by Dr. Robert W. Brumbaugh , U.S. Army Corps of Engineers Institute for Water Resources
In Pembroke Pines, Fla., a group of visionaries are restoring 358 acres of highly degraded, Melaleuca-infested wetlands on city property. At the completion of the project, the city will have a revenue-producing park with canoe trails, boardwalks, and picnic areas.
In Lake Charles, Ill., a wetland entrepreneur is creating and restoring approximately 46 wetland acres on St. Charles Park District lands. The project will improve water quality and will provide a refuge for area wildlife which will serve as nature-study habitat for the local population.
In Millhaven, Ga., an investor is restoring approximately 350 acres of previously drained wetlands on private lands.
All of this activity is possible because Federal and local
regulators alike have embraced a relatively new approach to
wetlands regulation and management - wetland mitigation
banking.
The concept of mitigation banking, although practiced for more than 15 years, is still relatively new, and is developing along with the "no net loss" policy. In trying to find innovative solutions to problems associated with standard onsite mitigation compensation, wetland mitigation banking became an important component of the Clinton Administration's Wetland Plan , introduced in August 1993. As can be found so often with new ideas, some wetland specialists forged the beginnings by working with regulators and developing the first of the banks.
Among the initiatives in the 1993 Wetland Plan was strong support for giving incentives to state and local government to engage in watershed planning, with the intent to reduce the conflict between wetlands protection and development when decisions are made on a permit-by-permit basis. To encourage greater use of comprehensive planning and to identify wetland protection and restoration needs, concerns, and opportunities, the Administration gave its support to mitigation banking. As part of the August 1993 package, the U.S. Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers issued joint guidance to their field staff that clarified the manner in which wetlands mitigation banking fits in the Federal wetlands regulatory program. The Administration further demonstrated its support of banking through a Federal interagency effort to develop mitigation banking guidance. That effort was led by Michael Davis, chief of the Corps Regulatory Branch and Chair of the White House Wetlands Working Group.
In spring 1995, the concept of mitigation banking reached a major
threshold when the Federal regulatory and resource agencies
released proposed guidance in the March 6, 1995 Federal
Register. Federal Mitigation Banking guidance was finalized in
the November 28, 1995 Federal Register. The Federal Guidance
for the Establishment, Use and Operation of Mitigation Banks
represents the consensus of five agencies: the Department of the
Army/Corps of Engineers, Environmental Protection Agency, the Fish
and Wildlife Service, the Natural Resources Conservation Service,
and the National Marine Fisheries Service. The guidance endorses
mitigation banking in support of the Administration's Wetlands
Plan. Mitigation banking is defined in that guidance as:
"The restoration, creation, enhancement, and (in
exceptional circumstances) preservation of wetlands and/or other
aquatic resources, expressly for the purpose of providing
compensatory mitigation in advance of authorized impacts to
similar resources."
In practice to date, there has been considerable variation in
implementation because almost all banks established have been ad
hoc arrangements between regulators and development entities.
However, banks generally share the following characteristics:
A mitigation bank is not like a checking account. Credits placed in deposit by a sponsor can only be spent by a user if the regulator approves the action. The "currency" of the bank must be measurable to the extent that wetland functions and values credited and debited are comparable. Owing to limitations in wetland functional assessment methodology, to date, in many cases, credits and debits have been measured simply in terms of acres of various wetland classes produced, or lost.
On the positive side, regulatory and resource agency personnel are enthusiastic about the prospects of wetland banking. Banking provides an alternative to the "postage stamp" approach typical of individual compensatory mitigation projects. Banks can produce large, ecologically superior wetland areas, since "postage-stamp" sized, on-site mitigation projects often fail. Also, mitigation for the cumulative impacts of many small wetland losses within a watershed or along a corridor is frequently more easily accomplished through a banking program.
Advantages to regulatory and resource agencies also include increased efficiency of review and compliance monitoring for mitigation projects. This increase in efficiency improves the reliability of efforts to restore, enhance, or create wetlands for mitigation purposes.
