3.17 ECONOMICS. Echo Trail Area Forest Management Project

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1 3.17 ECONOMICS Summary The Net Present Value (NPV) benefit/cost ratios resulting from each action alternatives would range from 0.76 to In all action alternatives costs would exceed timber revenues. The economy-wide cumulative effects of any alternative would be minimal Introduction The Echo Trail Forest Management Project Area is but a fraction of the Superior National Forest (which is part of a larger economic impact area). The Economic Impact Area (analysis area) used for analyzing the economic impacts of the selected Modified Alternative E of the Revised Forest Plan (2004) included the Superior and Chippewa National Forests, and associated counties. There is strong interest by local government units and others to look at the finest economic scale possible (e.g., the community level, Echo Trail Forest Management Project Area). However, this finer scale misrepresents the interactions among many local areas and underestimates total impacts associated with the National Forests. The National Forests provide direct and indirect multiple economic benefits to Minnesota and surrounding states, and especially to individuals and communities within the northern region. Economic benefits contributed to the region by National Forest land include market and non-market opportunities such as timber volume, tourism, wilderness use, balsam boughs, sightseeing, and fishing. Existence value analysis methodologies and value outcomes are not available in Minnesota at this time with reliable, independent information for the non-market opportunities. This is not to imply that such values are not important, but to recognize that non-market values are difficult to represent with appropriate dollar figures. In an attempt to address some non-market values, the Forest Plan FEIS analysis had incorporated 1990 RPA (Resource Pricing and Valuation Procedures for the Recommended 1990 RPA Program USDA FS RPA Program document) assigned values for the following areas: wilderness, hunting, fishing, non-consumptive wildlife uses, camping, picnicking, swimming, mechanized travel and viewing scenery, hiking, horseback riding, and water travel, winter sports, and resort use (Forest Plan FEIS page ). Forest Plan decisions contribute to economic sustainability by providing for a range of uses, values, products, and services. At the same time Forest Plan direction must be consistent with ecological sustainability. The mix of uses, values, products and services provided by the selected Modified Alternative E of the Revised Forest Plan are measured by representative values indicated by employment, income, industry sectors, portion of economic cumulative impacts, Net Present Value (NPV) and community resilience. These indicators were measured within the defined economic impact area (Forest Plan FEIS page through ). This analysis tiers to section Economic Sustainability of Local Communities; this tiering is specific to Indicator 4 Net Present Value which is the indicator used to measure economic efficiency in the Forest Plan FEIS. Specifically, Indicator 4 for economic stability includes costs, direct revenues and applied values associated with selected national forest natural resource management and recreational opportunities

2 Economic efficiency is a legal concept that National Forests must strive for when managing the National Forest. (National Forest Management Act, 36 CFR 219). The Forest Service s policy is to implement timber sale projects in the most cost efficient manner practicable to achieve objectives outlined in forest plans and facilitate a program where long-term benefits exceed costs (FSM 2432). A measure of economic efficiency is net present value (NPV) and it is used to compare alternatives. NPV is not a mechanism for describing economic benefits of a particular program on local communities (Forest Plan FEIS page 3.9-1). Since the NPV of each alternative presented in Table do not reflect the many non-market benefits that are difficult to quantify, this section will only address the financial efficiency analysis. This type of analysis basically compares estimated Forest Service direct expenditures with estimated financial revenues (collected from the sale of forest products). This type of analysis helps determine whether the proposed activities represent a prudent means of achieving the resource objectives outlined in the Forest Plan. The main assumption in this financial efficiency analysis is all vegetation management activities identified in the action alternatives would be accomplished through timber harvest to the extent practicable. A 4-percent discount rate was used for discounting in the analysis. Discounting is the process of determining the present value of a series of future cash flows. The Quick Silver PC version (Forest Investment Analysis Program) was used in the efficiency analysis of the Echo Trail Forest Management Project to calculate the return on each dollar spent. Quick Silver was also used to calculate a relative figure of the Net Present Value of each alternative. The costs calculated by Quick Silver included environmental analysis, timber sale layout and administration, road planning, planting activities and other ecosystem improvement activities (such as Timber Stand Improvement not associated with any timber harvests). As in all financial efficiency analyses, assumptions were applied in order for the analyses to result in assessments which could be compared. For this analysis it is assumed that the proposed activities resulting from each alternative would be implemented between 2007 and Analysis Methods This analysis for the Echo Trail Forest Management Project uses a total of three indicators to compare the effects of the alternatives. Indicator 1: Benefit/costs ratio for proposed activities (NPV) Indicator 1 compares the financial efficiency of each alternative. This indicator does a good job of quantifying the difference between the alternatives because it focuses on benefits and costs, or cost effectiveness of the proposed actions to the Forest Service. Indicator 2: The measure of return to the US Treasury and local county governments The return to the US Treasury consists of the total returns from potential timber sales, less the costs associated with all reforestation activities (both natural and artificial regeneration), other approved activities identified in the Knutson-Vandenberg Sale Improvement Plan (KV), and salvage sale funds (SSF). Stewardship contracts can also affect what is returned to the US Treasury. The returns to local governments are payments in lieu of taxes and are based on receipts from federal land. This second indicator does a good job of quantifying the different potential returns to the US Treasury and local county governments

