Better Incentives for Public Lands

by Randal O'Toole

Table of Contents

Americans interested in natural resources often put too much emphasis on who owns the land and not enough emphasis on how the land is managed. The division of land in the U.S. among federal, state, private, and other ownerships is, for the most part, an accident of history. Yet now that the division has been made, many people regard it as sacred and rabidly oppose any changes.

It is hard not to point to the irony, for example, that environmentalists believe that federal land management is almost uniformly bad, yet they strongly oppose any proposals to transfer federal lands to another ownership. As Peter Drucker tells us, "any government activity almost at once becomes moral. . . . They come to be seen as symbols and sacred rather than as utilities and means to an end."

Instead of concentrating on who owns the land, then, I want to submit to you four propositions.

Incentives Are the Key

Incentives play a central role in the management of all land, public or private. But some incentives lead to good management and others lead to bad management. When we compare any two pieces of similar land that are managed differently, almost inevitably we find that the differences are due to different incentives.

Managers of all organizations, public or private, large or small, are powerfully motivated by a desire to maintain and increase their budgets. I am certain, for example, that the Thoreau Institute could do a better job if it had a bigger budget. Just about everyone feels the same way about whatever organizations they are associated with.

Ultimately, managers don't really care where their budget comes from, only that it grows. Thus, activities that increase their budgets are, from the managers' view, "good" and activities that decrease their budgets are "bad."

In the private sector, profits are an important key to increasing managers' budgets. A manager who contributes more profits to the owners is likely to get a bigger budget. So profits become an indirect motive for private managers. But while the owners may be primarily interested in profits, the managers are interested in budgets and will produce profits only if that is the best way to get bigger budgets.

In the public sector, profits have almost nothing to do with managers' budgets. This doesn't have to be true; it has just worked out that way. Nearly everyone concerned with public resources has viewed managers not as humans motivated by incentives but as robots who will do what they are told. Thus, Congress and the state legislatures rely on command and control rather than on incentives to influence public resource managers. Yet the incentives remain, they are just haphazardly designed.

Federal Incentives Are Bad

The history of the federal lands, for example, have been of Congress spending inordinate amounts of time debating and passing increasing stringent rules that inevitably fail to produce the intended results. Little noticed are the incentives that provide the true motivation for federal managers.

Typically, Congress begins by giving an agency a mission and a budget appropriated out of tax dollars. If the agency can earn money, it is usually not allowed to keep the money because Congress doesn't want to "lose control" of it. So the agency becomes captive to the appropriations committees for its budget.

Often, the appropriators want something very different from the land than the agency's original mission:

Appropriators' preferences are often underscored by laws allowing the agencies to keep some of the receipts collected from some of the activities on their lands. The Forest Service can keep nearly all of its timber receipts, half of its grazing fees, but little or none of its recreation fees. These laws were not passed to give the agencies incentives but to fund things important to members of Congress. But the result is that the Forest Service has a powerful incentives to sell money-losing timber sales and little incentive to protect recreation.

Almost any public land controversy can be traced to such haphazard incentives. Why does the Park Service, for example, willingly allow hotel operators and other concessioners to use the parks for such tiny royalties? Royalties on state and some federal lands are typically around 10 percent, but national park royalties average just 3 percent and in some cases are below 1 percent.

The answer is that Congress does not allow the Park Service to keep any of the royalties, so it has no incentive to insure that concessioners pay the full amount they are willing to pay. Instead, it negotiates contracts that require concessioners to provide in-kind services to the park, such as construction of employee housing or maintenance of park facilities, in exchange for low royalties. The result is that the park effectively has a larger budget to spend on other activities.

In the years that I have been watching federal agencies and in the histories I have gathered I have only been able to find one member of Congress who seemed to understand that federal resource managers are influenced by incentives. That was Idaho's Senator James McClure. Before he retired, he experimented with several incentives, all oriented around his goal of boosting national forest timber sales.

One that I recall was that any forest that reached its timber target in one year automatically received a five percent bonus in its next year's budget for timber, recreation, wildlife, and soils & water--thus giving all resource managers an incentive to meet timber targets. While I disagree with McClure's goals, I found his methods intriguing and am sorry that no one else has followed up.

One reason why that may be is that Congress is interested primarily in instantaneous results: what happens in fiscal year 96 or 97. But incentives take awhile to percolate through an organization. The Forest Service typically takes up to a decade to respond to a major change in incentives. That is probably not fast enough for Congress, so it continues to rely--without much success--on command and control.

State Incentives Are Not Much Better Than Federal

The record of the states in giving land managers good incentives is not much better than that of the federal government. Like Congress, state legislatures typically want to control what fees land managers can charge and how they can spend those fees if they get to keep them at all. Most state resource agencies also receive a large share of their budgets from tax dollars, and state appropriators try to divert those budgets to various types of pork.

