Federal Wetland Mitigation Banking Guidance: Missed Opportunities

Royal C. Gardner

Mr. Royal C. Gardner is an Assistant Professor of Law at Stetson University College of Law. This Dialogue is adapted from Royal C. Gardner, Banking on Entrepreneurs: Wetlands, Mitigation Banking, and Takings, which will appear in the March 1996 issue of the Iowa Law Review.

[26 ELR 10075]

In November 1995, five federal agencies—the U.S. Army Corps of Engineers (the Corps), the U.S. Environmental Protection Agency (EPA), the Natural Resources Conservation Service, the Fish and Wildlife Service (FWS), and the National Oceanic and Atmospheric Administration—issued joint guidance concerning wetland mitigation banking.¹ The guidance's chief virtue is its detailed explanation of the approval process for the establishment and operation of mitigation banks.² Its chief flaw, however, flows from the complexity of this approval process. By calling for consensus decisionmaking among myriad agencies, the guidance creates a bureaucratic labyrinth that will discourage the use of mitigation banks. Moreover, the guidance's restrictions on the use of preservation, while not surprising, will limit the environmental and economic utility of mitigation banking. Unfortunately, the agencies have missed an opportunity to defuse public criticism about the unfairness and ineffectiveness of the current wetland regulatory program.

The Federal Guidance

Mitigation banking involves mitigating for wetland impacts before an activity causes environmental harm.³ In its simplest form mitigation banking occurs when, before beginning a project that will adversely affect wetlands, a developer restores, enhances, creates, or preserves wetlands; this mitigation activity generates "mitigation credits," which the developer may then draw upon to compensate for its project that will destroy or impair wetland functions. This is analogous to a savings account; one deposits and may later withdraw the proceeds. An entrepreneurial wetland mitigation bank involves a more complicated scenario. In this situation, a private entity produces mitigation credits, which another party purchases to satisfy its own mitigation requirements. This exchange is akin to a commercial paper transaction: Party A (the credit producer) informs Party B (the regulatory agency) that the credits should be released to Party C (the entity with mitigation requirements). The federal guidance allows both single-client and entrepreneurial banks.⁴

Properly implemented, wetland mitigation banking is better for the environment than the current system of compensatory mitigation. In the Clean Water Act § 404 program, the Corps allows landowners to fill wetlands based on promises to restore, enhance, and create wetlands; these promises are often unfulfilled, thus precluding progress toward achieving the goal of no net loss.⁵ As the guidance acknowledges, one of wetland mitigation banking's principal advantages over the present system is that it generally requires the mitigation to be in place before project impacts occur.⁶ This use of wetland mitigation banking as advance compensatory mitigation is ecologically sound for at least two reasons. First, if compensatory mitigation occurs after a development project, there will be a lag time between the destruction of the functions of the filled wetland and the restoration, enhancement, or creation of similar functions in a mitigation site. With mitigation banking, this lag time can be reduced or eliminated. Second, mitigation banking provides a greater likelihood of successful restoration, enhancement, and creation. If the mitigation bank sponsor fails to satisfy performance standards, no (or little) credit will be generated, and the bank cannot be used to offset wetland impacts.⁷

The guidance also recognizes the benefits that mitigation banking provides to the regulated public and the regulators. For beleaguered property owners, the guidance states the [26 ELR 10076] mitigation banking should "reduce permit processing times and provide more cost-effective compensatory mitigation opportunities."⁸ Unstated is the possibility that increased compensatory mitigation opportunities may lead to fewer permit denials. For the regulatory agencies, the guidance observes that consolidated mitigation bank sites will allow agencies to monitor permit compliance more efficiently.⁹

Despite these potential benefits, the federal agencies are reluctant to endorse mitigation banking without some constraints. One of the more significant limitations is that mitigation banking may only be employed for compensatory mitigation in the context of sequencing. As outlined in a 1990 EPA-Corps memorandum of agreement, a § 404 permit applicant must mitigate wetland impacts in the following manner: first avoid, then minimize any unavoidable impacts, and finally compensate for any remaining impacts (through restoration, enhancement, creation, or preservation).¹⁰ The mitigation banking guidance emphasizes that mitigation credits are applicable only to the final step—compensation—and may not be relied upon to deviate from the mitigation sequence.¹¹

In a "planning considerations" section, the guidance specifies other parameters. For example, it suggests that mitigation banks should be part of more comprehensive watershed planning efforts.¹² A mitigation bank site may be located on private or public lands, although in the latter case the generation of mitigation credits is more limited.¹³ In either case, the guidance stresses that mitigation banks should be designed to be self-sustaining. Accordingly, the guidance recommends that restoration projects "be the first option considered when siting a bank."¹⁴ Creation projects, which are generally more technically challenging and less successful, are discouraged.¹⁵

