Wetlands are diverse, but they can generally be defined as transitional areas between open waters and dry land, such as swamps, marshes, bogs, and similar areas. Wetlands are typically characterized by the frequent or prolonged presence of water at or near the soil surface, by soils that form under flooded or saturated conditions, and by plants that are adapted to life in these types of soils. Figure 1 is an example of a type of wetland. Federal authority over wetland development is exercised through section 404 of the Clean Water Act. The section 404 program requires that, unless exempted, anyone wanting to discharge dredged or fill material in navigable waters of the United States, which include most wetlands, obtain a permit from one of the 38 Corps district regulatory offices. This permitting process provides the Corps with a mechanism for enforcing mitigation efforts. Also, section 404 (b)(1) authorizes the Administrator of EPA, in conjunction with the Secretary of the Army, to develop guidelines the Corps uses in the permit process. Under these guidelines, developers must first avoid and then minimize adverse impacts to wetlands to the extent practicable and then compensate for any unavoidable impacts. The objective of mitigation is to compensate for adversely affected wetlands. In 1989, the Bush administration established the national goal of “no net loss” of wetlands. Subsequently, the Clinton administration expanded the goal to achieve a net increase of 100,000 acres per year by 2005. In addition, a 1990 memorandum of agreement between the Department of the Army and EPA, addressing mitigation under the Clean Water Act, states that the Corps will strive to achieve a goal of no overall net loss of wetland functions and values. Wetland functions include controlling floods and erosion, purifying water, and providing habitat for numerous bird and fish species. Wetland values are the economic and social benefits derived from wetland functions, including food, timber, improved water quality, and recreation. Agencies agree that it is difficult to measure the success of efforts to mitigate adverse impacts to functions and values, at least in part, because of variations across the country in wetlands. Under mitigation banking guidance issued in 1995 and in-lieu-fee guidance issued in 2000, mitigation banks and in-lieu-fee organizations should have formal, written agreements with the Corps, developed in consultation with the other agencies, to provide frameworks for the mitigation banking and in-lieu-fee options. These agreements are to include financial assurances and provisions for long-term management and maintenance of mitigation projects. In addition, the 1995 and 2000 guidance clarifies that responsibility for ecological success of mitigation efforts should rest with the mitigation bank or in-lieu-fee organization. However, neither guidance provides ecological success measurements. The agencies plan to review the use of the in-lieu-fee guidance by the end of October 2001. As of September 30, 2000, 17 of the 38 Corps districts had established in- lieu-fee arrangements, and officials from 8 additional districts informed us that they were planning to establish such arrangements. The 17 districts with an in-lieu-fee option had developed a total of 63 arrangements. Seven districts had established 1 arrangement, 9 districts had established between 2 and 5 arrangements, and 1 had established 27 arrangements. While the first arrangement was established in Vicksburg, Mississippi, in 1987, most were developed since January 1997. The arrangements have been designed predominantly to restore, enhance, and/or preserve wetlands, with some arrangements also allowing for the creation of wetlands. Developers have used in-lieu-fee arrangements to mitigate adverse impacts for over 1,440 acres of wetlands involving hundreds of projects, often smaller than an acre. Fees collected by in-lieu-fee organizations total over $64.2 million, with the individual arrangements involving total fees ranging from about $1,200 to $24.7 million. Acres adversely impacted and dollars collected are understated because some districts did not report data, sometimes because they did not track the data or it was not readily available. Figure 2 shows the number of in-lieu- fee arrangements in each Corps district. Appendix I provides information on the individual in-lieu-fee arrangements by district. Corps and EPA officials told us that they typically approve the use of in- lieu-fee arrangements as mitigation measures for minor impacts and when adversely affected acreage is relatively small. Officials explained that when developers make such arrangements, the Corps is able to operate more efficiently than when developers perform their own mitigation because the in-lieu-fee option results in fewer, more consolidated mitigation sites, thus reducing the Corps’ oversight burden. In addition, Corps officials said that using the in-lieu-fee option often gives permittees a less cumbersome alternative to performing their own mitigation, which requires submittal of a plan and schedule detailing their mitigation effort. Further, other federal agencies and others agree that the in-lieu-fee option services as a useful mitigation tool. EPA, FWS, and NOAA officials, as well as mitigation bank officials, however, expressed concern about the in-lieu-fee option. They questioned whether in-lieu-fees are being used in a timely manner and appropriately and whether adequate monitoring of mitigation efforts is taking place. These concerns are not unfounded. Corps officials from 11 of the 17 districts reported that they did not require in-lieu-fee organizations to spend or obligate fees received from developers within a specific time frame. In addition, three districts have some in-lieu-fee arrangements that have been in existence since 1997 or earlier and, as of September 2000, had not spent or obligated any funds that directly mitigated adverse impacts. In districts where in-lieu-fees have been spent, arrangements in three districts have used funds for activities, such as research