The permit applicant also realizes advantages, including economy of scale, improved cost estimates, and elimination of the "double permit" process where a permit is needed for both the development project and for the wetland project. A mitigation banking approach offers an opportunity of greater economies of scale at all stages: planning, design, construction, and operation of a replacement wetland.
Finally, mitigation banking has found acceptance not only because of the benefits or characteristics cited above, but also because of the opportunities to facilitate watershed-basedwetlands planning.
The Corps Institute for Water Resources (IWR) has been conducting a study for Corps Headquarters in an effort to better understand the concept of wetland mitigation banking and its application to the Federal wetland regulatory program. Phase 1 of the two-phase study focused on a review of mitigation banking practices to date. Results were published in six reports. Development of the Federal Guidance was based on these results. The current phase of the study, expected to be completed in 1996, focuses on commercial banking, watershed-based wetlands management, and development of technical tools to assist implementation of banking.
Findings from Phase 1 indicate that banking is very much in an exponential growth phase in terms of implementation. A majority of the more than 40 banks operating by summer 1992 existed for less than 5 years. Banked land totalled about 20,000 acres. Figure 1 graphically illustrates this rapidly expanding use. (Note: Today, probably more than a hundred banks are operating and an additional several hundred may be in the middle or latter stages of planning and design.)
The banks studied represented a variety of institutional arrangements. Mostly, they were single-client banks sponsored by state agencies, primarily state highway departments. Thus, the user or client is also the bank sponsor who produces the credits. A few banks were sponsored by private companies in need of compensatory mitigation for their own development actions.
When examined individually, many of the early banks had deficiencies in implementation or in designated long-term management programs. Nevertheless, the majority of the banks were functioning, or were expected to function, as planned. Not surprising, the most common reason for failure was improper design or engineering of hydrology.
As a population, these banks are
successful despite planning that often failed to provide
sufficient monitoring, liability, and enforcement.
Within the last few years, banks generally have been established
with much more specific long-term and oversight requirements.
Certainly there is more up-front Corps attention or involvement
than was the case for many early banks when, typically, the Corps
was not involved unless a permit was needed for bank
use or construction. The current Federal Guidance calls for Corps
participation and leadership.
Until 2 or 3 years ago, very few banks provided compensatory mitigation for general development. Most permit applicants could not take advantage of banking unless they had the ability and the funds to set up a bank for their own use. The potential for large-scale infusion of private-sector provided funds was not being realized.
In the early 1990s, the Bush Administration's Domestic Policy Council (DPC) showed interest in a market-oriented approach to get the private sector involved in banking as a mechanism to achieve the "No Net Loss" wetland goal. The DPC thought that market-based banks could support wetland restoration and management in locales where public funds were in short supply, but Administration Policy was not developed until the Clinton Administration's Wetland Plan was published, also supporting a market-oriented approach.
This support was underscored by the
Joint EPA-Army Memorandum to the field which stated
that permit applicants could draw upon the available credits of a
third party mitigation bank such as a bank developed and operated
by an entity other than the permit applicant. Now, the Federal
Guidance further supports the third-party bank concept in the
statement that the bank sponsor should be made responsible for
assuring the success of the mitigation bank replacement.
Commercial banks may represent, in a sense, a broader-based trading system for managing wetlands where the goal may be, for example, to maximize the ecological benefits within a watershed or regional context. Or, the goal may be to recreate the historic wetland assemblage, at least in terms of types and mix of wetland classes.
The Astoria Bank was part of a comprehensive plan for a 16-mile reach of the Columbia River, while the Bracut Marsh Bank siting was the result of state, city, and nonprofit collaboration on a subregional restoration plan. The Bracut Marsh Bank services permits for "pocket marshes in the city of Eureka and estuaries in the Humboldt Bay area."
