Timber Management: Opportunities to Limit Future Liability for Suspended
or Canceled Timber Sale Contracts (Letter Report, 10/31/96,
GAO/RCED-97-14).

Pursuant to a congressional request, GAO reviewed the federal
government's liability when the Forest Service and the Bureau of Land
Management (BLM) suspend or cancel timber sale contracts to protect
threatened or endangered species, focusing on what: (1) amounts and
types of damages have been awarded to purchasers and how the Forest
Service and BLM paid for the damages; (2) amounts and types of claims
are pending against the Forest Service and BLM, and how the agencies
expect to pay these claims; and (3) actions the Forest Service and BLM
are taking to minimize the future liability arising from suspended or
cancelled timber sale contracts.

GAO found that: (1) from October 1992 through June 1996, the Forest
Service and BLM paid more than $6.6 million in claims for 49 contracts
that were suspended or cancelled to protect threatened or endangered
species; (2) the agencies have paid purchasers for the value of
replacement timber, interest, lost profits, and unrecovered costs; (3)
the Forest Service paid damages of almost $6.5 million from its
appropriations and BLM settled its single claim by modifying another
contract held by the purchaser to reduce the amount paid to the
government for purchased timber without changing the original volume of
timber to be harvested; (4) as of October 1996, the Forest Service had
73 pending claims with potential damages of about $61 million, but it
could incur at least an additional $198 million in damages; (5) BLM had
one pending claim for almost $2.2 million, but it could incur between
$35 million and $40 million more in potential future liability; (6)
uncertainty arises from the agencies' inability to predict the outcome
of ongoing and future litigation that could result in the award of more
or less in damages than the purchasers claim, the results of
countersuits that could be filed by the Forest Service and BLM, or the
success of the agencies' efforts to offer replacement timber or other
settlements in lieu of paying damages; (7) Forest Service officials
stated that the Service may not have the funds to pay for pending and
future claims without additional congressional funding; (8) according to
a BLM official, if purchasers sought and were awarded damages, the
agency would first attempt to reduce the price of existing contracts to
offset damages; and (9) BLM has repeatedly revised its timber sale
contract to minimize its liability when it must suspend or cancel a
timber sale contract to protect threatened an endangered species, but
the Forest Service has not finalized either new regulations or a new
timber sale contract that would limit the government's liability on
cancelled timber sale contracts and redistribute the risk between the
Forest Service and the purchaser.

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

 REPORTNUM:  RCED-97-14
     TITLE:  Timber Management: Opportunities to Limit Future Liability 
             for Suspended or Canceled Timber Sale Contracts
      DATE:  10/31/96
   SUBJECT:  Timber sales
             Claims settlement
             Contract termination
             Government liability (legal)
             Endangered species
             Damages (legal)
             Litigation
             Forest management
             Appropriated funds
             Contract modifications
IDENTIFIER:  Pacific Northwest Forest Plan
             Forest Service Timber Sale Deposit Fund
             National Forest Fund
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Forests and Public Land
Management, Committee on Energy and Natural Resources, U.  S.  Senate

October 1996

TIMBER MANAGEMENT - OPPORTUNITIES
TO LIMIT FUTURE LIABILITY FOR
SUSPENDED OR CANCELED TIMBER SALE
CONTRACTS

GAO/RCED-97-14

Timber Sales Liability

(140537)


Abbreviations
=============================================================== ABBREV

  BLM - Bureau of Land Management
  DOI - Department of the Interior
  GAO - General Accounting Office
  OMB - Office of Management and Budget
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-274825

October 31, 1996

The Honorable Larry E.  Craig
Chairman, Subcommittee on Forests
 and Public Land Management
Committee on Energy and Natural Resources
United States Senate

Dear Mr.  Chairman: 

Each year, the U.S.  Department of Agriculture's (USDA) Forest
Service and the Department of the Interior's (DOI) Bureau of Land
Management (BLM) award thousands of contracts for the removal of
timber from public lands.  Since the early 1990s, the Forest Service
and BLM have suspended or canceled timber sale contracts for a number
of reasons, including their own noncompliance with provisions of the
National Forest Management Act of 1976, the Endangered Species Act of
1973, or the National Environmental Policy Act of 1969.  Suspending
or canceling timber sale contracts to protect threatened or
endangered species is a relatively new and growing phenomenon for
these federal agencies.  Before the 1990s, the Forest Service and BLM
rarely suspended or canceled a timber sale because of such concerns. 

Both the Forest Service's and BLM's timber sale contracts contain
provisions describing the liability that the agencies will incur if
they cancel a sale or cannot successfully negotiate a modification
with the purchaser following a suspension.  Concerned about the
potential magnitude of the federal government's liability, you asked
us to address the following questions: 

  -- What amounts and types of damages have been awarded to
     purchasers, and how did the Forest Service and BLM pay for the
     damages? 

  -- What amounts and types of claims are pending against the Forest
     Service and BLM, and how do the agencies expect to pay the
     claims? 

  -- What actions are the Forest Service and BLM taking to minimize
     the future liability arising from suspended or canceled timber
     sale contracts? 

As agreed with your office, we limited our work to timber sale
contracts that the Forest Service and BLM had suspended or canceled
to protect threatened or endangered species and the resulting claims
or lawsuits settled or pending between October 1992 and June 1996. 
To provide the most current information, we updated the data on
pending claims through October 1, 1996. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

From October 1992 through June 1996, the Forest Service and BLM paid
more than $6.6 million in claims for 49 contracts that were suspended
or canceled to protect threatened or endangered species.  The Forest
Service had 48 of the contracts; BLM had 1 contract.  The agencies
have paid the purchasers for the value of replacement timber,
interest, lost profits, and such unrecovered costs as those incurred
in maintaining performance bonds.  The Forest Service paid damages of
almost $6.5 million from its appropriations.  BLM settled its single
claim (almost $228,000 plus interest) by modifying another contract
held by the purchaser to reduce the amount paid to the federal
government for purchased timber without changing the original volume
of timber to be harvested. 