3 The Knutson-Vandenberg Act (K-V) is the authority for requiring purchasers of National Forest timber to make deposits to finance sale area improvement activities (e.g., reforestation activities) needed to protect and improve the future productivity of the renewable resources of forest lands on timber sale areas. Land Stewardship contracting can be best explained as a set of natural resource management practices that seeks to promote a closer working relationship with local communities in a broad range of activities that improve land conditions, consistent with a community s ecological, social, and economic objectives. This is a tool (and an opportunity) for the US federal government to keep revenues derived from timber sales on National Forest lands and apply the value of the forest products removed as an offset against the costs of services received. Therefore, any revenues not used by the KV and Salvage Sale Fund (SSF) collections can be directly available for land stewardship contracts. If this is the case there may be no returns to the US Treasury. Indicator 3: The measure of cumulative economic impacts This indicator for economic sustainability involves cumulative economic impacts as interpreted from the economic information analyzed within the economic model used for the Forest Plan revision. Economic effects to local counties were estimated using an economic input-output model developed with IMPLAN Professional 2.0 (IMPLAN). Economic relationships generated within IMPLAN was extracted and used in the Forest Economic Analysis Spreadsheet Tool (FEAST) models. The FEAST/IMPLAN information has traditionally been the professionally accepted means of analyzing effects of Forest Plan Alternatives. It provides for an area wide view of relative difference for employment, income, and revenue. This model and spreadsheet analyzed only the first decade of the planning horizon. Basic assumptions of IMPLAN do not include restructuring the economy, nor does it predict the specific future of industry related to the opening or closing of businesses. IMPLAN estimates jobs and income related only to National Forest resources and subsequent changes in proposed management of those resources. IMPLAN does analyze direct, indirect and induced effects by sector based on timber volume by product, and specific measurable recreation, wildlife, fisheries and mineral related resources values. For additional information about IMPLAN/FEAST please see Appendix B of the Forest Plan FEIS. The model IMPLAN utilizing FEAST was used to help analyze the economic variation of forest management based on each alternative s proposed management emphasis in the Forest Plan FEIS. The Net Present Value (NPV) analysis provided from IMPLAN estimates PNV over the 100 year planning horizon. This third indicator does a good job of quantifying the potential cumulative effects for economic sustainability Analysis Area The geographic area considered for this economics analysis is the Echo Trail Forest Management Project Area boundary. Only activities proposed within the action alternatives would be considered for the direct and indirect effects. The time period analyzed for direct and indirect effects is approximately 7-10 years. The main purpose of this analysis is to display cost effectiveness of the proposed activities and to determine if the action alternatives propose prudent means of achieving the resource objectives outlined in the Forest Plan