and/or education, that do not directly mitigate adverse impacts. Appendix II, which summarizes Corps district responses to our survey questions, provides detailed information about in-lieu-fee arrangements. In order to address concerns about the in-lieu-fee mitigation option, the Corps, EPA, FWS, and NOAA developed guidance that became effective in October 2000. Under the new guidance, in-lieu-fee organizations have a time frame for initiating physical and biological improvements of mitigation sites and are precluded from using fees for activities such as research and education. In addition, the Corps is required to track all uses of in-lieu-fee arrangements and to report those figures by public notice on an annual basis. The effectiveness of in-lieu-fee mitigation is unclear. Information provided by Corps district officials during our telephone survey was not always consistent with written data provided by those districts. Corps officials in 11 of the 17 districts with the in-lieu-fee option stated that the number of wetland acres restored, enhanced, created, or preserved by the in-lieu-fee organizations equaled or exceeded the number of wetland acres adversely affected. However, our analysis of written data submitted by those 11 districts showed that the data from only 5 supported the statements. In- lieu-fee organizations in 3 of the 11 districts had not performed mitigation at a level that equaled or exceeded the adversely affected acreage. Another 3 of the 11 districts were not able to provide data on the number of wetland acres that had been restored, enhanced, created, or preserved by in-lieu-fee organizations in their areas. For the remaining 6 of the 17 districts, officials from 1 district stated that the restored, enhanced, created, or preserved acres had not equaled or exceeded the adversely impacted acres, and officials from 5 districts stated that the question was not applicable to their respective districts because the in-lieu-fee organizations had not started any projects. These five districts reported having 12 in-lieu-fee arrangements, including 3 that had been operating for less than a year and, consequently, had had little time to collect fees or initiate projects. When asked about functions and values of wetlands, officials in 9 of the 17 districts reported that the functions and values lost from the adversely affected wetlands were replaced at the same level or better through the in- lieu-fee organizations’ mitigation efforts. However, officials in five of those nine districts also stated that they had never taken steps to determine whether in-lieu-fee organizations’ mitigation efforts have been ecologically successful, which calls into question their determinations about functions and values. Of the eight districts that did not report functions and values at the same level or better, one reported that the functions and values had not met or exceeded the functions and values of the adversely affected wetlands; two did not know whether the functions and values of the mitigated wetlands met or exceeded the functions and values of the impacted wetlands; and five reported that the in-lieu-fee organizations had not started any projects that could be assessed. Seven districts have taken steps to determine whether in-lieu-fee organizations’ mitigation efforts have been ecologically successful, and officials in these districts reported that they use a variety of techniques. While some districts use performance standards such as the percentage of vegetative survival, other districts review reports, visit mitigation sites, and/or use specific techniques such as the Wetland Rapid Assessment Procedure. Officials in some of the districts that have not taken steps to determine the success of in-lieu-fee organizations’ mitigation efforts assume that if the acreage requirement is met, then functions and values will follow suit. In addition, although most districts reported that they monitor the use of in-lieu-fees, several district officials also explained that their monitoring is limited by resource constraints. For example, officials in one district we visited explained that they receive monitoring reports from the in-lieu-fee organization but do not have time to review the reports. Furthermore, officials from several other districts told us that no significant monitoring efforts are needed because they consider in-lieu-fee mitigation to be a success as soon as the developer pays a fee to the in- lieu-fee organization, even if no mitigation has been performed, or because they use organizations that they trust will do adequate mitigation. NOAA officials said that using such organizations is not an adequate substitute for monitoring. In-lieu-fee organizations have the potential to compete with mitigation banks for developers’ mitigation business to the extent that organizations and banks provide similar mitigation services and serve the same geographic areas. In those areas with the potential for competition, some mitigation bank officials raised concerns about their ability to compete with in-lieu-fee organizations because, for example, in-lieu-fee organizations generally did not have requirements, such as securing financial assurances, that increased mitigation banks’ operating costs. The October 2000 guidance not only established such requirements for in-lieu- fee organizations, but also generally gives preference to mitigation banks. At the time of our survey, in-lieu-fee organizations and mitigation banks potentially could compete in 12 of the 17 Corps districts where in-lieu-fee mitigation was an option, according to information provided by Corps district officials. In-lieu-fee organizations had funded or planned to fund wetland restoration, enhancement, and preservation and/or other mitigation services in all 17 districts with the in-lieu-fee option. Mitigation banks provided restoration and other mitigation services similar to those provided by in-lieu-fee organizations in only 13 of the 17 districts, however, and mitigation banks served the same geographic area as in-lieu- fee organizations in only 12 of