As of October 1996, the Forest Service had 73 pending claims with
potential damages of about $61 million; BLM had 1 pending claim for
almost $2.2 million.  In addition, data from the Forest Service and
other sources showed that the agency could incur at least an
additional $198 million.  BLM officials estimate that BLM could incur
between $35 million and $40 million more in potential future
liability.\1 However, estimates of how much, when, and whether the
agencies will have to pay any of their potential future liability are
uncertain.  Uncertainty arises from the agencies' inability to
predict the outcome of ongoing and future litigation that could
result in the award of more or less in damages than the purchasers
claim, the results of countersuits that could be filed by the Forest
Service or BLM, or the success of the agencies' efforts to offer
replacement timber or other settlements in lieu of paying damages. 
Forest Service officials stated that the agency may not have the
funds to pay for pending and future claims without additional
congressional funding.  According to a BLM official, if purchasers
sought and were awarded damages, the agency would first attempt to
reduce the price of existing contracts to offset the damages. 

Although BLM has repeatedly revised its timber sale contract to
minimize its liability when it must suspend or cancel a timber sale
contract to protect threatened or endangered species, the Forest
Service has not.  Since the late 1980s, the Forest Service has been
developing new regulations and a new timber sale contract that would
limit the government's liability on canceled timber sale contracts
and redistribute the risk between the agency and the purchaser.  The
Forest Service has not finalized either the regulations or the
contract. 


--------------------
\1 Pending claims represent those that the purchasers have filed with
the agencies' contracting officers or Board of Contract Appeals or
with the U.S.  Court of Federal Claims.  Potential future liability
and/or claims are "me too" claims that purchasers may or may not file
depending on the outcome of claims or litigation by other purchasers
whose contracts had been suspended or canceled under similar
circumstances. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Forest Service, through its 9 regional offices, and BLM, through
its 12 state offices, award contracts to individuals or companies to
harvest and remove timber from the federal lands under their
jurisdiction.  The contracts set forth specific terms and provisions
of the sale, including the estimated volume of timber to be removed,
the period for removal, the price to be paid to the government, and
the environmental protection measures to be taken.  For contracts
valued at $2,000 or more, for fiscal years 1990 through 1995, the
Forest Service reported that it had awarded almost 24,500 timber sale
contracts valued at about $27 billion; for fiscal year 1996, data
from the Forest Service showed that it had awarded over 8,000 timber
sale contracts valued at more than $4 billion as of the end of April
1996.\2 BLM had about 200 contracts valued at more than $173 million. 

Both the Forest Service's and BLM's regulations and procedures
specify that the agencies can extend the time for completing a timber
sale contract under certain circumstances and that they can modify,
suspend, cancel, or partially cancel a timber sale contract for
various reasons, including the need to protect threatened or
endangered species and their habitat.  The Forest Service's and BLM's
procedures outline similar steps to take when deciding whether to
suspend or cancel a timber sale contract.  For example, within the
Forest Service and BLM, the contracting officer can suspend a
contract to protect threatened or endangered species.  However, only
the Chief of the Forest Service and BLM's state directors are
authorized to cancel contracts for environmental reasons.  (App.  I
provides additional information on the Forest Service's and BLM's
procedures.)


--------------------
\2 These data do not include sales for such products as Christmas
trees, cones, and burls. 


   VARIOUS ACTIONS THAT OCCURRED
   AROUND 1990 HAVE RESULTED IN
   FEDERAL LIABILITY
------------------------------------------------------------ Letter :3

From October 1992 through June 1996, the Forest Service and BLM paid
more than $6.6 million in claims for 49 contracts that were suspended
or canceled to protect threatened or endangered species.  The Forest
Service had 48 of the claims; BLM had 1.  The agencies have paid the
purchasers for the value of replacement timber, interest, lost
profits, and unrecovered costs incurred under the contracts.  BLM
settled its claim of almost $228,000 (plus interest) by modifying
another contract held by the purchaser to reduce the amount paid to
the government without changing the original volume to be harvested. 
Data from the Forest Service show that it settled 48 claims (totaling
almost $6.5 million) from timber management appropriations.\3
According to timber management officials, the Forest Service attempts
to find replacement timber when it must cancel all or a portion of a
sale.  However, the data that the Forest Service provided to us do
not indicate whether the agency took such action to settle past
claims for contracts suspended or canceled to protect threatened or
endangered species. 

According to Forest Service and BLM officials and attorneys
representing some timber sale purchasers, the agencies rarely
suspended or canceled timber sale contracts before the 1990s to
protect threatened or endangered species.  Before that time, public
interest groups raised little opposition to timber sales,
particularly as they affected threatened or endangered species. 
After that time, new scientific information about forest ecosystems
came to light, environmental advocacy groups became more aggressive
and effective, the public and the media focused greater attention on
environmental issues, and the listing of new threatened or endangered
species by the Fish and Wildlife Service under the Endangered Species
Act led to the suspension or cancellation of timber sale contracts. 
One central issue in the Pacific Northwest concerned whether and how
much of the remaining old-growth forests should remain available for
timber harvesting or be left undisturbed, in part to protect the
habitat of the Northern spotted owl, marbled murrelet, various salmon
populations, and other species. 

In addition, in the early 1990s, various environmental groups brought
legal actions to suspend or cancel timber sale contracts.  For
example, in May 1991, the U.S.  District Court for the Western
District of Washington 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.  Similarly, in June 1992, the U.S. 
District Court for the District of Oregon ordered BLM not to proceed
with timber sale contracts because the agency had not prepared a
supplemental environmental impact statement.  The primary cause of
the suspensions was that the Forest Service and BLM 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. 

