The Conservation Fund Defaults & The U.S. Army Corps of Engineers Takes Action

January 25, 2018

By: Douglas E. Kahle

In an unprecedented move among nationally recognized tax-exempt organization, The Conservation Fund (“TCF”) has defaulted on its obligation to provide compensatory mitigation for the destruction of wetlands in Alaska. Altogether TCF has failed to provide compensatory mitigation for the destruction of approximately 2,000 acres of wetlands.

On February 1, 2017, the U.S. Army Corps of Engineers (“Corps”) notified TCF that it was “in default” of its obligation “to implement compensatory mitigation” to offset the destruction of Alaskan wetlands. The Corps also warned TCF of approaching deadlines to provide compensatory mitigation for the destruction of another approximately two thousand (2,000) acres of wetlands. In October, 2017, the Corps terminated TCF’s compensatory mitigation program in Alaska following TCF’s continued “failure to fulfill the compensatory mitigation obligations [it] assumed”.

TCF began taking payments and assuming the obligation to provide compensatory mitigation to offset the permitted destruction of wetlands in Alaska in 1998. TCF had established an “in-lieu fee” (“ILF”) program in Alaska whereby Clean Water Act (“CWA”) Section 404 permit applicants (“Applicants”) paid TCF in order to have TCF assume the Applicants’ compensatory mitigation obligations required for the permitted destruction of wetlands.  Over the years CWA Section 404 permit Applicants in Alaska paid TCF over Fifteen Million Dollars ($15,000,000) to assume their legal obligations.

ILF programs such as the one operated by TCF have come under criticism. In 2006, the Environmental Law Institute released a comprehensive study of ILF programs. The study disclosed complaints about the delay between the time the permitted impacts occurred and when the ILF programs’ mitigation projects were implemented, known as temporal loss. The study also addressed the widespread criticism about ILF programs taking an Applicant’s money, thereby assuming the Applicant’s obligation to provide compensatory mitigation, without realistically assessing the costs to adequately fund a mitigation project that would fully offset the permitted destruction of wetlands.  

TCF’s operation of its ILF program in Alaska became subject to different requirements in 2013 when TCF and the Corps signed an amended agreement. (“TCF’s 2013 Agreement”). TCF’s 2013 Agreement provided that TCF legally assumed responsibility for satisfying the compensatory mitigation requirements of approved CWA Section 404 permits immediately upon its receipt of payment from the permits’ Applicants. As soon as TCF took the Applicants’ money, Federal regulations found in 33 C.F.R. Part 332 (“the Final Rule”) imposed deadlines. Specifically, the Final Rule required TCF to acquire land and complete the initial physical and biological improvements that would create the mitigation project that TCF intended to use to satisfy its assumed compensatory mitigation obligation by the end of the third growing season following TCF’s first receipt of payments from an Applicant in the subject service area.  (See 33 C.F.R. § 332.8(n)(4)).

TCF’s 2013 Agreement further provides that in the event of a default by TCF of its assumed obligations, then the Corps is authorized to “take appropriate action” such as suspending TCF’s credit sales operations in Alaska and “directing [TCF] to prepare an alternative mitigation proposal to include (but not be limited to) securing credits from approved mitigation banks”.

When the Corps sent its February 1, 2017 notice of default, it reminded TCF that the Corps had previously addressed TCF’s need to comply with the Final Rule on “multiple occasions over the past two years”. The Corps also warned TCF about its approaching deadlines to secure compensatory mitigation to offset the destruction of another approximately two thousand (2,000) acres of wetlands in Alaska.

Following TCF’s failure to implement an acceptable plan of mitigation, in October, 2017 the Corps announced that it had terminated TCF’s ability to continue its ILF program in Alaska. The Corps specifically cited TCF’s “failure to fulfill the compensatory mitigation obligations assumed in accordance with federal time requirements” as grounds for its action.

What remains to be done is for the Corps to determine the proper offsetting mitigation for the destruction of Alaskan wetlands that will sufficiently cure TCF’s default. According to TCF’s 2013 Agreement, this could involve “directing [TCF] to prepare an alternative mitigation proposal to include (but not be limited to) securing credits from approved mitigation banks”. Requiring TCF to expend sufficient funds to purchase credits from approved Alaskan mitigation banks would provide immediate compensatory mitigation for the previously permitted destruction of Alaska’s wetlands and would eliminate further temporal loss. It would also serve to direct funds to Alaskan mitigation bank sponsors who undertook significant financial obligations to establish their respective banks as sources of mitigation to compensate for impacts to the state’s natural resources.

The Corps’ prompt action in response to TCF’s default, terminating its ILF program and its ability to continue to sell advance credits in Alaska, was a necessary and appropriate first step in order to avoid the destruction of more wetlands without offsetting compensatory mitigation. The Corps now needs to take action, as authorized in TCF’s 2013 Agreement and in federal regulations, to require TCF to provide the actual compensatory mitigation that was promised as an offset to the previously permitted destruction of wetlands, consistent with its legal obligation.

The Corps’ timely response to TCF’s default by shutting down TCF’s program in Alaska is to be commended.  The Corp’s timely implementation of a corrective plan going forward is expected. Allowing the destruction of Alaska’s natural resources without promptly securing immediately available compensatory mitigation is not an option.