those 13 districts. In 3 of the 12 districts where in-lieu-fee organizations potentially could compete with mitigation banks, the in-lieu-fee organizations’ service areas covered an entire state, and in 9 of the districts, the area of potential competition was limited to a watershed, county, or other geographic area. No potential for competition existed in the remaining five districts because no mitigation banks existed in one, banks and in-lieu-fee organizations did not provide the same services in one, banks had not begun marketing mitigation services in one, and banks and in-lieu-fee organizations served different geographic areas in two. Of the 12 districts with the potential for competition, Corps district officials in 9 told us that in-lieu-fee organizations and mitigation banks had competed with each other, and officials in 3 said they had not competed. Corps officials’ views on competition were corroborated by in-lieu-fee organization and mitigation bank officials in the districts we visited. For example, in the Chicago district, where 1 in-lieu-fee organization and 10 mitigation banks operate in the same six-county area and provide similar services, mitigation bank and in-lieu-fee organization officials agreed that they competed with each other. In the three districts where Corps officials said mitigation banks and in-lieu-fee organizations had not competed, two districts have policies that encourage the use of mitigation banks and, in the other district, competition is expected after the in-lieu- fee arrangements that were established in 2000 take hold. Some mitigation bank officials have raised concerns about competing with in-lieu-fee organizations for several reasons. First, some bank officials have claimed that they are at greater economic risk than in-lieu-fee organizations because banks generally must invest money to establish wetlands before they can sell credits. In contrast, in-lieu-fee organizations often do not establish wetlands until they have collected sufficient fees from developers to cover their expenses. Second, some bank officials said that they have difficulty competing with in-lieu-fee organizations’ prices. For example, top management representing two mitigation banks in Chicago said that, in the Chicago district, the in-lieu-fee organization’s price was lower than the banks’ prices. The fund administrator of the in- lieu-fee organization acknowledged competing with mitigation banks and said that the organization’s price was lower than the prices of some banks and higher than the prices of others. Third, prior to the October 2000 in- lieu-fee guidance, some bank officials questioned whether in-lieu-fee organizations were being held to the same standards as banks. The recent in-lieu-fee guidance gives preference to mitigation banks under certain circumstances. For example, when impacts that require mitigation are outside the service areas of mitigation banks and in-lieu-fee organizations, use of a mitigation bank is preferable to in-lieu-fee mitigation, unless using the bank is not practicable or environmentally desirable. While there is a preference for mitigation banks, the new guidance also allows for flexibility according to officials in the Corps, EPA, FWS, and NOAA. Our survey showed that since January 1, 1996, 24 of the 38 Corps districts allowed developers to mitigate adverse impacts to wetlands through ad hoc arrangements. We found no definition of ad hoc arrangements in existing mitigation guidance. As explained earlier, ad hoc arrangements, for purposes of this report, involve mitigation payments from developers to third parties that are neither mitigation banks nor considered by the Corps to be in-lieu-fee organizations. For example, a district office that we visited allowed a developer to partly compensate for the adverse impact at a development site by paying a fee to a nearby landowner to preserve a wooded wetland by placing a restriction on the property to prevent future development. We were unable to determine the number of times ad hoc arrangements were used because not all districts routinely track the data. However, officials we surveyed in several districts told us that they used such arrangements infrequently. Corps district officials did not consider ad hoc arrangements to be in-lieu- fee arrangements for several reasons. Most often they distinguished ad hoc from in-lieu-fee arrangements by the lack of a formal agreement between the Corps district and the ad hoc fund recipient. Officials in some districts also said that ad hoc fund recipients usually perform mitigation at a single site with funds received from one developer for one development project. In contrast, in-lieu-fee organizations usually perform mitigation at one or more sites with funds consolidated from multiple developers for multiple development projects. EPA and Corps headquarters officials, as well as Corps district officials, disagree as to whether ad hoc mitigation is covered by the October 2000 in-lieu-fee guidance. Corps headquarters officials said that ad hoc mitigation is not covered under the guidance. EPA headquarters officials disagreed and said that mitigation is covered by the guidance when a third party other than a mitigation bank performs the mitigation and responsibility for the ecological success is transferred to the fund recipient as a condition of the section 404 permit. However, Corps headquarters officials reported that most permits authorizing ad hoc mitigation arrangements do not transfer responsibility, and Corps officials in 17 of the 24 districts using ad hoc arrangements told us that they never required transfer of responsibility as a condition of section 404 permits. Further, Corps district officials disagree on whether ad hoc mitigation is covered by the 2000 guidance. Officials in 6 districts that use ad hoc arrangements said that ad hoc mitigation is covered by the guidance, while officials in 7 said it is not covered, and officials in 11 said that they did not know whether it is covered by the guidance. Oversight of mitigation efforts performed under ad hoc arrangements