GAO-01-184R Timber Sale Liability

United States General Accounting Office

Washington, DC 20548

November 29, 2000

The Honorable Larry E. Craig

Chairman, Subcommittee on Forests

and Public Lands Management

Committee on Energy and Natural Resources

United States Senate

Subject: Timber Management: Forest Service Has Considerable Liability for

Suspended or Canceled Timber Sales Contracts

Dear Mr. Chairman:

This letter responds to your request for information concerning the contractual

liability of the U.S. Department of Agriculture’s (USDA) Forest Service under timber

sales contracts that it suspended or canceled to protect threatened or endangered

species. From October 1992 through June 1996, the Forest Service paid $6.5 million

to settle claims on 48 suspended or canceled timber sales contracts. In 1996, we

reported that timber purchasers had filed 73 pending claims, totaling about $61

million, against the Forest Service for suspended or canceled contracts.1 We also

estimated that timber companies could file claims for at least an additional $198

million, depending on the outcome of numerous court cases. At that time, we

recommended that the Forest Service finalize new regulations for canceling timber

sales contracts and a new standard timber sales contract that it had been developing

since the late 1980s. The regulations and contract would have limited the

government’s liability on canceled or suspended timber sales contracts and

redistributed the risk between the government and the purchaser.

This report addresses the Forest Service’s (1) current potential liability for timber

sales contracts that it suspended or canceled to protect threatened or endangered

species, (2) progress in finalizing its timber sales cancellation regulations and

standard timber sales contract, and (3) efforts to substitute timber (replacement

timber) in lieu of paying to settle suspended or canceled timber sales contracts. In

summary, we found the following:

1

See Timber Management: Opportunities to Limit Future Liability for Suspended or Canceled Timber

Sales Contracts (GAO/RCED-97-14, Oct. 31, 1996). In that report, as well as in this one, we limited our

work to reviewing environmental claims related to protecting threatened or endangered species.

Other claims can arise when conditions, such as natural resource damage, cause contracts to be

modified, suspended, or canceled. These claims were outside the scope of our work.
2 GAO-01-184R Timber Sale Liability

• Forest Service information shows, as of October 31, 2000, pending claims of about

$51 million for timber sales contracts suspended or canceled to protect

threatened or endangered species. This does not include future claims that

purchasers may file as a result of favorable rulings on current claims on similar

issues. However, all estimates of future liability are speculative because the

outcome of ongoing and future litigation is unpredictable and could result in the

award of less in damages than the timber sale purchaser’s claim. For example,

the Forest Service paid one purchaser $15,000 for a $6.2 million claim and paid

another purchaser $2,544 for a $71,692 claim. In other instances, the Forest

Service has paid purchasers the total amount of the damages claimed.

• The Forest Service has not finalized the regulations for canceling timber sales

contracts or the new standard timber sales contract even though the agency

claimed it was near doing so when we completed our previous work in October

1996. At that time, USDA expected to publish a final rule for canceling timber

sales contracts in December 1996 and to seek public comments on the proposed

new timber sales contract in 1997. According to Forest Service timber

management officials, the need to conduct more detailed economic analyses

delayed the issuance of the regulations. They said that higher-priority work, such

as revising the Forest Service’s planning regulations, took precedence over

finalizing the new timber sales contract. A recent court decision has affirmed the

validity of the existing contract provisions that limit the government’s liability for

timber sales contracts suspended or canceled for environmental reasons.

However, good business practices would dictate that the Forest Service finalize

its cancellation regulations and new standard contract to ensure that the

implementation of the contract language approved by the court will be

transparent for the purchasers and consistently implemented across the country

by Forest Service personnel.

• Although the Forest Service has sometimes used replacement timber to reduce or

eliminate claims associated with suspended or canceled timber sales contracts in

California, Oregon, and the state of Washington, several problems, including the

lack of available replacement timber within the sale area, have inhibited its use.

In addition, even when the Congress acted to expand the area of consideration for

replacement timber beyond the sale area and the Forest Service identified

available replacement timber, its use has been limited because the replacement

timber was of such poor quality that the purchasers would not accept it.

