Wetland Mitigation Banking:
Status and Prospects II

97-849 ENR

CONTENTS FOR THIS SECTION

Mitigation Banking Today

Federal Agency Wetland Responsibilities

Corps of Engineers
Environmental Protection Agency
Fish and Wildlife Service

State Involvement
Federal Mitigation Banking Guidance

Project Considerations
Geographical Considerations
Crediting and Debiting Procedure
Compensation Ratios
Bank Sponsor Responsibilities

Mitigation Banking Today

The Clinton Administration endorsed mitigation banking in its wide-ranging Wetland Plan, issued on August 24, 1993. As part of this effort, the Corps and EPA issued a regulatory guidance letter endorsing mitigation banking as a part of the § 404 program. The Administration promulgated detailed guidance, issuing draft regulations in the Federal Register on March 6, 1995 and final regulations on November 28, 1995 (effective on December 28, 1995). The guidance is signed by the five principal agencies involved in federal wetland programs-in addition to the Corps and EPA, the other agencies are the FWS, NMFS, and NRCS. These agencies are all members of a Interagency Wetlands Work Group. The regulations detail the process by which banks could be set up, used, and monitored to comply with requirements of the § 404 and swampbuster programs, emphasizing the roles that the federal agencies will play. This guidance includes a list of related statutes, regulations, and policies. The final guidance discusses several policy issues, including:

· planning considerations, including goal setting, site selection, technical feasibility, role of preservation, inclusion of upland areas, and banking in a watershed context;
· the process for establishing banks, including contents of the prospectus and the banking instrument, the roles of agencies, bank sponsors, public input, and dispute resolution procedures;
· criteria for using mitigation banking, including project applicability, relationships between banking and mitigation (including deciding between on-site mitigation or banking), using the same or different wetlands and the extent of the bank service area, timing of withdrawals, and credit and debit procedures; and
· long-term management and monitoring, including the operational life of the bank, the role of remedial actions, and commitments to long-term management, monitoring, and financing.

Mitigation banking is intended to help resolve contentious situations where growth and development pressures conflict with wetland protection efforts. This view is gaining support, as measured by the growing number of operating banks and the larger number that are being discussed or proposed. Most of the early operating banks are used by departments of transportation or highways to mitigate wetland impacts from highway construction, and are primarily managed by states. Privately owned for-profit banks are less numerous, and all have opened recently; the Corps approved the first commercial bank in December 1992. The federal Interagency Wetlands Work Group is now working to bring greater continuity to the many and disparate efforts by developing a model banking instrument which can be used by each bank to document its objectives and operation. Continuity may become more important as banking policies and operations continue to evolve in various forms in most states.

The 1990 Water Resources Development Act (P.L. 101-640) authorized wetlands demonstration studies, and the Office of Management and Budget used that authority to direct the Corps to make a detailed study of mitigation banking. The Corps' Institute for Water Resources has produced 9 volumes; the initial 6 were released in early 1994. A final report is anticipated soon. This study has inventoried banking experiences and studies of banks, and discussed almost all aspects of banking.

The study determined that about 10% of all the land on which mitigation banks were located was federally owned.8 The remainder were on other public or privately owned lands. Sponsors of banks on federal lands did not have to be federal entities. The three examples of federally owned mitigation banks, taken from the study and introduced in the following paragraphs provide a sense of the diversity of possible arrangements.9