was lacking in almost half of the 24 districts using such arrangements. Officials in seven districts said that they had not monitored either the mitigation efforts or use of funds made under ad hoc arrangements, and officials in three others did not know whether such monitoring had occurred. In addition, officials in eight districts said that they had never taken steps to determine whether mitigation efforts performed under ad hoc arrangements had been ecologically successful, and officials in two others did not know whether such steps had been taken. Officials in some districts gave reasons for the limited oversight. For example, officials in four districts said monitoring was unnecessary because developers make payments to organizations that the Corps was confident would use the payments to do adequate mitigation, such as The Nature Conservancy. Further, officials in some districts said that they had limited resources for oversight. Responsibility for the ecological success of mitigation performed by ad hoc organizations is unclear. Of the 24 districts that used ad hoc arrangements, officials in 13 said ad hoc fund recipients were not liable for the failure of their mitigation efforts, while officials in 2 said they were, and officials in 9 said they did not know whether ad hoc recipients were liable. Officials in many of the districts who said that ad hoc fund recipients were not liable also said that developers were responsible for the mitigation efforts. However, federal regulations setting forth requirements for section 404 permits do not require permits to include performance standards for ecological success of mitigation efforts. Consequently, no procedures exist for ensuring the ecological success of ad hoc mitigation efforts. In-lieu-fee arrangements have the potential to be an effective compensatory mitigation tool that benefits the environment and provides developers flexibility in meeting their mitigation requirements. It is not clear, however, whether such arrangements have, in practice, been an adequate method for mitigating adverse impacts to wetlands. Corps districts supplied us with contradictory information or were not able to provide us with data to support claims that acreage and/or functions and values of wetlands that had been restored, enhanced, created, or preserved equaled or exceeded those that had been lost through development. In addition, several districts have never taken steps to assess whether in-lieu-fee mitigation has adequately mitigated adverse impacts, and those that did make assessments used varying criteria. Similarly, oversight of ad hoc mitigation has been lacking. Projects, whether performed under in-lieu-fee arrangements or under ad hoc arrangements, must be assessed to determine whether they have been ecologically successful so that corrective action can be taken if necessary. The Corps lacks assurances that mitigation efforts under in-lieu-fee or ad hoc arrangements have been effective, sometimes relying instead on “good faith” on the part of the organizations performing the mitigation. We commend the Corps, EPA, and other agencies for developing and implementing the October 2000 guidance, which provides a framework for in-lieu-fee mitigation. Without such a framework, congressional and agency decisionmakers would be hampered in their ability to make sound management decisions in providing continued stewardship of our nation’s resources. At the same time, the recent guidance does not go far enough either to bring consistency to how determinations of ecological success should be made or to establish appropriate monitoring and oversight activities. Agencies need adequate success criteria in order to measure whether progress is being made toward achieving the national goal of no net loss of the nation’s remaining wetlands. Where states play a significant role in decisions on compensatory mitigation, the agencies could coordinate with them in developing the criteria. Once the agencies establish success criteria for in-lieu-fee arrangements, extending those criteria to all compensatory mitigation options would provide the agencies the opportunity to assess mitigation success more broadly. Further, for purposes of accountability, responsibility for the success of mitigation efforts must be clearly assigned to either the developer or the party performing the mitigation. To ensure that in-lieu-fee organizations adequately compensate for adverse impacts to wetlands, we recommend that the Administrator of EPA, in conjunction with the Secretaries of the Army, Commerce, and the Interior, establish criteria to determine the ecological success of mitigation efforts and develop and implement procedures for assessing success. To better ensure the ecological success of mitigation efforts under ad hoc arrangements, we recommend that the Secretary of the Army instruct the Corps to establish procedures to clearly identify whether developers or recipients of funds are responsible for the ecological success of mitigation efforts and, using the same success criteria applicable to in-lieu-fee arrangements, to develop and implement procedures for assessing success. We provided the Department of Defense, EPA, and the departments of Commerce and the Interior with a draft of this report for review and comment. While all four agencies agreed with our recommendation concerning ad hoc arrangements, only EPA and Commerce agreed with our recommendation that EPA, in conjunction with the Secretaries of the Army, Commerce, and the Interior, establish ecological success criteria. In disagreeing with the recommendation, Defense suggested two changes. We disagree with both. First, Defense believes that the Corps, rather than EPA, should have the lead in implementing the recommendation. We continue to believe that EPA should have the lead in implementing our recommendation because section 404(b) of the Clean Water Act authorizes EPA to issue section 404 guidance. Second, Defense stated that, instead of establishing criteria to determine the ecological success of mitigation efforts, because the term “success” is too