Within the last several years, numerous watershed-based wetland plans have, as elements, private or publicly sponsored commercial banks. Such watershed-based approaches represent an implicit move away from a rigid, onsite, in-kind preference for piece-meal compensatory mitigation towards a broader-based trading system that takes advantage of qualitative differences among wetlands and that can use the potential economic profits from the development of some low-valued wetlands (that may be doomed in any event) to contribute to an overall "No Net Loss" and, potentially, a Net Gain in wetland function and area. Some of those who are apprehensive about offsite (and out-of-kind) mitigation may only support banking if it is implemented within a watershed-based wetland plan.
The notion that banking can facilitate watershed-based wetlands planning and management raises the issue of bank site location. Certainly location is critical if the ecological potential of banking is to be realized.
Bank siting to date, especially for the single client bank, has
been mostly on an opportunistic or ad hoc basis. Bank location
typically has been the product of special circumstances or fairly
arbitrary decisions. Mitigation banks may have been sited on land
already owned by the relevant public agency or in other cases
located so as to salvage the economic value of a site that could
not be developed. For most early banks, site selection did not
use a multiple site evaluation process or a multiple-objective
plan-evaluation process. Public commercial banks and, to a
lesser extent, private commercial banks have used more of a
watershed-based site selection process.
Among the most critical issues that affect the financial success of commercial banks, and thus the willingness on the part of the private sector to get involved in commercial banking, is the timing of debiting versus accrual of credits in the bank. Ideally, mitigation banks are constructed in advance of development projects that result in wetland losses and are seen as a way of reducing uncertainty in the wetlands replacement process. However, virtually all private commercial bank entrepreneurs argue that for their banking ventures to be economically viable, they need to be allowed to sell credits before replacement wetlands are fully functioning or self-maintaining. Allowing a bank to be debited before it achieves a fully functioning stage involves a trade-off between ecologic and economic risks. The later the bank may be debited (along a time continuum from planning through design, construction, and operation), the lower the ecologic risk. However, delays in allowing debiting increase the financial risk to the investor. The private sector generally needs some level of immediate return to justify the financial risk or to supplement initial funding.
It must be remembered that the market for the supply of commercial compensatory mitigation is regulated. Accordingly, the demand for this product or service is highly uncertain. Every modification of wetland regulations changes the demand for credits. Completely revamped wetland regulations may actually jeopardize a commercial venture. Wetland regulations can expand and contract in terms of jurisdiction or flexibility. The market or demand for compensatory mitigation credits will expand and contract also, affecting financial success of commercial credit supply ventures. The hypothetical relationship between ecological and economic risks is illustrated in Figure 2.
Private commercial banks implemented to date reflect the value of time. Regulators have allowed debiting (generally to a limited extent) shortly after bank construction, during construction, or even shortly before construction, if there was an approved site plan and appropriate real estate arrangements and financial assurances (such as funds for remedial work, if needed, and for long-term management).
For example, the Interagency agreement between the Corps Chicago District, EPA, and the Fish and Wildlife Service (FWS) contains staged debiting and associated financial assurance criteria. The umbrella agreement, which serves as guidance to banks that are implemented within the Chicago District, allows up to 30 percent of the total expected credit capacity to be debited (released for sale) upon approval of a banking instrument (charter) and prior to the construction of replacement wetlands. These credits must be backed with surety bonds (or equivalent) equal to the estimated cost of generating conditionally certified credits. An additional 20 percent of credits can be transferred to permit applicants (sold) when the hydrology is established, and another 20 percent when planting is complete. The final 30 percent of the expected credits can be made available for use upon conditional certification of credits. Once the wetland credits have been conditionally certified (as on a trend towards success), the surety bond amounts can be reduced commensurate to the reduced level of risk.
Existing private commercial ventures generally include similar (to the Chicago District umbrella agreement) types of standards for the timing of credit use and types of financial assurance conditions mandated by regulators to minimize the risk of ecological failure.
The first private commercial mitigation bank, the Millhaven Bank (WET, Inc.), can sell one-half of the total expected mitigation credits generated for a particular mitigation parcel when construction and planting is complete for that parcel (and a preliminary determination of sufficient hydrology is made). In addition, the commercial venture must record a restrictive deed covenant on the parcels and obtain financial assurances. The venture must then show within 3 years that the parcel satisfies wetland delineation criteria relating to hydrology, soils, and vegetation before the remaining credits can be sold.