Purchasers who disagree with a Forest Service or BLM decision to
suspend or cancel a timber sale contract may submit a claim to the
responsible agency's contracting officer for a decision.  Under the
Contract Disputes Act, appeals from the contracting officer's
decision may be filed with the respective agency's Board of Contract
Appeals or the U.S.  Court of Federal Claims.  Either party may
appeal a decision of one of these bodies to the U.S.  Court of
Appeals for the Federal Circuit.  Generally, claims arising from the
suspension or cancellation of timber sale contracts to protect
threatened or endangered species have resulted from disagreements
between the federal agencies and the purchasers over the types and
amounts of compensation to which the purchasers are entitled.  Once a
court decides the merits of a case, the purchasers can seek
reimbursement for their attorneys' fees under the Equal Access to
Justice Act if the purchasers meet the criteria defined in the act.\4
If the court awards attorneys' fees, the Forest Service or BLM
generally has to pay the fees from appropriations. 


--------------------
\3 We limited our work to environmental claims related to protecting
threatened or endangered species.  Other environmental claims can
arise from noncompliance with the National Forest Management Act. 
Claims unrelated to environmental protection can arise from such
contractual grievances as breach of contract.  For example, two
purchasers in Alaska have filed claims for about $2 billion against
the Forest Service alleging, among other things, breach of contract
by the agency. 

\4 The Equal Access to Justice Act does not allow the award of
attorneys' fees to businesses with a net worth exceeding $7 million
or with more than 500 employees. 


   SIGNIFICANT UNCERTAINTY EXISTS
   ABOUT THE AMOUNT OF FUTURE
   LIABILITY
------------------------------------------------------------ Letter :4

Any estimate of future liability must be viewed with uncertainty. 
The outcome of ongoing and future litigation is unpredictable and
could result in the award of more or less in damages than the
purchasers claim.  In September 1996, for example, USDA's Board of
Contract Appeals awarded a purchaser over $4.2 million (plus
interest) on a $10 million claim for five timber sale contracts that
the Forest Service had suspended in September 1992.  Also uncertain
are the results of countersuits that could be filed by the Forest
Service or BLM, the success of the agencies' offers to replace timber
in lieu of paying damages, and the settlement of claims that have not
yet been filed. 

Claims pending against the Forest Service and BLM for contracts
suspended or canceled to protect threatened or endangered species
totaled almost $61 million and about $2.2 million, respectively, as
of October 1996.  Purchasers have filed claims for such expenses as
property taxes and insurance; the salaries of officers and watchmen;
depreciation; idle equipment, including logging trucks, skidders,
loaders, graders, and other assorted vehicles; interest; and the
value of replacement timber.  When pending claims, the agencies'
"best estimates" of potential future liability, and other information
are considered, the Forest Service's potential future liability as of
October 1996 could be at least $259 million; BLM officials estimate
that the agency's potential future liability could be between $37
million and $42 million.  Table 1 shows the number and amount of the
pending claims and the "best estimates" of potential future
liability. 



                                Table 1
                
                 Pending Forest Service and BLM Claims
                and Estimated Potential Future Liability
                 for Timber Sale Contracts Suspended or
                   Canceled to Protect Threatened or
                  Endangered Species Since Fiscal Year
                                  1992

                         (Dollars in millions)


                                     Amount of   Number of
                         Number of     damages    possible
Agency                      claims     claimed      claims      Amount
----------------------  ----------  ----------  ----------  ----------
Forest Service                  73        $ 61         203     $ 198\a
BLM                              1           2          22       35-40
======================================================================
Total                           74        $ 63         225    $233-238
----------------------------------------------------------------------
\a The amount shown relates to possible "me too" claims for 154
contracts; the Forest Service did not estimate damages for 49 such
claims.  It also includes an estimated $26 million that attorneys
representing one purchaser said would be filed in the future. 


      FOREST SERVICE
---------------------------------------------------------- Letter :4.1

According to timber management officials, purchasers had not, as of
October 1996, filed claims for the additional $198 million.  For
example, $170 million of the $198 million potential future liability
represents an estimate of potential claims that are still up in the
air because of a recent settlement agreement.  On September 17, 1996,
the Justice Department and 15 timber companies (44 section 318 sales)
agreed that the Forest Service would provide alternative timber to
the companies between 1997 and 1999, after completing environmental
analyses related to the replacement timber being offered.  Under the
agreement, the purchasers waive all rights to file claims for delays
in providing replacement timber that occur after the date of the
agreement. 

Given the above settlement agreement and a multiplicity of court
cases, it is difficult, according to Forest Service officials, for
the agency to determine a reasonable damage estimate.  Forest Service
officials added that the September 1996 settlement agreement does not
preclude environmental groups from filing suits to prevent the sale
of replacement timber that could be offered to the purchasers.  This
possibility adds further uncertainty to estimates of the Forest
Service's future liability. 


      FUNDING FOR PENDING AND
      FUTURE SETTLEMENTS MAY BE A
      PROBLEM
---------------------------------------------------------- Letter :4.2

According to Forest Service officials, the agency may not have the
funds to settle pending and future claims.  In the past, the agency
has not requested a specific appropriation to settle claims but has
reprogrammed funds or used funds carried over from prior fiscal
years.  However, the amount of settled claims was significantly
smaller than the amount of potential future claims.  Timber
management officials are concerned that a large judgment against one
or several forests could cause the Forest Service to stop all or some
programs in the forests or request supplemental appropriations to pay
the damages. 

Under the Forest Service's policies, the cost of administering a
timber sale contract is a cost of the forest on which the sale
occurs, and any costs associated with claims are to be covered by the
forest's funds.  Therefore, the applicable forest would first pay the
damages out of current appropriations from the account of the program
responsible for administering the contract--for example, timber
management or salvage sales.  The policy also states that the
involved forest and region may have to reprogram funds to cover these
costs.  The Forest Service has the discretion to reprogram funds
within the National Forest System Appropriations Account.  In fiscal
year 1996, the Congress appropriated $1.3 billion for that account. 

The policy further notes that funds must be available to avoid
violating the Anti-Deficiency Act and states that contracting
officers should not issue a decision on a claim unless funds are
available.  The policy also states that the Forest Service does not
have the authority to use either the Timber Sale Deposit Fund or the
National Forest Fund accounts to pay for settling claims because
federal law requires the deposit of all receipts from timber sales
into a miscellaneous receipts account of the U.S.  Treasury except in
specific situations that do not include payments for contract claims. 