While the states provide some good incentives to resource managers, ironically the best incentives often result from some federal mandate. For example, state fish & wildlife agencies are typically allowed to keep all of the hunting and fishing license fees they collect. This has given state managers powerful incentives to manage and recover game populations, many of which were nearly extinct at the turn of the century.

It turns out that the agencies get to keep their license fees only because of the Pittman-Robertson and Dingell-Johnson acts. These laws distribute federal funds for habitat improvement only to states that allow their fish & wildlife agencies to keep all license fees. While the states do so, the legislatures often regulate those fees to be below market value (or, in the case of out-of-state residents, above market value), which creates serious problems for many wildlife managers.

The Louisiana Department of Wildlife and Fisheries, for example, is in a state of perpetual "crisis" because the legislature won't let it charge sufficient license fees. At one time the agency was subsidized by oil and gas extracted from its lands, but falling oil prices have devastated the agency's budget.

State forests are often cited as an example of state management that is superior to, or at least more profitable than, federal management. Here again, this result is due to a federal mandate, which was that many state forests were granted to the states to provide funds for schools. This has evolved into a trust obligation to earn a profit. Congress could just as easily impose such an obligation on the U.S. Forest Service, but it has not.

An "obligation" to earn a profit is, of course, not an incentive but another form of command and control. So it is not surprising that the actual results are mixed. At least a third of state forest agencies lose money on their management of state forests. I suspect that, like the Forest Service, many of them "cook their books," and the actual number losing money is probably closer to half. Of those that do make money, the available evidence indicates that many often cross-subsidize unprofitable activities with profitable ones, thus producing less than maximum potential profits.

The most profitable state forest agencies are ones that are given incentives to be profitable by funding them out of their receipts. The Washington Department of Natural Resources, which is the most profitable of all, is funded out of a quarter of its receipts. So it has to earn four times its costs.

The Oregon Department of Forestry generally gets to keep nearly three-eighths of its receipts, which means that it produces lower profits than the Washington DNR even though its timber is every bit as valuable. For that matter, the Washington DNR is allowed to keep 50 percent of its receipts from some lands, and as far as I know it spends every cent of that 50 percent.

Other states, such as Idaho and Montana, allow their forest agencies to keep far smaller fractions of their receipts--10 percent in Idaho, 2.5 percent in Montana. These fractions are too small to run the agencies, so their funding is supplemented by appropriations from tax dollars. In some cases, the costs to taxpayers of running the forests are greater than the returns from the forests to local schools. This suggests that the legislatures are motivated more by pork than a desire to benefit schools.

Alaska funds its forests out of oil revenues. Missouri funds its state forests, wildlife, and parks out of a dedicated share of state sales taxes. Such funding sources provide a huge boost to state agency budgets, but make the agencies uninterested in producing revenues. Alaska and Missouri forests lose several times as much money as the forests of any other state.

State park systems seem to be the poor cousins of state natural resource agencies. Often created as an afterthought, with heavily regulated fees, the parks are treated as a luxury by the state legislatures. That is, when the states feel wealthy the parks are well funded, but when state budgets are cut--perhaps because taxpayers have voted to cut back property taxes for schools--the parks suffer.

Some of the best managed state park systems are those that have weaned themselves away from dependence on appropriations from tax dollars. Vermont and New Hampshire rely exclusively on user fees. Texas parks get some revenue from a dedicated tax but are mostly funded out of user fees.

The transition in Texas, which a few years ago funded 60 percent of park budgets out of state general funds, is particularly instructive. Agency leaders decided to overcome budget cuts by giving managers incentives to save on operating costs and boost revenues. Individual parks were promised a share of savings and increased revenues, with the result that the parks survived the budget cuts intact and with improved visitor services in many cases.

The Best Incentives Money Can Buy

History will record that the most important lesson of the twentieth century is that command and control leaves a society open to manipulation by special interests--and that one of those interests is the bureaucracy assigned to run the control system. The only way to safeguard against this is to decentralize as much as possible.

Command and control almost always produces unintended consequences. The would-be controllers usually fail to account for the incentives facing agency managers. Given a choice between a command to do one thing and an incentive to do something else, managers will choose to follow their incentives if they can get away with it. They usually can get away with it because the commands tend to be vague and compromised by the political process.

When controls do not work at first, the temptation is always to apply stricter controls. This only leads to more unintended consequences. Eventually, the whole system breaks down, as sometimes seems to be happening in the Forest Service.