4 The analysis area for cumulative effects analysis of economic impacts of alternatives analyzed in the Forest Plan FEIS is the Superior and Chippewa National Forests, associated counties. These areas are combined into one large economic impact area. This economic impact area included the Chippewa and Superior National Forests; 13 northern central and northeastern Minnesota/Wisconsin counties; Tribal communities and the Leech Lake, Bois Forte (Nett Lake), Fond du Lac, and Grand Portage Reservations, other National Forest associated communities, towns and cities; and rural areas. This broad, diverse impact area provided a picture of economic interactions within a regional economy. For a complete listing of all counties covered within the large economic impact area refer to Forest Plan FEIS page Section 3.9.1a Affected Environment. The Forest Service used a model that captured the cumulative effects of production relationships associated with the immediate users of forest resources. These cumulative effects are composed of direct, indirect, and induced effects. Direct effects capture the economic stimulus of the immediate user of the forest resource. Indirect effects account for additional production by industries that supply the immediate user. Induced effects capture the economic activity of household spending resulting from increased jobs in the direct and indirect industries. Since Net Present Value is not a mechanism for describing economic benefits of a particular program on local communities, we must tier to the Forest Plan (2004) for the economic impact cumulative effects. (Forest Plan FEIS page through ). The cumulative affects and conclusions are under cumulative effects section Affected Environment The affected environment for the financial efficiency analysis is the Echo Trail Forest Management Project Area. This area is located within both St. Louis and Lake Counties, Minnesota, and includes all or portions of sections in Townships 62, 63, 64, 65, and 66 North and Ranges 11, 12, 13, 14, 15, 16, and 17 West (see Figure 1-1). The centers of development located nearest the Project area include the small towns of Cook, Orr, Buyck, Tower, Soudan, Ely, and Winton. All of these communities are home to many people involved in the forest products industry Environmental Consequences Direct and Indirect Effects Financial Efficiency (PNV) The benefits (revenues) realized through timber harvests depends on market value and costs at the time of sale. Before any National Forest timber is sold, it is appraised to estimate the products fair market value. When a sale is offered, it is offered competitively and the contract is normally awarded to the firm offering the highest bid. These requirements are in place to help ensure that the government is justly compensated for any timber sold off of national forest lands. For this analysis, the action alternatives stumpage values were calculated using the base period prices effective January 2006 for the Superior National Forest. Prior to sale offer these base stumpage values may be increased to include estimated stump to truck, transportation, logging overhead, and road construction costs. The stumpage values do not include bid premiums that could result from competitive bidding for the timber when sold. Based on past trends, bids on timber sales run well above base period prices

5 Table Financial Efficiency Summary* Description Alt. 1 Alt. 2 Alt. 3 Modified Alt. 4 Present Value (cost) $639,357 $9,118,660 $7,523,610 $7,430,467 Present Value (benefits) $0.00 $6,945,873 $5,674,890 $5,845,904 Net Present Value -$639,357 -$2,172,787 -$1,848,720 -$1,584,563 Benefit/Cost Ratio** * At 4% discount rate ** A value greater than 1.0 indicates benefits exceeds costs Returns to Federal and Local Governments Timber sold on federal land would result in measurable revenues to the US Treasury and local county governments. (See Table ) The return to the US Treasury would consist of total returns from the timber sale (less the costs associated with reforestation activities), other approved activities identified in the Knutson-Vandenberg Sale Improvement Plan, and salvage sale funds. The returns to local governments are payments in lieu of taxes and are based on receipts from federal land. These payments would be made by the federal government to State agencies and would be distributed to local schools. Payments would equal twenty-five percent of the total timber receipts (gross revenues). Table Returns to Local Government and the US Treasury. Description Alt. 1 Alt. 2 Alt. 3 Modified Alt. 4 Total Volume Harvested * 0 71 * 58 * 60 * Total Revenue 0 $6,945,873 $5,674,890 $5,845,904 Return To US Treasury ** 0 $35,632 $29,004 $29,852 25% Payment To Counties 0 $1,736,468 $1,418,722 $1,461,476 * Total estimated volume is listed in million board feet (MMBF). ** Total potential minimum return to US Treasury. All mandatory expenditures (e.g., reforestation costs) are taken out of the revenues beforehand so these figures will be lower than projected. Alternative 1 (No-action) If Alternative 1 is chosen by the Responsible Official for implementation, no revenue producing activities would take place. (See Table ) However, the cost of developing the Echo Trail Forest Management Project Area EIS is identical no matter which alternative is chosen. Therefore, this cost is included in the economic analysis for each alternative. Documentation expenses are based on a five year average of documentation expenses on the Superior National Forest. If Alternative 1 is chosen, no other costs would be incurred and no revenues would be generated to offset the costs. The benefit to cost ratio would be zero