· The Montana Department of Transportation (MDOT) Wetland Mitigation Bank Program is sponsored by the Montana Interagency Wetlands Group. The FWS manages the implementation of this program. A majority of lands used for the bank are in public ownership. MDOT funds this bank, which has been in operation since 1989 and has accounted for a deficit of 68 acres lost to impacts of highway projects.
· The Pier J Anaheim Bay Mitigation Bank is operated by the Port of Long Beach (CA). It is located in the Seal Beach National Wildlife Refuge, within the perimeter of the Seal Beach Naval Weapons Station. The bank is used to mitigate wetland degradation due to port development. It has been in operation since 1990, and all but 14 of the 153.12 credits created have been used. The bank was constructed by the Port of Long Beach and initially managed by the Port and the Navy. But after this contract expired in 1991, the FWS and the Navy assumed the maintenance responsibilities.
· The Naval Amphibious Base Eelgrass Mitigation Bank in San Diego, Ca, started in 1986, was the first bank to be federally owned and operated. It has been used to mitigate for damage to eelgrass habitat from the operations of the Naval Amphibious Base in San Diego Bay. Of the 10 acres at this site, 4.2 acres compensated for one mitigation project and 5.8 acres were established for future Navy projects. The Navy is responsible for the operation of the bank, but the NMFS managed the restoration of the wetland and was reimbursed by the Navy.

Since these banks were established, some new approaches have emerged, and many new banks have been started. More recent examples were described by banking proponents at a March 14, 1996 hearing convened by the Senate Committee on Environment and Public Works to learn more about the status and potential of banking. For example, Charles Ruma, representing the National Association of Home Builders, described the establishment of a foundation by the association chapter in Ohio that developed two banks. The first, established in 1993 at a 34-acre site, has sold all its credits at $7,500 per acre, while the second, a 292-acre site to be dedicated in May 1996, had already sold over 100 acres at $12,000 per acre. Mr. Ruma noted that the Ohio Department of Transportation has been the largest customer, and also seemed pleased to be able to report that one applicant, using the bank, had been able to obtain a § 404 permit from the Corps in just 21 days. 10

This hearing and other discussions of banking show that participation in banking by both sponsors and clients is expanding rapidly, especially for commercial banks. For example. the Corps survey of commercial banks conducted during the summer of 1995 identified 77 banks, but only 24 were in operation and the remainder were either proposed or in planning. In Florida, where this activity is concentrated, the survey identified 12 operating or planning banks. But only several months later, the State of Florida's Department of Environmental Protection listed 32 commercial banks; 7 with permits to operate, 16 with permits pending and 9 in a pre-application stage.11

Four market sectors, in addition to commercial developers, that seem to provide the most attractive or most numerous opportunities for sponsors include airport authorities, state departments of transportation, oil and gas transmission line companies, and electric utilities. One witness at the March 1996 hearing estimated that about a half dozen entities were sponsoring mitigation banks as entrepreneurial opportunities in late1995.12 A Corps representative, conducting an informal survey of banks in 1997, found that about 20 of the 108 operating banks he identified had been approved under the federal guidelines. 13

Federal Agency Wetland Responsibilities

Five federal agencies primarily responsible for banking policy cooperate under the MOA and collaborated in developing the federal guidance that was issued in 1995. The overall wetland activities of these agencies, as well as the current status of efforts by states are summarized below, followed by a discussion of the criteria the federal agencies are to consider.

Corps of Engineers. The Corps is the federal agency with the lead roll in implementing the principal federal program that provides regulatory protection for wetlands, § 404 of the Clean Water Act (CWA; P.L. 92-500, as amended). Its intent is to protect waters of the United States, including adjacent wetland areas, from environmental damages due to discharges of dredged or fill material. Established in 1972, § 404 requires landowners or developers to obtain permits from the Corps to carry out activities involving disposal of dredge or fill materials into these waters.

The Corps has long had regulatory jurisdiction over dredging and filling, starting with the Harbors and Rivers Act of 1899 (ch. 425,30 Stat. 1151, as amended). The Corps and EPA share some responsibilities for the section 404 program, although the Corns administers the day-to-day program, including permit decisions. Other federal agencies, including FWS, NMFS, and NRC S, also have roles in this process. In the 1970s, legal decisions in several cases led the Corps to revise this program and to incorporate broad jurisdictional definitions for both regulated waters and adjacent wetlands.