If we give up on command and control, we have to rely instead on incentives. This means we have to decide which incentives are good and which are bad. Bad incentives are always created when natural resource agencies are funded out of tax dollars. The agencies become beholden to the appropriators, who usually represent on a small segment of Congress or the legislature. Even to the extent that appropriators represent all of Congress or a legislature, the incentives facing a legislator are often not the best for sound natural resource management.

Instead, natural resource agencies should be funded out of their receipts. This makes managers beholden to many decentralized users, not to a legislature or other central authority. Since almost all natural resources on public lands are routinely bought and sold on private lands, this should easily be possible. The question then becomes, what share of receipts should the agencies get?

The tendency for parks and wildlife is to suggest that the agencies get all of the receipts, while for forests that they get a specific share--25 percent or whatever--of gross receipts. Both of these answers are wrong. Funding an agency out of gross receipts encourages that agency to cross-subsidize unprofitable activities with profitable ones.

Suppose that an agency funded out of gross receipts makes a profit on some activity. The agency does not dare show a significant profit at the end of the year, so it has to find some money-losing activity to hide that profit. As a result, the agency will tend to overdevelop the parks, overproduce timber, and often damage other resources in the process. The same logic holds even if the agency gets only a specific fraction of gross receipts.

This problem is solved by funding the agency out of its net receipts. The accounting is simple. At the end of every fiscal year, we ask the agency how much it collected and how much it spent. The difference is the net. We let the agency keep the net (or, perhaps, a specific percentage share of the net) and give the rest to the general fund or to other funds that I will describe below.

What's so good about earning a profit that we should use this as a central incentive for resource managers? The answer is that profits are a symptom of good management. When someone makes a profit, it means that they are making other people happy enough, or at least satisfied enough, to pay them more than the cost of an activity. Maximum profits means that we are spending our resources most effectively.

Profits became a dirty word at the end of the nineteenth century for two reasons. First, people felt that they were unfairly divided among workers and capitalists. But this is not an issue if profits are earned on public resources.

Second, profits from marketed goods were often earned at the expense of nonmarket goods such as clean air and water. The "evil" here, if there is one, is not the profits but the lack of a market for the nonmarket good. To the extent that we can, the goal of resource management should be to create markets for all natural resources so that all can compete on a level playing field. This will produce a much better outcome for the environment than a system run by central planners motivated by incentives buried deep within their budgets.

If we don't fund agencies by giving them an incentive to earn a profit, the only alternative is to fund them by giving them an incentive to lose money. As Winston Churchill is reputed to have said, "socialists say that profit making is a vice. I should think that the vice is in making losses." Money-losing agencies will do far more harm to the environment and all the resources we care about than money-making agencies.

Still, some resources might simply be unmarketable, and such resources would be neglected by an agency run strictly for profit. For example, we can market hunting and fishing for game, but it is hard to market songbirds, frogs, or lichens. So it might be worthwhile to dedicate a share of agency receipts to a biodiversity trust fund that would be used to give both public and private land managers incentives to protect such resources. This could be taken out of the share of the gross that would otherwise go to the U.S. Treasury or state general fund.

Finally, to make a truly level playing field, agencies should be allowed to sell resources to people who don't plan to use them as well as to people who do. On private lands, such sales are called "conservation easements." But public agencies are reluctant to sell such easements because they interfere with the pork barrel nature of the agencies. Funding the agencies out of their net receipts, rather than tax dollars, should take care of that problem.


If the legislatures aren't funding the agencies, who will provide oversight to make sure that the agencies don't go out of control? I suggest that one mechanism for such oversight might be a land trust. Title to the land could remain in federal or state hands. But management of the land would be by the trust.

Trusts would have memberships and anyone could join, say, the Great Basin Park Trust or the Humboldt Forest Trust by paying a nominal annual fee. Members would get to vote on who is on the board of trustees. The boards, in turn, would hire and fire the trust superintendent and approve the annual budget and operating plan.

Rather than worrying about whether a piece of land is federally or locally controlled, this would naturally be self determined by the membership. Membership would probably be more national for a park such as Yellowstone and more local for something like the Miles City District of the BLM.

This system thus has a number of important checks and balances. Managers would be checked from losing money by funding them at a profit. The resources they produce would be balanced by the fees charged for a variety of resources. The biodiversity trust fund and conservation easements would insure balance for nonmarket resources. And the boards of trustees would provide a check to make sure managers did not overemphasize one resource to the detriment of others.


I am not much concerned about whether forests, parks, and rangelands are federal, state, or private. I am much more concerned about the incentives facing the managers of all such lands. To improve the incentives on both public and private lands, Congress and the state legislatures should reform public land agencies to insure that they: Regardless of who actually owns the lands, these reforms will make public land managers more responsive to users and more sensitive to competing uses. By supporting markets for a variety of resources and ending unfair competition, these reforms will also promote better management of private lands.
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