The use of preservation to produce mitigation credits is also discouraged. The guidance authorizes mitigation banks relying solely on preservation "only in exceptional circumstances."¹⁶ Such circumstances exist when the wetland performs important physical or biological functions and is threatened by "human activities that might not otherwise be expected to be restricted."¹⁷ The second factor seems to suggest that the threat of degradation by activities regulated by the § 404 program will not justify preservation-based mitigation banks. The guidance, however, does concede that preservation may be used in conjunction with restoration, enhancement, and creation projects when "the preservation will augment the functions of the restored, created or enhanced aquatic resource."¹⁸

The federal guidance describes a complicated process for establishing a mitigation bank. First, the bank sponsor is "encouraged" to coordinate its banking proposal with "the appropriate agencies"—the Corps, EPA, the FWS, the National Marine Fisheries Service (NMFS), and perhaps state and local agencies.¹⁹ After this pre-application coordination, the bank sponsor must provide the Corps with a prospectus describing the need for a bank, the bank's technical feasibility, and its anticipated ability to produce compensatory mitigation.²⁰ Submission of the prospectus is the initial formal step in what could be a lengthy bureaucratic process.

The prospectus should lead to a "banking instrument"—some formal document, such as a memorandum of agreement—that delineates the scope of the mitigation bank.²¹ Although the Clean Water Act vests the Corps with permit decisionmaking authority (and thus the authority to make decisions about mitigation), the mitigation banking guidance dilutes the Corps' powers. The approval of the banking instrument is left to a Mitigation Bank Review Team (MBRT).²² The MBRT is composed of representatives from interested federal agencies: the Corps, EPA, the FWS, the NMFS, and the National Resources Conservation Service. State and local representatives may also be part of the MBRT. The banking instrument is to be developed through consensus.²³ Thus, each MBRT member has, at most, an effective veto over the approval process or, at least, the ability to delay the establishment of a bank.

The banking instrument will contain performance standards for determining bank success, methodologies for determining credit production, and criteria concerning the timing of credit withdrawals.²⁴ Although the principal benefit of mitigation banking is the provision of mitigation before adverse project impacts, the guidance recognizes that bank sponsors face financial pressures, especially early [26 ELR 10077] in the bank's development. Accordingly, the guidance allows limited early withdrawals of credit (early in the sense that credit is given for areas that have not yet achieved the performance standard).²⁵ When the guidance was proposed for public comment, that draft offered an example of a bank in which 15 percent of the total projected credits were available for early use.²⁶ Some commenters viewed that figure as a floor, while others viewed it as a ceiling. To eliminate any misunderstanding, the final version removed the 15 percent reference to ensure "needed flexibility."²⁷ Of course, if the mitigation credit is produced through preservation, the credit would be available for debiting as soon as the bank sponsor implemented appropriate legal protections for the site, such as placing a conservation easement on the property or transferring it to a government or conservation agency.²⁸

The banking instrument also will describe the bank sponsor's many responsibilities. These duties include monitoring and reporting the progress of mitigation activities at the bank site.²⁹ The bank sponsor must develop an accounting system to track the bank's credit and debit transactions.³⁰ In addition to notifying the Corps of each transaction, the bank sponsor must prepare an annual ledger report for the MBRT.³¹ Furthermore, the bank sponsor is responsible for ensuring the long-term management and protection of the site and for undertaking remedial measures in case of mitigation failures.³² To encourage compliance with these obligations, the banking instrument will require the bank sponsor to provide financial assurances, for example through performance bonds or escrow accounts.³³ The guidance states that these financial assurances may be reduced or eliminated once a mitigation project has satisfied its performance standards.³⁴

Missed Opportunities

In sum, the guidance does a service by providing potential bank sponsors with the regulatory road map for securing approval to establish a bank. The guidance also sets forth the general parameters under which a bank must operate. Upon reviewing the road map and the parameters, however, potential bank sponsors may well be dissuaded from starting the process. Accordingly, we may not realize the benefits that widespread mitigation banking has to offer.

Many of the benefits cited by the agencies—such as consolidating mitigation into large parcels; bringing together financial resources and scientific expertise; and compensating for cumulative impacts—implicitly rely on the existence of entrepreneurial banks. Entrepreneurial banks, in turn, require private investment. To encourage private investment, a system must at least appear to be stable. The § 404 program does not offer this stability and lends itself to at least two layers of uncertainty.