imprecise and subjective to be consistently and effectively applied, criteria should be established to determine “that wetlands functions have been adequately compensated.” We believe that Defense’s suggestion of adequate compensation is too narrow and does not address the overall national goal of no net loss of wetlands. We continue to believe that establishment of ecological success criteria is not only possible, but essential to determine whether progress is being made toward achieving that national goal through section 404 mitigation efforts. Regarding our recommendation calling for ecological success criteria, Interior stated that it did not agree that the federal agencies should establish national criteria. However, our recommendation does not call for national criteria. We agree with Interior’s comment that criteria are most appropriately developed at the local level, where experienced personnel can work together to develop criteria keyed to local ecosystems or watersheds. The comments of Defense, EPA, Commerce, and the Interior, and our responses to those comments, are included in appendixes III, IV, V, and VI, respectively. To obtain information on the extent to which the in-lieu-fee option has been used and been effective in mitigating adverse impacts to wetlands, and on the extent to which in-lieu-fee organizations compete with mitigation banks for developers’ mitigation business, we conducted a two- phase telephone survey of Corps officials from the 38 district regulatory offices. The first phase of the telephone survey was conducted for all 38 Corps districts. We asked Corps officials to provide basic information such as whether their district provides the in-lieu-fee and mitigation banking options for developers, and if so, how many in-lieu-fee arrangements and mitigation banks exist in the district. We also asked Corps officials to provide us with copies of written in-lieu-fee agreements and any guidance concerning in-lieu-fee arrangements. We used the responses and documentation from the first phase to obtain an understanding of the extent to which in-lieu-fee arrangements were being used nationwide and to devise questions for the second phase of the survey. The second phase of the telephone survey consisted of two versions: one for districts that have in-lieu-fee arrangements, and the other for districts that do not have such arrangements. During this second phase of the survey, we asked Corps officials to verify the number of in-lieu-fee arrangements and mitigation banks in the districts and to respond to questions concerning such topics as in-lieu-fee guidance, monitoring and enforcement, ecological success, competition between in-lieu-fee organizations and mitigation banks, and ad hoc arrangements. In developing questions for our telephone survey, we conducted pretests of each version with two Corps district offices. During the pretest, we first asked Corps officials to answer the survey questions. After completing the survey questions, we interviewed the Corps officials to ensure that (1) the questions were clear, (2) the terms were precise, and (3) the survey appeared to be independent and unbiased. We also asked Corps districts to supply, in writing, information not suited for collection by telephone, such as the number of permits issued per district that used in-lieu-fees to satisfy mitigation requirements during fiscal years 1998–2000; the total dollar amounts received by in-lieu-fee organizations; and the number of acres that in-lieu-fee organizations restored, enhanced, created and/or preserved from the time that the in-lieu-fee arrangements were established through fiscal year 2000. Some districts did not provide all the information requested because, for example, the data were not tracked or not readily available. Further, we did not verify the information provided by Corps district officials; however, we corroborated the data with other sources to the extent possible. To better understand in-lieu-fee activities, the effectiveness of in-lieu-fee mitigation efforts, and competition between in-lieu-fee organizations and mitigation banks, we interviewed Corps officials and staff of in-lieu-fee organizations and mitigation banks, and we visited wetland sites in the Corps’ districts of Chicago, Illinois; Savannah, Georgia; and Vicksburg, Mississippi. We judgmentally selected these districts because they had in- lieu-fee arrangements that were established in 1997 or earlier and had mitigation banks available as a mitigation option. For additional perspective, we also interviewed officials from The Nature Conservancy in Arlington, Virginia; the National Mitigation Banking Association; the Corps of Engineers’ Engineer Research and Development Center in Vicksburg, Mississippi; a NOAA office in Charleston, South Carolina; and consulting firms in Savannah, Georgia, and Jackson, Mississippi. In addition, we met with a developer in Jackson, Mississippi, and with officials at a local FWS office in Athens, Georgia. Furthermore, we met with officials from Corps, EPA, FWS, and NOAA headquarters. We conducted our work from May 2000 through April 2001 in accordance with generally accepted government auditing standards. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies to other interested parties and make copies available to others who request them. We identified 17 Corps district offices that have established in-lieu-fee arrangements as a mitigation option for developers whose activities will adversely affect wetlands. The districts have established a total of 63 in- lieu-fee arrangements, ranging from 1 to 27 arrangements per district. Table 1 lists the in-lieu-fee arrangements by district, as well as selected characteristics of each arrangement. Some districts did not provide the information we requested because, for example, the data were not tracked or were not readily available. The October 2000 in-lieu-fee guidance, if properly implemented, requires the Corps to track all uses of in-lieu-fee arrangements and report those figures by public notice on an annual basis. That do not directly mitigate adverse impacts Total 0This is the date of the formal arrangement as reported by the Corps districts and verified, to the extent possible, with written arrangements provided by the districts. It is possible that some arrangements were in effect under general permits prior to the effective date. Arrangements with the effective date listed as “not final” have collected money although no written arrangement has been finalized. This information was not reported by the district because, for example, the data were not tracked or were not readily available. The in-lieu-fee arrangement is solely for stream mitigation: a total of 7,975 linear feet of streams was adversely impacted, 12,000 linear feet are required to have mitigation performed, and a mitigation effort is in progress. 