SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOCFINANCING OF ROADS IN THE NATIONAL FORESTS
TUESDAY, MAY 20, 1997
House of Representatives,
Subcommittee on Forestry,
Resource Conservation, and Research,
Committee on Agriculture,
The subcommittee met, pursuant to call, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the subcommittee) presiding.
Present: Representatives Doolittle, Smith of Michigan, Everett, Chenoweth, Chambliss, Moran, Pickering, Jenkins, Cooksey, Smith of Oregon (ex officio), Brown, Farr, Stabenow, Peterson, Berry, and Goode
Staff present: John E. Hogan, chief counsel; Sharla Moffett, Dave Tenny, Russell Laird, Monique Brown, Joy Mulinex, Wanda Worsham, clerk; and Danelle Farmer.
Mr. COMBEST. The hearing of the Subcommittee on Forestry, Resource Conservation and Research to examine the financing of roads on National Forests will come to order.
OPENING STATEMENT OF THE HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. COMBEST. The purpose of today's hearing is to examine how roads, both construction and reconstruction, are financed on the National Forests. In reviewing this issue, the subcommittee hopes to gain a better understanding of the National Forest Road Program and its financing, and determine whether the Purchaser Road Credit, one method of financing National Forest roads, contains a subsidy to companies that purchase Forest Service timber.
Page 2 PREV PAGE TOP OF DOC I am chairman of the Forestry Subcommittee, but I have to confess that I have a town in my district that's named No Trees. It is appropriately named. Forestry is a new issue to me, but one I have begun to learn about. And I mention that for two reasons: one, that I am not the foremost expert on forestry issues, but also that this has absolutely nothing to do from a parochial issue, but rather from an interest issue. I have, however, in an effort to try to learn something about the crops that we have and commodities that we have under this subcommittee, recently visited northern California.
Congressman Herger hosted a forestry tour. I found it very interesting and informative. And it also is extremely good to see on the ground, the facts rather than simply from a publication or from comments that people make.
One of the things that struck me, while we did not discuss the roads issue a great deal, we did recognize the something over 90 percent of the people who use those roads after they are constructed, are non-timber users or have no interest in timber other than possibly their homes being built of wood, but there are recreational uses that drive those areas, and it's questionable whether or not the general public, from a recreational standpoint, would have that opportunity without this program.
The roads of the National Forest System provide for recreation, grazing, wildlife management, fire suppression, administration and forest management. In fact, the No. 1 recreational activity on the National Forests is driving the roads. People are able to enjoy the beauty and solitude of these precious resources as a result of a road system that provides access to areas that are frequently characterized by steep, rugged terrain.
Considering the many benefits and uses of a transportation network across the National Forests, it is difficult to understand why roads have been under siege in recent years. Most recently, there have been allegations that a financing mechanism called Purchaser Road Credits represents a subsidy to the timber industry.
Page 3 PREV PAGE TOP OF DOC When it comes to cutting the budget and reducing the deficit, I am as enthusiastic as any Member of Congress. It is our responsibility to identify and cut corporate pork programs. As Members of Congress we are equally responsible to understand and ensure that the programs we propose to reduce or eliminate will, in fact, result in a budget decrease and a corresponding deficit impact.
Splashy media events and corporate pork rhetoric do not assist us in understanding the issues that allow us to make informed, sound policy decisions. Cutting subsidies to industry is as laudable goal, but often, hasty decisions only succeed in solving the wrong problem.
I would like to thank our witnesses for the time they have taken to prepare their testimony and appear before the subcommittee. I look forward to the testimony and the discussion, and would recognize Mr. Brown for any comments that he might wish to make.
OPENING STATEMENT OF HON. GEORGE E. BROWN, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. BROWN. I thank the chairman very much for this opportunity, and I commend him on starting the subcommittee promptly on the dot of 10 o'clock. I hope that's a precedent that will be maintained. I will tell him that there are certain virtues in not having the subject matter of this hearing reflected in the economy of your district because such a reflection can sometimes tend to slightly bias the views of the observer.
I say that with the greatest respect and affection for all of the logging communities in my own State, which bitterly resent any restrictions on logging, sometimes against their own long-term interests, because the long-term interest of the economy of many of these areas is what we had intended to be when we wrote the 1976, I think, Forest Management Act, which put great emphasis upon sustainability and multiple use of the forests. And we have deviated from that over the past generation, in ways which I think are destructive to the forests.
Page 4 PREV PAGE TOP OF DOC And I have come to the view that it may be necessary to put some restraints on the way we conduct these harvesting of the forests, and my statement will reflect that point of view. It reflects more than 20 years of experience in trying to develop that sustainable and multiple use of the forests, which has not succeeded, and it reflects visits to forests in every part of this country where they have been over-logged, clear-cut, and generally massacred against the best interests of all the people of this country.
I put a little more emphasis than I normally would because I want to be able to establish a position here which will get you to thinking, get all the members of this subcommittee thinking, about the proper course to follow.
I feel, at a time when Congress is facing tightening budget constraints, it's irresponsible to continue subsidizing new logging roads in our National Forests, and the purchaser road credits does amount to a subsidy for timber companies building roads in order to log on public land.
Now, that's a debatable subject, I admit, and I'm willing to debate it, but I make it flat-out in order to provoke that kind of a debate. It's well demonstrated that roads built for logging harm the environment, that construction of roads fragment wildlife habitat, and that inevitably results in soil erosion. In steep drain, this erosion can cause massive amounts of sediment to fill the streams imperiling native fish stocks.
The National Marine Fisheries Service concluded that road construction, along with logging, has been a primary cause of habitat decline for salmon and other fish species. Roads, especially in steep, unstable terrain, are a major contributor to landsliding and flooding. According to Forest Service, during the winter storms of 19951996, 70 percent of the 422 landslides were associated with Forest Service logging roads, and particularly those on very steep and normally inaccessible roads.
I was sharing with the chairman earlier the fact that one of my sons died in a logging accident on one of those steep slopes that were being logged by hand because you couldn't log them by machine. And they shouldn't have been logged at all but, nevertheless, he was on a contract job with the Forest Service to log those inaccessible types of terrain.
Page 5 PREV PAGE TOP OF DOC The bottom line is road construction in our National Forest System is a burden to the U.S. taxpayer. This is especially true in remote or roadless areas where the cost of building and maintaining logging roads most often exceeds the proceeds from timber sales.
In almost regions and all portions of the country, the Forest Service experiences a net loss on timber sale contracts. The taxpayer shouldn't have to pay for the destruction of their forested land.
There is no justifiable reason to continue using purchaser road credits. Millions of dollars could be saved annually by eliminating this program that has a completely obsolete rationale, given the excessive amounts of roads that currently exist in our National Forests.
It's hard to realize it, but the National Forest System already contains over 377,000 miles of road, roughly 8 times more than the interstate highway system. I've had the pleasure of hiking on many of these roads, and I actually got lost overnight on one of these logging roads up in Idaho. They do not have road signs on them, as a matter of fact. It makes it very difficult to find your way sometimes.
The Forest Service and Members of Congress need to realize that roads are not always of value to our National Forests, and we need to start attaching more value to the remaining wild and roadless areas in our country. Environmentally, roadless areas are extremely valuable in preserving ecological diversity, providing greater wildlife habitat, contributing to an overall healthy ecosystem and, ultimately, an overall healthy economic system in these regions. Thank you, Mr. Chairman, for indulging me.
Mr. COMBEST. Thank you, Mr. Brown. Mr. Doolittle.
Mr. DOOLITTLE. Mr. Chairman, I don't have an opening statement. I appreciate your holding the hearing on this subject, and I very much look forward to the testimony.
Mr. COMBEST. Thank you. Mr. Jenkins.
Mr. JENKINS. I do not have a opening statement, Mr. Chairman.
Page 6 PREV PAGE TOP OF DOC Mr. COMBEST. Mr. Moran, do you have any comment?
Mr. MORAN. No, Mr. Chairman.
Mr. COMBEST. We're pleased to have with us three witnesses that produced a report addressing the question of whether or not Purchaser Credit Program provides a subsidy to timber purchasers. The Federal Budget Consulting Group and Price Waterhouse LLP just completed a rigorous analysis on the financing of roads in the National Forests.
I'm looking forward to hearing about this timely and important issue, and would like to invite our panel, who is at the table, for introduction purposes, Mr. Stanley Collender, managing director of the Federal Budget Consulting Group; Ms. Sarah Ducich, director of the Federal Budget Consulting Group, and Dr. Cathleen Koch, principal consultant, Price Waterhouse LLP, who developed this report. All of your written statements will be made a part of the record, and you might summarize those however you would wish, or proceed however you would wish and, Mr. Collender, I would recognize you first to proceed.
STATEMENT OF STANLEY E. COLLENDER, MANAGING DIRECTOR, FEDERAL BUDGET CONSULTING GROUP
Mr. COLLENDER. Thank you, Mr. Chairman. On behalf of myself, Sarah Ducich, who managed the study for the Federal Budget Consulting Group and is sitting on my left, and Cathy Koch, who managed the economic analysis performed by Price Waterhouse LLP and is sitting on my right, please accept our sincere appreciation for your invitation to appear this morning. We are certainly looking forward to working with you and the other Members of the subcommittee as you continue to work on this subject.
With your permission, and as you just mentioned, we would like to submit for the record the full text of our study, Financing Roads on National Forests, briefly summarize our findings, and then respond to any questions you and the other members might have.
The administration's proposal to eliminate purchaser credits as a mechanism for financing road construction has made this an important issue for Congress to look at this year.
Page 7 PREV PAGE TOP OF DOC Because of this, we were asked to prepare a comprehensive analysis of financing roadwork on the National Forests, and whether such financing represents a subsidy to the forest products industry.
It's important for me to state up front that this study was commissioned and paid for by the American Forest and Paper Association. However, it's equally important for me to state that when both the Federal Budget Consulting Group and Price Waterhouse LLP agreed to undertake the project, we made it clear to the American Forest and Paper Association that we had no preconceived notions about the timber sales program in general and purchaser credits in particular, and much more importantly, we would not in any way guarantee that the American Forest and Paper Association would like what our analysis discovered.
Much to its credit, the American Forest and Paper Association readily agreed to these terms. As a result, I have no qualms whatsoever in saying that this study was completed with the highest degree of objectivity. Frankly, if this was not the case, we would not have agreed to present it to you this morning.