In reviewing permit applications, the Corps evaluates a broad range of factors, including cumulative impacts of the proposal and its intended use on the public interest. This process is intended to consider various competing and conflicting views and values. The decision whether to authorize a permit, and the conditions under which the proposed activity will be allowed, are determined by a general balancing process that reflects concern for both protection and utilization of important resources. As part of this process, the Corps considers the extent to which mitigation shall be required when damage to wetlands cannot be avoided or minimized. Further, the Corps approves and monitors mitigation projects, including any banking activity.

Environmental Protection Agency. EPA has significant responsibilities under the § 404 program. First, the substantive water protection criteria that permit applicants must meet are established in guidelines developed by EPA in conjunction with the Corps. Second, EPA has the authority to veto the Corps' permit decisions under § 404(c), if it determines that the discharge of fill material would have an unacceptable adverse effect on municipal water supplies, shellfish beds and fishery areas, wildlife, or recreational uses. EPA's veto authority has been highly controversial: although rarely used (about a dozen times in 20 years), some believe that it has served as a deterrent many other times. Authority to enforce § 404 is shared by EPA and the Corps.

Fish and Wildlife Service.The FWS, in the Department of the Interior, cooperates with the Corps and the EPA in permit reviews for the § 404 program. Under the Fish and Wildlife Coordination Act (ch. 55, 48 Stat. 401), the Corps is required to consult the FWS before issuing permits. The FWS provides recommendations on how wetland losses can be avoided, minimized, or mitigated. However, unlike the EPA, the FWS has no authority to override a Corps decision. The FWS published a formal mitigation policy more than a decade ago which ranks habitat by its scarcity value, and establishes mitigation planning goals. 14

National Marine Fisheries Service. The NMFS, a part of the National Oceanic and Atmospheric Administration in the Department of Commerce, is actively involved in providing guidance on mitigating wetlands losses in coastal areas. This agency contributed to the development of the Federal Register guidelines. Its role is similar to that of the FWS.

Natural Resources Conservation Service. NRCS, in the Department of Agriculture, administers the swampbuster program, enacted in the 1985 Food Security Act (P.L. 99-198). Swampbuster specifies that farmers who drain wetlands to plant crops could lose access to numerous federal farm program benefits until they restore those wetlands. Swampbuster is not a regulatory or permit program, as each farmer decides whether he will risk losing these benefits by altering a wetland. NRCS assists farmers in identifying and delineating wetlands, and determines if they are violating swampbuster. (NRCS is also responsible, based on a MOA with the Corps, for delineating wetlands in agricultural areas for the § 404 program. Also, § 404 includes a provision that explicitly excludes "normal farming activities" from permit requirements, while swampbuster excludes certain kinds of wetlands, such as those created as a byproduct of leaking pipes around irrigation apparatus.)

Swampbuster allows mitigation in some instances, and the federal guidance states that mitigation banks may be used to satisfy' requirements of swampbuster.15 To date, no banks have been set up specifically to support the swampbuster program. Amendments in the 1996 farm law (P.L. 104-127) authorized a pilot mitigation banking effort, increasing the likelihood that banks will emerge in agricultural areas in the future. This pilot program is being administered through a large agricultural land retirement program, the Conservation Reserve Program (CRP).16

State Involvement

The concept of mitigation banking was applied at few sites and in relative obscurity for about two decades, until interest suddenly blossomed in the 1990s. Some states operate programs, but most are currently translating the concept from an abstract idea into a functioning program. Some states prohibit banks under current laws. Other states limit mitigation banking to use by state departments of transportation or highways for impacts to wetlands caused by highway construction. A few states have been more aggressive in developing mitigation banks, and some were pursuing banking initiatives before the federal guidance was issued, including California, Illinois, Wyoming, and Minnesota. Two innovative states, New Jersey and South Carolina, have created wetland councils to oversee the development of banks and have numerous projects underway. Many other states which are attempting to develop banks are working to resolve the same kinds of questions about the guidelines and operation for mitigation banks that the federal government had to resolve for its guidelines.

