Mitigation Banks

Wetlands mitigation banking is the creation, restoration, or under certain circumstances the increased protection, of an area of functioning wetland in advance of, and to offset anticipated wetland impacts within the same ecoregion. This concept originated in response to the initiation of wetland regulatory programs, and was intended to expedite the regulatory approval process for allowing wetland impacts. As wetland regulations were originally implemented, developers and governmental agencies with regular construction needs, such as departments of transportation, faced recurring and unpredictable time delays and costs in obtaining permitting approval for projects that involved wetland impacts. They sought a means of advance planning that would make th e permitting process more reliable and would minimize costs. From this need the concept of mitigation banking emerged. While the typical wetland bank involves creation of wetlands from upland area, banking has been expanded to include other compensatory activities. These include restoration or enhancement of degraded wetland and, in rare cases, providing more stringent protection for wetland or wetland/upland habitat associations that are otherwise threatened by human activities not subject to regulatory control. Throughout this discussion, the term "bank" will connote a unified planning effort involving any of these advance forms of wetland mitigation, singly or in combination.

Mitigation banking is different from the normal wetland permitting process in two key aspects. First, it attempts to construct mitigation areas, or bank wetlands, far enough in advance of anticipated impacts in the area to attain fully functional bank wetlands by the time impacts are contemplated, in theory allowing a simple, one-to-one acreage and functional trade in "real time". Second, banks are typically large in area to provide this trading service for numerous contemplated impacts, as opposed to the typical impact-by-impact process associated with conventional wetland permitting.

The general process occurs as follows. The need for a bank is identified by a transportation agency with road construction needs; local or state government planning agency identifying watershed restoration needs; developer planning a large, phased project; commercial entrepreneur; or other party anticipating future mitigation needs in a given area. All banks require the acquisition or possession of a long-term interest in a piece of land by such a corporate, non-profit, or government "sponsor". A site is chosen based on suitability to support the anticipated wetland functional needs. The sponsor establishes dialogue with relevant wetland permitting agencies during these early planning stages. Agencies strongly encourage or require, depending on regulatory jurisdiction, submittal of information on the character of the bank. The bank is designed, depending on its goals, to replace either the anticipated functional losses or identified historical functional losses within a specified trading area. Watershed boundaries are often used to define the trading area based on water resource replacement rationales, but ecoregional or other boundaries may also be used. Regardless of the type of bank created, its value is determined by quantifying the created or restored wetland functions in terms of "credits". Credits may be calculated simply by the amount of acreage and the wetland type, by quantifying habitat, or by quantifying physical and biological functions and social values (IWR 1992). At some point, a permit or other instrument is finalized establishing the bank's: goals, ownership, location, size, wetland and/or other resource types included, trading area, crediting methods and accounting procedures, performance and success criteria, monitoring and reporting protocol, contingency plans, financial assurances, long-term responsibility, and detailed construction plans (Federal Register 1995). Subsequent permit applicants proposing wetland impacts that meet the bank's criteria must first meet all other normal wetland permitting requirements imposed by an agency, such as avoidance and minimization of impacts prior to proposing mitigation. Such applicants can then withdraw "debits" from the bank based on anticipated wetland functional losses due to their development activities.

Federal Banking Guidelines
Final, joint federal agency guidance, effective December 28, 1995, encourages the establishment and appropriate use of mitigation banks in the Clean Water Act Section 404 and Farm Bill Swampbuster programs (Federal Register 1995). The guidance defines mitigation banking as:

wetland restoration, creation, enhancement, and in exceptional circumstances, preservation undertaken expressly for the purpose of compensating for unavoidable wetland losses in advance of development actions, when such compensation cannot be achieved at the development site or would not be as environmentally beneficial.

It further states that banking typically involves consolidation of small fragmented mitigation projects into one large contiguous site. Banks, ideally functioning in advance of development impacts, are seen as a way of reducing uncertainty in the federal permitting programs by having credit available to applicants. They can also more effectively replace lost wetland functions within a watershed by consolidating compensation requirements, and can provide economies of scale relating to planning, implementation, monitoring and mmanagementof mitigation projects. The guidelines stress that credits may only be authorized when adverse impacts are unavoidable.

Procedurally, prospective bank sponsors are encouraged to first discuss their proposal with the appropriate agencies, then to submit a prospectus to the Corps or the NRCS to initiate the formal agency review process. The prospectus should discuss the objectives of the bank and how it will be established and operated. It should include detailed physical and legal characteristics such as those identified above in the concepts sub-section. The prospectus will be reviewed by a Mitigation Bank Review Team with representatives from each relevant agency. This team and the bank sponsor will eventually agree on an "instrument" that embodies the information in the prospectus.