Our analysis has four key conclusions. First, it clears up much of the confusion concerning the funding sources for building and rebuilding roads on the National Forests. Federal appropriations--primarily pay for recreation and general purpose roads, and contrary to what many people believe timber purchasers, and not the Federal Government, finance most of the roads associated with timber sales.
Second, although there is a great deal of concern about new road construction, most of the roadwork financed by timber purchasers and by Federal funds is for reconstruction, when the existing roads have worn away and need significant work to address safety, environmental, and access requirements.
Third, the Forest Program has been cut almost in half over the past 5 years.
Fourth, and finally, as the Price Waterhouse LLP analysis shows and, again, contrary to what many believe the roads program does not, in our opinion, represent a subsidy to the forest products industry.
Page 8 PREV PAGE TOP OF DOC Before Sarah and Cathy provide additional details to support these conclusions, let me try to anticipate and answer one question that I know must be of extreme interest to you all, especially as Congress rushes to complete work on the budget resolution this week.
Eliminating purchaser credits is an accounting change; it would not increase Federal receipts. The only impact on the deficit would be because the current program includes purchaser credits in the formula that is used to determine the Federal payment to States and counties. If purchaser credits were eliminated, the Federal payment to them would be less. And that's the only impact on the deficit.
STATEMENT OF SARAH E. DUCICH, DIRECTOR, FEDERAL BUDGET CONSULTING GROUP
Ms. DUCICH. Thank you. Our study focused on the financing issues associated with the construction and reconstruction of roads and bridges on the National Forests. There has been considerable interest in this issue lately as a part of the overall issue of the Forest Service's timber sale program. Specifically, there have been many questions about the financing mechanisms for road construction and whether such mechanisms represent a subsidy to the timber industry.
In looking at these questions, it is important first to understand the financing mechanisms used by the Forest Service to construct and reconstruct roads. There are a number of misconceptions about what these mechanisms are and about the roads program itself.
First, just a few statistics about the roads themselves. There are approximately 380,000 miles of roads on the National Forests. Excluding wilderness areas, this is about 1.6 miles of road per square mile.
Most of these roads were built and financed by timber purchasers, but are now used for a wide range of activities on the National Forests, including recreation, firefighting, and management of the National Forest System.
Very few of these roads will remind you of Pennsylvania Avenue or Route 29. Most are single lane, unpaved roads.
Page 9 PREV PAGE TOP OF DOC Nearly three-quarters of the roads, 281,000 miles, are local roads which provide access to specific activities and sites, such as campgrounds, trailheads, logging areas, mineral development and administrative sites. These are generally single lane, unpaved, often dirt, roads.
Nineteen percent are known as collector roads, generally single lane, gravel roads which provide access to major forest roads or public highways.
Only 7 percent of the roads are major roads--generally multilane, paved roads. These roads are known as arterial roads and form the major transportation network to and across National Forests.
The Forest Service uses basically three ways to finance road construction and bridge work in the National Forests.
First, it uses annual appropriations which pay primarily for recreation and general purpose roads. Appropriations also pay for some timber management roads, where the costs cannot be attributed to a single timber sale.
Second, the Forest Service uses purchaser credits. The overwhelming majority of road work on the National Forests, 80 percent since 1991, has been financed by timber purchasers as part of timber sale contracts.
The Forest Service keeps track of the value of the road work performed by the timber purchaser and awards the purchaser with credits equal to the value of the road work that has been completed.
Within certain limitations, the timber purchaser can use the credits to pay for timber that is being harvested--either on that sale or another sale within the same National Forest.
Purchaser road credits are not Federal spending but simply an accounting mechanism to allow the Forest Service to keep track of this in-kind exchange.
The third method of financing is the Purchaser Election Program. Less than 4 percent of road work has been done under this program since 1991.
Page 10 PREV PAGE TOP OF DOC Since 80 percent of road work has been financed by timber purchasers in exchange for purchaser credits, much of the focus of the roads program has been on this financing mechanism. I would like to make a few brief points about the purchaser credits.
As I just stated, purchaser credits are not Federal spending. They are a contract mechanism that govern the speed at which timber purchasers can recover their costs.
All of the State timber sales and Federal timber sales that we reviewed as part of this study allow timber purchasers to recover the costs of the road work that they perform. The difference is in the speed of recovery.
The Bureau of Land Management and the State of Washington require that timber purchasers recover their costs as part of the price that they pay for the timber. This means that the purchaser recovers their costs over the entire length of the timber harvest.
Oregon and Idaho timber sale programs use a purchaser credit system similar to the Forest Service, allowing purchasers to recover costs in the first year or 2 of the timber harvest.
The Forest Service instituted the purchaser credit system in 1964 to institute more certainty in the payment and recovery of road costs, thereby minimizing the risk for both the timber purchaser and the Forest Service in the recovery of road construction costs; and, secondly, to protect small businesses who did not have access to capital to finance road work and wait the length of the timber sale, often 5 years with the Forest Service, before they recover their costs.
Purchaser credits are extensively used on timber sale contracts. Eighty-two percent of the volume and 89 percent of the value of timber sold under contract since 1992 had purchaser credits as part of the contract.
These purchaser credits were, on average, only 8 percent of the value of the timber sold under the contract--an average of less than $30,000 for purchaser credits compared to an average of over $350,000 for timber.
As part of this study, we reviewed the spending trends for the forest roads. The Purchaser Credit Program as well as the entire forest roads program has declined substantially as the overall timber sale program has declined.
Page 11 PREV PAGE TOP OF DOC Total spending on road construction and reconstruction--including Federal spending by the Forest Service and private spending by timber purchasers--has declined by 47 percent since 1991--and that's on this chart over here. As you can see, total spending dropped from $141 million in 1991 to $74 million in 1996. This decline is reflected in roads financed both by appropriations and by purchaser credits.
Appropriations have dropped from $53 million in 1991, the blue on the chart, to $27 million in 1996. The value of road work performed by timber purchasers has dropped from $82 million in 1991 to $41 million in 1996, a 50 percent decline.
Reflecting this decline, the amount of road work has declined substantially. This chart here shows the amount of road work that was performed in 1996 on National Forests. In 1996, the amount of new road construction was 463 miles, a two-thirds decline since 1991. Of this new construction, only 17 miles were financed by Federal appropriations, and only 1 of these miles was for the timber program.
Most of the road work performed was for reconstruction work. That is, improvements and repairs to existing roads and bridges for safety, environmental safeguards, and improved use. This has declined less severely since 1991, by 23 percent. As the second chart shows here, nearly 80 percent of the reconstruction work on forest roads has been done by timber purchasers.
Even though the roads program is half of what it was 5 years ago, there are still proposals to eliminate the program on the premise that it is a subsidy to the industry, which is the issue that Dr. Cathy Koch at Price Waterhouse reviewed and will now discuss.
[The prepared statement of Ms. Ducich appears at the conclusion of the hearing.]
STATEMENT OF CATHLEEN KOCH, PRINCIPAL CONSULTANT, PRICE WATERHOUSE LLP
Ms. KOCH. Thanks, Sarah. Price Waterhouse was asked to analyze the forest roads program on the National Forests to determine whether it provided a subsidy to the timber industry. From 1994 through 1996, over 80 percent of timber road work was funded by timber purchasers through the purchaser road credit program. Because this large majority of roads built for timber management are paid for through the Purchaser Credit Program, an analysis of the forest roads program necessarily focuses on the Purchaser Credit Program.
Page 12 PREV PAGE TOP OF DOC In reviewing the Purchaser Credit Program, Price Waterhouse found that the purchaser road credits are a fair representation of the value of the roads built by timber companies and left to the Government for recreation, future timber harvests, forest management, and other purposes.
The contracting and bidding process ensures that the purchaser road credits appropriately reflect the cost of roads necessary to harvest each timber sale, and any subsidy should be eliminated in the bidding process.
If there was a subsidy, eliminating the Purchaser Credit Program would be expected to increase Federal receipts. However, the administration's proposal to eliminate purchaser road credits acknowledges no such increase in receipts.
When a site is designated for a harvest, there is much planning and preparation that takes place before the cut. On average it takes 2 to 3 years to prepare a designated harvest area for a cut. There are mandatory examinations of the timber, wildlife, geology, and water to gauge the consequences of the cut. Then, an engineering staff begins to survey the information gathered in these scientific surveys to establish standards and restrictions for the cut as well as for the road system that is required.
The engineers use these surveys to develop plans for the timber roads. These plans and the auction and contracting process can be described in several steps. First, the cost of clearing the site and building the road is estimated. This estimate is formed based on the answers to several questions. How much land is to be cleared for the road? How will the area be excavated? What type of drainage systems must be in place? Will bridges be necessary?
The total road cost estimate is derived by summing engineers' cost estimates for each of the tasks involved. Sometimes public work contracts for each task are summed to develop an estimate of the road costs for a timber harvest.
The cost estimates then become the maximum allowable purchaser road credit, and are included in the timber sale contract, along with harvest volume specifications, harvest restrictions, and an appraisal price for the timber. This appraisal price, by the way, becomes the minimum acceptable bid on the sale. All these items are included in the contract and the sale is advertised.
Page 13 PREV PAGE TOP OF DOC Potential purchasers have 30 days to submit sealed bids. There may also be an oral auction, in which sealed bids represent minimum starting bid.
The highest bidder wins the right to harvest the entire volume of designated timber on the sale. Occasionally, sales are assigned by the Forest Service in cases in which there are no bidders. The assigned sale always cover the minimum bid set in the contract advertisement.
Data from the Pacific Northwest shows that 97 percent of timber sales in the last 3 years have been awarded under sealed or open bid auctions.
I'm an economist, and economists love to study things. Auctions are one of them. Auction theory is a big deal in economics. What we've concluded in economics is that auctions provide the efficient method of identifying the buyer willing to pay the most for a product. In this case, the product is timber.
In a market where the value of timber is well known, because the prices for processed timber are well known by all potential purchasers, bid values will be very close to the market value for all bidders, minus any cost incurred to process the timber.
If certain costs--for example, road costs--are reimbursed by the seller in the form of credit, these credits will be reflected dollar- for-dollar in the bid amount. The bid amount will reflect the net value of the timber to the purchaser. The amount raised at auction net of purchaser road credits will be the same with or without the purchaser road credit program.
In the absence of the purchaser road credit program, the timber sales program can continue, but the cost of roads will be built into the timber contracts in the form of lower bid prices. Net payments to the Government should be the same under the contracts without purchaser road credits. This is, indeed, the estimate reflected in the President's fiscal year 1998 budget, which proposes to eliminate purchaser road credits.
