Tom Barlow, who coined the term “below-cost timber sales,” left the Natural Resources Defense Council in 1982 to move to Kentucky where he, improbably, managed to get himself elected to Congress for one term. Soon after that, his associate Gloria Helfand, who gathered most of the data for NRDC’s forest-by-forest analysis of timber profitability, ran off to Berkeley to get her Ph.D. in economics and now teaches at the University of Michigan.
That left the Wilderness Society, which had a couple of economists, and me to do the heavy lifting on money-losing timber sales. While NRDC was the first to look at timber profitability on a forest-by-forest basis, I was the first to look at it on a timber sale-by-timber sale basis in my analysis of 10,000 Forest Service timber sales sold in 1983.
In addition to reporting on the issue in Forest Planning/Watch magazine, I wrote many reports on timber sale economics. In 1980, Subsidizing the Timber Industry described how the Forest Service lost money on timber sales. The Citizens’ Guide to Forestry and Economics in 1986 looked at the overall picture of the inefficiencies of national forest management. In 1991, Growing Timber Deficits performed a detailed analysis of the Forest Service’s 1990 timber sale program. The Citizens’ Guide to the Forest Service Budget in 1992 went step-by-step through the timber sale process to show how the Forest Service increased its budget by losing money on timber.
A fundamental problem was that the Forest Service made no effort to even find out if sales would produce net revenue for the treasury. Out of about 75 line items in the Forest Service budget, two were unquestionably required for selling timber: sale preparation and harvest administration. In 1975, these two items totaled around $60 million, but by 1985 they had grown to $160 million despite no increase in timber sales. Much of this was due to inflation, but net of inflation this still represented a 45 percent increase in costs. Most of that increase probably went to do the environmental analyses needed to satisfy laws such as the National Environmental Policy Act and National Forest Management Act.
Even just $60 million a year represented a cost of more than $50 per thousand board feet sold. Since the Forest Service never hesitated to sell timber for less than that amount, many sales were clearly below cost even before considering any other costs.
For each sale, the Forest Service set a minimum bid price and sold the timber at auction. While any private party would set a minimum price to cover their costs, the Forest Service appraisal process focused on costs to the timber purchaser. Starting with published data reporting the value of wood products, Forest Service appraisers subtracted the cost of cutting the trees, moving them to the mills, and sawing them into lumber, plywood, and other finished goods, and then subtracted a little more to allow the purchaser a profit. The net might be very low, sometimes negative, values.
The Forest Service did have a minimum requirement that sales should return 50 cents per thousand board feet to the U.S. Treasury. By 1975, this was less than 1 percent of their costs to the treasury; by 1985, less than half a percent. In addition, the Forest Service set the minimum bid price high enough to cover the amounts it was allowed (under the Knutson-Vandenberg Act) to keep for reforestation and — after 1976 — other “improvements” to wildlife habitat, watershed, and recreation in the sale area. Other laws allowed the Forest Service to keep money for brush disposal (which usually meant burning the branches and twigs left behind after logging) and road maintenance, and the Forest Service added these costs to the minimum bid price. In short, it safeguarded its own budget, but made no effort to cover the cost to taxpayers beyond 50 cents per thousand.
I once asked George Leonard, who was the Forest Service’s director of timber management before he became deputy chief, where this 50 cents came from. He told me that was the cost of sale preparation and administration when the rule was written back in the 1930s. Costs had grown to be at least 200 times as much since then but the rule was never revised.
The Forest Service often required purchasers to build roads to access the timber. Appraisers estimated the road construction cost, and purchasers could then credit that cost (even if they actually spent less than the Forest Service’s estimates) against the price they bid on the timber. Such purchaser credits, however, did not apply to the base of 50 cents per thousand or to the amounts going into the K-V, brush disposal, or road maintenance funds.
Another fund was the salvage sale fund, which applied to sales of trees burned in fires, killed by insects, or otherwise dead or dying. This revenues from such sales went into this fund, which paid the costs of salvage sale preparation and administration. If a salvage sale also including some K-V funds, then the forest selling it didn’t even have to return 50 cents per thousand board feet to the treasury.
A timber sale might sell for $100 a thousand board feet. If sale preparation and administration cost about $50 a thousand, it might look like the sale made a profit, and the Forest Service often presented these numbers to make sales look profitable. But if $75 per thousand went into the K-V, brush disposal, and road maintenance funds, and another $20 was paid for by purchaser road credits, the net to the treasury would be only $5 per thousand.
In some markets, sales generated spirited bidding that might double the price of the timber above the Forest Service appraisal. In that case, forest managers could revise their Knutson-Vandenberg plans to include more “improvements” that would absorb the extra revenues.
Other markets had no bidding at all. Chief among them was the Alaska’s Tongass National Forest, which at 13.5 million acres was the largest national forest in the country by far. To stimulate economic development, the Forest Service had sold two 50-year timber sale contracts in the 1950s. One, to Ketchikan Pulp Company (which was owned by Louisiana-Pacific, John Crowell’s one-time employer), was for 8.25 billion board feet; the other, to Alaska Pulp Company, was for 5 billion board feet.
These contracts specified that the prices the mills paid for timber would be reassessed each year, so when the market went up, they paid more but when the market went down, they paid less. The Southeast Alaska Conservation Council asked me to look at these contracts and I discovered that these appraisals were all a sham due to the purchaser credits clause in the contract.