Federal Mitigation Banking Guidance

Federal mitigation banking guidance requires programs to be consistent with agency policies before bank development and maintenance plans are approved. Under the 1995 guidelines, banking may be acceptable if specific criteria, summarized below, are followed. This guidance is intended to be administered with flexibility to accommodate variations in banking. This flexibility may become more important if planning on a watershed basis continues to be emphasized. The watershed approach places wetlands in a larger geographic context, and should contribute to more effective decisions about the location and use of banking sites.

At each federally-approved bank site, activities of all agencies are coordinated through an interagency mitigation bank review team. The team oversees planning and operations. The Corps representative chairs all teams, except the NRCS representative chairs banks that are limited to wetland losses on agricultural lands in conjunction with the swampbuster program. The primary purpose of these teams is to facilitate the timely development of an acceptable banking instrument, but they are involved in other ways as well.

Project Considerations. The central goal of any bank is to manage a self-sustaining, functioning wetland ecosystem. The criteria encourage restoration projects to replace the wetland values that would be lost over creation projects. Experience has shown that restoration sites are much more likely to succeed than sites where wetlands are created. The credits at a bank should be at least equal in acreage, functions, and values to similar wetlands that will be degraded through anticipated projects. Each bank is to have a specified number of credits that it can provide for compensatory mitigation. Each proposed activity which must compensate for adverse impacts to wetlands can be authorized to use a mitigation bank as a condition of a permit, as long as credits are not resold or used to compensate for multiple activities. However; the same credit can be used for an activity which requires approval by more than one agency.

Geographical Considerations. The guidelines stress that the designation of the banking service area should be based upon the "consideration of hydrologic, edaphic and biotic criteria," with a strong preference for replacing the losses at the impact site with similar wetland functions, similar positioning in the broader landscape, and similar species populations. For example, purchasing credits at a freshwater wetland bank may not be appropriate compensation for the degradation of a brackish or saline wetland. Debiting from mitigation banks which have different functions than affected wetlands may be limited to banks that are developed to accomplish a specific resource objective. All permit reviews are handled on a case-by-case basis.

The selection of a bank site should be based on how it will functions in the context of the watershed, and not on what land happens to be available, as often has been the case with mitigation. Banking may have its greatest potential for success when it is part of a watershed-based wetland plan. However, such planning is especially difficult for banks that serve linear projects passing through multiple landscapes or watersheds, such as new highway or pipeline corridor locations. The guidelines emphasize that banking should be used only after the three-step process of avoidance, minimization, and on-site mitigation has been followed, which is likely to fit with watershed planning goals.

Crediting and Debiting Procedure. Credits and debits designate the units of trade. Credits represent the composite of wetland functions at a bank site, while debits represent either the loss of wetlands and their functions at a project site, or the wetlands values that are withdrawn from a bank when a transaction is approved. The number of wetland credits available from the mitigation bank should be determined using an appropriate functional assessment methodology acceptable to all parties with official responsibilities, including members of the mitigation bank review team. A single method should be used to quantity the value of both credits and debits. Credit and debit documentation is to be submitted to the chair of the mitigation bank review team each time a transaction is approved. The guidance allows the use of an acreage measure if a functional assessment methodology is impractical.

Compensation Ratios. Some banks do not always issue credits at a ratio of 1:1; that is, each acre of wetland lost is not treated as identical to an acre gained at the bank site. The ratio may be different because:

· the value of the wetland debits varies;
· the value of the credit depends on the pre-bank wetland functions;
· the bank recognizes different levels of risk of success in various banking situations;
· the transaction involves different types of wetlands; or
· some functions are valued more highly than others.

The replacing of a naturally-occurring wetland with one that is restored or created may also lead to a variable ratio. The ratio may change over time, as well; it may decrease as the wetlands at the bank site become established and the risk of failure declines.