The major consequence of eliminating the purchaser road credit program will be lower gross receipts and reduced payments to States that are based on these receipts. In fact, the only Federal budget impact from eliminating the forest roads program are a result of lower payments to States and counties.
Page 14 PREV PAGE TOP OF DOC Another consequence of the loss of purchaser road credits will be a delay in the cost recovery for timber purchasers. Road costs are written off against sales, which may follow costs by 1 year or more. Under the Purchaser Credit Program, the credits can be used to purchase timber from any National Forest in the region, and this current cash value helps to defray the carrying cost of road building expenses. The elimination of purchaser road credits will hurt mostly small timber purchasers, who have the least access to credit. Large timber purchasers can more easily carry road construction costs. Eliminating purchaser road credits, therefore, will make it hard for small businesses to participate in timber sales and will reduce competition in the bidding process.
Based on our investigation, we've concluded that the forest roads program does not contain a subsidy for timber purchasers and provides an efficient and effective mechanism for financing road construction and reconstruction.
Again, the conclusion is that net timber sale receipts to the Government will be the same with or without a purchaser road credit program.
[The prepared statement of Ms. Koch appears at the conclusion of the hearing.]
Mr. COLLENDER. Thank you, Mr. Chairman. We'll be happy to try to respond to your questions.
Mr. COMBEST. Thank you all very much. Let me--and you may not be able to answer this question because you were looking at it from the roads construction--but both this chart and the previous chart, is there a proportional decrease in the amount of money that's being spent on either construction or reconstruction or maintenance of roads, to the decline in the amount of timber being harvested on National Forest lands?
Ms. DUCICH. I don't have the exact statistics, but the decline in the roads program is about 50 percent, and the decline in the timber sale program is roughly the same, maybe a little bit more, since 1991. So, it is roughly proportional.
Page 15 PREV PAGE TOP OF DOC Mr. COMBEST. Is there a saturation point in which--how many, would you say, 100,000 miles of roads----
Ms. DUCICH. There are 380,000 miles.
Mr. COMBEST. Is there a saturation point in which you eventually--I mean, you've got a limited amount of land in the country that timber can be harvested. Is there a saturation point in which those have the roads on them that would be available and, therefore, there needs to be a normal decrease in the amount of roads being constructed, that maybe either the reconstruction or maintenance would come to be more predominant than constructing roads?
Ms. DUCICH. I think actually that the Forest Service has reached that point. The Forest Service says that about 95 percent of the road system has been constructed. And as you can see, most of the work that's being done now is road reconstruction.
Mr. COMBEST. But even after an area has been harvested for the amount, total amount, of harvest in a given area in which a road has been constructed, those roads then continue to be used either for recreation but also as well for firefighting and other purposes after the area has been harvested.
Ms. DUCICH. Right--and I don't have the statistics in front of me--about two-thirds to three-quarters of the roads remain open to the public after the timber sales have been completed. About 25 percent of the roads are gated and not available for public access. Some of these roads are closed during the wintertime, but nearly three-quarters of the roads are available for public access after the timber sale.
Mr. COMBEST. How does the U.S. Forest Service ensure that the purchaser road credit reflects the actual cost of road construction?
Ms. DUCICH. There are several ways. First, the Forest Service estimates road cost using cost guidelines that are based, in part, on public works contracts. They use cost guidelines that are used also by the Bureau of Land Management, the Bureau of Indian Affairs. State timber programs use similar cost guidelines to estimate the cost of the road work that has to be performed on a timber sale. So, they all use similar cost guidelines to come up with their estimates.
Page 16 PREV PAGE TOP OF DOC They have several ways to check on the estimates. One, as part of the timber sale contract, they can require the timber purchaser to turn over the estimates of the road costs, the actual contracts and how they paid for the costs.
Second, on the purchaser election program, which I didn't speak a whole lot about, which is for certain timber purchasers that meet certain small business requirements. The purchaser can elect to have the Forest Service construct the road and, in that respect, the Forest Service then can check their cost estimates to see if they have estimated them appropriately.
Finally, the incentive for the Forest Service is probably to do roads on the cheap anyway. Although, they're building roads often a higher public access standard than other timber sale programs, their incentive is to bring the road in as part of the timber sale, and they want to make the timber sale as cost- effective as possible. So, the incentive is to keep the costs down on the roadwork.
Mr. COMBEST. Do you know if the timber which is harvested to allow a road to be constructed through the area which is not part of the sale is considered part of the sale? Do you know how that timber that is cut down to allow that road to go through is handled? Is it purchased by the buyer? Do you know how that timber is handled?
Ms. DUCICH. I don't know the answer to that question, I'm sorry.
Mr. COMBEST. Some contend that considering all the sources of revenue available to States and counties, that reducing to 25 percent payments, $10 million through elimination of the Purchaser Credit Program, would not have a severe impact on counties. Does your analysis support this conclusion?
Ms. DUCICH. We didn't look at the impact on counties specifically. There would be some counties and States that would be affected more greatly than others, and we have a table in our report, table 8, that shows the value of purchaser credit by region, and you can see that Pacific Northwest, region 6, had a value of purchaser credit in 1996 of $12 million. So, Oregon and Idaho would lose $4 million. The counties there would lose $4 million if purchaser credits were eliminated.
Page 17 PREV PAGE TOP OF DOC Counties that rely on the timber industry would see a bigger impact at the elimination of the Purchaser Credit Program. The northern region, Idaho and Montana would also see a pretty great impact as well.
Mr. COMBEST. I will end there with my questioning, but just a comment. I was not aware of this payment before I visited this area and, with the closure of some 30 to 40--I don't remember exactly how many mills closed due to the reduction in the amount of timber being harvested--the impact on the local communities. Some of the community leaders who were not even involved in timber at all, were talking about that impact and how much it was impacting the local area in a negative fashion, and that so much of their schools and other activities in the community had been financed by this amount in the past. Number 1, their unemployment is relatively high now but, second, many of those who had worked in the timber industry before had now found other jobs that were not paying as well, so it was much more difficult to go out and increase, obviously, their local taxes because it was quite an economic strain on the community. I was not even aware of that 25-percent payment up until that point, but obviously it is having some serious impact on some of those local communities.
Mr. BROWN. Thank you, Mr. Chairman. May I first ask Mr. Collender, did you make the statement initially that this study was paid for by the timber industry?
Mr. COLLENDER. The American Forest and Paper Association, yes, sir.
Mr. BROWN. Was there a reason for that, why they should do this study rather than the Forest Service?
Mr. COLLENDER. The answer is I don't know. They just came to us and asked us to do it. Why they did it as opposed to someone else, I have no idea.
Mr. BROWN. It is not unusual, of course, for industry groups to ask for studies, and even the prestigious National Research Council does studies for industry, and they require full disclosure of the source of funding and also peer review of the results. Was there any such review conducted in this case?
Page 18 PREV PAGE TOP OF DOC Mr. COLLENDER. The draft of this was sent to a number of folks, agricultural economists and others. I believe there is a list in the back of the report. Also, we were hoping this hearing and other distributions of the paper, which is only about 2 weeks old, would provide some of that follow-up. The draft was, in fact, distributed to a number of folks for review.
Mr. BROWN. I would hope that that would be the case.
Dr. Koch, did I hear you correctly, that it was your conclusion that the cost of the timber, or the receipts from the sale of the timber, would be the same with or without the credits, road credits?
Ms. KOCH. Yes. The cost of the roads are going to be reflected in the net bid to the--I have a chart, so I can show you how I think this is going to work.
You can see on this chart, if we just had a hypothetical value of timber of $100, market value of $100, with the purchaser road cost of $40. These relationships don't reflect anything but easy arithmetic for me. So, keep in mind we have market value of the wood for $100, road costs of $40.
Under the purchaser road credit program, the $40 would be reimbursed in the form of credit to the timber purchaser, and the bid, which would be the net value to the timber purchaser, would be the $100, minus $40, $60, plus the credit, $40, the bid would be $100. But the net receipts to the Government would be $60 because they would get $100 but they would give $40 in credit, net receipts are $60.
If there were no purchaser road credit program, market value of the wood is $100, costs are $40. The purchaser have to reflect the costs of procuring the resource in any bid value, so the net value to them of the timber is going to be $60, and that's what they're going to bid. In either case, net receipts to the Government are $60.
Gross receipts, however, are different, and that's where the difference comes in. But, yes, net receipts to the Government will be the same with or without the program. Without the program, purchasers can build the roads, they'll just bid less for the wood.
Page 19 PREV PAGE TOP OF DOC Mr. BROWN. Well, to be honest with you, I don't understand that. You're taking, in your example, $40 out of this process, and it seems to me that in order for the Government to receive the same $60--or for the lumbering company to make the same, they're going to have to increase their bid by $40 in order to pay for the roads, and the consumer is going to pay an extra $40.
You may have figured out some way that this isn't going to be true, but I don't think, in the short time we have, I would be able to understand your explanation of it. So far, I haven't.
Now, let me ask another question. One of you remarked that this system helps small business. It's of interest to me that you would make that point because I didn't know there were any small businesses left in the timber industry. Could you explain to me what portion of sale from National Forests goes to small businesses, and define them in some way that I can understand?
Ms. KOCH. I don't have any of the information on the profiles of purchasers.
Mr. BROWN. So the statement that it helps small business is more or less immaterial unless you know what small businesses are bidding, isn't it?
Don't answer that question.
Ms. KOCH. OK.
The CHAIRMAN. If the gentleman will yield?
Mr. BROWN. Certainly.
The CHAIRMAN. Small business, as defined for most instances as well as this one, is a company with less than 500 employees.
Mr. BROWN. That's the normal definition, yes.
The CHAIRMAN. That's true here.
Mr. BROWN. It's true here. And do we know what percentage of the National Forests are logged, sales are made to business of that size?
Page 20 PREV PAGE TOP OF DOC The CHAIRMAN. Well, I'm not sure that I have that number, but we can surely get it for you, if you'd like.
Mr. BROWN. Well, that was the information I was seeking. Thank you for enlightening us.
Ms. KOCH. We know small businesses do participate.
The CHAIRMAN. And you are correct, there are much fewer than there used to be because of the policies of this Congress.
Mr. BROWN. This will be my last question. You had some charts up there indicating a rather steep decline from 1990 to the present. Did you look at the figures from 1980 to 1990?
Ms. DUCICH. What we looked at was just the last 5 years of the program, and it reflected the decline. We didn't go any further back.
Mr. BROWN. You didn't observe the vast increase in logging that went on from 1980 to 1990 then, did you?
