated programs are choices that can included in a below-cost policy;
• Agency discretion. The Forest Service currently has complete discretion over fiscal standards for timber programs. The opposite extreme would be a rigid policy that would prohibit all below-cost sales or pro-grams based on the identified standards. However, other possibilities include: national standards for local consideration in forest planning and/or program or project planning; regional or Washington Office review of fiscal performance to determine program continuation or modification; and external regional or national review boards (consistent with or exempted from the Federal Advisory Committee Act) for recommendations to the Regional Forester or the Chief;

Additional choices and possibilities undoubtedly exist, and the number of feasible combinations is nearly infinite. Thus, there are many approaches that Congress and/or the Administration could select in their attempts to improve Forest Service timber sale fiscal performance, with myriad ramifications for local economies and for the environment.

APPENDIX A

Net Profit (Loss) as Reported in TSPIRS
(in million dollars; losses in parentheses and italics)

Source: U.S. Dept. of Agriculture, Forest Service, Timber Management. Timber Sale Program Annual Report. Washington, DC: U.S. Govt. Print. Off., FY 1989-1993.

Footnotes

1. Robert E. Wolf, "National Forest Timber Sales and the Legacy of Gifford Pinchot: Managing a Forest and Making It Pay," University of Colorado Law Review, vol. 60, no. 4 (1989): 1037-1078. (Hereafter referred to as Wolf, "Timber Sale Profitability.")

2. For reasons behind the agency's desire for the Multiple-Use Sustained-Yield Act of 1960, see: U.S. Congress, Office of Technology Assessment. Forest Service Planning: Accommodating Uses, Producing Outputs, and Sustaining Ecosystems. OTA-F-505. Washington, DC: U.S. Govt. Print. Off., Feb. 1992. pp. 35-38.

3. Wolf, "Timber Sale Profitability," p. 1059-1061.

4. Wolf, "Timber Sale Profitability," p. 1063-1064.

5. U.S. Congress, Senate, Committee on Interior and Insular Affairs. A University View of the Forest Service. [Prepared by a Select Committee of the University of Montana at the Request of Senator Metcalf.] S.Doc. No. 91-115. 91st Congress, 2d Session. Washington, DC: U.S. Govt. Print. Off., Dec. 1, 1970. 33 pp.

6. Marion Clawson. "The National Forests," Science, vol. 191, no.4228 (Feb.20, 1976): 762-767.

7. Thomas J. Barlow, Gloria E. Helfand, Trent W. Orr, and Thomas B. Stoel, Jr. Giving Away the National Forests: An Analysis of U.S. Forest Service Timber Sales Below Cost. Washington, DC: Natural Resources Defense Council, Inc., June 1980.

8. U.S. Congress, House, Committee on Appropriations, Subcommittee on the Department of the Interior and Related Agencies. Hearings on Department of the Interior and Related Agencies Appropriations for 1984: Part 11. 98th Congress, 1st Session. Washington, DC: U.S. Govt. Print. Off., 1983.pp 51-56, 326-342.

9. See: U.S. Library of Congress, Congressional Research Service. Summary of Recent Reports on Forest Service Timber Sale Costs and Revenues. [by Ross W. Gorte.] CRS Report No. 84-799 ENR. Washington, DC: Nov. 8, 1984. 14 pp.

10. U.S. Congress, House, Committee on Appropriations. Department of the Interior and Related Agencies Appropriations, 1985. H. Rept. No. 98-886. 98th Congress, 2d Session. Washington, DC: U.S. Govt. Print. Off., June 29, 1984. p. 70.

11. Congressional Record [daily ed.], vol. 130, no. 99 (July 31, 1984): H8097.

12. U.S. Congress, Senate, Committee on Appropriations. Department of the Interior and Related Agencies Appropriations, 1985. S. Rept. No. 98-578. 98th Congress, 2d Session. Washington, DC: U.S. Govt. Print. Off., Aug. 6, 1984. pp. 84-85.

l3. U.S. Congress, House, Committee on Agriculture. Hearings: Economics of Federal Timber Sales. Serial No. 99-4. 99th Congress, 1st Session. Washington, DC: U.S. Govt. Print. Off., 1985. 974 pp.

l4. U.S. General Accounting of fine. Timber Sale Accounting: Analysis of Forest Services's Proposed Timber Program Information Reporting System. GAO/AFMD-86-42. Washington, DC: April 198

l5. U.S. General Accounting System. Timber Program: A Cost Accounting System Design for Timber Sales in National Forests. GAO/AFMD-87-33. Washington, DC: April 1987.

16. U.S. Dept. of Agriculture, Forest Service, Programs and Legislation, Policy Analysis Staff. Forest Service Timber Sale Program Information Reporting System (TSPIRS): Final Report to Congress. Washington, DC: U.S. Govt. Print. Off., April 1987.