A bank in Eugene, Oregon, for example, uses variable compensation ratios. It gives restored wetlands a frill credit, but only 0.66 for created wetlands and only 0.44 for enhanced wetlands. 17 Therefore, at a restored mitigation bank site of 3 acres, for example, a credit would be 3.0, but if the bank site was an enhanced wetland, the credit would only be worth 1.32. Using the same example and viewed from the applicant's perspective, 3 acres of degraded wetlands would require purchasing credits worth 3 acres of restored wetlands, but 7.5 acres of enhanced wetlands. In this example, the "quality" of the 3 acres to be affected or lost is not considered. It is not clear from published sources whether variable credits are widely used, but they appear to be more widely used now than in earlier years, and may reflect an increasing sophistication and creativity in banking.

Bank Sponsor Responsibilities. The bank sponsor is responsible for assuring the success of all operations at the bank site. The bank sponsor carefully manages the accounting procedures, financial considerations, and long-term maintenance of wetland functions and values for the banking entity. The bank sponsor should submit all appropriate documentation to the team. Prior to any debiting from a bank, the sponsor must satisfy three requirements:

· the banking instrument and final mitigation plans must be approved;
· the bank site must be secured; and
· appropriate financial assurances must be confirmed.

In addition, initial physical and biological improvements to the bank site should be completed within the first growing season following the first debiting by the bank. Federal and state agencies will oversee the maintenance of the bank site. One source of information about the condition of the site is the monitoring reports prepared by the bank sponsor. The bank sponsor can be held responsible to finance additional resource improvements if the team determines that the bank is not achieving the objectives outlined in the authorization documents.

Banking instruments, the agreements between the bank operator and regulatory agencies, have taken many forms, ranging from memoranda of agreement to permits to corporate charters. Topics commonly addressed in banking instruments include the permitting and approval process, bank management and operation, credit production and evaluation, client relationships, and, if appropriate, long-term bank ownership. These agreements vary in several ways, including the amount of detail, the duration of the agreement, the methods prescribed to resolve disputes, and enforcement mechanisms. If the model banking instrument that the Interagency Wetlands Work Group is developing is widely adopted, it will gradually bring greater uniformity to future agreements.

ENDNOTES

8 Brumbaugh, R., and Reppert, R. National Wetland Mitigation Banking Study: First Phase Report. IWR Report 94-WMBA. Alexandria, VA, February, 1994..

9 Environmental law Institute and IWR. National Wetland Mitigation Banking Study: Resource Document. IWR Report 94-WMB-2. January 1994, Alexandria, Virginia.

10 Testimony submitted by Charles Ruma, on behalf of the National Association of Home Builders, to the Senate Committee on Environment and Public Works, March 14, 1996.

11 U.S. Army Corps of Engineers. Commercial Wetland Mitigation Credit Ventures; 1995 National Survey IWR Report 96-WMB-9. August 1996, Alexandria, VA. P.54.

12 Testimony submitted by Robert Sokolove, President of U.S. Wetland Services Inc., to the Senate Committee on Environment and Public Works, March 14, 1996.

13 Personal communication with Robert Brumbaugh, Corps Institute for Water Resources, September 1997. Counts of bank numbers require careful review to determine whether each site is considered as a bank or whether all units operated by one entity are combined and considered as a single bank. For example, in this count, he considered a Minnesota Department of Transportation activity as a single bank even though it involves more than 60 sites. Others might count each site as a bank.

14 U.S. Dept. Of the Interior, Fish and Wildlife Service. "U.S. Fish and Wildlife Service Mitigation Policy: Notice of Final Policy." Federal Register 456(15):7644-7663.

15 Currently, mitigation banking is allowed only in the conversion of frequently cropped wetlands, with restoration allowed on prior converted wetlands. For more information on Swampbuster, see CRS Report 96-35 ENR, Agricultural Wetlands: Current Programs and Legislative Proposals.

16 For background information on the CRP, see CRS Report 97-673, Conservation Reserve Program: Status and Current Issues.

17 Testimony submitted by Steve Gordon on behalf of the Council of Lane County Governments to the Senate Committee on Environment and Public Works, March 14,1996.

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