Ms. DUCICH. We did not review the period prior to 1990, no, we did not.
Mr. BROWN. I see. And do you consider that that's a complete representation of the situation on the National Forests, to just look at the years in which there have been declines and not the years that there have been increases?
Ms. DUCICH. Well, I think it's an appropriate. We were trying to put what the program is today in context of where it was a few years ago, that was the premise of this.
Mr. BROWN. Thank you.
Mr. COMBEST. The information relative to small companies, I think, is probably available, and we'll try to get that information for the committee for the record, over a historic period of time how that has changed.
Mr. BROWN. Back to 1980 also, could we get those?
Mr. COMBEST. Yes, we'll certainly try to get it from as long back as we can obtain it.
Page 21 PREV PAGE TOP OF DOC The Chair would recognize the gentleman from Oregon, chairman of the committee, for comments, statement, questions that he might have.
The CHAIRMAN. Thank you, Mr. Chairman. I just have a statement for the record. Thank you very much.
Mr. COMBEST. Certainly. The gentleman and any other Member's statement will be entered into the record, as well as, I said before, all of those of the witnesses.
[The prepared statement of Chairman Smith, Mrs. Chenoweth, and Mr. Pickering follow:]
PREPARED STATEMENT OF HON. ROBERT F. (BOB) SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON
Thank you, Mr. Chairman. I am pleased to be able to participate in this hearing on how roads are financed on the National Forests. The forest roads issue has received much attention over the last few years, and the 105th Congress has been no exception.
In 1997, there have been calls to eliminate one of the ways in which roads on the National Forests are financed--a program called purchaser road credits. Some have alleged that the program is a subsidy to companies that purchase Forest Service timber, while others claim that it is an outdated system and no longer necessary due to a smaller timber sale program.
There is no question that this is a complex issue--one that I am certain took wading through a sea of data to complete the analysis we will hear today. I am delighted to have the definitive study on the financing of roads, and more specifically, the purchaser road credit program.
I have had an opportunity to review the report being presented today. Some of the major findings of this report are:
The Purchaser Credit Program does not contain a subsidy for timber purchasers;
The network of roads that allows us to access our National Forests for camping, fishing, hunting, fire suppression, wildlife management, and forest management was financed and built by timber purchasers;
Page 22 PREV PAGE TOP OF DOCStates such as Oregon and Idaho use similar methods of financing forest roads;
The vast majority of road work done in the National Forests through the Purchaser Credit Program has been road reconstruction, not new road construction. That means roads have been improved for environmental, as well as public safety reasons.
The fact that purchaser credits are not a subsidy also means that this program is budget neutral and has no deficit impact. But the elimination of this program would have a serious effect on States and counties. Without purchaser credits, States would suffer the loss of about $11 million per year nationwide.
In 1996, the total value of purchaser credits was about $44.5 million. As you all know, States are compensated by the Federal Government, because local governments cannot collect property taxes on federally-owned land. This compensation is in the form of 25 percent payments. By law, it is used to finance public schools and county roads.
This $44.5 million represents just over $11 million that States would not collect if the Purchaser Credit Program were eliminated. Spread across the country this $11 million may not seem significant, but in rural counties that have already seen dramatic reductions in county budgets, the $150,000 or $200,000 this might mean to their budget could be the difference between retaining and eliminating a critical public school program. It is ironic that, with all of the discussion of corporate welfare, the big losers under a proposal to eliminate purchaser road credits would be our rural school children. States and counties that cannot provide for themselves will create an added burden to the Federal Government.
As we consider the financing of roads, it is important to understand the full scope of this issue and all of its impacts, rather than arriving at hasty conclusions.
I thank the witnesses for being here today, and I look forward to having a rigorous discussion about the financing of roads today and in the future.
STATEMENT OF HON. HELEN CHENOWETH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IDAHO
Page 23 PREV PAGE TOP OF DOCThank you Mr. Chairman. Good morning, I would like to begin by thanking the chairman for his commitment to our National Forests.
Mr. Chairman, attempts are being made to target the National Forest Service roads program. The Clinton administration has proposed that $55 million be cut from the fiscal year 1998 budget from the U.S. Forest Service road credits. Of the $55 million, $50 million is to be eliminated as purchaser credits. This news is disturbing.
Additionally, I understand that Representative John Kasich
(R-OH), chairman of the House Budget Committee, has gone so far as to target the logging roads program as an example of ''corporate welfare.'' With all due respect to my esteemed colleague and friend from Ohio, this attack is purely false.
Mr. Chairman, purchaser road credits are not a form of corporate welfare or subsidy. If anything, purchaser road credits are the exact opposite. They are important to Idaho's school children and I am adamantly opposed to this misguided effort.
The Purchaser Road Credit construction cost estimates done by the U.S. Forest Service on timber sales are fair and if anything, put more burden on the purchaser. In fact, the purchaser is often forced to carry the cost over several years.
In addition, real costs may often exceed the value of the credit. For example, in the Caribou National Forest near Pocatello, ID the Forest Service estimated road work cost on the Crystal Creek Timber sale at $85,620. However, the total amount of purchaser road credits allowed for the purchaser was $72,970. This $12,650 deficit--15 percent of the total--is a cost to the purchaser, not the taxpayer.
Mr. Chairman to end purchaser road credits from the Federal budget will eventually make the Forest Service more dependent upon Congressional discretionary funding. Additionally, at the same time it will reduce gross receipts to the Treasury and in turn reduce revenue-sharing payments to counties.
Page 24 PREV PAGE TOP OF DOCIn fact, there is no net gain to the Federal Treasury. This is an unnecessary change, and an undue burden to counties with large areas of National Forest lands within their boundaries.
Mr. Chairman, the issue of purchaser road credits are being used as a political tool to kill the Federal road and timber programs. By allowing this debate to continue, Congress will be contributing to the further degradation of our Nation's national forest assets and resources because if there is not a purchaser to do the work, roads will not be properly maintained and the public will lose access; and to loss of millions of dollars in revenue sharing which is badly needed for schools and roads; the continued shifting of monies from local economies to the Federal Government.
This is a bad plan and one that I will fight.
Thank you, Mr. Chairman.
PREPARED STATEMENT OF HON. CHARLES W. ''CHIP'' PICKERING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI
Thank you Mr. Chairman. I would like to thank the panel for their in-depth analysis on the issue of forest roads financing. This study is a testament to the previous success of the forest roads program. This program is not only important to the timber industry in my rural district in Mississippi where timber sales have a significant impact on the stability of the local economy, but also to the local schools, which receive a portion of these funds.
I believe opponents of this program do not understand the importance of building and maintaining roads in our national forests. these roads are not used solely for logging purposes, but also for public access for wildlife and fisheries projects and fire protection.
Given the importance of the forest roads program, it is my hope that Congress will appropriate the necessary funds for the program's success. I believe that economic studies, like the one we will discuss in this hearing today, are the key to gaining necessary support in the 105th Congress and allow us to pass legislation to continue a program that truly works. We cannot allow a program that serves as an efficient and effective mechanism, while also aiding our local schools, to be eliminated.
Page 25 PREV PAGE TOP OF DOC
The CHAIRMAN. Mr. Chairman, if I may, just one question. Doctor, would you go over again, for the understanding of this committee and especially Mr. Brown, that this is not a subsidized program, that it does not cost the taxpayer an additional $40. Would you please go through that carefully again?
Ms. KOCH. First of all, let me just start by saying that the cost estimates that become the allowable purchaser road credit that we'll talk about in 2 seconds, they are done 2 to 3 years prior to the sale. So, I just want to make clear that they are all added up outside of the sale, away from the purchaser--kind of not in the sale context. So, that helps to ensure that there's no undue influence on the cost estimates.
Now, if we say that the market value--you want me to go through this chart again, right? We say that the market value of the timber to the purchaser is $100. These are just hypotheticals again. And we have a purchaser road credit program. The purchaser is reimbursed for the cost of the road. So, if the cost of the road were $40, he would get a purchaser road credit of $40, and the net value of the timber to him would be the market value minus the cost plus the credit, because that's the net value. So, he would bid that net value, which would be $100.
The net receipts to the Government, however, would be the $100 gross receipts in, minus the $40 purchaser road credit out. So the net receipts would be $60.
In the absence of a purchaser road credit program, these sales can continue, it's just that the purchaser will have to reflect the cost of the road in his bid because, even though the market value of the timber to him if $100, if he has to spend $40 to get to it, he can't bid $100 because that's a loss. So, anytime you have to procure a resource, you're going to reflect that in the price you'll pay for input.
So, what happens in the absence of a purchaser road credit program is that here's the $100 market value, minus the cost of goods sold basically, which is this $40 of road, and he bids the $60. In this case, there's no credit back. His gross bid and his net bid are basically the same, there's zero-credit. So, again, the Government receives $60. In either case, they receive $60.
Page 26 PREV PAGE TOP OF DOC I don't know if I'm being very clear on that. I'll be glad to do it again.
The CHAIRMAN. Well, you're perfectly clear. I guess the taxpayers don't pick up the $40 in addition, right?
Ms. KOCH. No, they don't. It seems like they do if you just look at with purchaser road credit program, but what you have to consider is that in the absence of the program the bids are not going to be as high as they are with the program. So, it does seem here like the taxpayer is out $40, but what you don't see when you just look at the purchaser road credit program--is that if there was no purchaser road credit program, the bid prices for the timber would be lower, and they would be lower by the amount of the road cost, and that, is what we don't see at first glance when we look at the purchaser road credit program. We don't realize that purchasers are going to lower their bid to reflect the cost of resource procurement. In any business I think this would happen.
The CHAIRMAN. Do you understand it now?
Mr. COMBEST. Mr. Farr.
Mr. FARR. Thank you, Mr. Chairman. I think Dr. Koch noted that the leftover roads had a lot of purposes, and it seems to me that there's no consideration in these roads at the outset for those other considerations. I mean, you don't ask Fish and Wildlife to come in and plan the road, or recreational users to plan the road. So, the purpose of the road is one thing, and the use of it after it is built is secondary, is that not correct?
Ms. KOCH. Well, I think when the surveys are done, they have in mind a purpose, when that asset is left behind to the Government, what it will be used for. If it's in a certain area, a campground kind of plan, they'll have that in mind when they do it. Sarah went through a lot of that process.
Ms. DUCICH. When the Forest Service is planning for a road, the road is intended to meet its overall forest management plan each National Forest has a management plan, a roads plan.