First, a general concern about the legitimacy of privately operated mitigation banks exists. Neither the Clean Water Act nor its implementing regulations mention the term"mitigation bank." Instead, affirmation of this concept is relegated to the murky world of guidance documents, which an agency can adopt, amend, and revoke without any public notice-and-comment period.³⁵ To underscore this point, the preamble to the guidance makes the following disclaimer:

The policies set out in this document are not final agency action, but are intended solely as guidance. The guidance is not intended, nor can it be relied upon, to create any right enforceable by any party in litigation with the United States. The guidance does not establish or affect legal rights or obligations, establish a binding norm on any party and it is not finally determinative of the issues addressed.³⁶

Put that way, the guidance provides a shaky foundation on which to construct a mitigation bank at personal risk.

The second layer of uncertainty relates to the application of the guidance. Unlike typical markets, regulatory agencies control both the supply of and demand for mitigation credits. The guidance's creation of the MBRT exacerbates the uncertainty involved in establishing and operating a bank by increasing the number of agencies involved in the decisionmaking process.

For example, the guidance encourages the bank sponsor, prior to the submission of the prospectus to the Corps, to consult with other "appropriate agencies." The guidance describes the process as "pre-application coordination," but bank sponsors may view the prospect of contending with various federal and state agencies as a regulatory nightmare. In the context of individual permit applications (not involving mitigation banks), the Corps has stated clearly that it "is responsible for initiating, coordinating, and conducting pre-application consultations" between the permit applicant and the federal resource agencies (EPA, the FWS, and the NMFS).³⁷ Thus, the typical permit applicant has a single point of contact with the federal government: the Corps, which will coordinate with other interested agencies. In contrast, in the mitigation banking guidance, the Corps appears to abdicate its responsibility to lead the pre-application process, instead thrusting the responsibility back to the bank sponsor.

[26 ELR 10078]

The guidance's emphasis on consensus regarding the terms of the banking instrument contributes to the uncertainty. Although decisions made by consensus may lead to better outcomes, the consensus requirement delays the decisionmaking process. This outcome naturally occurs because of the diffusion of authority. Obviously, the greater the number of agencies that wield an effective veto over a mitigation bank's establishment and operation, the more uncertain the approval process becomes. Only a few investors will take that risk.

Perhaps the most disappointing aspect of the guidance involves its treatment of preservation. The guidance overlooks the ecologically beneficial aspect of preservation: it removes important aquatic resources from the reach of developers. By placing a conversation easement on wetland areas or by transferring title to these areas to a governmental or conservation organization, these wetlands are permanently protected from development. Moreover, once these areas are out of private hands or are encumbered with permanent conservation easements, questions about takings and just compensation dissipate.

The agencies are reluctant to accept preservation because it is viewed as frustrating the goal of no net loss. Indeed, authorizing the destruction of a wetland in exchange for the preservation of others does result in a net loss, at least in terms of acreage. But what if many high-quality wetlands are preserved in exchange for the filling of lower quality wetlands?³⁸ Has there not been some environmental gain in such a transaction?

The environment has in fact benefitted by putting the high-quality wetlands out of the developers' reach. No net loss, whether in terms of acreage or functions and values, can only be aspirational when we still lose 70,000 to 90,000 acres of wetlands each year. A more realistic analysis divides the world of wetlands into three parts, where A represents wetlands that regulated activities threaten, B represents wetlands that nonregulated activities (including natural occurrences) threaten, and C represents those wetlands that have been preserved.

[SEE ILLUSTRATION IN ORIGINAL]

Wetlands in subset A are only "protected" under the § 404 program to the extent that permit applications are denied or proposed projects are modified; however, in fiscal year 1994 the Corps denied less than 1 percent of the 48,000 applications to fill wetlands.³⁹ "No net loss" cannot be achieved by herding all wetlands into subset A; rather, the goal of a regulatory program should be to remove wetlands from the permit system. The goal should be to put as many wetlands as possible into subset C, where they will no longer be threatened by developmental activities. The existence of subset B merely recognizes that although wetlands may be preserved as a legal matter, nature may have other ideas.⁴⁰

The most efficient method of expanding the base of wetlands in subset C is by encouraging the use of preservation in mitigation banks. If the § 404 program recognized the value of preservation, benefits would flow in many directions. Landowners would not view their wetlands as valuelessmerely because of the presence of regulatory restrictions.⁴¹ Regulatory agencies would be better insulated against takings claims.⁴² Environmental advocates should also be heartened. Unlike restoration, enhancement, or creation projects, there is no concern about whether the preserved site will function on its own. Finally, from the perspective of the entrepreneurial banker, preservation allows more flexibility in establishing a mitigation bank because mitigation credits are immediately available for use or sale.

