Author: Deborah Fleischer

The wetland mitigation-banking world often looks very different to private-sector bankers and not-for-profit environmentalists. The Ecosystem Marketplace previously ran an article focusing on the environmental community's concerns with wetland mitigation banks. This follow-up piece records bankers' reactions to these concerns.

It is hard to be a wetland these days. Not only are wetland watersheds being polluted, but the pressures associated with growing populations is leading to the construction of new homes, more port-related activities, airport expansions, bridge retrofits, and transportation improvements--all with the potential to unavoidably impact wetlands. Add to that the current political environment where resources for enforcement and monitoring are limited, and the future of wetlands is looking pretty dim.

Faced with these pressures, mitigation bankers and environmental regulators argue that wetland mitigation banks are an important and viable mechanism to achieve a "no net loss" of wetlands and reduce the need to manage and monitor numerous small, isolated wetland mitigation projects.

A Matter of Perspective

While bankers and regulators see the world from one perspective, most environmental non-profits working to protect and restore the remaining wetland habitat see things a little differently. When the environmental community looks out into the world, they see a landscape where 50 percent of the nation's original wetland habitats have been diked and filled for farming, grazing, homes, and other development and infrastructure projects. Given this history, they say that the focus should be on avoiding future damage to wetlands.

If wetlands must be damaged and mitigation is required, most within the environmental community make a case that mitigation banking is not automatically the preferred choice (see the story on the concerns of environmentalists). One of their concerns is that off-site mitigation banks may result in the loss of important local and regional wetland functions.

The flip side of this concern is that "sometimes a project will be designed to avoid [damaging] an on-site wetland resource, but then it [the remaining wetland] is totally isolated and cut off from connection with the larger ecosystem," remarks Molly Martindale, a Regulatory Project Manager with the San Francisco District of the US Army Corps of Engineers (US ACE). While there is a current policy preference for on-site mitigation, there appears to be a growing trend, encouraged by the banking community, for regulators to pursue the most "ecological preferable" approach.

While a 2001 report by the National Academy of Science National Research Council (NRC) (entitled Compensating for Wetland Losses Under the Clean Water Act) details the concerns with mitigation, it concludes that "third-party compensation approaches (mitigation banks, in-lieu fee programs) offer some advantages over permittee-responsible mitigation." In addition, the report states that a "preference for on-site and in-kind mitigation should not be automatic, but should follow from an analytically based assessment of the wetland needs in the watershed and the potential for the compensatory wetland to persist over time."

Keeping an Eye on the Prize

Based in part on the findings of the NRC report, both bankers and regulators consistently argue (see the Guest Editorial by Craig Denisoff, President of the National Mitigation Banking Association) that larger-scale, ecosystem-based, off-site mitigation banks provide a higher level of ecological function over the long term than piecemeal small-scale projects, where the wetlands are isolated. Faced with the choice of protecting an acre of wetland at the backside of a big shopping mall or requiring a developer to purchase credits at a 100-acre large-scale project, from the regulator and banker perspective, banks offer better ecosystem functions and a more viable long-term solution for wetland mitigation.

"Mitigation banks are an important tool to make conservation work when you have lots of development going on," explains Carl Wilcox, Habitat Conservation Manager of the Central Coast Region of the California Department of Fish and Game (C-DFG). "When developers are having lots of small impacts across an ecosystem, it is difficult for them to do mitigation effectively. In this instance, banks provide an opportunity for meaningful mitigation."

Wilcox further suggests a provocative idea: in some cases, keeping your eye only on the goal of no-net loss can actually be harmful to the very same resources you are working to protect. Another goal to consider, he argues, is to "recreate an ecosystem rather than focus just on wetland acreage."

For example, if you are looking to preserve and enhance a threatened resource, such as vernal pools, in the face of development pressures, and are only focusing on no-net loss of acres, you start requiring bankers to create higher densities or take out upland habitat. Wilcox suggests that at some sites you might want to create less actual wetland acres, but create an ecosystem that includes upland habitat that functions better and enhances the services for the species that you are interested in.