The Millhaven venture obtained an irrevocable letter of
credit to fulfill its assurance requirement. The Corps permit
called for the reduction of the financial assurance in stages
commensurate with the level of ecological risk reduction.
Credit/debit evaluation is currently limited by technical deficiencies in measurement of wetland functions. Current assessment methods are varied in their capability to accurately and quantitatively assess individual functions, with the result that some functions may be emphasized simply because they can be evaluated, e.g., fish and wildlife habitat. Banks present the need and opportunity to consider multiple functions. However, even the more advanced assessment methods are primarily limited to looking at individual functions.
In a paper presented at the National Interagency Workshop on Wetlands sponsored by the U.S. Army Engineer Waterways Experiment Station (WES) in April 1995 in New Orleans, Dr. L. Jean O Neil and Julie Metz pointed out that an inherent difficulty for credit and debit assessment is the size differential between a bank and most wetland loss sites. Further, the probability increases that the replacement wetland will include nonwetland cover types which confound a credit evaluation for wetland functions. (See the June 1995 Wetland Research Program Bulletin Vol. 5, No. 2, for a discussion of that workshop (on-line at http://www.wes.army.mil/el/wrtc/wrp/bulletins/v5n2/v5n2.html ).
A method under development at WES should aid bank credit and
debit evaluation. Its shell is the "Hydrogeomorphic
Classification," which helps to identify important functions by
wetland type, per hydrogeomorphic setting, by region. Functional
capacity indices are under development as part of the overall
methodology. An article in the Oct. 1994
Wetlands Research Program Bulletin,
Vol. 4, No. 3, describes the hydrogeomorphic approach (on-line at
http://www.wes.army.mil/el/wrtc/wrp/bulletins/v4n3/v4n3.html
).
The guidance affirms Federal agencies strong support of
mitigation banking as an opportunity for achieving the
President's Wetlands Plan. Guiding principles of that plan are:
As Davis points out in his article in the July-August 1995 National Wetlands Newsletter (Vol. 17, No. 4) "A More Effective and Flexible Section 404," when properly implemented, wetland mitigation banking can serve as a compensatory mitigation tool that benefits the aquatic environment and provides landowners flexibility in meeting permit requirements.
Approximately 130 letters were received that commented on the proposed guidance. Some of the more difficult issues the agencies had to resolve, in addition to timing of credit withdrawals discussed above, were the nature of Corps leadership and other Federal agency roles in bank planning (and development of a banking instrument) and operation.
The Federal mitigation banking guidance clarifies the manner in
which wetlands mitigation banks may be established and used to
satisfy mitigation requirements of the Clean Water Act, Section
404 permit program, and the wetland conservation provision of the
Food Security Act (i.e., "Swampbuster" provision). The purpose
of providing guidance to the field-operating activities of
involved agencies was to achieve consistency in decision-making on
mitigation banking.
The policy for mitigation banking endorses the following:
Other issues addressed in the guidance include use of preservation of existing wetlands, wetland buffers, public participation, siting on public lands, bank service area, and monitoring requirements. IWR is assisting a staff-level Federal Interagency Working Group to prepare technical materials that will support the policy guidance. A model banking instrument is among these products.
While the guidance is specific on key policy issues at the national level, flexibility has been maintained to allow field-operating activities latitude in interpreting the guidance to address regional needs and interests.
However, despite the support of the Administration and encouragement provided by the Federal Guidance, the future of banking practices, like that of the individual entrepreneurial banker, is one of uncertainty not so much as uncertainty as a viable concept, but rather the uncertainty about the extent of the program. This uncertainty is largely the product of possible Congressional directives. Both the U.S. House of Representatives (HR 961) and Senate (S 851) have Clean Water Act reauthorizing legislation that could affect the demand for mitigation in a number of ways.
Additional information is available from Robert Brumbaugh at (703) 355-3069.