1. Defense stated that developers’ payments to a consultant to construct off-site mitigation projects may be interpreted as ad hoc arrangements. We agree that confusion exists about ad hoc mitigation, as illustrated in our discussions on the disagreement about whether such arrangements are covered by the October 2000 in-lieu-fee guidance and whether or not ad hoc fund recipients are responsible for the ecological success of mitigation efforts. We revised our report to reiterate that ad hoc arrangements, for purposes of this report, involve mitigation payments from developers to third parties that are neither mitigation banks nor considered by Corps districts to be in-lieu-fee arrangements. We also added that we found no definition of ad hoc arrangements in mitigation guidance. Clarification of in-lieu-fee and ad hoc arrangements is an issue that could be discussed when the agencies hold a stakeholder forum in the summer of 2001 and when the agencies review the use of the guidance by the end of October 2001. 2. We agree that establishing criteria and developing and implementing procedures to determine the ecological success of in-lieu-fee mitigation is a big step that entails more than assuring mitigation compliance. Our report notes that it is difficult to measure the success of efforts to mitigate losses to functions and values because, at least in part, of variations in wetlands across the country. However, like the Environmental Protection Agency, Fish and Wildlife Service, and National Oceanic and Atmospheric Administration, we believe that scientifically sound criteria is essential to determine if the objectives of compensatory mitigation are being fulfilled. We also believe that such criteria is essential to measure whether progress is being made toward achieving the national goal of no net loss of the nation’s wetlands through section 404 mitigation efforts, and that the federal agencies need to work together to establish the criteria. 3. Defense stated that lack of context renders some of our report potentially meaningless or distorted. We disagree. In particular, we do not believe that the example cited by Defense illustrates the lack of context. Our intent in reporting that arrangements in three districts used in-lieu-fees for research and/or education was to illustrate situations where funds were used for purposes that do not directly mitigate adverse impacts. Other agencies have raised concerns about such uses. We did not imply that the districts did not achieve the goal of no net loss of wetlands because they allowed funds to be used for such purposes. In fact, data collected during our survey shows that arrangements in two of the districts that reported using funds for research and/or education also reported that the number of wetland acres for which mitigation had been performed had equaled or exceeded the number of acres lost through development. Moreover, we disagree with Defense’s position that as long as the mitigation provided meets the compensatory need, excess funds belong to the in- lieu-fee administrators to expend as they see fit. This position contradicts the October 2000 in-lieu-fee guidance that states that in- lieu-fee funds should not be used to finance nonmitigation programs and priorities, such as research and education. 4. Defense stated that our report does not describe how different requirements for institutional arrangements can affect the Corps’ roles and responsibilities for in-lieu-fee arrangements. During our audit work we identified instances where in-lieu-fee arrangements were based on Programmatic General Permits developed by the Corps. However, our report does not focus on specific details of individual in- lieu-fee agreements or the relationships between Corps districts and individual arrangements. Rather, our report provides a broad overview of the in-lieu-fee program across the country. In addition, the October 2000 in-lieu-fee guidance should cause agreements between Corps districts and in-lieu-fee organizations to be more consistent. 5. We revised the report to show that the information regarding adversely affected acres and dollars collected covered the periods from the time each in-lieu-fee arrangement was established through fiscal year 2000. 6. While we did not define the term “ecological success,” our recommendation calls for the agencies to establish criteria to determine ecological success. Defense also stated that the scientific and professional disciplines associated with wetlands management do not possess sufficient information to make a definitive statement about ecological success. While recognizing that assessing wetland functions and values is difficult, we believe that it is possible to establish scientific criteria to determine ecological success. EPA, FWS, and NOAA officials told us during our audit work that assessing ecological success is possible. In fact, NOAA officials said that there are many existing methodologies from which agencies can draw to establish criteria for ecological success. Further, the Corps’ Engineer Research and Development Center has developed information, such as Hydrogeomorphic Approach data that can be used to assess functions of some regional wetlands, that may be useful for establishing criteria. 