Officials from the Forest Service's Northwest Region told us that
they have considered other options to fund future damages.  For
example, the Forest Service and the purchaser could mutually agree to
the amount of the damages and establish credits that could be
transferred to existing contracts or held in a "bank" for future
contracts.  Second, the agency could allow the forests to offset the
damages when a purchaser has defaulted on other contracts.  Timber
management officials said they had discussed these two options with
regional, headquarters, and USDA officials.  They noted, however,
that neither the legislation nor the regulations applicable to the
Forest Service allow the agency to implement these options.  Third,
the Congress could enact legislation allowing the Forest Service to
use funds, derived from the sale of timber under contracts that were
subsequently suspended, that the agency had deposited in the Timber
Sale Deposit Fund or the National Forest Fund. 

For claims that purchasers have already filed, Forest Service
officials estimate that some of the damages may come due in fiscal
year 1997.  Because some claims have only recently been filed and
because USDA's Board of Contract Appeals or the Court of Federal
Claims can take between 2 and 5 years to issue a ruling, some of the
liability may not be realized until beyond 1997.  In addition,
countersuits and appeals could further delay the date when the
liability could become due. 


      BLM
---------------------------------------------------------- Letter :4.3

As of October 1, 1996, BLM had one claim pending for almost $2.2
million.  In 1992, the U.S.  District Court for the District of
Oregon ordered BLM to halt timber sale contracts because of concerns
about the Northern spotted owl.  As a result of this decision, BLM
suspended 23 timber sale contracts.  The purchaser of 1 of the 23
suspended contracts has filed a claim with the Department of the
Interior's Board of Contract Appeals for about $2.2 million. 
Attorneys from the office of DOI's regional solicitor in Portland,
Oregon, could not estimate when the Board would render a decision on
this claim. 

According to an attorney from the regional solicitor's office, if the
Board's decision is favorable to the purchaser, some or all of the
remaining 22 companies could file similar claims.  The court lifted
the injunction in January 1995, and the companies have been
harvesting timber since that time.  According to a BLM official and
an attorney from the regional solicitor's office, the potential
liability could be between $35 million and $40 million if the other
22 purchasers filed and were successful in their claims.  These
officials pointed out, however, that BLM has not conducted any
analyses to support the estimated liability. 

A BLM official noted that the 22 purchasers have probably finished
harvesting timber from the sales.  Therefore, if the purchasers were
successful in their claims, BLM would first determine whether the
purchasers had other contracts with the agency and, if so, attempt to
negotiate a settlement that would modify existing contracts to reduce
the price by the damages awarded without changing the original amount
of timber to be harvested.  According to an official, if that action
was not sufficient to settle the damages or if the purchasers did not
agree to the settlement, BLM would have to fund the damages from
appropriations. 


   THE FOREST SERVICE CAN FURTHER
   LIMIT ITS FUTURE LIABILITY; BLM
   HAS COMPLETED ITS ACTION
------------------------------------------------------------ Letter :5

Both the Forest Service and BLM have taken some actions to minimize
the future potential liability arising from the suspension or
cancellation of timber sale contracts to protect threatened or
endangered species.  Although BLM has completed the actions to limit
its liability, the Forest Service has spent years drafting and
redrafting proposed changes to its regulations and standard contract
language.\5 The Forest Service has not finalized either document.  In
commenting on a draft of this report, officials from USDA's Office of
General Counsel and the Forest Service's Timber Management staff
pointed out that changes in environmental laws, the increase in the
number of lawsuits, and the impact of the resulting court rulings
contributed to the delay in finalizing draft regulations and a draft
timber sale contract. 


--------------------
\5 Although the proposed regulations and contract had not been
released for public comment, USDA provided us with a July 1996
version to review. 


      FOREST SERVICE
---------------------------------------------------------- Letter :5.1

The existing Forest Service timber sale contract includes three
provisions that can come into play when the agency suspends or
cancels a timber sale contract to protect threatened or endangered
species.  The following summarizes the three provisions: 

  -- If the Forest Service suspends a contract to prevent serious
     environmental degradation or resource damage or to comply with a
     court order, the purchaser's claim is limited to the
     out-of-pocket expenses incurred as a direct result of the
     suspension.  The contract specifies that such out-of-pocket
     expenses do not include lost profits, the cost of replacement
     timber, or any other anticipated losses. 

  -- If the Forest Service cancels a contract to be consistent with a
     forest plan, to comply with a court order, or to 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,
     the purchaser is entitled, under provision CT9.5, to
     out-of-pocket expenses and to reasonable compensation for the
     cost of acquiring comparable timber to replace that lost through
     the cancellation. 

  -- If, for the same reasons, the Forest Service cancels a contract,
     the purchaser is entitled to out-of-pocket expenses but not,
     under provision CT9.52, to compensation for the value of
     replacement timber. 

However, the language of CT9.52 differs from the language in the
Forest Service's regulations addressing the cancellation of contracts
for environmental protection.  Those regulations state that the
Forest Service will provide reasonable compensation to the purchaser
for unrecovered costs and for the value of replacement timber.  One
purchaser has filed a suit with the U.S.  Court of Federal Claims
alleging, among other things, that CT9.52 is not consistent with the
Forest Service's regulations.  Officials from USDA's Office of
General Counsel said that it is not atypical for a case in the U.S. 
Court of Federal Claims to take several years to be resolved. 


         DRAFT CANCELLATION
         REGULATIONS WOULD USE A
         NEW FORMULA TO CALCULATE
         THE VALUE OF REPLACEMENT
         TIMBER
-------------------------------------------------------- Letter :5.1.1

In August 1990, the Forest Service published proposed regulations on
canceling timber sale contracts.  The Forest Service did not issue
final regulations because it identified additional changes that were
needed and litigation was occurring at that time.  In 1992, the
Forest Service again revised its regulations on cancellations.  The
1992 revision incorporated, among other things, the contract
provisions affecting (1) the protection of endangered species'
habitat and (2) the settlement that will be provided when the agency
cancels a timber sale contract to protect threatened or endangered
species.  The agency had expected to publish the proposed regulations
for comment in January 1994.  (App.  II provides additional details
on the proposed regulations.)