Political Considerations

Always controversial, the federal regulation of wetlands is especially vulnerable today. Concerned about the rights of private-property owners, Congress is considering significant revisions to the Clean Water Act § 404 program. Some proposals would redefine what constitutes a wetland, employ a categorization scheme, and restrict the use of mitigation sequencing. Other proposals are more circumspect and seek to make the § 404 program too expensive to operate.

Environmentalists, who in the past have criticized the § 404 program as ineffective, now fight a rearguard action to protect the status quo. Yet the conditions that prompted their past concerns have not evaporated. From an environmental perspective, perhaps the most serious problem with the § 404 program involves the failure of compensatory mitigation. Regulatory guidelines permit wetlands to be filled based on the promise of future enhancement, restoration, and creation projects. This promised mitigation frequently fails to materialize, but regulatory agencies are unable or unwilling to take action to ensure that permittees are complying with mitigation requirements and to punish those that do not.

[26 ELR 10079]

While President Clinton has intimated that he will veto any bill that reduces wetland protection, the legislative attacks on the § 404 program are illustrative of the discontent that the current system has engendered. Clearly, a path must be found that reduces the burden on private landowners, but not at the undue expense of environmental values. Wetland mitigation banking, especially entrepreneurial banking, may provide that path. Unfortunately, recently issued federal guidance on mitigation banking does not go far enough to encourage private-sector investment in the process of wetland mitigation.

Conclusion

The federal guidance fails on at least two fronts: process and preservation. First, the guidance creates a bureaucratic labyrinth, calling for "consensus" decisionmaking among numerous agencies. This diffusion of authority will lead to decisionmaking delays, thus discouraging entities from attempting to establish mitigation banks. Second, the federal guidance generally views preservation as an unworthy means of generating credit in a mitigation bank. Accordingly, the guidance falls short of capitalizing fully on the potential of mitigation banking.

1. Federal Guidance for the Establishment, Use and Operation of Mitigation Banks, 60 Fed. Reg. 58605 (Nov. 28, 1995) [hereinafter Federal Guidance]. Although the guidance clarifies the use of mitigation banks in the Clean Water Act § 404 program and the Food Security Act's wetland conservation provisions, this Dialogue will focus only on the former.

2. The November 1995 guidance provides much more information than the Corps and EPA's 1993 interim national guidance. See U.S. Environmental Protection Agency and the Department of the Army, Memorandum to the Field: Establishment and Use of Wetland Mitigation Banks in the Clean Water Act Section 404 Regulatory Program, reprinted in 60 Fed. Reg. 13711-12 (Mar. 14, 1995).

3. For a comprehensive overview of mitigation banking, consult ENVIRONMENTAL LAW INSTITUTE, WETLAND MITIGATION BANKING (1993).

4. Federal Guidance, supra note 1, at 58607. The guidance also applies to both publicly and privately operated banks. Id.

5. See, e.g., U.S. Environmental Protection Agency and U.S. Fish and Wildlife Service, Interagency Follow-Through Investigation of Compensatory Mitigation Sites (May 1994) (characterizing only 4 of 17 creation and restoration sites in the state of Washington as functioning well). See also Florida Department of Environmental Regulation, Report on the Effectiveness of Permitted Mitigation (1991) (finding high rate of noncompliance with state permit conditions).

6. Federal Guidance, supra note 1, at 58607.

7. In addition the guidance lists the following environmental benefits of mitigation banking: it can maintain "the integrity of the aquatic ecosystem [by] consolidating compensatory mitigation into a single large parcel or contiguous parcels"; it "can bring together financial resources, planning and scientific expertise," thereby increasing the likelihood of mitigation success; and it "can contribute towards attainment of the goal for no overall net loss of the Nation's wetlands by providing opportunities to compensate for authorized impacts when mitigation might not otherwise be appropriate or practicable." Id.

8. Id.

9. Id.

10. For an excruciatingly detailed examination of the 1990 mitigation memorandum agreement, see Royal C. Gardner, The Army-EPA Mitigation Agreement: No Retreat From Wetlands Protection, 20 ELR 10337 (Aug. 1990).

11. Federal Guidance, supra note 1, at 58611.

12. Id. at 58609 ("banks should be planned and developed to address the specific resource needs of a particular watershed").