Background

The Forest Service awards contracts to individuals or companies to harvest and

remove timber from the federal lands under its jurisdiction. Forest Service timber

sales contracts set forth specific terms and provisions of a sale, including the

estimated volume of timber to be removed, the time period of the removal, the price

to be paid to the government, and the environmental protection measures to be

taken. However, the agency’s regulations and procedures specify that it can extend

the time for completing a timber sales contract under certain circumstances and that

it can modify, suspend, cancel, or partially cancel a timber sales contract for various
3 GAO-01-184R Timber Sale Liability

reasons, including the need to protect threatened or endangered species and their

habitat.

Each timber sales contract contains provisions describing the liability that the Forest

Service will incur if it cancels a sale or cannot successfully negotiate a contract

modification with the purchaser following a suspension. The contract limits the

Forest Service’s liability to out-of-pocket expenses incurred as a direct result of a

suspension. If the Forest Service cancels a contract to (1) be consistent with a forest

plan; (2) comply with a court order; or (3) respond to a determination that continued

timber harvesting would seriously degrade the environment; cause resource or

cultural damage, and/or jeopardize sensitive, threatened, or endangered species,

contract provisions provide that the purchaser is entitled to out-of-pocket expenses

and to reasonable compensation for the cost of acquiring comparable timber to

replace that lost through the cancellation.

Since the early 1990s, the Forest Service has suspended or canceled timber sales

contracts for a number of reasons. In the early 1990s, various groups brought legal

actions to suspend or cancel timber sales contracts. For example, in May 1991, the

U.S. District Court for the Western District of Washington (State) ordered the Forest

Service to stop selling timber in much of the area inhabited by the Northern spotted

owl until the agency had prepared a management plan and environmental impact

statement for the species.2

The court found that the Forest Service had failed to

produce plans that satisfied the requirements of such laws as the National Forest

Management Act of 1976, the Endangered Species Act of 1973, or the National

Environmental Policy Act of 1969.

Considerable Liability for Suspended or Canceled Timber Sales Contracts

Remains

As of October 31, 2000, information from the Forest Service shows, pending claims of

about $51 million for timber sales contracts that were suspended or canceled to

protect threatened or endangered species. This does not include future claims that

could arise from purchasers as a result of favorable rulings on other claims on similar

issues. Since all estimates of future liability are inherently speculative, the outcome

of ongoing and future litigation is unpredictable and could result in the award of less

damages than the timber sale purchaser’s claim. For example, the Forest Service

paid one purchaser $15,000 for a $6.2 million claim and paid another purchaser $2,544

for a $71,692 claim. According to Forest Service officials, the large difference can be

attributable to various reasons, including disagreements over the value of

replacement timber that the Forest Service offered to settle the claims. On the other

hand, the Forest Service has sometimes paid purchasers the total amount of the

damages claimed after the contracting officer validates the claim.

In total, since June 1996, the Forest Service, Department of Justice, USDA’s Board of

Contract Appeals, and/or Court of Federal Claims have settled 80 claims totaling over

$27 million on timber sales contracts suspended or canceled to protect threatened or

endangered species. Although forest funds have been used to settle some of these

2

Seattle Audubon Society v. Evans, 771 F.Supp. 1081 (W. D. Wash. 1991), aff’d, 952 F.2d 297 (9th Cir.

1991).
4 GAO-01-184R Timber Sale Liability

claims, the vast majority of funds to pay claims—almost $26 million--has come from

the Department of the Treasury’s Judgment Fund.3The claims that have been settled

since June 1996 have occurred primarily in three Forest Service regions—Region 3,

Southwestern; Region 5, Pacific Southwest; and Region 6, Pacific Northwest.4

Federal agencies must reimburse the Department of the Treasury for Contract

Disputes Act claims paid from the Judgment Fund, and reimbursement is becoming

an increasing concern of the Forest Service. In a December 1999 memorandum to

USDA’s Chief Financial Officer, the Director of Forest Management raised concerns

that the costs of potential claims for suspended and canceled timber sales contracts

was beyond the Forest Service’s ability to manage within existing budget constraints.

The memorandum cited several conditions that made it “virtually impossible” for the

Forest Service not only to reimburse the Department of the Treasury for previously

settled claims but also for the estimated $40 million needed to settle later claims. The

memorandum noted that the outstanding liabilities far exceeded the less than $1

million in claims historically paid by the Forest Service annually.