Since that time, USDA has been reviewing the proposed regulations. 
According to Forest Service officials, on September 26, 1996, USDA
gave its approval for the Forest Service to send proposed regulations
to the Office of Management and Budget (OMB) for its review and
approval.  At an October 1996 meeting, according to officials from
the Forest Service and USDA's Office of General Counsel, OMB asked
the Forest Service to provide additional information on the economic
impact of the proposed regulations.  The Deputy Director for Timber
Management told us that the Forest Service expects to provide the
required analysis to OMB by December 1996 but could not estimate when
proposed regulations would be published for public comment. 


         DRAFT TIMBER SALE
         CONTRACT WOULD REDUCE THE
         GOVERNMENT'S RISK
-------------------------------------------------------- Letter :5.1.2

In January 1988, the Forest Service completed its consolidated
revision of the two most frequently used timber sale contracts, which
had not been revised since the fall of 1973, and provided the draft
to USDA for its review.  In 1993, the Forest Service and USDA
initiated a second effort to revise the timber sale contract, but
neither draft has been published for comment or implemented because
USDA is still reviewing it.  If the Forest Service had finalized the
contract, USDA's Associate General Counsel, Natural Resources
Division, and other officials from that office believe that some of
the current liability might be greatly reduced because the proposed
contract would give the government more flexibility to modify
contracts and delete timber areas affected by threatened or
endangered species. 

On September 27, 1996, Forest Service officials told us that the
Chief had approved the proposed contract and was planning to meet
with USDA's Under Secretary for Natural Resources and the Environment
about it.  They could not estimate when or whether USDA would approve
releasing a proposed contract for public comment.  (App.  II provides
additional details on the draft contract.)


      BLM
---------------------------------------------------------- Letter :5.2

BLM has not had many claims for contracts suspended or canceled to
protect threatened or endangered species.  BLM's contract provisions
and regulations allowing extensions of the completion date have
significantly limited cancellations.  In addition, beginning in 1996,
BLM's contracts have limited purchasers' damages to unrecovered costs
when cancellations have resulted from the Endangered Species Act. 

Since 1984, BLM's timber sale contract has included a provision that
allows the agency to suspend a contract to protect threatened or
endangered species.  If its subsequent analysis shows that mitigating
actions can address the concerns or that the concerns no longer
exist, BLM can extend the contract's completion date for time equal
to the operating time that has been lost because of the suspension. 
According to a BLM official, valid reasons for granting extensions
include delays necessitated by the Endangered Species Act, court
injunctions by parties outside of the contract, and reviews of
cultural resources.  From 1992 through June 1996, BLM extended the
completion dates for 52 contracts, primarily to comply with the
Endangered Species Act. 

If its subsequent analyses show a continuing problem, BLM attempts to
negotiate a modification with the purchaser.  If unsuccessful, BLM
cancels the contract.  According to BLM officials, the agency has not
canceled any timber sale contract since at least fiscal year 1992. 
In 1991 and again in 1994, BLM revised the provision and expanded the
circumstances under which the agency could suspend operations to
consult or reinitiate consultation with the Fish and Wildlife Service
and other agencies.  For example, BLM could suspend operations while
certain raptors and owls were nesting or upon discovering "survey and
manage species" identified for protection in a resource management
plan.  Following the suspension, the purchasers can resume timber
harvesting operations; BLM does not incur any liability. 

In addition, BLM's regulations and standard timber sale contract
provisions are consistent and do not require the agency to compensate
purchasers for the value of replacement timber when contracts are
canceled or partially canceled.  However, until 1996, BLM's contract
was silent on the types of damages that purchasers could claim
following a cancellation or partial cancellation.  Rather, BLM relied
on its contracting officers, DOI's Board of Contract Appeals, and the
courts to determine whether payment for damages was warranted and how
much was to be awarded. 

Since March 1996, BLM's contract has included a provision that limits
the purchaser's damages to the actual costs that have not been
recovered by the value of the timber removed from the contract area. 
For example, if the purchaser builds a road to harvest a sale, BLM
would compensate the purchaser only for that portion of the road's
construction costs applicable to the portion of the sale that had
been canceled.  BLM uses a formula to determine the government's
liability.  BLM compensates purchasers for such unrecovered costs
only when contracts are canceled or partially canceled to protect
species listed under the Endangered Species Act. 

According to a BLM official and an attorney from the office of DOI's
regional solicitor in Portland, Oregon, BLM had considered adding
provisions to reduce the federal liability, such as unilaterally
canceling a timber sale contract for the convenience of the
government, but they noted that such actions may not be in the
agency's best interest, since the more restrictive a contract, the
less purchasers are likely to bid for the timber.  As of September
1996, BLM officials with whom we met said that they believe the
agency has sufficient protection and has no plans to either expand
its contract provision or take any other action that could further
limit the agency's future liability.  BLM's past success in
negotiating a noncash settlement with a purchaser seems to support
the agency's belief. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

BLM has suspended or canceled significantly fewer timber sale
contracts than the Forest Service, and BLM has consistently taken
actions to protect itself from the damages that could arise from
suspending or canceling timber sale contracts to protect threatened
or endangered species.  In contrast, as evidenced by the current
lawsuit alleging inconsistency in the language of its cancellation
regulations and standard timber sale contract provisions, the Forest
Service's actions have not fully protected the agency. 