7. We revised the report to show that some of the arrangements in the five districts that have not started any projects have been operating only a short period of time and, consequently, have had little time to collect fees and initiate projects. 8. Defense stated that local agency rules and/or in-lieu-fee structure and protocol may result in constraints in terms of use of compensatory mitigation options that override other decisions and could affect competition between in-lieu-fee organizations and mitigation banks. As explained in our response to Defense comment 4, our report provides a broad overview of the in-lieu-fee program rather than specific details about individual arrangements. Moreover, during our audit work, none of the districts that reported no competition between in-lieu-fee organizations and mitigation banks said that local rules and/or in-lieu-fee structures or protocols had constrained competition. 9. We revised the footnote to show that state trust funds, such as those in Pennsylvania and Maryland, are included as ad hoc arrangements in our report. Corps districts reported to us those instances where developers were allowed to compensate for adverse impacts to existing wetlands by paying third parties that are neither mitigation banks nor considered by the districts to be in-lieu-fee arrangements. As explained in our report, ad hoc fund recipients usually do not have a formal agreement with the Corps and typically perform mitigation at a single site with funds received from one developer for one development project. However, ad hoc arrangements identified by Corps districts also include state trust funds, which receive payments from multiple developers that can be used for more than one project. 10. Defense suggested that we change our first recommendation to give the lead to the Corps instead of EPA and to have the federal agencies develop criteria to determine “that wetlands functions have been adequately compensated” instead of criteria to determine the ecological success of mitigation efforts. We disagree and did not revise our recommendation. While we recognize that the Secretary of the Army clearly has authority and responsibility under section 404(a) of the Clean Water Act regarding compensatory mitigation, section 404(b) authorizes the Administrator of EPA, in conjunction with the Secretary, to issue section 404 guidance. Also, we did not change the recommendation regarding the type of criteria because we continue to believe that development of criteria for ecological success is not only possible, but essential. 11. Defense stated that our report appears to concentrate on in-lieu-fee arrangements developed prior to 1997. While we choose to make site visits to districts with arrangements developed in 1997 or earlier because in-lieu-fee organizations in those districts had had more time to develop projects than those in districts with more recent arrangements, our report provides information about all in-lieu-fee arrangements established through fiscal year 2000. We did not include the in-lieu-fee arrangement in St. Louis in our report because, according to a Corps St. Louis District official, it was not established until October 2000, which was after fiscal year 2000 ended. 12. As explained in the Scope and Methodology section of our report, we used implementing agreements to obtain an understanding of the extent to which in-lieu-fee arrangements were being used nationwide and to devise questions for the second phase of our survey. We did not report the extent to which in-lieu-fee arrangements followed their implementing agreements because many, if not all, agreements should change substantially to comply with the protocol in the October 2000 in-lieu-fee guidance. 13. Defense did not concur with our first recommendation. We disagree. See comments 6 and 10. 1. EPA stated that a useful addition to our first recommendation would be to recognize the significant role that many states play in decisions on wetlands restoration and compensatory mitigation and the close working relationship between EPA and the states in administering the Clean Water Act. EPA also suggested that we recommend coordination with states in developing ecological success criteria. We did not change our recommendation. However, coordination with states in developing ecological success criteria is an EPA prerogative that our recommendation does nothing to preclude. We revised our conclusions to state that where states play a significant role in decisions on compensatory mitigation, the agencies could coordinate with them in developing ecological success criteria. 2. We agree that the same ecological success criteria applicable to in-lieu- fee arrangements should be used to assess ad hoc arrangements’ mitigation efforts, as stated in our second recommendation. Also, we believe that procedures should be developed and implemented to assess the ecological success of ad hoc arrangements’ mitigation efforts. However, the procedures should allow the Corps flexibility in assessing the success of ad hoc mitigation efforts, taking into consideration such factors as available resources as well as potential environmental impacts. 1. Comments provided by Commerce for NOAA stated that NOAA concurs with our two recommendations. The comments also stated that rather than developing procedures for assessing the ecological success of ad hoc mitigation on a district-by-district basis, NOAA believes that Corps headquarters should develop the procedures so that a consistent approach is taken throughout the country. We clarified our recommendation to have the Secretary of the Army direct the Corps, instead of its districts, to establish procedures to clearly identify whether developers or recipients of funds are responsible for the ecological success of mitigation efforts. In addition, Commerce stated that Corps headquarters should resolve widespread confusion about the applicability of the in-lieu-fee guidance by explicitly stating that ad hoc mitigation is covered by the in-lieu-fee guidance. Because, as noted in our report, EPA and Corps headquarters officials disagree as to whether ad hoc mitigation is covered by the October 2000 guidance, we agree that there should be clarification. This is an issue that should be discussed when the agencies hold a stakeholder forum in the summer of 2001 and considered when the agencies review the use of the guidance by the end of October 2001. 