Cancellation Regulations and New Timber Sales Contract Have Not Been

Finalized

The Forest Service has not finalized either the cancellation regulations for timber

sales contracts or its new standard timber sales contract. In August 1990, the Forest

Service published proposed regulations aimed at reducing its financial liability when

canceling timber sales contracts. The proposed regulations were never finalized and

underwent various modifications until December 1996, when they were again

released for public comment. The proposed regulations would have (1) clarified

when, why, and by whom contracts may be canceled; (2) provided a new formula for

compensation when the government must cancel timber sales contracts; and (3)

limited the financial liability of the United States on certain contracts. According to

Forest Service timber management officials, the agency delayed issuance of the

regulations because it needed to conduct a more detailed analysis of the impact of

timber sales on minorities through a Civil Rights Impact Assessment and an analysis

of the government’s potential liability.

In July 1993, at the direction of the Assistant Secretary of Agriculture for Natural

Resources and Environment, the Forest Service reinitiated an effort started in the late

1980s to develop a revised standard timber sales contract. The new timber sales

contract was intended to distribute liability and risk more equitably between the

parties and bring the contract into conformity with standard business practices. For

example, the new contract would have permitted the Forest Service to modify the

contract to protect natural resources, including threatened or endangered species,

and adjust the contract’s terms to allow the purchaser additional harvesting time or

money in consideration of such modifications.

3

The Judgment Fund is a permanent, indefinite appropriation available to satisfy final judgments

against the United States (31 U.S.C. 1304). The Forest Service may owe the Judgment Fund additional

funds for other than threatened and endangered species claims.

4

Region 3 includes Arizona and New Mexico; Region 5 includes California, Hawaii, Guam, and the

Trust Territories of the Pacific Islands; and Region 6 includes Oregon and the state of Washington.
5 GAO-01-184R Timber Sale Liability

The Forest Service expected that the new standard contract would be completed by

October 1994 and later expected to issue it for public comments in 1997. Although

the Forest Service completed its review of the new contract in September 1996, it was

never finalized. Forest Service officials said that higher-priority work, such as the

proposal to end the construction of roads on 43 million acres of Forest Service land

and revising the Forest Service’s planning regulations, took precedence over

finalizing the new timber sales contract.

In the interim, a September 1999 decision of the U.S. Court of Appeals for the Federal

Circuit has affirmed the validity of specific contract provisions that limit the

government’s liability for timber sales contracts suspended or canceled for

environmental reasons. The court held that the timber purchaser was entitled only to

limited compensation provided under the contract for a sale canceled because of

spotted owl concerns.5Although the court decision stated that the existing contract

provisions and language control the government’s actions, good business practices

would dictate that the Forest Service finalize its cancellation regulations and new

contract to ensure that implementation of the contract language approved by the

court will be transparent for the purchasers and consistently implemented across the

country by Forest Service personnel.

Replacement Timber Has Been Used to Settle Only a Limited Number of

Claims

Although the Forest Service has sometimes used replacement timber to reduce or

eliminate claims associated with suspended or canceled timber sales contracts in

California, Oregon, and the State of Washington, several problems, including the lack

of available replacement timber within the sale area, have limited its use. Even when

the Congress acted to expand the area of consideration for replacement timber

beyond the sale area and the Forest Service identified available replacement timber,

its use has been limited because the replacement timber was of such poor quality that

the purchasers would not accept it. As a result, the Forest Service has claims totaling

over $45 million pending for timber sales contracts suspended or canceled to protect

threatened or endangered species in California, Oregon, and Washington.

The Forest Service believes that on the basis of a Comptroller General decision (B177602, Apr. 20, 1973), the geographic area in which it can find replacement timber is

limited. The Comptroller General’s decision concluded that replacement timber must

be provided from the same geographical location as that of the original sale.