Although complying with various environmental laws before offering a
timber sale would help protect the agencies against future
suspensions or cancellations and the damages that could follow,
effective regulations and a contract that has the same suspension and
cancellation language as the regulations would go a long way to
further minimize the potential for future claims, lawsuits, and
damages.  Many years have passed since the Forest Service started to
develop proposed regulations and a revised contract that would
minimize the agency's future liability.  However, the Forest Service
has not yet released these documents for public comment--a process
that would help it identify the issues that still need to be
addressed.  Although various circumstances contributed to the delay
in issuing draft regulations and a contract for public comment, the
dialogue that would result from the expeditious publication of both
documents may lead to more consistent actions by the industry and a
better understanding of the regulatory and contractual requirements
by both the industry and the public. 


   RECOMMENDATION
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Agriculture direct the Chief of
the Forest Service to expeditiously release for public comment
proposed regulations for canceling timber sale contracts and a
revised timber sale contract. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We provided USDA, the Forest Service, DOI, and BLM with a draft of
this report for comment.  We met with officials from these agencies,
including attorneys in USDA's Office of General Counsel; the Deputy
Director, an assistant director, and other members of the Forest
Service's Timber Management staff; an assistant director from BLM's
Lands and Renewable Resources staff; a forester in BLM's Oregon State
Office; and attorneys from the office of DOI's regional solicitor in
Portland, Oregon.  These officials agreed with the report's findings,
and USDA and the Forest Service agreed with the recommendation.  USDA
and Forest Service officials also provided us with additional reasons
for the delay in issuing new cancellation regulations and a new
timber sale contract and expressed concern about the specificity of
the information provided on these documents.  Officials from USDA,
the Forest Service, and BLM and attorneys from the office of DOI's
regional solicitor in Portland, Oregon, suggested clarifications to
our report that we incorporated as appropriate. 

Attorneys in USDA's Office of General Counsel and the Deputy
Director, Timber Management, noted that changing environmental
circumstances, the tremendous increase in the number of lawsuits, and
the decisions resulting from the numerous lawsuits filed by public
interest groups and the timber industry over the last 8 years have
resulted in draft cancellation regulations and a draft timber sale
contract that differ significantly from the Forest Service's original
proposals.  They also noted that these and other issues contributed
to the delay in moving forward with the two proposals.  We
incorporated these views in the draft where appropriate. 

USDA and Forest Service officials were concerned about the
specificity of the information that we had provided on the draft
regulations and draft timber sale contract because the agency has not
released the two documents for public comment.  They explained that
both proposals are very sensitive and would shift some of the risk
from the government to the industry.  We modified some information on
the draft regulations and contract to provide a more general
discussion of their expected impact. 


---------------------------------------------------------- Letter :8.1

We performed our work from May 1996 through September 1996 in
accordance with generally accepted government auditing standards. 
Appendix III contains details on the scope and methodology of our
review. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 7 days after the date of this letter.  At that time, we will
send copies to the Secretaries of Agriculture and the Interior and
the Director, Office of Management and Budget.  We will make copies
available to others upon request. 

This work was performed under the direction of James K.  Meissner,
Associate Director for Timber, who can be reached at (206) 287-4810
if you or your staff have any questions about this report.  Other
major contributors to this report were Mary Ann Kruslicky and John S. 
Kalmar, Jr. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy, Resources,
 and Science Issues


AGENCIES' PROCEDURES FOR
SUSPENDING OR CANCELING TIMBER
SALE CONTRACTS
=========================================================== Appendix I

The Bureau of Land Management's (BLM) and the Forest Service's
procedures outline similar steps that the agencies should take when
deciding to suspend or cancel a timber sale contract for
environmental reasons, including concerns about threatened or
endangered species.  BLM has delegated the responsibility for
suspending a contract to the contracting officer.  The Forest Service
has delegated the responsibility to suspend a contract to the forest
supervisor, who can redelegate the authority to the contracting
officer.  Table I.1 summarizes the agencies' procedures for
suspending a contract. 



                               Table I.1
                
                     BLM's and the Forest Service's
                Procedures for Suspending a Timber Sale
                   Contract to Protect Threatened or
                           Endangered Species

BLM                                       Forest Service
----------------------------------------  ----------------------------
Notify purchaser orally or in writing     Prepare suspension notice

Prepare suspension notice                 Deliver suspension notice

Deliver suspension notice                 Negotiate a contract
                                          modification

Negotiate a contract modification or      Resume operations if
send a letter warning                     contract is modified
of cancellation

Resume operations if contract is          Move to terminate contract
modified                                  if agreement on modification
                                          cannot be reached

Move to terminate contract if agreement
on modification cannot be reached
----------------------------------------------------------------------
The procedures for canceling a timber sale contract differ from those
for suspending one.  Within BLM, the state director is authorized to
cancel a timber sale contract to prevent environmental degradation. 
According to an official, BLM's canceling of a timber sale contract
is a "rare occurrence." None of the information provided to us by BLM
indicated that it had canceled a timber sale contract since fiscal
year 1992 to protect threatened or endangered species.  Within the
Forest Service, only the Chief can cancel a timber sale contract upon
determining that its continuation would cause serious environmental
degradation.  In addition, the courts have ordered or the Forest
Service has agreed to voluntarily cancel timber sale contracts. 
Table I.2 summarizes BLM's and the Forest Service's procedures when
canceling a timber sale contract. 



                               Table I.2
                
                     BLM's and the Forest Service's
                 Procedures for Canceling a Timber Sale
                   Contract to Protect Threatened or
                           Endangered Species

BLM                                       Forest Service
----------------------------------------  ----------------------------
Contracting officer notifies state        Forest supervisor or
director                                  contracting officer notifies
                                          regional forester

State director concurs                    Damages are determined

Damages are determined                    Chief reviews and decides on
                                          the action to be taken

Regional solicitor reviews                Contracting officer's
proposed action                           decision (cancellation
                                          notice) is sent to purchaser

Termination notice is sent                Board of Contract Appeals or
to purchaser                              U.S. Court of Federal Claims
                                          rules if purchaser appeals
                                          contracting officer's
                                          decision

Board of Contract Appeals or
U.S. Court of Federal Claims
rules if purchaser does not
accept settlement
----------------------------------------------------------------------