Page 27 PREV PAGE TOP OF DOC Most roads are built with public access in mind, and so they are built to a standard of public access. This is different than most timber sale programs.
Mr. FARR. If, indeed, that is the purpose, then why aren't the other user groups charged or given credit for that? I mean, why aren't they in here supporting the program, and paying for it?
Ms. DUCICH. We didn't look at that.
Mr. COLLENDER. Without trying to sound like we're evading the question, that is a bit beyond what we looked at for this particular study. We just tried to look at the purchaser credits.
Mr. FARR. What percentage of the totally harvested timber in the United States is under this road program--private timber forests, State forests?
Ms. DUCICH. The Forest Service road, the timber program is significant--I'm not quite sure----
Mr. FARR. Let me put it the other way. If you don't have this road program, what do they do on other forests? What do they do on State forests?
Ms. DUCICH. They build roads on State forests. They build roads on private land. We did look at that and, as----
Mr. FARR. Who paid for those?
Ms. DUCICH. In my opening statement, what I said was we looked at State programs and Federal programs, and there are two methods of recovering costs. The State of Washington and the Bureau of Labor Management build in the cost into the price of timber. The price is lower and they recover their road cost over the life of the sale.
The State of Oregon and the State of Idaho, use a similar purchaser credit, development credit, similar to the Forest Service that allows purchasers to recover their costs in the first couple years of the sale.
Page 28 PREV PAGE TOP OF DOC Mr. FARR. I guess I disagree with the premise that without these roads you're not going to have timber harvests. I think you do have timber harvests. In other areas where there aren't these roads, you also have in--forests that I represent, they don't harvest by going in roads, they use helicopters because the area is very sensitive and they won't allow them to build roads into the forests.
Ms. DUCICH. There is nowhere in our report where we say that without the purchaser credit they would not build roads. We are saying that there would be no difference in receipts to the Government with or without the Purchaser Credit Program. There will still be roads built. The bid prices will be lower and, therefore, the net receipts to the Government would be the same. As Dr. Koch said, there would be two impacts. One would be lower payments to States and counties, which include purchaser credit as part of the formula for their payment. The second impact would be one small businesses that are in the program, it would be harder for them to access capital and some of them may be driven out of the program.
Mr. FARR. And those small businesses don't cut on other forests without this program?
Ms. DUCICH. They may. The Forest Service does manage a fairly significant portion of the timber sale program in the United States. So, to the extent that that is their market, they would be affected
Mr. FARR. Thank you. Thank you, Mr. Chairman.
Mr. COMBEST. I need to make certain for the record and for Members, there's a number of questions this panel may not be able to answer because we asked them to come specifically on this report, which they did. There's a number of areas that are going to be outside of the scope. That doesn't mean that those questions aren't answerable, and it certainly is not any reflection on this panel. But as well to respond to the gentleman's question about why aren't those other people who use these, that have no direct impact, here supporting it. This is the only panel today. We can certainly solicit questions from other groups, but that was not the purpose of the hearing. The purpose of this hearing was specifically on this report, and I just need to reemphasize that for the record. Mr. Doolittle.
Page 29 PREV PAGE TOP OF DOC Mr. DOOLITTLE. Dr. Koch, let me see if I understand what you're saying. The cost of building these roads is going to be collected either through the purchaser credit that we have now, or through the reduced amount paid for the timber sale contract, is that correct?
Ms. KOCH. That's correct.
Mr. DOOLITTLE. So, when I hear even colleagues of my own party misrepresent that this is a terrible corporate subsidy, did your findings conclude that this was a corporate subsidy or corporate welfare?
Ms. KOCH. No. My findings support the statement that with or without purchaser road credit, there will be timber sales, there will be roads, and net receipts to the Government will be the same.
I think in any business you are going to reflect the cost of production in the amount you would be willing to pay for input and in your final product price. I think this is not different than that. I just think you are going to reflect the cost of production in what you'd be willing to pay for input, and that's simply what I'm saying here.
Mr. DOOLITTLE. Sure. No, I understand what you're saying. It's very clear that this is not something that taxpayers are paying for.
Ms. KOCH. No, it's not. It seems like a cash out when you look at the credit, but if you look at it outside of that context where there is no purchaser road credit, purchasers are going to have to reflect the cost in their bid to the Government. It wouldn't make sense for them to pay $100 if they have to pay $40 to get to the resource, that's just not good business.
Mr. DOOLITTLE. Right. Now, let me see if I further understand then what the effect of the Clinton administration's proposal to eliminate the Purchaser Credit Program will be. You will then go to a system where, instead of recovering the road cost in approximately the first year or so, you will be forced to recover those costs over the entire life of the timber sale contract, is that correct?
Page 30 PREV PAGE TOP OF DOC Ms. KOCH. That's correct.
Mr. DOOLITTLE. And the life of that timber sales contract could run 2 or 3 years. So, instead of the first year, 2 or 3 years. Furthermore, taking your example there, where with the purchaser credit the bid is $100, and without the credit it is $60, and since the 25 percent payment to counties and schools is based on the gross receipts, you will therefore reduce substantially the payment to those cities and counties because you have reduced the gross receipts, is that correct?
Ms. KOCH. That's correct.
Mr. DOOLITTLE. So then could the Clinton administration be proposing something that disadvantages small timber purchasers and other small businesses in the timber industry and that disadvantages rural schools and counties?
Ms. KOCH. Well, the fact of eliminating the purchaser road credit----
Mr. BROWN. Point of order, Mr. Chairman. That's a leading question. [Laughter.]
Mr. DOOLITTLE. I don't believe that's a point of order in the committee, is it, Mr. Chairman? I just want to get this across. This is absolutely outrageous, that the administration, which claims--it's phrase used to be ''putting people first''--is advancing a proposal that is going to have direct negative consequences and impact upon small businesses and upon rural counties and schools.
I have a number of these timber areas in my district, and when I hear my own Republicans even--I'll be bipartisan now, George--when they get on their horses and call this corporate welfare, that is flat-out wrong. It's a misstatement, a complete misstatement, and the evidence you're producing today completely substantiates that that's a misstatement. This is nothing more than the cost of doing business. The timber purchaser credit is a way of making it easier, or leveling the playing field if you will, for small businesses to compete with big businesses, and it's a way, frankly, to recognize the impact that the vast amounts of Federal ownership have on our rural counties where so much of the land is removed from the tax base, and at least we have the timber receipts payment which, through this asinine change in the law, will be reduced significantly. Thank you, Mr. Chairman.
Page 31 PREV PAGE TOP OF DOC Mr. COMBEST. Mr. Goode.
Mr. GOODE. I've looked at table 8, and could you tell me, is Virginia in region 8 or region 9?
Ms. DUCICH. Virginia is in region 8, the southern region.
Mr. GOODE. All right. I'm interested in what localities in Virginia receive money, and how much. If you could provide me that over, say, the last 5 years, particularly. I could give you the localities.
Ms. DUCICH. Sure, we could do that for you.
Mr. GOODE. Nelson County, Albemarle, Bedford, Franklin, Patrick, and Campbell.
Ms. DUCICH. We can get that for you.
Mr. GOODE. Thank you. That's all I've got.
[Ms. Ducich responded for the record:]
There are two National Forests in Virginia; the George Washington National Forest and the Jefferson National Forest. The following shows the value of purchaser credit that was part of contracts awarded in fiscal years 1992 through 1996 to these forests.
(Purchaser credit established in thousands of dollars)
1992, $177.0; 1993, $297.3; 1994, $158.6; 1995, $116.3; 1996, $117.6.
The George Washington National Forest and the Jefferson National Forest cover 1,654,222 acres in Virginia, of which 19,586 acres are in Nelson County and 18.810 acres are in Bedford County.
Mr. COMBEST. Mr. COMBEST. Mr. Smith.
Mr. SMITH of Michigan. Do you support corporate welfare for the forest industry? No, erase that question. [Laughter.]
Mr. SMITH of Michigan. I mean, I think the question is, No. 1, on local reimbursement, there's no different if you give the locals 6 percent of the $100 or 10 percent of the $60, so I think we're going to do what we want to in what's fair in terms of local reimbursement.
Page 32 PREV PAGE TOP OF DOC And so the question, I think, comes to those roads that have specifications that are greater than what is needed to harvest that timber. Is there any cases where the road costs are in excess of the market value of the timber?
Ms. DUCICH. The road costs are in excess of the market value of the timber. We didn't go contract-by-contract. What we found overall----
Mr. SMITH of Michigan. Would there be any instances where the road costs, because it's a recreational hardtop road being built into the forest area, where the credits would exceed the value of the timber in that particular contract?
Ms. DUCICH. Under the procedures that Forest Service has, if the road costs are going to exceed the value of the timber, what they're going to be receiving for that timber,the Forest Service won't be making that sale.
Mr. SMITH of Michigan. I'm not sure that that is correct. Is there anybody on the committee----
Ms. DUCICH. There's also a whole concept known as ineffective purchaser credit. There is a base rate, a minimum cash payment, that a timber purchaser must make before they can utilize their purchaser credit.
Mr. SMITH of Michigan. Excuse me for interrupting. Did you examine the road specs for these forest sales against the road specs for private-owned timber sales?
Ms. DUCICH. We interviewed people in private companies, but we did not go in and look at specifications. I think it cuts two ways and this is from the interviews that we did. One is that many claim that the Forest Service builds roads to a higher standard. If they are requiring a higher standard on timber roads, they should be paying for it out of Federal appropriated dollars. The timber purchaser should not be paying for that.
Mr. SMITH of Michigan. But that's not the way it works, right?
Ms. DUCICH. Last year, it was about half a million dollars that they spent. In 1996, they spent about half a million dollars for higher standards for roads.
Page 33 PREV PAGE TOP OF DOC But, second, the Forest Service is trying to bring roads in on the cheap. They are often lowering the surfacing, making it less expensive, so they can bring the roads in on the timber sale, so the timber sale can carry the cost of the road.
So, one private company I interviewed, I asked them how much they spent on road reconstruction, and they said, ''Well, we don't reconstruct our roads, we construct our roads to be permanent and then we maintain them.'' In the Forest Service they build the roads to a standard that they can afford--and then I don't know that they maintain them very well. The maintenance budget has declined on this as well, and so I think it's difficult for them to maintain them and they end up doing a lot of reconstruction.
Mr. SMITH of Michigan. Do private roads have to follow the same environmental requirements with a private contractor, I suspect, as the specs, road specifications, for going into our U.S. Forests?