According to Forest Service officials, the consequence of the decision is substantial

because suitable replacement timber may not be available in the same area. In

California, for example, the Forest Service has settled six claims totaling $10 million

for contracts suspended or canceled to protect threatened or endangered species, but

almost no replacement timber was used to settle the claims. The Forest Service has

an additional nine pending claims totaling about $19.2 million where it will be

difficult to offer the purchasers replacement timber because it is either unavailable or

of such poor quality that the purchasers would not accept it. In addition, Forest

Service officials told us that because the timber within the original sale area had been

5

Reservation Ranch v. United States, No. 98-5159, 30 ELR 20094 (Fed. Cir. 1999) aff’g, 39 Fed.Cl. 696

(1997).
6 GAO-01-184R Timber Sale Liability

subject to a competitive bid process, it would be inappropriate to substitute timber

from outside the sale area on which the agency had not obtained competitive bids.

To help alleviate the problem of providing replacement timber in the Pacific

Northwest, in 1995, the Congress enacted Public Law 104-19 that, among other things,

required the Forest Service to provide “an equal volume of timber of like kind and

value” for certain timber sales that had been canceled or suspended to protect the

spotted owl and the marbled murrelet. The act did not limit the Forest Service to the

original geographical location when finding alternative timber. After complying with

the act’s various requirements, the Forest Service needed to provide alternative

timber for 55 contracts. Of the 55 contracts, the Forest Service has provided

replacement timber for 16 and settled, canceled, or bought out an additional 21 for a

total of almost $15 million. For the remaining 18 contracts, the Forest Service

expects to buy out one and has found replacement timber for 17. Despite the

agency’s efforts to comply with the Rescissions Act, purchasers have filed three

claims totaling over $24 million against the Forest Service related to the definition

and calculation of “out-of-pocket expenses” and the suspension of timber sales

contracts.6

According to Forest Service officials, the agency expected to meet the time frame for

providing replacement timber for the remaining contracts. However, subsequent

events, such as a lawsuit by the Oregon Natural Resources Council, have prevented

the Forest Service from releasing the timber. In that lawsuit, the U.S. District Court

for the Western District of Washington (State) held that that the Forest Service had

not properly surveyed timber harvest areas as required under the Record of Decision

in the spotted owl cases.7

In a December 1999 settlement, the Forest Service agreed

to conduct extensive surveys for about 80 categories of species.

Agency Comments

We provided Forest Service timber management officials with copies of a draft of this

report. These officials generally agreed with the content of the draft report and

provided technical clarifications, which we incorporated where appropriate.

Scope and Methodology

To provide information on the Forest Service’s current potential liability for timber

sales contracts that it suspended or canceled to protect threatened or endangered

species, we obtained information on the number, amount, and location of pending

claims. We also obtained information on claims settled since our October 1996

report, including the amount of the settlements and the source of the funds used to

pay them. We compared the information obtained from Forest Service headquarters

with that available from two of its regional offices—Pacific Northwest and Pacific

Southwest—to verify the data obtained. We also reviewed court decision relevant to

the government’s contract liability.

6

In the Pacific Northwest, the Forest Service has one other pending claim totaling almost $1.5 million is

that is not related to the Rescissions Act.

7

Oregon Natural Resources Council Action v. U.S. Forest Service and Bureau of Land Management, 59

F. Supp. 2d 1085 (W.D.Wash. 1999).
7 GAO-01-184R Timber Sale Liability

To obtain information on the current status of the revised timber sales cancellation

regulations and the new timber sales contract, we discussed progress to date with

Forest Service timber management officials as well as officials from USDA’s Office of

General Counsel.

To obtain information on using replacement timber to settle pending claims, we met

with Forest Service timber management officials. We compared the information

provided by Forest Service headquarters officials with that provided by officials in its

two major regional offices—the Pacific Northwest and Pacific Southwest—who are

primarily responsible for finding such timber.

We conducted our work from June 2000 to October 2000 in accordance with generally

accepted government auditing standards.

-----

We are sending copies of this report to the Honorable Ron Wyden, Ranking Minority

Member of your Subcommittee; appropriate congressional committees; the

Honorable Daniel R. Glickman, Secretary of Agriculture; and the Honorable Michael

Dombeck, Chief, Forest Service. We will make copies available to others upon

request.

If you have any questions about this report, please call me on (202) 512-3841. Key

contributors to this report were Margaret Armen; Jill Berman; John Kalmar, Jr.; and

Mary Ann Kruslicky.

Sincerely yours,

Barry T. Hill

Director, Natural Resources

and Environment

(360020)