He acknowledges that this concept is difficult for people because it goes against a long tradition of focusing on acreage. This approach, he says, "requires a broader consideration of what the biological objectives are."

Facilitation of Development

While the majority of environmental organizations express concern that banks facilitate development, regulators and bankers consistently disagree with this statement.

Martindale of the US ACE admits if a mitigation bank is available, it might make it easier for a project manager to approve a project, however, she says, with or without banks, "almost all permits do get approved. Not having mitigation banks does nothing to stop development," she stresses.

Philip Shannin, Senior Project Manager with the San Francisco District of US ACE agrees. "Banks do not facilitate development. It really isn't any easier to get a permit because there is a mitigation bank present." In fact, some argue, the upfront cost of purchasing credits at a mitigation bank can provide a clear economic signal to developers, creating an incentive to avoid wetland impacts.

Financial Safeguards

One of the advantages of mitigation banks compared to regular mitigation is the financial assurances required by a banking agreement. "Mitigation banking provides the best procedural substantive safeguards," suggests George Kelly, a principal with Environmental Banc & Exchange (EBX), a private firm that develops and manages wetland mitigation projects. "We feel that every other form of mitigation should be held to these same safeguards."

One such safeguard is the requirement that banks provide "financial assurance" for their projects. This assurance is typically required for three key items: bank construction, a contingency fund to ensure completion of construction and achievement of ecological function, and an endowment fund to generate interest to help manage the site in perpetuity.

An assurance can come in several forms, the most common being performance bonds, escrow accounts and letters of credit. At the US ACE San Francisco District, before they will release the first 15 percent of credits, a banker must provide a financial assurance to cover 100 percent of the estimated construction costs. This assures that a banker will not sell the initial 15 percent of credits and walk away from the project. This sort of assurance is not required for other forms of mitigation (i.e. permitee-responsible mitigation and "in-lieu-fee" mitigation).

Then there is the contingency fund, which is created so that if a banker does not meet their performance criteria, funds are available to cover the corrective construction or interim adaptive management actions necessary to ensure the achievement of performance standards. The San Francisco District of the US ACE is moving to require a contingency fund of 10-20 percent of total construction costs.

One complaint from the environmental community on this front, however, is that contingency funds are typically not big enough to solve any of the real problems that result should a project fail to perform.

"A huge amount of effort goes into planning and wetlands that get created have a high probability of success," responds C-DFG's Wilcox. "I haven't been associated with many that needed much ultimate remediation. If you are picking sites that are conducive to wetlands creation or restoration and you are paying attention to the soils and hydrology, you have a pretty high potential for success at the start."

"If a bank isn't functioning, the ultimate performance bond is taking away the banker's ability to sell credits. If they are not meeting their success criteria, they won't get their credits released," he explains.

Release of Credits

Another criticism of banks is that they are allowed to sell credits before the bank is fully functioning, leading to temporal habitat losses and raising issues of accountability. According to the ELI 2002 report, Banks and Fees: The Status of Off-Site Wetland Mitigation in the United States, "The percentage of credits released before achieving all performance standards ranges from 15 percent to 100 percent."

Banking is an expensive business, and it requires a lot of capital to get a project built. To help raise capital to construct a project, typically, up to 15 percent of credits can be sold upfront.

"Some credits are released early," explains Shannin of US ACE, "but that is a better scenario than with standard mitigation, where you are essentially giving full credit upfront as soon as they do construction, 100 percent release before you know that it is working. In that respect, bankers are right. You do have a greater assurance of success [with a mitigation bank] than you do with regular mitigation."

The latest trend is to link the credit release schedule to reaching specified success criteria. There is a new standard credit release schedule being used by the San Francisco District of the US ACE that releases 15 percent of the total credits upon signing, 25 percent once the hydrology is functioning, and an additional 15 percent released annually if interim success measures are met.