Ms. DUCICH. Roads on private lands have to follow whatever rules that private builders have to govern private ownership of land. But they do not have to go through the procedural steps that the Forest Service has to go through to do a sale, and they don't have the public comment period, and they don't have a number of the other steps the Forest Service does.
Mr. SMITH of Michigan. But they would have to meet the same environmental standards.
Ms. DUCICH. I think there are additional environmental standards that the Forest Service has to meet.
Mr. SMITH of Michigan. I have no more questions, Mr. Chairman.
Mr. COMBEST. Ms. Stabenow.
Ms. STABENOW. Thank you, Mr. Chairman. If I might go back to the question of comparing purchaser credit to other programs. I don't know if you looked at other programs, but I know that the Bureau of Land Management, for instance, does not subsidize their road construction, logging road construction. Have you looked at that at all? What's the impact of that? I know that is considered a cost of doing business under their program. Does that disenfranchise small business? Have you looked at that at all?
Page 34 PREV PAGE TOP OF DOC Ms. DUCICH. We looked at the Bureau of Land Management. We looked at the States of Oregon, Washington, Idaho. The Bureau of Land Management requires the recovery of cost as part of the bid price, so they lower their bid price and they recover their cost over the length of the timber sale.
The Forest Service, we wouldn't call it a subsidy, we'd call it a recovery, because they allow timber purchasers to recover their costs more quickly in the first couple of years of the sale.
The difference is the Forest Service sale can often take up to 5 years whereas with the timber sales in the Bureau of Land Management, the sales are restricted to being, at most, 36 months long. So, purchasers that are involved in the Bureau of Land Management sales, which tend to be smaller than Forest Service sales and tend to be shorter than Forest Service sales, may not have as large an impact on that.
Ms. STABENOW. Did you look at all at the concern of small businesses not being able to have access because of that kind of procedure?
Ms. DUCICH. We didn't look at who was purchasing from the Bureau of Land Management, so we don't know if they are precluded from participating in the Bureau of Land Management.
Let me add also that the State of Oregon and the State of Idaho have a credit similar to the Forest Service, that allows purchasers to recover their costs in the first year or two of the sale.
Ms. STABENOW. Thank you.
Mr. COMBEST. Mrs. Chenoweth.
Mrs. CHENOWETH. Thank you, Mr. Chairman. I want to congratulate the three of you on this outstanding presentation. It is exceedingly and exceptionally well done, and I want to thank you.
You begin to compare State road credits--which I'm from Idaho, and so I was familiar with the fact that in Idaho they have purchaser road credit also--but then to also clarify the record, when a private person is cutting timber on his own land and he has to punch a road in, the cost of that road goes against the cost of doing business, and it becomes then a business expense, doesn't it?
Page 35 PREV PAGE TOP OF DOC Ms. DUCICH. Right, that's a cost of doing business, exactly.
Mrs. CHENOWETH. I wanted to ask you, how do road densities in National Forests generally compare to road densities of other forest owners?
Ms. DUCICH. We did look at that. There are 380,000 miles of roads on the National Forests, excluding wilderness areas--that's about 1.6 miles of road per square mile of National Forest. Some of the private lands that we surveyed can be up to 7 to 8 miles of road per square mile, but that's not a fair comparison. I think areas on the National Forests with timber sales in it can be up around 3 or 4 or 5 miles of roads per square mile, but on the overall system, it's 1.6 miles of road per square mile.
Mrs. CHENOWETH. Also, to clarify other statements that have been made here, isn't it true that under the National Forest Management Act, that roads can be constructed on the public domain, under Forest Service administration, that can immediately be torn out right after the sale?
Ms. DUCICH. We did not look at temporary roads, and there can be temporary roads as part of the sale. They have to be part of the timber sale plan and they have to be approved of by the Forest Service, but we did not look at temporary roads as part of the study.
Mrs. CHENOWETH. Let me go to another subject. The Clean Water Act imposes the same standard on private owners as it does on contractors working in the public domain, doesn't it, or on the Forest Service?
Ms. DUCICH. I think we got outside my expertise there.
Mrs. CHENOWETH. You've discussed how new road construction and reconstruction are financed, but maintaining roads is obviously very important to ensuring public safety and preventing adverse environmental effects. How is the maintenance of these roads financed?
Ms. DUCICH. Once the road is built, the Forest Service does pay for the maintenance of roads out of Federal appropriated dollars. In the past, when the timber sale program was larger, the Forest Service has estimated that about 40 percent of maintenance on the roads was paid for by timber purchasers. As the timber sale program has declined, that naturally has declined as well.
Page 36 PREV PAGE TOP OF DOC Timber purchasers do not receive purchaser credits for maintenance work that they do on roads, so there is no accounting mechanism to track how much was done exactly. But as the timber sale program has declined, this maintenance has declined as well. The Federal funds for maintenance of forest roads has also declined by about $5 million since 1991. That's putting greater and greater pressure on the Forest Service to maintain roads, and they have an increasing backlog of road work and maintenance work that they have to be doing.
Also, roads that aren't maintained tend to erode more quickly, and there is more and more pressure to push that into the reconstruction level, so you're seeing more and more reconstruction as well.
Mrs. CHENOWETH. And isn't it true that last year the 104th Congress passed a law that enabled the Forest Service to charge for access into the forests by all users, including those people who would use the roads? I just wanted to follow up on the record an inquiry that Mr. Farr had.
Ms. DUCICH. I wasn't aware of that, but we can check that out and verify that.
Mrs. CHENOWETH. Dr. Koch, given the conclusions of your analysis, in your opinion, is there any advantage to eliminating--any at all--to eliminating purchaser road credits?
Ms. KOCH. Our analysis was without any position, without any advocacy, so I can't say that I unearthed any advantage at all. Our analysis was, as I said, more without any advocacy.
Mrs. CHENOWETH. We've spent a lot of time this morning talking about timber purchasers financing forest roads. What about the recreationalists, and others? They receive the benefit of these roads, and right now I think that they are being enabled by the work that we did last year, to also pay for the road systems, but 1 use of the roads that won't be paid for in direct subsidies, but in saving the resource, of course, is fire suppression, and that's of great value to us all.
Ms. KOCH. The roads are used for fire management and other forest management programs that are environmentally valuable.
Page 37 PREV PAGE TOP OF DOC Mrs. CHENOWETH. Thank you, Dr. Koch. Thank you, Mr. Chairman.
Mr. COMBEST. Mr. Berry?
Mr. BERRY. Mr. Chairman, I don't have any questions at this time.
Mr. SMITH of Michigan. Mr. Chairman, could I ask one more question?
Mr. COMBEST. You may, as soon as I'm finished. Let me go back just a moment here and ask about this--to make sure I understand the calculations correctly. The road costs are $40. The 25 percent payments to counties is based upon not the timber sale, but on the road cost, is that correct?
Ms. KOCH. Yes. Excuse me--based on gross receipts.
Mr. COMBEST. On gross receipts from the sale?
Ms. KOCH. That's right. So, on this chart, they would be based on the column that says ''Bid''.
Mr. COMBEST. On gross receipts.
Ms. KOCH. Right. That is what is paid to the Government by the purchaser.
Mr. COMBEST. And in your--well, how much would be the gross receipts?
Ms. KOCH. The gross receipts would be the bid, with the purchaser road credit, I, as a timber purchaser, I would pay $100, and this could be----
Mr. COMBEST. It would be based on what you have in your column called ''Bid''.
Ms. KOCH. That's correct.
Mr. COMBEST. It would be based on $100, so they would receive $25.
Ms. KOCH. That's correct.
Mr. COMBEST. And that's paid by the Government to the county.
Ms. KOCH. That's correct.
Mr. COMBEST. And without the purchaser credit, if the bid was $60, they would receive their 25 percent based in the $60.
Page 38 PREV PAGE TOP OF DOC Ms. KOCH. That's right, that would be $15. When the costs have to be reflected in the bid, the bid is lower and, therefore, the formula upon which payments to States and counties is based. They are calculated on a lower base.
Mr. COMBEST. So, in this instance, you are talking about $15 versus $25.
Ms. KOCH. That's correct.
Mr. COMBEST. All right. Now, there would be a budget savings on that amount, wouldn't there be?
Ms. KOCH. It seems to me that there would be because payments to States--if these numbers were real, which they are not, there would be a savings of $10.
Mr. COMBEST. Right. But the agreement to make those payments to counties is based up--I'm assuming--this is the question--is based upon the fact that within that county there is a lot of Federal land, or there is some Federal land, that is not taxable.
Ms. KOCH. That's correct.
Mr. COMBEST. In the instance when there is--what exactly is it called where the--if you're working on the credits, let's say that would prevent a small company from having to pay an up-front cost for the road construction.
Ms. KOCH. Well, they would pay the up-front cost, but then they would be immediately able to use those costs to buy timber that they could sell and get revenue from.
Mr. COMBEST. Right. So, the receipts to the county would not be impacted by that. I mean, they're going to get their money in the same timely fashion regardless of how the timber purchase is made?
Ms. KOCH. Yes, except that they're going to get a different amount if the timber purchase is made without purchaser road credit and the bid price is lower. I'm not sure I'm answering your question.
Mr. COMBEST. You may have, and I'm not sure I understood the answer if you did.
Page 39 PREV PAGE TOP OF DOC Ms. KOCH. With purchaser road credit, any purchaser can immediately take those credits, buy other timber, and have some revenues to support the cost of construction, the ongoing cost of construction. He'll bid a price that reflects the purchaser road credit, the payments to States will be based on those receipts.
Without the purchaser road credit program, the bid price will be lower and the payment to States will be based on this lower bid price. In either case, I believe the payments are made with the same timing. The payments for the timber sale are made at the same time, but it's just it will be a different calculation.
Mr. COMBEST. I would yield the balance of my time to Mr. Smith for his question.
Mr. SMITH of Michigan. How long after the road is built is the credit issued? Did you look at that?
Ms. KOCH. The credits can be issued as soon as road construction costs are incurred.
Mr. SMITH of Michigan. And how long does it take the Government to go through that bureaucracy and red tape?
Ms. DUCICH. There's an engineer on-site, they generally check the work at least weekly.
Mr. SMITH of Michigan. So you don't know if it's a year?
Ms. DUCICH. Oh, no, I don't think it's a year. No.
Mr. SMITH of Michigan. Do we have other people from the Forest Service so maybe we can--how long after the credit is issued is the credit used?
Ms. DUCICH. Now, that's another question.
Mr. SMITH of Michigan. Did you look at that in your study?