The sponsor will be responsible for the bank wetlands' physical success, including monitoring, reporting, and remedial action, and for successful operation of the exchange system. The expected monitoring period is five years, longer for forested and other projects. The greater the risk of bank failure, the higher the financial assurances required. The instrument should identify long-term management/ownership of the bank resources. The bank resources should be protected in perpetuity with appropriate real estate arrangements, such as conservation easements or transfer of title to an agency or non-profit conservation organization.

The guidelines identify a number of notable planning considerations. They encourage setting the objectives for a bank in advance of site selection, driven by the anticipated mitigation need. Ecological suitability of a site will be weighed by the agencies, with importance placed on size and location of the site relative to other ecological features, hydrologic sources, compatibility with adjacent land uses and watershed management plans, and other factors.

On the issue of types of acceptable compensatory mitigation, the guidelines state that, "In-kind compensation should generally be required. Out-of-kind compensation may be acceptable if it is determined to be practicable and environmentally preferable to in-kind compensation (e.g., of greater ecological value to a particular region)." As with normal compensation protocol, restoration should be the first option considered when siting a bank, since it typically has the greatest likelihood of success. Preservation of wetlands or other aquatic resources may be given credit if it is done in conjunction with restoration, creation, or enhancement of wetlands, and to the extent that such preservation augments the functions of the created, restored, or enhanced wetlands. Further, preservation of wetlands may be authorized as the sole basis for generating credits in mitigation banks only in exceptional circumstances requiring careful judgement. Two key factors to be judged are whether the wetlands proposed for preservation: perform functions important to the region; and "are under demonstrable threat of loss or substantial degradation due to human activities that might not ootherwisebe expected to be restricted. The existence of a demonstrable threat will be based on clear evidence of destructive land use changes which are consistent with local and regional land use trends and are not the consequence of actions under the control of the bank sponsor." Credit may be given for the inclusion of upland areas with in a bank "only to the degree that such features increase the overall ecological functioning of the bank."

The desire to withdraw credits from a bank before it "matures", or is fully functional, invariably arises in mitigation bank projects. The general approach outlined is that the number of credits available for withdrawal should be commensurate with the functional level attained by a bank at the time of withdrawal. The agencies identify minimum actions to be taken before withdrawals will be allowed, involving approval of mitigation plans, acquisition of the site, and establishment of financial assurances. In addition, they state that "initial physical and biological improvements should be completed no later than the first full growing season following initial debiting of a bank." In these circumstances, where withdrawals are made prior to construction, higher compensation ratios may be required to offset temporal loss of functions that occurs (see below).

The federal track record on mitigation bank permitting prior to formal adoption of the guidelines extends back to the early 1980s under the Clean Water Act Section 404 program (ELI 1992, Short, 1988). Approximately 100 mitigation banks are already in operation or are being constructed in 34 states across the country (IWR 1992, Salveson 1995). Most banks are owned and operated by state transportation departments, port authorities, and federal agencies. An increasing number of entrepreneurial banks, known as commercial banks, are selling mitigation credits on the market (IWR 1992, Salveson 1995). These banks offer the economy-of-scale advantages of large-scale projects and greater planning flexibility for developers (Kusler 1992).

Banking Issues
Temporal Loss of Wetland Functions:
Ideally, mitigation banks should be created in advance of proposed development activities, and should be functionally equivalent to the wetland being impacted before credits are withdrawn. In common practice, even government agencies, such as state departments of transportation, may plan and budget only a few years in advance and have only some idea of their mitigation needs (IWR 1992). Yet, bank planning and the permitting process alone may take up to a few years, while subsequent implementation and functional establishment of banks can take at least ten years, with no guarantee of success. This incompatibility raises the issues of temporal loss of wetland functions and remedial/alternative planning and responsibility, and brings into question the practice of granting credit exchanges at a one-to-one ratio in advance of the existence of a functioning bank. A bank that is not constructed in advance of wetland impacts results in temporal loss of wetland functions, and is similar in that regard to wetland mitigation that occurs under normal (non-banked) wetland permitting scenarios. Construction of bank wetlands could potentially be delayed even beyond the time of debited wetland impacts, since with the banking process, impact and mitigation are not directly coupled in the same permit application and the same development site as they are under normal permitting scenarios. One method of offsetting this temporal loss of function is to require a greater ratio of mitigation-to-impact wetland acreage than one-to-one, as recommended in the recent federal guidance. In this case, the method of quantifying ratios becomes an issue, since a greater quantity of an early successional habitat does not truly replace the lost system, and amounts to trading apples and oranges, or more appropriately, trading green oranges and ripe oranges. Some observers believe that given the historic losses of wetlands in the U.S., and the less-than-certain nature of wetland creation technology in general, wetland impacts should not be allowed prior to full functional establishment of bank wetlands, or at least prior to reasonable assurance of successful establishment based on monitoring indications. However, such a policy would be unreasonable without similarly changing normal wetland permitting criteria, which accept concurrent wetland impacts and mitigation area construction as routine. In any case, the issue of temporal loss of wetland functions offers no easy answers.