13. Id. at 58608. Privately operated mitigation banks on public lands may generate mitigation credits only to the extent that mitigation activities are "supplemental to the public program(s) already planned or in place." Id.

14. Id.

15. Id. The guidance states that creation projects "should only be considered where there are adequate assurances to ensure success and that the project will result in an overall environmental benefit." Id.

16. Id.

17. Id. at 58609.

18. Id. at 58608. The guidance also permits upland areas to be included in mitigation banks, if the areas "increase the overall ecological functioning of the bank." Id. at 58609. Buffer zones may therefore be included in banks. The guidance notes that these upland areas may not necessarily produce mitigation credits by themselves; instead, these areas will usually "increase the per-unit value of the aquatic habitat in the bank." Id. Upland areas might produce limited mitigation credits, however, when they "directly enhance or maintain the integrity of the aquatic ecosystem" and "might otherwise be subject to threat of loss or degradation." Id.

19. Id. at 58609.

20. Id.

21. Id. at 58609-10. Multiple bank sites may require an "umbrella" banking instrument. Id. at 58609.

22. Id. at 58610.

23. Id. The guidance stresses that the MBRT "will strive," "seek," and "will work" to obtain consensus on its actions and that "it is anticipated that all issues will be resolved by the MBRT in this manner." Id.

The federal guidance does state, however, that the MBRT Chair (a Corps representative) has "the responsibility for making final decisions regarding the terms and conditions of the banking instrument where consensus cannot otherwise be reached within a reasonable timeframe (e.g., 90 days from the date of submittal of a complete prospectus)." Id. Whether, in light of the guidance's emphasis on consensus, Corps representatives will exercise this "responsibility" remains to be seen.

24. Id. at 58609. With respect to functional assessment methodologies, the guidance suggests "Habitat Evaluation Procedures [and] hydrogeomorphic approach to wetlands functional assessment" as appropriate measurement techniques. Id. at 58612.

25. Id. at 58611-12.

26. Proposed Federal Guidance for the Establishment, Use and Operation of Mitigation Banks, 60 Fed. Reg. 12286, 12291 (Mar. 6, 1995).

27. Federal Guidance, supra note 1, at 58606 (supplementary information).

28. Id. at 58612.

29. Id. at 58613. The guidance envisions the typical monitoring period to last five years, but may be longer in the case of forested wetlands or where remedial measures are necessary.

30. Id. at 58612.

31. Id. It appears odd to require a bank sponsor to submit a statement to the Corps each time an approved mitigation transaction occurs, since the Corps is the regulatory agency that must approve the transaction in the first place. After receiving the bank sponsor's statement, the Corps will distribute it to the other MBRT members. Perhaps the Corps wishes to shift the onus of paperwork production.

32. Id. at 58612-13.

33. Id. at 58613.

34. Id.

35. See Administrative Procedure Act, 5 U.S.C. § 553(b)(3)(A), available in ELR STAT. ADMIN. PROC. (excluding interpretative rules and general statements of policy from notice-and-comment requirements). Although the federal agencies submitted the proposed guidance for public comment, they were under no legal obligation to do so. See Royal C. Gardner, Public Participation and Wetlands Regulation, 10 UCLA J. ENVTL. L. & POL'Y 1, 24-39 (1991).

36. Federal Guidance, supra note 1, at 58606 (supplementary information).

37. U.S. Army Corps of Engineers, Regulatory Guidance Letter 92-1 (Federal Agencies Roles and Responsibilities), 60 Fed. Reg. 13703, 13704 (Mar. 14, 1995).

38. For example, one commentator reports that a developer received a permit to fill four acres of wetlands in exchange for preserving 200 acres of wetlands in which an endangered plant lived. William W. Sapp, Mitigation Banking: Panacea or Poison for Wetlands Protection, 1 ENVTL. LAW 100, 130-31 (1994).

39. See Michael L. Davis, A More Effective and Flexible Section 404, NAT'L WETLANDS NEWSL., July/Aug. 1995, at 7, 9.

40. It also recognizes that nonregulated activities, such as nonpoint source discharges, can affect a wetland that is protected from direct development.

41. Cf. David A. Dana, Natural Preservation and the Race to Develop, 143 U. PA. L. REV. 655 (1995) (arguing that lack of a compensation scheme for owners of areas such as wetlands accelerates the development process).

42. See William J. Haynes II & Royal C. Gardner, The Value of Wetlands as Wetlands: The Case for Mitigation Banking, 23 ELR 10261 (May 1993).