Comment: Many people suggested new pilots that were often combinations of the draft pilots, such as a collaborative group combined with a forest trust.
Response: The Forest Options Group proposes that such combinations be optional so long as a full range of pilot "building blocks" is tested.

Comment: Open-bucket pilots should be given a special line item in the budget approved by Congress so that other forests are not forced to adjust their budgets when the pilots spend or less on particular line items.
Response: The Forest Options Group proposes to create a new line item in the budget dedicated to the pilot forest program.

Comment: Basing at least some pilots on ranger districts rather than national forests would return the Forest Service to its decentralized roots and allow nearly five times as many pilots without increasing the land area of the pilots.
Response: The Forest Options Group agrees that some pilots could work on ranger districts and has made that optional.

Comment: The Forest Service research branch or a committee of scientists should be delegated the task of developing evaluation criteria and monitoring the pilots.
Response: The group suggests that monitoring be done by an outside consultant using criteria developed jointly by the consultant and a new Office of Pilot Projects.

Comment: Pilot forests should be selected from applicants by a board that includes representatives of various interest groups, such as the Sierra Club and AF&PA. This will give those interest groups assurance that the pilots are done right.
Response: The group proposes that an advisory board consisting of a full range of interests assist the secretary of agriculture in selecting pilot forests.

Comment: The Lubrecht Group suggested, and several commenters agreed, that pilots report to a "Region 7."
Response: The group agreed that an Office of Pilot Projects should monitor and assist the pilot forests, but decided not to call this a "region" because the group wants the office to be more like the old "inspection districts" than the current regions.

Comment: Many reviewers worried that pilots 1 and 4 did not have funding or safeguards for nonmarket resources.
Response: The group created a nonmarket stewardship fund for both pilots.

Comment: The collaborative councils should be non-profit but not necessarily be 501(c)(3). The collaborative pilot forest supervisors should also be ex officio (non-voting) members of the councils.
Response: Agreed.

Comment: Keeping the status quo budgeting process for pilot 2 would leave the forest supervisor with a choice of being fired for not following the budget assigned by the region and being fired for not cooperating with the collaborative board.
Response: The group agreed to make pilot 2's budget an open-bucket budget.

Comment: If a board is to be elected, a proportional voting system should be used that would insure representation from a broad range of minority views. Such a system is used to elect the Cambridge, MA, city council and many European parliaments.
Response: While the Forest Options Group did not incorporate this into a pilot, it is an option that could be tried by a forest interested in an alternative method of selecting a board.

Estimating Pilot Budgets

In general, a natural resource agency can be funded in one of four ways: appropriations plus gross receipts, appropriations alone, gross receipts alone, and net receipts alone. Further variations are possible depending on the percentage of gross or net the agency is allowed to keep. But in general, a forest funded out of appropriations plus gross receipts will always have a larger budget than one funded out of appropriations alone, and a forest funded out of gross receipts will always have a larger budget than one funded out of net receipts.

To estimate the effect of the pilots, imagine three forests, all of which have historic budgets of $10 million per year. The first forest has historically earned receipts of $20 million per year, the second $10 million, and the third $2 million. Imagine further that new user fees could produce additional revenues of $6 million per year, but that a rate board might limit new user fees to just $4 million per year. Pilot budgets under these assumptions are shown in the table below.

Hypothetical Pilot Budgets
($1,000s per year)

                  Forest 1   Forest 2   Forest 3
Pilot 1 budget     13,000      8,000      5,000
Pilot 2 budget     10,000     10,000     10,000
Pilot 3 budget *   19,500     12,000     10,000
Pilot 4 budget     13,000      8,000      5,000
Pilot 5 budget     18,000     10,500      5,000

All hypothetical forests have historic budgets of $10 million per year. Forest 1 has historic receipts of $20 million per year; Forest 2 $10 million, and Forest 3 $2 million. All could earn about $6 million more if recreation and other fees were increased to market rates but only about $4 million more if fees are set by a rate board.

Pilot 1 is funded out of net, which averages about half of gross--more for forest 3 because of the safety net. Pilots 3 and 5 are funded out of three-quarters of gross, which is slightly lower in 5 because of the rate board. The safety net increases pilot 3 and 5 budgets in forest 3. Pilot 2 gets historic funding.

As shown in the table, a forest that historically lost money would have the largest budget under pilot 2, while a forest that historically broke even or made money would have the largest budget under pilot 3 (after its forest plan is done). A forest that historically lost money but could significantly boost revenues would also gain under pilot 3.

In actual practice, of course, both budgets and receipts will be much more fluid. Many forests may be able to streamline their budgets without significantly reducing public services. Forests funded out of their receipts will be likely to shift budget emphases to those programs that can produce more receipts.

Public discussions of the draft Second Century report suggests that many people remain confused about the distinction between net and gross receipts and why it is important. Net receipts are equal to gross receipts minus costs. A forest that is funded out of 100 percent of its net receipts will tend to set its costs equal to its net. Since net plus costs equal gross, if costs equal net then costs will tend to be about half of gross.

Yet funding out of net produces very different incentives than funding out of half of gross. A forest funded out of gross receipts will have an incentive to cross-subsidize activities that reduce net income but increase gross income, while a forest funded out of net will have an incentive to avoid such cross-subsidization.

The Oregon Department of Forestry is funded out of 36 percent of its gross receipts, while the Washington Department of Natural Resources is funded out of 25 percent of its gross. Could Oregon receive large profits if it forced its forestry department to live off of just 25 percent of gross? Could Washington receive greater returns if it allowed its resources department to invest an additional 11 percent of gross? There is no way to know; only an agency funded out of its net income will have an incentive to maximize net income.

Is profit an appropriate goal for public forests? To the extent that all resources are priced in the market place, the answer is yes. Maximum profit indicates that the public is getting the maximum net benefit out of the forest.

But what about resources that are not priced by the market, such as endangered species? Profit maximization provides no incentives to protect such resources, but neither does loss maximization (roughly the current situation) or profit nullification (the case if funded out of gross). If spending money on revenue-producing activities is harmful to nonmarketable resources, then profit maximization may be the best solution since it leads to the lowest budgets. Pilots 1 and 4 also contain special funds for nonmarket stewardship activities.

The Forest Options Group recognizes that the self-nomination process will pose a dilemma for national forests. Many forest budgets will shrink if funded out of gross receipts rather than the current process; funding out of net receipts will always produce smaller budgets than funding out of gross receipts. Thus, forests will be tempted to propose open-bucket appropriations or gross-receipts funding rather than net receipts. Yet the Forest Options Group strongly believes that all options must be tested. The pilot project advisory committee must insure that pilots cover the full range of budgeting options.