Performance Standards

If credit release is based on performance criteria, it raises the question, how are you going to measure success or the ecological effectiveness of a project?

The 2002 ELI report recommends that standards "should measure a broad array of the major functions of wetlands, particularly related to hydrology, vegetation, water quality, wildlife, habitat and soil." An assessment of 135 banks found that the most common standards used are for vegetation, hydrology and the presence of non-native species. Here, again, there is change afoot. At the San Francisco District of US ACE they are beginning to base performance criteria on a reference site, the goal being to create functions similar to a functioning wetland.

"The most important thing when you are creating wetlands is to hit the correct hydrology because with wetlands, the whole basis for the system is the correct hydrologic system. If you hit the target hydrology, you have more assurance that it will support the target vegetation," explains Shannin of the US ACE.

The ELI report also states that since 1995, 49 banks have been established without performance standards or success criteria included in the authorizing instruments. However, while interviewing regulators and bankers for this article, they all said performance standards are clearly articulated in all the banking agreements they have been involved with.

Greg Lyman, San Francisco Bay Area Regional Manager for Wildlands, Inc., a private habitat development and land management company that has established nine banks in California, reports that every bank Wildlands is working on includes specific performance criteria.

Tool for Private Land Owners

Landowners interested in generating an economic return from land without developing it also see wetland mitigation banks as a practical option. With limited state and federal resources available to support outright land acquisition and restoration, in certain circumstances a mitigation bank is one of the few potential tools available to support acquisition and restoration goals while allowing private landowners to generate a cash flow from conservation.

Land trusts play a key role in this regard, and the California Central Valley Land Trust Council is holding a mitigation workshop in July of 2005 to explore when it is appropriate for a land trust to get involved in the mitigation process. When state or local resources are not available to support outright acquisition of a property, some argue, development of a mitigation bank should be a potential tool for land trusts to consider. However, without an open dialogue with key stakeholders--and the development of a detailed organizational policy--others in the land trust movement believe that diving into the mitigation-banking world could result in a high-level of controversy.

In the case of Southern California Edison (SCE), the potential economic return from a mitigation bank motivated them to restore an additional 20-acres of tidal wetland at their Del Mar, California wetland mitigation project. However, navigating the complex regulatory process and balancing the various competing needs takes time and patience.

"It is not easy to execute a bank agreement that all parties feel good about," reports David Kay, Manager of Environmental Projects at SCE.

The Future of Banking?

"The best thing is to not impact wetlands, but as we all know, sometimes it happens," summarizes Kevin L. Irwin, an ecologist who works on wetland issues in Florida. And if one must mitigate impacts, he says, then mitigation banking "is a good tool to have in the tool kit."

The regulatory framework for mitigation banks, and mitigation in general, is growing and evolving as we speak. "Banks from six months ago are not going to look the same as banks six months from now," says Wildlands Inc.'s Lyman. "That is how quickly the regulation is changing."

The NRC and ELI reports include dozens of recommendations on how mitigation in general, and banking specifically, can be improved to better support conservation goals. These suggestions include:

• Engage stakeholders in the process in a more meaningful way;


• Require detailed performance goals to ensure no-net loss of wetland area and functions;


• Link the release of credits to meeting performance standards; and


• Require a contingency fund and a clear process for how to catch potential problems and implement corrective actions.

According to Craig Denisoff in his recent Editorial, "mitigation bankers continue to hold out an olive branch to the environmental community...And, believe it or not, we too are in favor of higher standards for all forms of wetland mitigation across the US." Given this common goal, there seems to be plenty of room for future dialogue among regulators, bankers, and the environmental community on how to improve the mitigation banking process so that when this tool is pulled out of the toolbox, it will consistently support a brighter future for wetlands in the US.

Deborah Fleischer, principal of Green Impact, is a San Francisco Bay Area consultant who works on land conservation and sustainability issues. Green Impact works with NGOs, socially responsible companies, and governmental agencies to ensure the success of new programs. She can be reached at Deborah@greenimpact.com.

First posted: July 12, 2005