Timber Management: Forest Service Has Considerable Liability for
Suspended or Canceled Timber Sales Contracts (Correspondence, 11/29/2000,
GAO/GAO-01-184R).

The Forest Service canceled or suspended several timber sales contracts
to protect endangered or threatened species. From October 1992 through
June 1996, the Forest Service paid $6.5 million to settle claims on 48
canceled or suspended contracts. Currently, there are pending claims of
about $51 million for canceled or suspended contracts. To minimize its
financial liability in the future, the Forest Service is developing
cancellation regulations and a new standard timber sales contract.
Progress in finalizing there new regulations has been slow because of
the the Forest Service's need to conduct a more detailed economic
analysis. The proposed rules have also undergone several modifications
in since the Forest Service began working on them in the late 1980's. In
an effort to settle some of the timber companies' claims, the Forest
Service has sometimes used replacement timber. However, the timber
replacement program has had limited success because the timber was
either not available within the sale area or was in such poor condition
that many companies would not accept it.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-184R
     TITLE:  Timber Management: Forest Service Has Considerable
	     Liability for Suspended or Canceled Timber Sales Contracts
      DATE:  11/29/2000
   SUBJECT:  Forest management
	     Endangered species
	     Government liability (legal)
	     Timber sales
	     Damages (legal)
	     Forestry legislation
	     Wildlife conservation
	     Contract termination
	     Sales contracts
	     Claims settlement

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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

ï¿½ 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.

ï¿½ 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.

ï¿½ 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 (9 th 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. 3 The 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. 5 Although
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)
*** End of document. ***