17. U.S. Congress, House Committee on Appropriations, Subcommittee on Department of the Interior and Related Agencies. Department of the Interior and Related Agencies Appropriations for 1991. Part 3: Justification of the Budget Estimates, Forest Service. 101st Congress, 2d Session. Washington, DC: U.S. Govt. Print. Off., 1991. pp. 826-828.

18. U.S. Congress, House Committee on Agriculture, Subcommittee on Forests, Family Farms, and Energy. Administration's Proposed Below-Cost Commercial Timber Sale Pilot Test. Hearing on March 1, 1990. 101st Congress, 2d Session. Washington, DC: U.S. Govt. Print. Off., 1991. Serial No. 101-65.

19. "Subcommittee Opposes Plan To Lessen Timber Losses," Congressional Quarterly, July 21, 1990, p. 2294.

20. Executive Office of the President. A Vision of Change for America. Washington, DC: U.S. Govt. Print. Off., Feb. 17, 1993. p. 75.

21. Keith Schneider, "U.S. Would End Cutting of Trees in Many Forests," New York Times, April 30, 1993, pp. Al, A18.

22. U.S. Congress, Senate Committee on Agriculture, Subcommittee on Agricultural Research, Conservation, Forestry, and General Legislation. The Clinton Administration's Below-Cost Timber Sale Policy. Hearing on June 24, 1993. 103d Congress, 1st Session. Washington, DC: U.S. Govt. Print. Off., 1993. S.Hrg. 103-230.

23. This section summarizes CRS Report for Congress No. 94-698 ENR, What Are Below-Cost Timber Sales?

24. See, for example: John H. Beuter. Overview of Below-Cost Timber Sale Issue. Technical Bulletin No.90-02. Washington, DC: American Forest Resource Alliance, Nov. 30, 1990. pp. 16-21.

25. Michael D. Bowes and John V. Krutilla. Multiple-Use Management: The Economics of Public Forestlands. Washington, DC: Resources for the Future, 1989.

26. Classical accrual accounting matches the costs that result from individual activities with revenues from that action. TSPIRS, however, reports revenues on timber harvested in the current year (the annual program), while the revenues from a sale may occur over multiple years. Thus, the matching in TSPIRS is based on averages, rather than on a classical accrual basis.

27. See: U.S. Library of Congress, Congressional Research Service. Timber Sale Cost Accounting: the Forest Service arid TSPIRS. [by Ross W. Gorte.] CRS Report for Congress No. 93-505 ENR. Washington, DC: May 17, 1993.

28. This problem is less severe in TSPIRS than in private sector income accounting, because of the cost pools used to match expenditures with revenues; private sector profitability can fluctuate widely with relatively small changes in revenues, because fixed costs are associated with the time period, rather than with the output level.

29. This is the reverse of the situation many investors seek. Classic tax shelters are investments with low profits (or even losses) but positive cash flows.

30. See the discussion in: U.S. Library of Congress, Congressional Research Service. Economic Impacts of Protecting Spotted Owls: A Comparison and Analysis of Existing Studies. [by Ross W. Gorte.] CRS Report for Congress No. 92-922 ENR. Washington, DC: Dec. 7, 1992. pp. 49-50.

31. In Alaska, the Forest Service began trying to establish a timber industry in the 1920s; two long-term contracts, each requiring the construction of a pulp mill, were finally signed (and the mills built) in the 1950s. For more on these contracts and on the agency's use of timber for regional development, see: Alfred A. Weiner. The Forest Service Timber Appraisal System: A Historical Perspective, 1891-1981. U.S.D.A. Forest Service Report No. FS-381. Washington, DC: U.S. Govt. Print. Off., Aug. 1982. 144 p.

32. W. Hugh O'Riordan. "Discussion: Neither Complex Nor Obscure in Meaning." Community Stability in Forest-Based Economies: Proceedings of a Conference in Portland, Oregon, November 16-18, 1987. Dennis C. LeMaster and John H. Beuter, eds. Portland, OR: Timber Press, 1989. pp. 51-53.

33. See, for example: John H. Beuter. Overview of Below-Cost Timber Sale Issue. Technical Bulletin No. 90-02. Washington, DC: American Forest Resource Alliance, Nov. 30, l990.

34. This is not to suggest that costs, efficiency, and/or profits should be ignored, but only that they cannot be the sole criterion for national forest management decisions.

35. U.S. House, Committee on the Budget, Republican Caucus. The Republican Budget Initiative for Fiscal Year 1995. Washington, DC: March 3, 1994. p. 160.

36. The report also examines timber sale efficiency -- how to decrease unit costs and/or increase revenues. Although sale efficiency and steps to improve efficiency could be significant factors in assessing and reducing the frequency and magnitude of below-cost timber sales, a detailed examination of such factors is beyond the scope of this report.