Other Functional Replacement Issues:
While financial assurances may reduce bank failure rates, they do not ensure that success will equate to type-for-type replacement. Unless bank functional criteria are established during permitting, simple, low-cost systems, such as ponds with water lilies, that may perform as wetlands in the broad sense, but are functionally unlike impacted wetlands, could become more common (Salveson 1995). Such systems are typically easier to establish and not functionally equivalent to the complex natural systems for which they are traded (see Mitigation Success section). The issue of functional replacement must be addressed during permitting. Several questions arise here. One of these is how specific the functional replacement must be. The concept of a mitigation bank involves predicting both the types of habitat and the proportions of those habitat types that will need to be impacted by future development within the trading area. At some level of functional specificity, there will be unavoidable inability to predict or replicate site-specific elements of lost wetlands. Agencies must perform the difficult tasks of setting defensible practical limits on the degree of functional replacement required, and of establishing protocol for situations where insufficient similarity is achieved or where unequal proportions of the different habitats are created. In these cases, criteria for the trading of "apples and oranges" must be established, or agencies may be placed in the unpopular position of requiring remedial actions on desirable but differently functioning wetland habitat.

Another question related to functional replacement involves spatial replacement of functions. The broadest issue here is establishment of the spatial applicability, or trading limits, of the bank. Wetlands perform many functions, and spatial limits set for habitat functions provided for certain species may not coincide with those set for water quality values provided to the watershed. Also, practical considerations related to including sufficient future development area to generate the acreage of impacts being offset by the bank to make the bank economically supportable arise as well. In practice, most banks use hydrologic spatial (i.e. watershed) boundaries because of their ease of definition and the relatively universal likelihood of water quality and quantity functions and values being at stake. The recent federal guidance bases limits of the bank "service area" on hydrologic and biotic criteria, and recommends using watershed or ecoregional boundaries (Federal Register 1995).

A difficult part of spatial replacement of functions stems from the effect of location or landscape position on the functions performed by wetlands. A wetland targeted for impact may provide local water storage functions, species habitat that depends on the wetland's landscape position, or local water quality functions. These functions may be lost through the banking process, since bank wetlands may be created a significant distance away from impact wetlands or in a different landscape position. Replication of such landscape position-derived functions can even be strongly at odds with the concept of creating one large wetland system to offset numerous small future impacts. For example, small isolated wetlands in upland landscapes perform many habitat functions that would be lost in a large wetland hydrologically tied into a floodplain (Robinson 1995, Means 1990, Laney 1988, Moler 1987, Beissinger and Takekawa 1983, Kushlan 1981). Regulatory agencies should be vigilant to maintain this often-overlooked but important issue in the list of considerations that go into banking negotiations. They may need to exclude the use of banks for certain types of wetland impacts, or require designs to incorporate upland areas that recreate certain landscape functions.

The recent federal guidance gives no strong direction on this issue. It recognizes that on-site mitigation may be preferable in the types of circumstances described above, but states that this should not preclude the use of a bank when there is no practicable opportunity for on-site compensation. Criteria given for choosing between the two include: the likelihood for success of the given habitat type; compatibility of the mitigation with adjacent land uses; and "practicability of long-term monitoring an d maintenance to determine whether the effort will be ecologically sustainable, as well as the relative cost of mitigation alternatives" (Federal Register 1995).

Agencies may take the approach of prioritizing wetland functions within a candidate trading area to simplify the process of bank functional design. This can be a valuable tool for ordering the process, but it also introduces the risk of losing sight of all but the highest-priority functions.

Long-Term Responsibility:
The difficulties involved in creating bank wetlands in advance also highlight the importance of establishing responsibility in the event of bank failure or bank wetland establishment in a functional form other than that agreed upon. If bank credits have been sold and development impacts incurred, a failed bank effort means that the functions of the original natural wetlands have been completely lost from the watershed. Examples of failed mitigation banking efforts already exist. Although all credits had been sold, the Northlakes Park Bank in Hillsborough County, Florida, did not achieve the water levels anticipated in the restoration wetland and was subsequently "abandoned" (Salveson 1995). Similarly, the Mud Lake Bank in Jefferson County, Idaho, required enough water to maintain the hydroperiod for the 150-acre site. This could not be achieved because local agriculture and development projects utilized most of the available water. The importance of clarifying responsibility up front is becoming increasingly clear from banking attempts such as these. The permitting process should require remedial plans in the event of poor bank establishment, and contingency plans in the event of bank failure, along with long-term committments to bank establishment and protection by the appropriate parties. Another means of gaining greater assurance of responsibility for bank success is the use of performance bonds. Regulatory agencies have started requiring performance bonds, based on bank acreage, to guarantee wetland performance for at least 5 years after the last credit is sold (Salveson 1995). The recent federal guidance stresses the importance of adopting an enforceable mechanism establishing responsibility of the bank sponsor to develop and operate the bank properly, and the importance of requiring adequate financial assurances based on the risk of bank failure (Federal Register 1995).