When markets were down, the mills ended up spending more on road construction than the appraisers said the timber was worth. Since the contracts were for 50 years, they accumulated these purchaser credits. Later, when the market went back up, they used the accumulated credits to pay for the high-valued timber. In fact, rather than pay for the timber, the Forest Service instead wrote checks to the mills to cover the accumulated purchaser road credits. More than just losing money, taxpayers were literally paying the mills hundreds of millions of dollars to take the timber away. Unlike the lower 48 states, where roads built with purchaser credits were later used by hunters and other recreationists, on the Tongass most roads were closed to recreationists because they were on islands with no connections to the cities where the recreationists might be.
Congress cancelled the 50-year contracts in 1997, but that was only four years before the Louisiana-Pacific contract was due to expire anyway. While the economic development benefits of the sales were dubious, the taxpayer-subsidized sales destroyed wildlife habitat and fisheries that probably provided greater value to the region’s economy than the timber.
In contrast to Alaska, timber values in northern California, northern Idaho, Oregon, and Washington were so high that the Forest Service couldn’t find enough improvements to make in the sale areas to spend all of the revenues. As a result, many national forests in these areas returned a net profit to the treasury on their timber programs. Elsewhere, most sales lost money.
However, my analysis of 1983 timber sales found that more timber was sold below-cost in the Pacific Northwest region than any other Forest Service region. While Douglas-fir and ponderosa pine were both valuable, other trees growing in the region, such as lodgepole pine, were not. To increase the funds it could spend on forest improvements (not to mention administrative overhead), Oregon and Washington forests would cross-subsidize stands of lodgepole pine and other worthless timber by including them in the same sales as ponderosa or other valuable timber. In effect, the ponderosa would be sold for less than it was worth to compensate the purchaser for having to also cut the lodgepole.
This violated a Forest Service rule known as the “tract value policy.” I found this policy in the Forest Service Manual, a collection of 15 to 20 volumes of three-ring binders that the Forest Service regularly updated. Section 2403.25 of the manual stated, “the appraised value of a tract of timber will not be reduced to obtain utilization of a species, size, or class.” Dieter Mahlein and I regularly documented sales that violated this policy, but we were unable to get the Forest Service to enforce it.
Although our rhetoric claimed that below-cost sales were subsidies to the timber industry, they were really subsidies to the bureaucracy. A third of the money in the K-V fund and about 20 percent of the brush disposal, road maintenance, and salvage sale funds actually went into administrative overhead. Since most timber purchasers were paying market rates set in auctions, they didn’t feel subsidized at all and they found the whole debate over below-cost sales rather frustrating.
Besides the bureaucracy, the other big beneficiary was counties. Congress had generously allotted 25 percent of gross receipts to the counties in which national forests were located to make up for the property taxes lost because the lands were federally owned. Thus, timber that sold for $100 per thousand would return $25 of those $100 to the counties even if the treasury collected only 50 cents per thousand of the total. Such a sale cost federal taxpayers $24.50 per thousand without even counting sale preparation, administration, and other costs.
Because so much national forest timber came from forests in Oregon, and Oregon’s old-growth timber was more valuable than timber on most other national forests, Oregon counties raked in 40 percent of the total national forest returns to counties. On top of this, BLM lands in western Oregon returned 50 percent of their revenues to the counties. The result was that many Oregon counties were rolling in dough.
In a 1992 paper titled Other People’s Money: The Case for Reforming the 25 Percent Fund, I argued that this distribution was grossly inequitable. While Oregon counties were getting tens of millions of dollars more than they would have collected from property taxes, some counties such as those surrounding Indiana’s Hoosier National Forest got less from the 25 percent fund than they would have received if they were collecting property taxes on the land.
Oregon counties had Mark Hatfield, ranking member of the Senate Appropriations Committee, to defend their share of the take from national forest timber sales. But we made below-cost sales controversial enough that Congress in 1985 ordered the Forest Service to develop an accounting system that could determine whether sales made money.
The Forest Service called the result the Timber Sale Program Information Reporting System, or TSPIRS. TSPIRS ignored the payments to counties, amortized road costs over hundreds of years even though roads require expensive reconstruction every twenty years or so, and failed to account for the fact that the Forest Service kept a large share of receipts in the K-V and other funds.
Based on this flawed system, the Forest Service admitted that about half the national forests lost money on timber, but claimed the timber program overall earned more than $600 million in profits in 1990. My recalculation of those numbers found that more than 80 percent of the forests lost money on timber and overall losses were nearly $120 million.
Unfortunately, when Congress told the Forest Service to develop an accounting system, it didn’t say that it had to do anything with the data. Thus, even the forests that TSPIRS found to lose money didn’t have to adjust their programs in any way.
The Forest Service was once proud to claim that it was one of the few government agencies to earn a profit. In fact, my review of historic data found that it did earn a profit in four years of the 1950s and two years in the 1960s. By the 1980s, however, it had no aspirations to earn profits for taxpayers.
Budgets and revenues were completely separate offices in the agency and there was no attempt to temper one with the other. Once I went to the Pacific Northwest regional office to get the revenues for each forest in the region, then trooped to a completely different floor to get the budgets for those forests.
“Some people compare our budgets with our revenues to see if we earned a profit,” a budget official (who didn’t know I had already been to the revenue office) told me while I was there. “I used to work in the private sector, where earning a profit was important. But we’re the government; we don’t have to earn a profit.” That pretty much summed up the Forest Service’s public attitude in the 1980s.