FOREST SERVICE'S DRAFT
CANCELLATION REGULATIONS AND
TIMBER SALE CONTRACT
========================================================== Appendix II


   DRAFT REGULATIONS WOULD MAKE
   COMPENSATION SIMILAR TO THAT OF
   OTHER AGENCIES
-------------------------------------------------------- Appendix II:1

In an effort to limit the financial liability of the Forest Service
when it must, for reasons of public policy or statutory direction,
cancel a timber sale contract, in August 1990, the agency published
proposed regulations concerning the cancellation of timber sale
contracts.  The Forest Service did not issue final regulations
because it subsequently identified additional changes that should
have been included in the 1990 proposed regulations and because
litigation was occurring at that time.  In 1992, the Forest Service
again instituted an effort to incorporate two of its contract
provisions--one to protect the habitat of endangered species and the
other to specify the settlement that will be provided when the agency
cancels a timber sale contract to protect threatened or endangered
species--into its regulations.  The Forest Service had expected to
publish the proposed regulations for public comment in January 1994. 
According to Forest Service officials, on September 27, 1996, the
U.S.  Department of Agriculture (USDA) gave its approval for the
Forest Service to send proposed regulations to the Office of
Management and Budget (OMB) for its review and approval.  They also
noted that OMB is required to complete its review within 30 days and
said that USDA would then have to approve the Forest Service's
publication of the regulations for public comment. 

The July 1996 version of the Forest Service's draft regulations that
we reviewed would clarify when, why, and by whom contracts may be
canceled; remove redundant provisions; provide a new formula for
compensation when the government must cancel timber sale contracts;
and limit the financial liability of the United States on certain
contracts.  The regulations would also include the language of the
Forest Service's Settlement for Threatened and Endangered Species
contract provision (CT9.52) and change the formula for calculating
compensation for the value of replacement timber to be similar to
that of other agencies. 

In the preamble to the draft regulations, the Forest Service states
that assuming most of the risk is no longer in the public interest
nor is it fiscally feasible, given the increasing uncertainties
surrounding national forest timber sales.  The preamble notes that
the draft regulations would give agency officials the flexibility to
adjust management activities on National Forest System land.  The
preamble also notes that these and other changes are necessary
because the agency cannot continue to bear most of the financial risk
and burden of contract cancellations arising from its compliance with
the increasingly complex and rigorously enforced environmental laws
and regulations. 


   DRAFT TIMBER SALE CONTRACT
   WOULD REDUCE THE GOVERNMENT'S
   RISK
-------------------------------------------------------- Appendix II:2

In January 1988, the Forest Service completed its draft consolidated
revision of the two most frequently used timber sale contracts
(2400-6 and 2400-6T), which had not been revised since the fall of
1973.\1 The draft was not published for comment and was never
implemented.  In its April 1993 Timber Cost Efficiency Study--Final
Report, the Forest Service indicated that it would revise its timber
sale contracts.  In July 1993, at the direction of the Assistant
Secretary of Agriculture for Natural Resources and Environment, USDA
and the Forest Service began a second initiative to develop a revised
timber sale contract. 

We reported in April 1994 that the Forest Service had sent the
revised contract to the Secretary of Agriculture in January 1994,
expecting it to be issued by October 1994.\2

As of October 1996, the Forest Service had not published the revised
contract for public comment.  According to officials from the Forest
Service and USDA's Office of General Counsel, interested parties,
including the industry, should have a chance to comment on the
revision because they may be able to suggest changes that will
improve the contract or identify aspects of it that will not work on
the ground.  On September 27, 1996, Forest Service officials told us
that the Chief had approved a proposed contract and was planning to
meet with USDA's Under Secretary for Natural Resources and the
Environment about it.  Officials could not estimate when or whether
USDA would approve the Forest Service's release of a draft contract
for public comment. 

In developing the draft contract, USDA and the Forest Service
reviewed timber sale contracts used by several states, the Department
of the Interior, and private parties to sell private timber and
reviewed court decisions to identify specific ambiguities and
weaknesses in the current timber sale contracts.\3 According to the
conclusion, the draft contract would distribute liability and risk
"more equitably" between the parties and bring the contract into
conformity with standard business practices.  For example, the draft
contract would permit the Forest Service to modify the contract to
protect natural resources, including threatened or endangered
species, and to adjust the contract's terms to give the purchaser
additional harvesting time or money in consideration of such
modifications. 

Currently, the Chief of the Forest Service may cancel a contract to
comply with a court order or upon determining that the contract's
continuation would degrade the environment, be inconsistent with land
management plans, damage cultural resources, or jeopardize threatened
or endangered species.  Although the Forest Service's regulations
provide other circumstances under which the Chief may cancel, the
existing contracts do not include the additional actions.  The draft
contract would incorporate the other circumstances specified in the
regulations and permit the Chief to also cancel a contract (1) if
continued operations would violate a federal law or conflict with the
management of other forest resources, (2) upon a physical change in
the sale area or damage that materially diminishes the value of the
timber, and (3) upon a final determination that the purchaser had
violated environmental quality regulations on a national forest.  The
Forest Service would reimburse the purchaser for any unrecovered
out-of-pocket expenses. 

In the cost and benefit analysis supporting the draft contract, the
Forest Service concluded that the agency and the timber industry
would realize a net benefit of more than $7 million from the
contract's implementation.  The Forest Service also estimated that
the contract revision could affect about 3,000 timber sales each
year, the costs for purchasers to administer the revised contract
would increase about 10 percent over the costs of administering the
current contracts, the government would receive about $26 million
less for the timber sold, litigation costs to both parties would be
reduced by about $330,000 annually, and damages would be reduced by
between $20 million and $30 million over the next 4 to 5 years. 

Although major differences exist between federal and state laws,
regulations, and guidelines, we noted that the timber sale contract
used by Oregon seems to restrict the types of damages more than the
Forest Service's contract, yet the state is able to market and sell
large volumes of timber.  For example, under Oregon's timber sale
contract, the state can terminate the contract in whole or in part
whenever such action is in the state's best interest.  If Oregon
terminates a part or all of a timber sale contract, the purchaser is
not entitled to lost profits, the cost of replacement timber, or any
other consequential damages.  Also, any interest earned on moneys
deposited by the purchaser remains with the state. 