The Role of Mitigation Banks
The most suitable role for wetland banking has been a subject of some discussion, and the issue of whether agencies should limit the application of banks to certain types of impacts has been debated. While the speculative, commercial side of banking has been contentious, it appears that banking can be especially useful for projects where individual losses are relatively small (but collectively significant) and cannot be fully mitigated on, or immediately adjacent to, the project site (Short 1988). For example, banks offer a viable alternative to the piece-by-piece mitigation needs incurred by parties seeking to widen or locate new linear facilities, such as roadways, power corridors, and other utility easements. Banking allows these applicants to conduct prior planning and to acquire property in well-suited locations, as opposed to shoehorning mitigation sites piecemeal into existing holdings, often within rights-of-way or roadway stormwater ponds. Banking can also be more efficient in terms of the permitting process. It can be negotiated one time, up front, providing greater predictability and simplicity to the mitigation aspect of subsequent individual permit applications. This is especially attractive for government agencies seeking permits, such as transportation agencies and county road departments, that must adhere to strict budget time frames and constraints and that cannot afford uncertainties often associated with wetland mitigation permitting. Permitting agencies also benefit from the more efficient use of review time.

Economies of scale can be obtained in design, construction, monitoring, and long-term protection of banks. Banking allows the design of one mitigation site instead of many. Similar economies occur with construction costs at only one site at one time, as opposed to at numerous small sites spread out over time and space, especially since a significant part of such costs is associated with mobilization of equipment. Substantial economies of scale can occur associated with longer-term monitoring and maintenance of a single constructed wetland as opposed to many, and with remedial actions that may be needed. These economies apply to agency compliance monitoring as well as to the permittee's monitoring and reporting requirements.

The consolidation of resources associated with economies of scale allows for a better quality of work in all aspects of bank development compared to numerous small mitigation sites. For example, a more thorough evaluation of bank site features, such as hydrology, can be conducted with the same amount of resources as needed for separate sites. This focusing of resources increases the chances of bank success.

As mentioned in the introduction, properly conducted banking eliminates the temporal loss of wetland functions that occurs with normal permitting procedures. It also eliminates the uncertainty that normally occurs over whether mitigation will be successf ul. Even bank wetlands that have obtained only partial functions at the time of credit withdrawal provide partial offsetting of temporal loss of functions and partial elimination of uncertainty.

One philosophical concern of banking opponents has been that the use of banks may remove some of the caution with which applicants would otherwise consider proposing impacts, as well as some of the rigor with which agencies evaluate the mandatory applicant efforts to avoid and minimize impacts to wetlands in project design. In light of the variable success record of wetland mitigation to date, incentives to relax the emphasis on avoidance and minimization of impacts is of concern to some observers. However, the newly released federal guidelines make clear that the normal review process changes in no way for applicants proposing to draw on a mitigation bank (Federal Register 1995).

Perhaps the most promising use of mitigation banking is in the realm of watershed and wildlife corridor planning and protection. Here, innovative uses of banking offer the potential to complement landscape-scale environmental protection and restoration e fforts. Local government planners are beginning to consider using mitigation banking as a way of increasing their ability to successfully establish greenways and wildlife corridors. The opportunity also exists to direct wetland banking efforts strategic ally within the watershed to benefit identified water quality needs at this scale. Banking in this context is being expanded to include not only wetland creation, but also restoration of degraded wetlands, re-establishment of native upland communities in association with wetlands, and placement of long-term protective restrictions on use of these areas.

Source: WATERSHEDSS, which was developed under a grant from the U.S. Environmental Protection Agency, Office of Research and Development, National Exposure Research Laboratory, Ecosystems Research Division, Athens, GA (EPA Project #CR822270/Grant Cooperative Agreement 818397011), Understanding the Role of Agricultural Landscape Feature Function and Position in Achieving Environmental Endpoints, which was granted to North Carolina State University. The EPA project officer is Dermont Bouchard. Principal Investigator and Project Manager is Judith A. Gale (NCSU).