6 Alternatives 2, 3 Modified, and 4 The financial efficiency benefit/cost ratios resulting from each action alternatives would range from 0.76 to 0.79 (see Table ). The b/c ratios were expected to be below 1.0 due to the high costs of reforestation activities proposed in each alternative. The relative proportion of acres harvested (clearcut with reserves and partial cut acres), acres to be naturally regenerated and acres to be converted through plantings are very similar between alternatives 2 and 3 Modified. Alternatives 2 and 3 Modified both propose to naturally regenerate 62-64% of the harvested acres, diversity plant 8-12% and convert to conifer 36-38% of the harvested acres. In contrast alternative 4 proposes to naturally regenerate 55%, diversity plant 3% and convert to conifer approximately 42% of the harvested acres. Other costs not related to harvested areas which have greatly decreased the benefit/cost ratios are the non-harvest related planting activities and transportation system related activities. Table shows the estimated volume for each alternative, in addition to the estimated minimum revenues that would go to the US Treasury and the estimated amount that would go to the counties. Alternative 2 has potential to return the greatest amount to the US Treasury and the counties. Alternatives 3 Modified and 4 would return approximately the same amount to the US Treasury and counties Cumulative Effects Table presents the Superior National Forest Portion of the cumulative economic impact under Forest Plan FEIS Modified Alternative E (projected for year 2012). The economic indicators within IMPLAN/FEAST used to display cumulative impacts were the number of jobs and the associated income within the first decade of the Forest Plan. As displayed in Table , the overall volume of forest related jobs in the local economy was found to be minor and did not change much between the alternatives analyzed in the Forest Plan FEIS. For this reason, the economy-wide effects of any alternative of the Echo Trail Forest Management Project would be minimal. However, the direct and indirect effects may be considerable for individual persons, families, or businesses within the analysis area. Within the rural communities of the surrounding area, particularly in very small communities, the loss of a single job may be very important to the community, even though it may be barely noticeable within the larger economy Conclusion Direct, Indirect, and Cumulative Effects Despite the differences between the alternatives, the (impact area) economy-wide effects of any alternative would be minimal

7 Table Superior N.F. : Cumulative Economic Impacts in 2012 (Projected)* 2002 (Current)** 2012 (Projected) for Mod Alternative E Economic Indicator Area Totals Forest Portion Area Totals Forest Portion Employment Total (jobs) 301,000 24, ,000 27,140 % of Area Totals 100% 8.2% 100% 8.3% % Change from No Action % Labor Income Total ($ million) $8,592.0 $561.0 $9,896.0 $642.5 % of Base 100% 6.5% 100% 6.5% % Change from No Action % * Source of data: Forest Plan FEIS, Ch Economic Sustainability of Local Communities page ; Table ECN-11 ** At the time of the Forest Plan Revision Process the cumulative economic impact IMPLAN/FEAST numbers were not absolute. The 2002 area totals and forest portion of that are numbers based on the best estimate the State of Minnesota was able to provide for labor and income. The 2012 numbers were derived from the FEAST model and are projections of the 2002 numbers

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