The vice presidents of two industry organizations with whom we met
told us that Oregon has only about 2 to 3 percent of the timber sales
in the state (the Forest Service has about 15 percent), deals with
only one or two forests, sells to a limited group of purchasers, and
awards its contracts for short terms; therefore, purchasers are
willing to accept more restrictive provisions.  They also noted that
since Oregon uses timber sale revenues for such activities as
schools, the state has an incentive to resolve problems rather than
suspend or cancel contracts and incur damages. 


--------------------
\1 The Forest Service uses Form 2400-6 when the payment for timber is
made after the logs have been cut, removed from the sale area, and
measured by scalers, and Form 2400-6T when it measures the trees and
estimates the volume before awarding the contract. 

\2 See Forest Service:  Status of Efforts to Achieve Cost Efficiency
(GAO/RCED-94-185FS, Apr.  26, 1994). 

\3 The states included California, Michigan, Minnesota, Montana,
North Carolina, Oregon, South Carolina, and Washington.  The private
parties included Weyerhaeuser and International Paper Company. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III

The Chairman, Subcommittee on Forests and Public Land Management,
Senate Committee on Energy and Natural Resources, asked us to
determine (1) the amounts and types of damages awarded to purchasers
whose timber sale contracts have been suspended or canceled and the
ways the agencies have paid the damages, (2) the amounts and types of
claims pending against the Forest Service and Bureau of Land
Management (BLM) and the sources of funds from which the agencies
expect to pay the claims, and (3) the actions that the Forest Service
and BLM are taking to minimize the future liability arising from
suspended or canceled timber sale contracts.  As agreed with the
Chairman's office, we limited our work to timber sale contracts that
have been suspended or canceled to protect threatened or endangered
species and to claims settled or pending between October 1992 and
June 1996.  To provide the most current information, we updated the
data on pending claims through October 1, 1996. 

To obtain the information in this report, we reviewed relevant Forest
Service and BLM regulations, policies, and procedures related to
awarding, suspending, and canceling timber sale contracts.  We
reviewed reports by GAO, the Congressional Research Service, and the
U.S.  Department of Agriculture's (USDA) and the Department of the
Interior's (DOI) Offices of Inspector General on various aspects of
the Forest Service's and BLM's timber programs.  We also obtained
legal briefs that had been submitted to the U.S.  Court of Federal
Claims on some of the pending lawsuits and reviewed rulings issued by
that court as well as by USDA's Board of Contract Appeals, the U.S. 
District Court for the Western District of Washington, and the U.S. 
District Court for the District of Oregon.  We visited the Forest
Service's and BLM's offices responsible for timber sale contracts in
the Pacific Northwest.  We selected this location because almost all
of BLM's timber sale contracts are awarded by its Oregon State Office
and 35 percent of the Forest Service's timber sale contracts over
$2,000 are awarded by its Pacific Northwest Region.  We also met with
the Vice President of the Northwest Forestry Association, which
represents timber companies located in Oregon and Washington State,
and the Vice President of the Independent Forest Products
Association, which represents timber companies throughout the United
States. 

To determine the types and amounts of damages awarded to purchasers
for suspended or canceled timber sale contracts, we reviewed the
applicable provisions of each agency's timber sale contract.  We also
met with timber management officials at the Forest Service to discuss
the types and amounts of damages paid to timber purchasers.  In
addition, at our request the Forest Service gathered data from each
forest on the claims paid and the source of the funds used to pay the
claims.  We also contacted all 12 BLM state offices to determine the
damages that were paid since fiscal year 1992 for timber sale
contracts that were suspended or canceled to protect threatened or
endangered species.  For the one claim paid by BLM, we obtained
information from the state office and the office of DOI's regional
solicitor in Portland, Oregon. 

In documenting the types and amounts of claims pending against the
Forest Service and BLM and the sources of funds from which the
agencies expect to pay the claims, we relied on information provided
by the forests and BLM's state offices.  A Forest Service timber
management official requested each forest to gather information on
the claims that were pending for timber sale contracts that had been
suspended or canceled to protect threatened or endangered species. 
We reviewed the data and compared them with the data the Forest
Service had provided to the Subcommittee.  We discussed the pending
claims with officials from USDA's Office of General Counsel and
gathered data from a local law firm that represents several timber
purchasers to determine the rationale for their clients' claims and
the amounts they are seeking in damages.  We also contacted attorneys
in six of the Forest Service's nine regional offices to determine the
reasons that purchasers filed claims.  For BLM's one pending claim,
we gathered supporting documentation and discussed the basis for the
claim with a BLM state office official and an attorney in the office
of DOI's regional solicitor in Portland. 

We discussed with Forest Service and BLM officials the actions the
agencies can take to minimize the future liability arising from
suspended or canceled timber sale contracts.  We obtained copies of
the provisions in each agency's timber sale contract that have been
used to limit the agencies' liability when timber sale contracts have
been suspended or canceled to protect threatened or endangered
species.  We discussed the provisions' merits with officials from
USDA's Office of General Counsel as well as with BLM state officials
and regional solicitors.  We reviewed drafts of the Forest Service's
July 1996 regulations and contract revisions.  The draft regulations
are aimed at reducing the Forest Service's liability for canceled
timber sales and the draft timber sale contract would assign risk
differently between the Forest Service and purchasers.  We discussed
the history and relevance of both proposals with officials from the
Forest Service and USDA's Office of General Counsel as well as with
private attorneys who had drafted a proposed timber sale contract at
the industry's request.  Finally, we discussed with BLM state
officials and an attorney in the office of DOI's regional solicitor
in Portland the actions that BLM has taken or plans to take to limit
its future liability for timber sale contracts that are suspended or
canceled to protect threatened or endangered species. 


*** End of document. ***