Ms. DUCICH. We did not look at that specifically. We do know that they do have to make a minimum cash payment for the timber purchase before they can use the purchaser credit. So, they're getting some cash for the sale at least, it's not all roads. But, generally, they use the purchaser credit as quickly as they can.
Page 40 PREV PAGE TOP OF DOC Mr. SMITH of Michigan. Yes, but I'm just wondering whether it's 1 year, or 2 years, or 3 years.
Ms. DUCICH. No, no, no, no.
Mr. SMITH of Michigan. You're guessing it would be shorter.
Ms. DUCICH. No, I'm certain it's 1 or 2 years. We also looked at the transferability issue which is unique to the Forest Service. In the Forest Service, a purchaser can either use the purchaser credit to buy timber on that sale or another sale within the same National Forest. And on average, over the last 5 years, about 37 percent of the purchaser credits have been used to purchase timber on another sale. So, that has been--so I would assume that is a quick acceleration of being able to use the credit, so I think they do it rather quickly.
Mr. SMITH of Michigan. Mr. Chairman, I've driven on some of the arterial roads that were built with this credit, and they are very wide roads. They have a stripe down the middle. There's a lot of traffic. It seems to me that some of these roads could very well be paid for, because of so much public use out of the highway trust funds. Are there a lot of arterial roads that are part of the transportation----
Mr. COMBEST. The gentleman's time for his one question has expired and would be recognized on his own. There are a number of questions which Members may have--the gentleman from Michigan said some of them--that I think the Forest Service could better answer, and we'll certainly submit those to them.
Mr. BROWN. Thank you very much, Mr. Chairman. The gentlelady from Idaho made reference to what would happen to a private forest owner if they wanted to log, and indicated that they would pay for the cost of the road and the privately owned forest, and would recoup the money from the sale of the forest products.
What is the situation if the Forest Service owns--it's publicly owned forest--and the cost of putting the roads in--obviously, in the private case, they wouldn't build a road if they didn't recover more than the cost of the road--but in the case if the Forest Service sold the logs, it was on Forest Service property, and the road cost more than the net proceeds from the sale, they could still go ahead and log that, could they not? We have examples of below-cost timber sales in every forest in the country.
Page 41 PREV PAGE TOP OF DOC Ms. DUCICH. We didn't look at the issue of below-cost timber sales. We did not look at timber sales in general. What we did look at was the value of the purchaser credit compared to the value of the timber on a harvest, and what we found is it's about 8 percent of the total value of the timber harvested. So, on the average, we're not seeing timber paying for roads 1 to 1, you're seeing it at about the 10 percent level.
Mr. BROWN. Well, I understand that on average you would get that kind of results, but wouldn't this allow for the logging of those exceptional, nonaverage forests, where it would cost more to get into the forest and get the logs out--it would cost more to build the roads than the logs would yield, but the cost of the road is a wash. It doesn't matter what it costs because they get the credits for it. Am I misinterpreting this?
Ms. DUCICH. Again, we didn't look at the below-cost timber sale issue but, from our discussions, what we understand is that there is a minimum cash price that the timber purchaser has to pay on every timber sale, and they cannot use the purchaser credits unless they have met that minimum bid price. And so the Government is not realizing revenue on every sale, and the road costs cannot exceed the cost of the value of the timber. I think the process for preparing the sale puts in safeguards against having road costs exceed the value of the timber.
Mr. BROWN. Well, I'm just reciting information that I've received from various sources, that we're still making, or have been making, below-cost timber sales that is not sufficient to pay for all the costs incurred by the Federal Government, and even the costs that they calculate do not include the intangibles, such as either cost or benefit, as far as that's concerned. You can't include the future benefits of a logging road that's left there in the forest. Hikers may use it, or something else. Neither can you adequately quantify the cost of the damage of, we'll say, runoff down those trails that destroy--those logging roads, which destroy surrounding environmental amenities, such as riparian habitat and that sort of thing, which happens also. Those costs are not figured into the formula by which the Forest Service decides whether the sale is a below-cost or not-below-cost, am I correct?
Page 42 PREV PAGE TOP OF DOC Ms. DUCICH. Right, that is correct.
Mr. BROWN. I'm also informed that it is customary for the Forest Service not to use the actual cost of the road, but to make an estimate based upon their engineering studies and so forth, of what the highest cost would be, and that generally is about perhaps 30 percent higher than the actual cost of the road. Did you receive any information that would indicate that's the case?
Ms. DUCICH. Not on the highest cost of the road. They used cost guidelines that are similar to what the Bureau of Land Management uses to estimate the value of the road work performed there. They use the Bureau of Indian Affairs--State timber programs use the same kind of cost guidelines to estimate the value of the road work performed. So, it is an estimated value of the road work, but they also use the purchaser election program when they perform the road work themselves, to check. They expect that that's going to be somewhat higher because they pay higher wage rates, but they do use that as a check.
Mr. BROWN. Did you actually compare the cost of roads as completed with the cost of the estimates that were made?
Ms. DUCICH. We did not do that. No, we did not go in and look at the----
Mr. BROWN. So you can't verify whether the information that the estimate is generally 30 percent higher or not, can you?
Ms. DUCICH. We did not look at contracts.
Mr. BROWN. Thank you very much.
Mr. COMBEST. I would suggest that if the gentleman wishes to pose some questions to the Forest Service, the subcommittee would be happy to do that and, obviously, that is an issue that we should deal with them on, but it's my understanding that they do determine the minimum bid price that has to be met, that is correct?
Ms. DUCICH. That's correct, yes.
Page 43 PREV PAGE TOP OF DOC Mr. COMBEST. So, if they are bidding at lower than actual receipts, we maybe should talk to the Forest Service about that.
Mr. BROWN. Thank you, Mr. Chairman.
Mr. COMBEST. Mrs. Chenoweth.
Mrs. CHENOWETH. Mr. Chairman, I have no questions at this time. Thank you.
Mr. COMBEST. Mr. Smith, do you have other questions?
Mr. SMITH of Michigan. Mr. Chairman, no, but it seems to me that what is very, very important is somehow to determine the value of these roads for recreation, for firefighting, for normal public transportation, if we are going to assess the true value of these roads as opposed to what is the most we can get from timber sales, and so that would be a key to better help me analyze the value of whether it's a credit or whether it's an outright bid. The key is the kind of specifications that are required for that particular road, and how much in excess are they of the minimal amount required to get the timber out. Thank you.
Mr. COMBEST. Ms. Stabenow.
Ms. STABENOW. No questions.
Mr. COMBEST. There may be other questions that come from this, and we would hope that we might be able to contact any or all of you. The Chair would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the subcommittee. Without objection, it will be so ordered.
I appreciate very much the work you've done. If the Members of the subcommittee have not seen the report, it is included in the material, and I would certainly suggest you look at that. And I'm sure that other questions that we may raise with others than yourself may cause us to need to come back for further clarification.
Mr. COLLENDER. Anytime, we'd be happy to be of help.
Page 44 PREV PAGE TOP OF DOC Mr. COMBEST. Again, I appreciate very much the work put in on this, the time you've spent on it and, with no further questions, the hearing is adjourned.
[Whereupon, at 11:30.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
TESTIMONY OF SARAH E. DUCICH, DIRECTOR, FEDERAL BUDGET CONSULTING GROUP, BURSON-MARSTELLER
Our study focused on the financing issues associated with the construction and reconstruction of roads and bridges on the national forests. There has been considerable interest about this issue lately as a part of the overall issue of the Forest Service's timber sale program. Specifically, there have been many questions about the financing mechanisms for road construction and whether such mechanisms represent a subsidy to the timber industry.
In looking at these questions, it is first important to understand the financing mechanisms used by the Forest Service to construct and reconstruct roads. There are a number of misconceptions about what these mechanisms are and about the roads program itself.
There are approximately 380,000 miles of roads on the national forests. Excluding wilderness areas, this is about 1.6 miles of road per square mile.
Most of these roads were built and financed by timber purchasers but are now used for a wide range of activities on the national forests, including recreation, firefighting, and management of the national forest system.
Very few of these roads will remind you of Pennsylvania Avenue or even Highway 29. Most are single lane, unpaved roads.
Nearly three-quarters of the roads, 281,500 miles, are local roads which provide access to specific activities and sites: campgrounds, trailheads, logging areas, mineral development and administrative sites. These are generally single lane, unpaved--often dirt--roads.
Nineteen percent are known as collector roads, generally single lane, gravel roads which provide access from major forest roads or public highways.
Page 45 PREV PAGE TOP OF DOCOnly 7 percent of the roads are major roads--generally multilane, paved roads. These roads, known as arterial roads, form the major transportation network to and across national forests.
The Forest Service basically has three ways that it finances road and bridge work in the national forests.
First, annual appropriations. Annual appropriations pay primarily for recreation roads and general purpose roads. Appropriations also pay for timber management roads, where the costs cannot be attributed to a single timber sale.
Second, purchaser credits. The overwhelming majority of road work on the national forests, 80 percent since 1991, has been financed by timber purchasers as part of timber sale contracts.
The Forest Service keeps track of the value of the road work performed by the timber purchaser and awards the purchaser with credits equal to the value of road work that has been completed.
Within certain limitations, the timber purchaser can use the credits to pay for timber that is being harvested--either on that sale or another sale within the same national forest.
Purchaser road credits are not Federal spending but simply an accounting mechanism to allow the Forest Service to keep track of this in-kind exchange.
The third method of financing is the purchaser election program. Less than 4 percent of road work has been done under this program since 1991.
Since 80 percent of road work is financed by timber purchasers in exchange for purchaser credits, much of the focus about the roads program has been on this financing mechanism. I would like to make a few brief points about the purchaser credits.
As I just stated, purchaser credits are not Federal spending. They are a contract mechanism that govern the speed at which timber purchasers can recover their costs.
All of the State timber sales and Federal timber sales we reviewed allow timber purchasers to recover the costs of the road work that they perform. The difference is in the speed of recovery.
The Bureau of Land Management and the State of Washington require that timber purchasers recover their costs as part of the price that they pay for the timber. This means that the purchaser recovers their costs over the entire length of the timber harvest.
Page 46 PREV PAGE TOP OF DOCOregon and Idaho timber sale programs use a purchaser credit system similar to the Forest Service, allowing purchasers to recover costs in the first year or two of the timber harvest.
The Forest Service instituted the purchaser credit system in 1964 to:
Institute more certainty in the payment and recovery of road costs, thereby minimizing the risk for both the timber purchaser and the Forest Service in the recovery of road construction costs.