1. Interior stated that full implementation of the October 2000 in-lieu-fee guidance would prevent or rectify many of the problems with in-lieu- fee mitigation programs identified in our report. We agree that full implementation of the guidance may rectify some of the problems we identified. For example, the guidance sets time frames for mitigation efforts and states that in-lieu-fee funds should be used for replacing wetlands functions and values. However, full implementation of the guidance does not address the problems that our recommendations are intended to correct. That is, the guidance does not establish criteria for ecological success and does not clearly establish responsibility for mitigation success performed by ad hoc organizations. 2. Interior said that the Corps should suspend the use of any in-lieu-fee programs found to be in noncompliance with the October 2000 guidance until such time that corrective measures are enacted. We did not develop information on this issue as part of our audit work. However, suspension might be an option that agencies could discuss at the stakeholder forum in the summer of 2001 and when the agencies review the use of the guidance by the end of October 2001. 3. Interior stated that, with regard to our recommendations, it does not agree that federal agencies should establish national criteria to determine the ecological success of mitigation efforts. Our recommendation does not call for national criteria. In fact, our survey showed that over 80 percent of the Corps districts with in-lieu-fee arrangements said that national performance standards for measuring the success of mitigation efforts were not feasible. In addition, we agree that establishing national standards would be infeasible given the diversity of wetland types across the country. Further, we believe that criteria are most appropriately developed at the local level where experienced agency personnel may work together to develop success criteria that are keyed to local ecosystems or watersheds. In addition to those named above, Nancy J. Eslick, June M. Foster, Byron S. Galloway, Lynn M. Musser, and Barbara L. Patterson made key contributions to this report.

Summary: More than half the estimated 220 million acres of marshes, bogs, swamps, and other wetlands in the United States during the colonial times, have disappeared, and others have become degraded. This decline is due, primarily, to farming and development. Developers whose projects may harm wetlands must, according to environmental regulations, first avoid and then minimize adverse impacts to wetlands to the extent practicable. If harmful impacts are unavoidable, the developer must compensate by restoring a former wetland, enhancing a degraded wetland, creating a new wetland, or preserving an existing wetland. Such mitigation efforts can occur under the following three types of arrangements: (1) mitigation banks, under which for-profit companies restore wetlands under Army Corps of Engineers agreements and then sell credits for these wetlands to developers; (2) in-lieu-fee arrangements under which developers pay public or non-profit organizations fees for establishing wetland areas, usually under formal Corps agreements; and (3) ad hoc arrangements, under which developers pay individuals or companies to perform the mitigation. This report, determines the extent to which (1) the in-lieu-fee option has been used to mitigate adverse impacts to wetlands, (2) the in-lieu-fee option has achieved its intended purpose of mitigating such impacts, and (3) in-lieu-fee organizations compete with mitigation banks for developers' mitigation business. This report also discusses the use of ad hoc arrangements as a mitigation option. Most of the arrangements were designed to use fees received from developers to restore, enhance, or preserve wetlands, with a few arrangements designed to allow wetlands to be created. During fiscal years 1998 through 2000, developers used the in-lieu-fee option to fulfill mitigation requirements for more than 580 acres of adversely affected wetlands, and paid more than $39.5 million to in-lieu-fee organizations. The extent to which the in-lieu-fee option has achieved its purpose of mitigating adverse impacts to wetlands is uncertain. Although Corps officials in 11 of the 17 districts with the in-lieu-fee option said that the number of wetland acres restored, enhanced, created, or preserved by in-lieu-fee organizations equaled or exceeded the number of wetland acres adversely affected, data submitted by more than half of those districts did not support these claims. Officials in 9 of the 17 districts said that functions and economic values lost from the adversely affected wetlands were replaced at the same level or better through in-lieu-fee mitigation, but officials in more than half of those districts also acknowledged that they have not tried to assess whether mitigation efforts have been ecologically successful. As a result, the Corps cannot be certain that in-lieu-fee mitigation has been effective. Corps district officials in 9 of the 17 districts with the in-lieu-fee option said that organization and mitigation banks were competing with each other by providing similar mitigation services in the same geographic area. No competition existed in 5 of the 17 districts because either no mitigation banks were available, or in-lieu-fee organizations and mitigation banks provided different services, or served different geographic areas. GAO found that hoc arrangements typically were for one-time projects without a formal agreement. Oversight of mitigation affairs was lacking in almost half of the districts using such arrangements. Corps districts disagreed on whether responsibility for the ecological success of ad hoc mitigation rests with the ad hoc fund recipient or the developer.