Protect small businesses who did not have access to capital to finance road work and wait the length of the timber sale, often five years with the Forest Service, before they recovered their costs.
Purchaser credits are extensively used on timber sale contracts:
82 percent of the volume and 89 percent of the value of timber sold under contract since 1992 had purchaser credits as part of the contract.
The purchaser credits were, on average, 8 percent of the value of the timber sold under contract--an average of $29,590 for purchaser credits compared to an average value of $353,278.
As part of this study, we reviewed the spending trends for forest roads. The Purchaser Credit Program as well as the entire forest roads program has declined substantially as the overall timber sale program has declined.
Total spending on road construction and reconstruction (including Federal spending by the Forest Service and private spending by timber purchasers) declined by 47 percent from 1991 to 1996, from $140.9 million to $74.3 million. This decline is reflected in both roads financed by appropriations and by purchaser credits.
Appropriations have dropped from $53 million in 1991 to $27 million in 1996.
The value of road work performed by timber purchasers has dropped from $82 million in 1991 to $41 million in 1996.
Spending for purchaser election roads has been at most $6 million annually.
Reflecting this decline, the amount of road work has declined substantially.
Page 47 PREV PAGE TOP OF DOCIn 1996, the amount of new road construction was 463 miles, a two-thirds decline since 1991. Of this new construction, only 17 miles were financed by appropriations and only one of these miles were for the timber program.
Most of the road work performed was for reconstruction work--that is, improvements and repairs to existing roads and bridges for safety, environmental safeguards, and improved use. This has declined less severely since 1991, by 23 percent. 80 percent is performed by timber purchasers.
Even though the roads program is half of what it was five years ago, there are still proposals to eliminate the program on the premise that it is a subsidy to the industry, which is the issue that Cathy Koch at Price Waterhouse reviewed and will now discuss.
TESTIMONY OF CATHLEEN KOCH, PRICE WATERHOUSE LLP
Price Waterhouse LLP (PW) was asked to analyze the forest roads program (FRP) on the National Forests to determine whether it provided a subsidy to the timber industry. From 1994 through 1996 over 80 percent of timber road work was funded by timber purchasers through the purchaser road credits. Because this large majority of roads built for timber management are paid for through the Purchaser Credit Program, an analysis of the forest roads program necessarily focuses on the Purchaser Credit Program.
In reviewing the Purchaser Credit Program, PW found that the purchaser road credits are a fair representation of the value of the roads built by timber companies and left to the government for recreation, future timber harvests, forest management and other purposes. The contracting and bidding process ensures that the purchaser road credits appropriately reflect the cost of roads necessary to harvest each timber sale; and any subsidy should be eliminated in the bidding process. If there was a subsidy, eliminating the Purchaser Credit Program would be expected to increase federal receipts. However, the administration's proposal to eliminate purchaser road credits acknowledges no increase in receipts.
Page 48 PREV PAGE TOP OF DOCContracting and Bidding Process. When a site is designated for a harvest, there is much planning and preparation that takes place before the cut. On average, it takes 2 to 3 years to prepare a designated harvest area for a cut. There are mandatory examinations of the timber, wildlife, geology, and water to gauge the consequences of cut. Then, an engineering staff begins to survey the planned road system and decide on road standards. The Forest Service uses the information gathered in these scientific and engineering surveys to establish the standards and restrictions for the timber cut, as well as the road system that is required.
The engineers develop plans for the timber roads. These plans, and the auction process, can be described in several steps:
1. The cost of clearing the site and building the roads is estimated. This estimate is formed based on the answers to several questions:
How much land must be cleared to build roads?How will the area be excavated? What type of drainage systems must put in place? Will bridges be necessary?
The total road cost estimate is derived by summing engineers' cost estimates for each of the tasks involved. Sometimes, public work contracts for each task are summed to develop an estimate of the road costs for a timber harvest.
2. The cost estimates become the maximum allowable purchaser road credits and these credits become a part of the timber sale contract, along with harvest volume specifications, other harvest restrictions, and the appraisal price for the timber. This appraisal price becomes the minimum acceptable bid on the sale.
3. The sale is advertised. Potential purchasers have 30 days to submit sealed bids. There may also be an oral auction, in which sealed bids represent minimums.
4. The highest bidder wins the rights to harvest the entire volume of designated timber on the sale. Occasionally, sales are ''assigned'' by the Forest Service in cases in which there are no bidders. The assigned sales always cover the minimum bid set in the contract advertisement.
Page 49 PREV PAGE TOP OF DOCAuction. Data from the Pacific Northwest shows that 97 percent of timber sales in the last three years have been awarded under sealed or open bid auctions.
Auctions provide the most efficient method of identifying the buyer willing to pay the most for a product.
In a market where the value of the timber is well-known (because prices for processed timber are well-known by all potential purchasers), the bid values will be very close to the market value for all bidders, minus any costs incurred to process the timber. If certain costs are reimbursed by the seller in the form of credits these credits will be reflected dollar for dollar in the bid amounts. The bid amounts will reflect the net value of the timber to the purchaser, plus any reimbursements. The amount raised at auction net of purchaser road credits is the same as would be raised without the credits.
Alternatives to the Purchaser Credit Program. In the absence of the Purchaser Credit Program, the timber sales program can continue, but the cost of roads will be built into the timber contracts in the form of lower bid prices. Net payments to the government should be the same under contracts without purchaser road credits. This is, indeed, the estimate reflected in the President's fiscal 1998 budget, which proposes to eliminate purchaser road credits.
The major consequence of eliminating the Purchaser Credit Program will be lower gross receipts and reduced payments to States that are based on these receipts. In fact, the only Federal budget impact from eliminating the forest roads program are a result of lower payments to States and counties.
Another consequence of the loss of purchaser road credits will be a delay in the cost recovery for timber purchasers. Road costs are written off against sales, which may follow costs by one year or more. Under the Purchaser Credit Program, the credits can be used to purchase timber from any national forest in the region, and this current cash value helps to defray the carrying cost of road building expenses. The elimination of purchaser road credits will hurt mostly small timber purchasers, who have the least access to credit. Large timber purchasers can more easily carry road construction costs. Eliminating PRC, therefore, will make it hard for small businesses to participate in timber sales and will reduce competition in the bidding process.
Page 50 PREV PAGE TOP OF DOCRoad Construction and Reconstruction Costs. PW analyzed forest roads construction costs to determine if the costs incurred under the Forest Service program were out of line with non-Forest Service timber programs.
To the extent it is possible, we have attempted to compare costs of road construction within the Forest Service, as well as non-Forest Service forest regions, which include BLM and State forest programs. Oregon and Idaho have road construction credit systems, while Washington State and BLM auction timber without road credits. For our analyses, we have acquired road construction data from the Forest Service, as well as from the Timber Data Company, an independent data collection agency.
Caution must be taken in interpreting the results of data analysis. There are many complex qualitative issues that are not well captured in the timber sales data. We have only attempted to capture the broad trend while trying to control as many variables as possible.
Comparing Forest Service regions with Idaho State programs, the average costs per mile of road constructed and reconstructed are substantially lower for the Forest Service. In particular, the cost for the region 1, which includes Idaho, is one-third less than Idaho State programs.
Cast in per-volume basis, the relationship between the average road costs between Forest Service and State programs is different than the relationship between these numbers on a per mile basis. In terms of volume sold, the road costs for Idaho State programs are now less than in Forest Service region 1 in 1996. (The proportion was 3 1/2 times higher in per-mile basis.) One explanation is that Idaho State Forests had a higher yield than the Forest Service region 1, even though it may be less developed and more costly to build roads in.
Oregon State forests also have substantially higher sits than the comparable Forest Service region 6 (about twice as high in 1996.) The road costs are also 2.7 times higher than in Idaho State forests. However, one must take care in using comparisons between eastern regions like Idaho to western regions like Oregon, because the logging regions east and west of Cascade mountains use different definitions of log scale, which affect the definition of volume of timber.
Page 51 PREV PAGE TOP OF DOCConclusion. Based on our investigation, we conclude that the forest roads program does not contain a subsidy for timber purchasers and provides an efficient and effective mechanism for financing road construction and reconstruction. Net timber sale receipts to the government will be the same with or without a forest roads program.
Purchaser road credits, determined by engineers and advertised in advance of timber sales, do not provide timber purchasers with excessive compensation for road costs. The data on timber roads shows that road costs of timber sales with purchaser road credits are no higher than road costs on timber sales for which purchaser road credits are not offered.
STATEMENT OF THE NATIONAL ASSOCIATION OF COUNTIES
FEDERAL TIMBER RECEIPTS AND AMERICA'S ''TIMBER COUNTIES''
Receipts from Federal timber sales are extremely important to America's ''timber counties''. Under existing law, 25 percent of the gross receipts from Federal timber sales go to the counties from which the timber is removed.
For FY 1995 the U.S. Forest Service timber sale program generated receipts of $695.7 million. It also supported 63,000 jobs and provided $2.2 billion in employment-related income, and $336.8 million in Federal income tax revenues.
Unfortunately, over the past few years, Federal timber sales have declined precipitously, primarily from limitations placed on the Forest Service by environmental considerations and species protection efforts for spotted owls (Mexican and Northern), marbled murrelets, and various species of salmon and other fish resources. In 1987, the timber sale program provided 12.45 million board feet of timber. Ten years later, only 3.65 million board feet were sold. Receipts from timber sales, while substantial, have also dropped dramatically,
from $1.38 billion in 1990 to only $695.7 in 1995. It does not take an accountant to determine the serious implications this has for the budgets of rural timber counties.
New proposals to eliminate ''purchaser road credits'' that the Forest Service provides to timber purchasers to offset some of the costs of reaching the timber would also have serious implications for timber counties. The credit if eliminated would not have the positive Federal budget effect that proponents project. Elementary economics tells us that purchasers will simply bid less for the timber than they would if the credit were in place, to offset their increased costs, and the Federal Government will net virtually the same amount, but because timber counties receive 25 percent of gross receipts, they would receive nearly $12.5 million less under this proposal. The only real losers from this proposal will be timber county taxpayers.
Page 52 PREV PAGE TOP OF DOCCongress and the Forest Service should careful consider the implications of their policies on timber sales, and make every effort to increase the volume whenever and wherever possible. The should also reject any effort to eliminate or reduce purchaser road credits because it will not inhibit bidding on sales, as some environmental groups claim, but in actuality will hurt the ability of timber counties to meet their obligations to their taxpayers and to users of our National Forest resources.
"The Official Committee record contains additional material here."